SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-22262
COMMERCIAL ASSETS, INC.
(Exact name of registrant as specified in its charter)
Maryland 84-1240911
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 South Yosemite Street, Suite 900 80237
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
(303) 773-1221
(Registrant's telephone number, including area code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
As of May 1, 1996, 10,158,396 shares of Commercial Assets, Inc. Common
Stock were outstanding.
<PAGE>
COMMERCIAL ASSETS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Financial Statements: PAGE
Balance Sheets as of March 31, 1996
(Unaudited) and December 31, 1995......................... 1
Statements of Income for the three months ended
March 31, 1996 and 1995 (Unaudited)....................... 2
Statements of Cash Flows for the three months ended
March 31, 1996 and 1995 (Unaudited)....................... 3
Notes to Financial Statements (Unaudited)................... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 6
Definitions................................................. 15
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K............................ 16
(i)
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC.
CONDENSED BALANCE SHEETS
(Dollar amounts in thousands)
March 31, December 31,
1996 1995
---- ----
Assets (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 254 $ 598
Accrued interest receivable 672 675
Restricted cash 1,210 768
CMBS bonds 69,182 69,503
Other assets, net 42 46
---------- ----------
Total Assets $ 71,360 $ 71,590
========== ==========
Liabilities
Accounts payable and accrued liabilities $ 114 $ 133
Management fees payable 378 292
Short-term notes payable 400 700
---------- ----------
Total Liabilities 892 1,125
---------- ----------
Stockholders' Equity
Preferred Stock, par value $.01 per share, 25,000,000 shares authorized; no
shares issued or outstanding -- --
Common Stock, par value $.01 per share, 75,000,000 shares authorized;
10,158,396 and 10,142,034 shares issued and outstanding, respectively 102 102
Additional paid-in capital 75,619 75,523
Cumulative dividends declared (14,621) (12,897)
Cumulative net income 13,589 11,982
---------- ----------
Dividends in excess of net income (1,032) (915)
---------- ----------
Net unrealized holding losses on CMBS bonds (4,221) (4,245)
---------- ----------
Total Stockholders' Equity 70,468 70,465
---------- ----------
Total Liabilities and Stockholders' Equity $ 71,360 $ 71,590
========== ==========
</TABLE>
See Notes to Condensed Financial Statements.
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<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC.
CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
---------
1996 1995
---- ----
Revenues
<S> <C> <C>
CMBS bonds $ 2,311 $ 2,210
Interest 7 139
-------- -------
Total Revenues 2,318 2,349
-------- -------
Expenses
Management fees 378 232
General and administrative 330 394
Interest 3 190
-------- -------
Total Expenses 711 816
-------- -------
Net Income $ 1,607 $ 1,533
======== =======
Net income per share $ .16 $ .15
Weighted-average shares outstanding 10,142 10,078
Dividends per share $ .17 $ .17
</TABLE>
See Notes to Condensed Financial Statements.
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<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
---------
1996 1995
---- ----
Cash Flows From Operating Activities
<S> <C> <C>
Net income $ 1,607 $ 1,533
Adjustments to reconcile net income to net cash flows from operating
activities - amortization of discount on CMBS bonds and other assets (238) (118)
Decrease in accrued interest receivable 3 1
Increase in accounts payable and accrued liabilities 164 76
------- ---------
Net Cash Provided By Operating Activities 1,536 1,492
------- ---------
Cash Flows From Investing Activities
Principal collections from CMBS bonds 144 134
------- ---------
Cash Flows From Financing Activities
Dividends paid (1,724) (2,011)
Repayments of short-term notes payable (300) (6,295)
Decrease in other assets -- 28
------- ---------
Net Cash Used In Financing Activities (2,024) (8,278)
-------- ---------
Cash and Cash Equivalents
Decrease (344) (6,652)
Beginning of period 598 12,367
------- ---------
End of period $ 254 $ 5,715
======== =========
</TABLE>
See Notes to Condensed Financial Statements.
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<PAGE>
COMMERCIAL ASSETS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Capitalized terms not otherwise defined in the narrative below
shall have the meaning indicated in the "Definitions" which may be found at the
end of this report.
A. Organization
Commercial Assets, Inc. was incorporated under Maryland law on
August 11, 1993 by Asset Investors. The Company commenced operations on October
12, 1993. Asset Investors contributed $75,000,000 to the capital of the Company
and distributed approximately 70% of the shares of Common Stock of Commercial
Assets, Inc. to Asset Investors' shareowners (the "Distribution"). The Company's
Common Stock is listed on the American Stock Exchange under the symbol "CAX."
B. Presentation of Financial Statements
The Condensed Financial Statements of the Company have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Commission. These Condensed Financial Statements reflect all adjustments,
consisting of only normal recurring accruals, which, in the opinion of
management, are necessary to present fairly the financial position and results
of operations of the Company as of March 31, 1996 and for the three months then
ended and all prior periods presented. These statements are condensed and do not
include all the information required by GAAP in a full set of financial
statements. These statements should be read in conjunction with the Company's
Financial Statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995.
C. Statements of Cash Flows
For purposes of reporting cash flows, cash maintained in bank
accounts, money market funds and overnight cash investments are considered to be
cash and cash equivalents. The Company paid interest expense in cash of $5,000
and $217,000 for the three months ended March 31, 1996 and 1995, respectively.
For the three months ended March 31, 1996 and 1995, the Company had non-cash
investing activities of $442,000 and $96,000, respectively, from principal
collections on CMBS bonds transferred to restricted cash. The Company had
non-cash financing activities of $96,000 and $83,000 during the three months
ended March 31, 1996 and 1995, respectively, related to Common Stock issued
pursuant to DERs.
D. CMBS Bonds
As of March 31, 1996 and December 31, 1995, the outstanding balance
of the Company's CMBS bonds was $99,781,000 and $100,368,000, respectively,
while unamortized purchase discounts, acquisition costs and allowance for credit
losses totaled $26,378,000 and $26,620,000, respectively. Additionally,
unrealized holding losses on the CMBS bonds as of March 31, 1996 and December
31, 1995 were $4,221,000 and $4,245,000, respectively.
At March 31, 1996, the outstanding balance of the mortgage loans
collateralizing the CMBS bonds was $1,125,217,000 and the outstanding principal
balance of the CMBS bonds that are senior to the Company's CMBS bonds was
$1,008,159,000. The aggregate allowance for credit losses on the Company's CMBS
bonds was $12,720,000 at both March 31, 1996 and December 31, 1995. At March 31,
1996, one of the mortgage loans with an outstanding balance of $788,000, which
collateralizes the Company's CMBS bonds, was delinquent. There have been no
credit losses charged to operations or write-downs charged against the allowance
for credit losses.
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<PAGE>
Pursuant to the provisions of certain of the Company's CMBS bonds,
principal payments which would otherwise be attributable to the Company's
interests are required to be set aside in reserve accounts for credit support of
the more senior classes of CMBS bonds. At March 31, 1996 and December 31, 1995,
$1,210,000 and $768,000, respectively, were set aside in reserve accounts and
are shown as restricted cash on the balance sheet.
E. Short-Term Notes Payable
On November 29, 1994, the Company entered into a $50,000,000 Loan
and Security Agreement which is currently collateralized by four CMBS bonds
(FNMA 94-M2C, FNMA 94-M2D, Kidder 94-M1C and Kidder 94-M1D), pursuant to which
the Company can borrow amounts based upon the value of the collateral pledged,
upon either a committed or an uncommitted advance through November 29, 1996.
Advances bear interest based upon a spread over the LIBOR with a term that most
closely approximates the term of the advance. Committed advances are subject to
non-usage fees. The Loan and Security Agreement contains certain covenants with
which the Company was in compliance at December 31, 1995 and March 31, 1996. At
December 31, 1995 and March 31, 1996, no borrowings were outstanding and
$21,616,000 was available to be borrowed.
On July 19, 1995, the Company entered into a one-year, unsecured
line of credit with a bank for $1,000,000. Advances bear interest at prime. Two
of the Company's Independent Directors are members of the Board of Directors of
the bank. At March 31, 1996, $400,000 was outstanding on this line of credit at
an interest rate of 8.25% per annum. The advance was repaid in April 1996. At
December 31, 1995, $700,000 was outstanding on this line of credit, which was
repaid in January 1996.
F. Management Fees
On April 1, 1996, Financial Asset Management LLC assumed the
obligations of the Management Agreement. Financial Asset Management LLC is 80%
owned by two wholly owned subsidiaries of MDC and 20% owned by Spencer I.
Browne, the President and a Director of the Company.
During the three months ended March 31, 1996 and 1995, the
Company's total management fees pursuant to the Management Agreement were
$378,000 and $232,000, respectively. Management fees during the three months
ended March 31, 1996 and 1995 included: (i) Base Fees of $171,000 and $188,000,
respectively; (ii) Administrative Fees of $16,000 and $16,000, respectively; and
(iii) Incentive Fees of $191,000 and $28,000, respectively. No Acquisition Fees
were incurred during the three months ended March 31, 1996 or 1995.
G. Stock Option Plan
The Stock Option Plan currently permits options granted under the
plan to accrue DERs. During the three months ended March 31, 1996 and 1995,
dividends resulted in noncash charges to general and administrative expense of
$96,000 and $83,000, respectively, for DERs covering 16,362 and 14,206 shares,
respectively, of Common Stock which are subject to issuance pursuant to options
granted under the plan.
H. Subsequent Event
The Company has been notified that two of its CMBS bonds (Aspen
MHC, Series 1994-1, Class C and D-1) with an outstanding balance of $9,664,000
will be repaid in May 1996. At March 31, 1996, the amortized cost of these CMBS
bonds was $8,276,000. The early redemption of these two CMBS bonds will result
in approximately $1,400,000 of income during the second quarter of 1996 from
acceleration of discount amortization on the CMBS bonds.
-5-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Capitalized terms not otherwise defined in the narrative below
shall have the meaning indicated in the "Definitions" which may be found at the
end of this report.
Commercial Assets, Inc. was incorporated under Maryland law on
August 11, 1993 by Asset Investors. The Company commenced operations on October
12, 1993, the date on which Asset Investors contributed $75,000,000 to the
capital of the Company and distributed approximately 70% of the shares of Common
Stock of Commercial Assets, Inc. to Asset Investors' shareowners (the
"Distribution"). The Company's Common Stock is listed on the American Stock
Exchange under the symbol "CAX".
The Company's day-to-day operations are performed by the Manager,
pursuant to the Management Agreement, which is subject to the annual approval of
a majority of the Independent Directors. The Manager also manages Asset
Investors. On April 1, 1996, Financial Asset Management LLC assumed the
obligations of the Management Agreement from Financial Asset Management
Corporation. Financial Asset Management LLC is 80% owned by two wholly owned
subsidiaries of MDC and 20% owned by Spencer I. Browne, the President and a
Director of the Company.
The Manager is subject to the supervision of the Board of Directors
of the Company. As part of its duties, the Manager presents the Company with
asset acquisition opportunities and furnishes the Board of Directors with
information concerning the acquisition, performance and disposition of assets.
The Company has no employees. Certain employees of the Manager and MDC have been
designated officers of the Company.
With the proceeds of its initial capitalization, the Company
acquired, and the Manager administers on the Company's behalf, subordinate debt
interests in CMBS bonds issued in securitizations of mortgage loans on
multi-family properties. The 11 CMBS bonds owned by the Company are from six
commercial mortgage loan securitizations acquired at a cost of $74,433,000 with
an outstanding principal balance of $99,781,000 at March 31, 1996 and an
estimated weighted-average yield-to-maturity before credit losses of 13.4
percent. The weighted-average yield-to-maturity of the Company's CMBS bonds is
adversely impacted by the amortization of $553,000 in acquisition costs
capitalized by the Company. Approximately 72 percent of the Company's CMBS bonds
are unrated, and the remaining 28 percent are rated "BB" or "B" by national
credit rating agencies.
Geographic diversity of the collateral which secures a CMBS bond is
an important component of the Company's acquisition criteria. The mortgages
which comprise the collateral for the Company's CMBS bonds are secured by
apartment communities and mobile home parks in 36 states. Approximately 24
percent, 13 percent and 10 percent of the mortgage loans are collateralized by
properties in Texas, Florida and Arizona, respectively.
The multi-family mortgage loans that collateralize the Company's
CMBS bonds were primarily originated during 1993 and 1994. Capital for mortgage
financing during these years was generally less available than in 1995 and 1996
because of, among other things, the pull back of traditional real estate lenders
(e.g. banks, thrifts, pension funds, etc.) as a result of significant losses
which resulted from falling real estate values in the late 1980s and early
1990s. Accordingly, the Company believes the mortgage loan underwriting
procedures applied to mortgage loans originated in 1993 and 1994 were more
stringent than underwriting procedures applied to multi-family mortgage loans
originated in 1995 and 1996. The Company may benefit from the more stringent
underwriting procedures on the mortgage loans that collateralize its CMBS bonds
through reduced credit losses in the future.
Presented below is a schedule of the CMBS bonds owned by the
Company as of March 31, 1996 and December 31, 1995 (dollar amounts in
thousands).
-6-
<PAGE>
<TABLE>
<CAPTION>
Weighted Senior Outstanding
Maturity Average Date CMBS Bonds(4) Balance at
Description Coupon Date Life(5) Acquired Rating 3/31/96 3/31/96 12/31/95
- ------------------------------------------------- ------------------ ---------- -------- ------ ------- ------- --------
Kidder, Peabody Acceptance Corporation I, Series
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993-M2, Class E(1) 8.88% 8/2021 4.4 yrs. 11/16/93 BB $ 93,035 $10,000 $ 10,000
Lehman Capital Corporation Trust Certificate,
Series 1994-2(2) 6.50 10/2003 7.6 2/24/94 Unrated 127,069 2,143 2,143
Lehman Capital Corporation Trust Certificate,
Series 1994-3 6.50 10/2003 7.6 2/24/94 Unrated 4,162 4,162
Aspen MHC, Series 1994-1, Class C(3) 9.00 3/2024 4.5 3/08/94 BB 94,895 6,116 6,261
Aspen MHC, Series 1994-1, Class D-1(3) 9.00 3/2024 14.3 3/08/94 Unrated 3,596 3,596
Fannie Mae Multi-Family REMIC Trust 1994-M2, Class
C(6) 7.99 1/2001 4.6 3/30/94 Unrated 364,098 11,225 11,587
Fannie Mae Multi-Family REMIC Trust 1994-M2, Class
D(6) 8.18 1/2004 7.4 3/30/94 Unrated 38,635 38,715
DLJ Mortgage Acceptance Corporation, Series
1994-MF4, Class B-3 8.50 4/2001 5.0 6/15/94 B 93,070 3,136 3,136
DLJ Mortgage Acceptance Corporation, Series
1994-MF4, Class C 8.50 4/2001 5.0 6/15/94 Unrated 4,183 4,183
Kidder, Peabody Acceptance Corporation I, Series
1994-M1, Class C 8.25 11/2002 5.3 11/29/94 B 235,992 8,930 8,930
Kidder, Peabody Acceptance Corporation I, Series
1994-M1, Class D 8.25 11/2002 5.7 11/29/94 Unrated 7,655 7,655
---- ----- --------- -------- -----
Total outstanding balance 8.24% 6.4 yrs. $1,008,159 99,781 100,368
==== ===== ==========
Unamortized discount (14,131) (14,393)
Allowance for credit losses (12,720) (12,720)
Unamortized acquisition costs 473 493
-------- -------
Amortized cost 73,403 73,748
Net unrealized holding losses (4,221) (4,245)
-------- -------
Total net book value $ 69,182 $ 69,503
======== ========
- ------------------------------------------------------------
<FN>
1 The Company has a 75.2% ownership interest in this CMBS bond.
2 The Company has a 51.7% ownership interest in this CMBS bond.
3 There is a bond class subordinate to Aspen class C and D-1 with an
outstanding balance at March 31, 1996 of $11,986,000. The Company has
been notified that these bonds will payoff in May 1996.
4 The amount of CMBS bonds senior to the Company's subordinate CMBS bond
classes. The amount is aggregated for classes from a single issuance.
5 Remaining weighted-average life at March 31, 1996.
6 Payment of principal and interest is not guaranteed by FNMA.
</FN>
</TABLE>
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<PAGE>
RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
REIT Income
The Company's REIT income for the three months ended March 31, 1996
was $2,059,000 ($.20 per share) compared with $1,704,000 ($.17 per share) for
the same period in 1995. The primary reason for the increase was higher
amortization of the pricing discount from one of the CMBS bonds.
REIT income from CMBS bonds for the three months ended March 31,
1996 was $2,825,000 ($.28 per share) compared with $2,398,000 ($.24 per share)
for the same period in 1995. The increase in REIT income from CMBS bonds
primarily resulted from an increase in the amortization of the pricing discount
on one of the CMBS bonds. For this particular bond, the Company elected to limit
the amount of amortization to the lesser of principal received or computed
amortization. During 1994 and 1995, the normally scheduled principal from the
bond was less than the computed amortization. Accordingly, earnings from
amortizing the pricing discount were limited to principal received. During the
three months ended March 31, 1996, there was a $337,000 principal prepayment
from a mortgage collateralizing this bond. However, even with the prepayment,
principal received since acquiring the CMBS bond was less than computed
amortization since acquisition. As a result of the election, amortization was
increased by the amount of the prepayment.
The CMBS bonds have coupon interest rates ranging from 6.5% to 9.0%
and a weighted-average yield-to-maturity before credit losses for REIT purposes
of 13.4%. The yield from CMBS bonds exceeds the coupon interest rate because the
subordinate CMBS bonds were sold to the Company with original issue discount or
market discount (i.e., the acquisition prices of the CMBS bonds were less than
their par values).
Through March 31, 1996, one mortgage loan with a balance of
$788,000 collateralizing the Company's CMBS bonds has been delinquent. To date,
no credit losses have been realized.
The Company has been notified that two of its CMBS bonds (Aspen
MHC, Series 1994-1, Class C and D-1) with an outstanding balance of $9,664,000
will be repaid in May 1996. At March 31, 1996, the amortized cost of these CMBS
bonds was $8,276,000. The early redemption of these two CMBS bonds will result
in approximately $1,400,000 of income during the second quarter of 1996 from
acceleration of discount amortization on the CMBS bonds.
The proceeds from the redemption will be invested in short-term
cash instruments until a long-term strategy is determined. Except for the
increased discount amortization from early redemption of the bonds in the second
quarter of 1996, future income from CMBS bonds will likely be less than in 1995
and the first quarter of 1996 until the proceeds from the redemption are
invested.
Interest income during the three months ended March 31, 1996 was
$7,000 ($.00 per share) compared with $139,000 ($.01 per share) for the three
months ended March 31, 1995. The Company had $12,367,000 of cash on hand at
December 31, 1994, which it used to pay down notes payable during the first half
of 1995.
General and administrative expenses of the Company were $392,000
($.04 per share) for the three months ended March 31, 1996 compared with
$411,000 ($.03 per share) for the same period in 1995. General and
administrative expenses decreased during the three months ended March 31, 1996
compared with the first quarter of 1995 due to lower costs for shareholder
relations and accounting expenses partially offset by higher DER expense as a
result of more stock options outstanding.
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<PAGE>
The Company is soliciting shareowner approval of an amendment to
the Stock Option Plan at its annual meeting in May 1996 to authorize the Company
to issue shares of Common Stock in the second quarter of 1996 to the holders of
stock options who voluntarily give up their DERs that in the future will create
the right to receive shares of Common Stock. If approved, the amendment will
also eliminate provisions in the Stock Option Plan that permit the issuance of
DERs in connection with stock options granted in the future. The effect of the
proposal, if approved and rights to the DERs are relinquished, will be to reduce
general and administrative expenses from DERs by approximately $300,000 in 1996
and approximately $400,000 per year in subsequent years. The issuance of Common
Stock in exchange for the right to receive DERs will result in a one-time charge
to 1996 income of approximately $950,000 and issuance of approximately 150,000
shares of Common Stock.
The Manager receives fees pursuant to the Management Agreement. The
Base Fee is payable quarterly in an amount equal to 1% per annum of the "average
invested assets" of the Company. The Manager also is entitled to an Incentive
Fee only after the Company's shareowners first have received a return on the
Company's "average net worth" equal to the "Ten-Year United States Treasury
Rate" plus 1%. Twenty percent of the Company's "net income" in excess of this
amount is paid to the Manager as the Incentive Fee. The Manager receives an
Acquisition Fee of 1/2 of 1% of the initial cost of each asset which the Manager
assists the Company in acquiring. The Acquisition Fee compensates the Manager
for performing due diligence procedures on CMBS bonds reviewed for acquisition
by the Company. The Manager also performs certain bond administration and other
related services for the Company pursuant to the Management Agreement and
receives an Administrative Fee for such services.
The Company's management fees were $378,000 ($.04 per share) for
the three months ended March 31, 1996 compared with $232,000 ($.02 per share)
for the same period in 1995. The increase in management fees during 1996
compared with 1995 was due to an increase of $163,000 of Incentive Fees, offset
by a $17,000 decrease in Base Fees. The increase in Incentive Fees was due to a
$355,000 increase in REIT income and a 158 basis point decrease in the average
Ten-Year U.S. Treasury Rate from the first quarter 1995 to the first quarter
1996. The decrease in Base Fees was primarily due to a reduction of invested
assets from $4,245,000 of unrealized holding losses on the CMBS bonds recorded
at December 31, 1995.
During the three months ended March 31, 1996, interest expense on
the Company's short-term notes payable was $3,000 ($.00 per share) compared with
$190,000 ($.02 per share) for the same period in 1995. The decrease was
primarily the result of paydowns of the notes payable during the first half of
1995.
Dividend Distributions
In March 1996, the Company declared a first quarter dividend of
$.17 per share which was paid on March 29, 1996 to shareowners of record on
March 18, 1996. This is the sixth consecutive quarter of a regular dividend of
$.17 per share. Since the Company's inception in the fall of 1993, the Company
has distributed dividends to its shareowners totaling $14,621,000 ($1.45 per
share).
Book Income
For the three months ended March 31, 1996, the Company earned book
income computed in accordance with GAAP of $1,607,000 ($.16 per share) compared
with $1,533,000 ($.15 per share) for the same period in 1995. The significant
increase in the amortization of the pricing discount recorded for REIT purposes
is not included in book income. Otherwise, the $74,000 ($.01 per share) increase
in book income was for primarily the same reasons as the changes in REIT income
previously discussed.
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<PAGE>
Reconciliation of REIT Income and Book Income
The Company computes its income in accordance with the Code (REIT
income) and in accordance with GAAP (book income). As a REIT, the Company's REIT
income is extremely important as it is the basis upon which the Code requires
the Company to make distributions to its shareowners. However, because the
Company's Common Stock is registered with the SEC, the Company also is required
to report its financial position and income in accordance with GAAP.
During the three months ended March 31, 1996, REIT income exceeded
book income by $452,000 ($.04 per share). Substantially all of this difference
is due to: (i) the method of recording credit losses, which for REIT income
purposes are not deducted until they occur and which for book income purposes
are estimated and reflected as a reduction of revenues in the form of lower
discount amortization included in interest income from CMBS bonds (to date, no
credit losses have been realized); (ii) the method of amortizing purchase price
discounts, which for REIT income purposes is subject to certain limitations not
applicable for book income purposes; and (iii) the timing of the deduction of
DER expense, which for book income purposes is on the record date of the
dividend and for REIT income purposes is subject to tax elections made by the
recipient.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its cash flows from operating activities and other
capital resources: (i) to provide working capital to support its operations;
(ii) for making distributions to its shareowners; and (iii) for the repayment of
short-term borrowings. For the three months ended March 31, 1996 and 1995, cash
flows provided by operating activities were $1,536,000 and $1,492,000,
respectively. As of March 31, 1996, the Company had $254,000 in cash and cash
equivalents, which the Company currently intends to use to pay its expenses and
make dividend distributions to shareowners.
On November 29, 1994, the Company entered into a $50,000,000 Loan
and Security Agreement which is currently collateralized by four CMBS bonds
(FNMA 94-M2C, FNMA 94-M2D, Kidder 94-M1C and Kidder 94-M1D), pursuant to which
the Company can borrow amounts based upon the value of the collateral pledged.
No borrowings were outstanding on this line at March 31, 1996 and $21,616,000
was available to be borrowed. Advances bear interest based upon a spread over
the LIBOR with a term that most closely approximates the term of the advance.
The Loan and Security Agreement contains certain covenants with which the
Company was in compliance at March 31, 1996.
On July 19, 1995, the Company entered into a one-year, unsecured
line of credit with a bank for $1,000,000. Advances bear interest at prime. Two
of the Company's Independent Directors are members of the Board of Directors of
the bank. At March 31, 1996, $400,000 was outstanding on this line of credit at
an interest rate of 8.25% per annum. The advance was repaid in April 1996.
The amount the Company will be able to borrow under its secured
credit facility will vary depending on the value of the collateral pledged to
secure such facility. To the extent that changes in market conditions cause the
cost of such financing to increase relative to the income that can be derived
from the assets acquired, the Company may reduce the amount of leverage it
utilizes. The Company currently does not plan to acquire additional CMBS bonds
through leverage without having a source of long-term financing in place.
The Company has been notified that two of its CMBS bonds (Aspen
MHC, Series 1994-1, Class C and D-1) with an outstanding balance of $9,664,000
will be repaid in May 1996. The repayment of the CMBS bonds was eight years
earlier than scheduled. The proceeds from the bond redemption will be invested
in short-term cash instruments until a long-term strategy is determined.
-10-
<PAGE>
The indentures of the commercial securitizations in which the
Company has acquired CMBS bonds generally provide for substantial penalties if
the mortgage loans underlying the commercial securitization are prepaid, and the
prepayments generally are allocated to the senior bond classes before the
subordinate bond classes. Significant principal distributions to subordinate
CMBS bonds generally are not anticipated until the scheduled principal
distributions are made.
The Company's ability to acquire additional assets will depend on,
among other things, unanticipated principal prepayments such as the $9,664,000
of CMBS bonds redeemed in May 1996, or obtaining new debt or equity capital.
There is no assurance the Company will be able to identify new CMBS bond
acquisition opportunities that meet the Company's acquisition criteria or that
it will be able to raise additional funds, whether from principal prepayments,
borrowings, debt securities, Common Stock or Preferred Stock issuances or other
sources.
As a REIT, the Company is required, among other things, to
distribute annually to its shareowners at least 95% of its REIT income. By
qualifying for the favorable tax treatment accorded to a REIT and by
distributing to its shareowners 100% of the Company's REIT income, the Company
generally will not be required to pay income tax at the corporate level.
At March 31, 1996, undistributed REIT income (cumulative REIT
income in excess of cumulative distributions to shareowners) was $509,000 ($.05
per share). The Company anticipates additional REIT income from the redemption
of the $9,664,000 of CMBS bonds in May 1996 of approximately $1,400,000 ($.14
per share) during the second quarter of 1996. However, if the Company's
shareowners approve the amendment to the Stock Option Plan to eliminate DERs and
all holders of stock options give up their DERs, the Company will incur a
one-time charge of approximately $950,000 in the second quarter of 1996 in
connection with the issuance of shares of Common Stock as consideration for the
elimination of DERs. Taking into consideration: (i) the carryover of
undistributed REIT income from March 31, 1996; (ii) the REIT income generated by
the redemption of $9,664,000 of CMBS bonds; and (iii) the expenses from the
issuance of Common Stock in exchange for the elimination of DERs, undistributed
REIT income should increase approximately $1,000,000, subject to, among other
things, expense levels and credit losses and principal payments on its
subordinate CMBS bonds.
Under the Code, the Company has elected an income recognition
methodology for certain of its CMBS bonds that computes REIT income attributable
to the amortization of market discount as the lesser of: (i) the amount of
principal received from the CMBS bond during the year; or (ii) the computed
discount amortization. The effect of this election is to defer a portion of the
amount of the Company's REIT income from non-cash discount amortization from the
early years in the life of the applicable bonds to later years when significant
repayments of principal are expected to be received. The Company was able to
make this election on four CMBS bonds which had an outstanding principal balance
of $56,165,000 at March 31, 1996.
Subordinate CMBS bonds acquired by the Company are relatively
non-liquid and, as a result, the Company's ability to change its portfolio
quickly in response to changes in economic and other conditions may be limited.
In addition, REIT rules applicable to the Company may require the Company to pay
capital gains taxes on assets it sells within four years of their acquisition.
As the holder of subordinate CMBS bonds (which generally are
allocated the first losses on the underlying mortgage loans), the Company has
credit risk. These bonds are subject to a greater risk of loss of principal and
non-payment of interest than the more senior bonds. If a borrower defaults on a
commercial mortgage loan that is pledged as collateral for a commercial mortgage
loan securitization and the proceeds of the foreclosure of the property are less
-11-
<PAGE>
than the unpaid balance of the mortgage plus foreclosure costs (principal and
interest advances through foreclosure sale, repair and maintenance costs during
the foreclosure, brokerage fees, legal fees, taxes, insurance, etc.), the
Company, as the holder in most cases of the subordinate class, will suffer a
loss.
The Company believes that cash generated by current and future
operations and additional capital-raising activities, including borrowings, will
enable the Company to meet its current and anticipated future liquidity
requirements, including the payment of dividends to its shareowners in an amount
equal to at least 95% of the Company's REIT income.
CMBS BOND YIELD CONSIDERATIONS
Defaults
The yields on the CMBS bonds acquired by the Company are extremely
sensitive to the amount and timing of defaults and the severity of losses
resulting from the defaults on the mortgage loans collateralizing such CMBS
bonds. The Company's right, as a holder of subordinate CMBS bonds, to
distributions of principal and interest is subordinate to the more senior
classes of CMBS bonds. Actual losses on the loans (after default, where the
proceeds from the foreclosure sale of the real estate are less than the unpaid
balance of the mortgage loan plus disposition costs) will be allocated first to
the subordinate first-loss CMBS bonds prior to being allocated to the more
senior CMBS bond classes. The CMBS bonds the Company owns and may acquire in the
future are speculative and may be subject to special risks, including a
substantially greater risk of loss of principal and non-payment of interest than
the more senior rated bonds.
If the Company acquires a CMBS bond with an anticipated yield based
on a projected rate of default and severity of loss on the mortgage loans that
is lower than the actual default rate and severity of loss, the yield on the
CMBS bond will be lower than the Company initially anticipated and, in the event
of substantial losses, the Company may not recover a significant portion, or
any, of its acquisition cost. The timing of actual losses also will affect the
Company's yield on CMBS bonds, even if the rate of default and severity of loss
are consistent with the Company's projections. In general, the earlier a loss
occurs, the greater the adverse effect on the Company's yield.
The Company's CMBS bonds also will be affected by interest rate
levels during the periods that the mortgage loans collateralizing the CMBS bonds
mature. For example, if at the maturity date of a mortgage loan, the prevailing
mortgage interest rates are much higher than the original interest rate on the
mortgage loan, the operating cash flows from the commercial property may not be
sufficient to meet the higher debt service costs of replacement financing, and
the owner of the commercial property, unable to obtain replacement financing,
may go into default on the mortgage. If the property is not sold for more than
the amount of the mortgage plus foreclosure costs, the Company may incur credit
losses. Similar losses may occur if refinancing of the commercial properties
cannot be arranged at the balloon due date of the current outstanding mortgage
due to higher interest costs or poor property performance.
There can be no assurance as to the rate of delinquency or timing
and severity of losses on the mortgage loans collateralizing the CMBS bonds and,
thus, no assurance as to the actual yield received by the Company.
-12-
<PAGE>
Prepayments
The aggregate amount of distributions on the Company's CMBS bonds
and their yields also will be affected by the amount and timing of principal
prepayments on the mortgage loans. To the extent that the more senior tranches
of CMBS bonds are outstanding, generally, all payments of principal, including
prepayments, on the mortgage loans will be paid to the holders of the more
senior classes, and none will be paid to the subordinate classes held by the
Company. When computing yields-to-maturity on its CMBS bonds, the Company
generally does not consider prepayments from the underlying mortgage loans
collateralizing its CMBS bonds. Because the Company is acquiring the CMBS bonds
at a significant discount from their outstanding principal balance, if the
Company receives prepayments of principal on the CMBS bonds the Company owns,
the Company's yield on its CMBS bonds would increase.
Because the rate and timing of principal payments on mortgage loans
will depend on future events and on a variety of factors over which the Company
has no control, no assurances can be given as to the rate or timing of principal
payments on the CMBS bonds the Company owns or may acquire.
Loss Severity
While the rate of default and the rate and timing of prepayments on
the Mortgage Collateral are important in determining the anticipated yield on
subordinate CMBS bonds, the anticipated severity of the loss (i.e., the total
loss on any foreclosure sale as a percentage of the remaining outstanding
principal balance of a mortgage loan) is significantly more important in
determining the anticipated yield on a subordinate CMBS bond. The severity of
the losses on defaulted Mortgage Collateral through foreclosure sales of the
properties, which are the primary security for the Mortgage Collateral, is
extremely important because such losses generally will be allocated to, and will
reduce the remaining principal balance of, the Company's subordinate CMBS bonds.
The severity of loss takes into account the anticipated decline in market value
of the commercial property, accrued and unpaid interest through the foreclosure
and maintenance and disposition expenses, which include, among other things,
necessary repair and maintenance costs during the foreclosure, brokerage fees,
legal fees, interest charges on servicing advances, insurance and taxes. In
addition, the higher the coupon rate of the mortgage loan, the higher are the
costs of foreclosure which reflect accrued and unpaid interest from default
through foreclosure sale.
INFLATION, INTEREST RATES, MORTGAGE PREPAYMENTS AND OTHER FACTORS
The Company and the Common Stock will be affected by prevailing
market interest rates, including: (i) the effects of interest rates on the
values of long-term, fixed-rate debt securities; (ii) the possibility that, in
periods of high interest rates, the Common Stock may be less attractive than
alternative investments of equal or lower risk; (iii) possible mismatches
between the Company's borrowing costs and the Company's cash flow requirements
which could have a negative effect on the Company's income; (iv) the negative
effect of high interest rates on the properties underlying the CMBS bonds
(including a negative impact on the owner's ability to refinance debt secured by
such properties) which the Company has acquired and may acquire in the future;
and (v) the effects of interest rates on the Company's borrowing costs. Interest
rates are determined in large part by market conditions and government policies
which are beyond the control of the Company and which are difficult to predict.
Certain statements in this Form 10-Q Quarterly Report, as well as
statements made by the Company in periodic press releases, oral statements made
by the Company's officials to analysts and shareowners in the course of
presentations about the Company and conference calls following quarterly
earnings releases, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
-13-
<PAGE>
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. Such
factors include the following: general economic and business conditions;
interest rate changes; competition; the availability of financing with terms and
prices acceptable to the Company; the Company's ability to maintain or reduce
expense levels and the assumption that losses on non-agency CMBS bonds do not
exceed the Company's estimates.
-14-
<PAGE>
DEFINITIONS
The following terms used in the text are understood to have the
meanings indicated below.
Acquisition Fee - a one-time fee paid to the Manager pursuant to the Management
Agreement for performing due diligence procedures in connection with the
acquisition by the Company of each asset equal to 0.5% of the cost of such
acquisition.
Administration Fee - a fee of up to $10,000 per annum which is paid to the
Manager pursuant to the Management Agreement for administration and other
services related to each of the Company's CMBS bonds. If the Company owns more
than one class of a commercial securitization the Manager is entitled to receive
an additional fee of $2,500 per annum for each additional class.
Asset Investors - Asset Investors Corporation, a Maryland corporation.
Base Fee - management fee equal to 1% per annum of the Company's consolidated
Average Invested Assets as defined in the Management Agreement which is payable
quarterly to the Manager pursuant to the Management Agreement.
CMBS bond - commercial mortgage-backed security, which is a debt instrument
secured by mortgage loans on commercial real property.
Code - the Internal Revenue Code of 1986, as amended.
commercial mortgage loan securitizations - multi-class issuances of bonds which
are secured and funded as to the payments of principal and interest by a
specific group of mortgage loans on multi-family or other commercial real
estate, accounts and other collateral.
Company - Commercial Assets, Inc., a Maryland corporation.
Contribution Agreement - the contribution agreement between Asset Investors and
the Company, dated as of August 20, 1993.
DERs - Dividend equivalent rights, as defined in the Company's Stock Option
Plan. Option holders earn shares of Common Stock equal to the value of dividends
received as if the options were outstanding Common Stock.
first-loss - a first-loss security is the most subordinate class of a security
having multiple classes and which is the first to bear the risk of losses
related to defaults on the underlying collateral.
GAAP - generally accepted accounting principles.
Incentive Fee - management fee equal to 20% of the dollar amount by which the
annual Net Income (as defined in the Management Agreement, based on REIT income)
of the Company exceeds an amount equal to the Average Net Worth (as defined in
the Management Agreement) of the Company multiplied by the Ten-Year U.S.
Treasury Rate (as defined in the Management Agreement) plus 1% per annum,
payable quarterly to the Manager pursuant to the Management Agreement.
Independent Director - pursuant to the Company's By-laws, an Independent
Director is a person "who is not affiliated, directly or indirectly, with the
person or entity responsible for directing or performing the day-to-day business
affairs of the corporation (the "advisor"), including a person or entity to
which the advisor subcontracts substantially all of such functions, whether by
-15-
<PAGE>
ownership of, ownership interest in, employment by, any material business or
professional relationship with, or by serving as an officer of the advisor or an
affiliated business entity of the advisor."
LIBOR - the London Interbank Offered Rate on Eurodollar deposits.
Management Agreement - the one-year management agreement entered into between
the Company and the Manager.
Manager - Financial Asset Management LLC, effective April 1, 1996. Financial
Asset Management LLC is 80% owned by two subsidiaries of MDC and 20% owned by
Spencer I. Browne, the President and a Director of the Company. Prior to April
1, 1996, the Manager was Financial Asset Management Corporation, a wholly owned
subsidiary of MDC.
MDC - M.D.C. Holdings, Inc., a Delaware corporation.
REIT - a real estate investment trust, as defined in the Code.
REIT income - taxable income computed as prescribed for REITs prior to the
"dividends paid deduction" (including the dividends paid deduction for dividends
related to capital gains).
Stock Option Plan - the Commercial Assets, Inc. 1993 Stock Option Plan.
PART II
OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
4.2 Form of certificate representing common stock of the
Registrant (incorporated herein by reference to Exhibit 4.2 to
the Form 10-Q for the period ended March 31, 1994, of the
Registrant, Commission File No. 1-22262 filed on May 16,
1995).
4.3 Automatic Dividend Reinvestment Plan relating to the common
stock of the Registrant (incorporated herein by reference to
Exhibit 4.2 to Amendment No. 1 to the Form 10 of the
Registrant, Commission File No. 1-22262, filed on August 31,
1993).
10.2 Registration Rights Agreement, dated as of August 20, 1993,
between the Registrant and Asset Investors (incorporated
herein by reference to Exhibit 10.2 to Amendment No. 2 to the
Form 10 of the Registrant, Commission File No. 1-22262, filed
on September 15, 1993).
10.3 Management Agreement, dated as of January 1, 1995, between the
Registrant and Financial Asset Management Corporation
(incorporated herein by reference to Exhibit 10.3(b) to the
Registrants Quarterly Report on Form 10-Q, Commission File No.
1-22262, filed on May 12, 1995).
-16-
<PAGE>
10.3(a) Amendment to the Management Agreement dated as of January 1,
1996 between the Registrant and Financial Asset Management
Corporation.
10.3(b) Assignment of the Management Agreement dated as of April 1,
1996 between Financial Asset Management Corporation and
Financial Asset Management LLC.
10.4 Commercial Assets, Inc. 1993 Stock Option Plan (incorporated
herein by reference to Exhibit 10.4 to Amendment No. 2 to the
Form 10 of the Registrant, Commission File No. 1-22262, filed
on September 15, 1993).
10.5 Form of Non-Officer Directors Stock Option Agreement
(incorporated herein by reference to Exhibit 99.2 to the
Registration Statement on Form S-8, Registration No. 33-7467B,
filed on February 1, 1994).
10.6 Form of Officers Stock Option Agreement (incorporated herein
by reference to Exhibit 99.3 to the Registration Statement on
Form S-8, Registration No. 33-7467B, filed on February 1,
1994).
10.7 Form of Indemnification Agreement between the Registrant and
each Director of the Registrant (incorporated herein by
reference to Exhibit 10.5 to Amendment No. 1 to the Form 10 of
the Registrant, Commission File No. 1-22262, filed on August
31, 1993).
10.8 Loan and Security Agreement, dated as of November 29, 1994,
between the Registrant and PaineWebber Real Estate Securities,
Inc. (incorporated herein by reference to Exhibit 10.8 to the
Registrants Annual Report on Form 10-K, Commission File No.
1-22262, filed on March 29, 1995).
10.8(a) Amendment to the Loan and Security Agreement, dated as of
November 29, 1994, between the Registrant and PaineWebber Real
Estate Securities, Inc. (incorporated herein by reference to
exhibit 10.8a to the Registrants Annual Report on Form 10-K,
commission File No. 1-22262, filed on March 28, 1996.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the Registrant
during the period covered by this Quarterly Report on Form 10-Q.
-17-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
COMMERCIAL ASSETS, INC.
(Registrant)
Date: May 14, 1996 By /s/ Paris G. Reece III
------------------------
Paris G. Reece III
Chief Financial Officer
-18-
AMENDMENT TO MANAGEMENT AGREEMENT
AMENDMENT as of January 1, 1996 to the Management Agreement, dated as
of January 1, 1995 (the "Management Agreement"), between COMMERCIAL ASSETS,
INC., a Maryland corporation (the "Company"), and FINANCIAL ASSET MANAGEMENT
CORPORATION, a Delaware corporation (the "Manager").
RECITALS
A. The Company and the Manager entered into the Management Agreement
pursuant to which the Manager performs the duties and responsibilities set forth
in the Management Agreement, subject to the supervision of the Company's Board
of Directors; and
B. The Company desires to engage the Manager to perform the duties and
responsibilities set forth in the Management Agreement on the terms set forth in
the Management Agreement and this Amendment and the Manager desires to be so
engaged for an additional one-year term.
NOW, THEREFORE, in consideration of the mutual agreements herein set
forth, the parties hereto agree as follows:
1. Section 9(f) of the Management Agreement is amended and restated
hereby as follows:
(f) Adjustment and Payment. The Manager shall compute the
estimated compensation payable or refundable under Sections 9(a), 9(b),
9(c), 9(d) and 9(e) hereof as soon as practicable after the end of each
fiscal quarter, but no later than 35 days after the end of each such
quarter. A copy of such computations shall be thereafter promptly
submitted to the Company and each member of the Board of Directors. Such
compensation shall be paid to the Manager, or refunded to the Company, no
later than the 45th day after such fiscal quarter as payment on account,
subject to adjustment under this Section 9(f) of this Agreement. The
aggregate amount of the Manager's compensation under Sections 9(a), 9(b),
9(c), 9(d) and 9(e) for each fiscal year shall be adjusted within: (x)
120 days after the end of such fiscal year; or (y) 120 days after the
filing of the Company's federal income tax return for such fiscal year,
whichever is later. Such adjustment shall be made to reflect additional
information provided by the Company's tax return for such fiscal year.
Any excess owed to, or refund owed by, the Manager shall be paid to the
Manager or remitted by the Manager to the Company within ten days of
presentment of the adjustment.
<PAGE>
2. Section 9(g) is hereby added as follows:
(g) Certain Expenses. If the Company requests any third party to
render services to the Company or to provide the Company with any data or
information, other than those services and data required to be rendered
and delivered by the Manager hereunder, the costs and expenses charged by
such third parties shall be paid by the Company. The Manager shall notify
the Company's Board of Directors if the costs and expenses to be charged
to the Company pursuant to this Sectoin 9(g) shall exceed $50,000 per
year.
3. Section 16 of the Management Agreement is amended and restated
hereby as follows:
"This Agreement shall continue in force until December 31, 1996 unless
otherwise renewed or extended."
4. This Amendment shall be deemed assigned to Financial Asset
Management LLC in the same manner and to the same extent as the Management
Agreement. Except as amended hereby, the Management Agreement shall remain in
full force and effect. In the event of a conflict between this Amendment and the
Management Agreement, the terms of this Amendment shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
[CORPORATE SEAL] COMMERCIAL ASSETS, INC.
ATTEST: By:/s/Spencer I. Browne
--------------------------
Name: Spencer I. Browne
/s/ Daniel S. Japha Title: President and Chief
- ------------------- Executive Officer
Daniel S. Japha, Secretary
FINANCIAL ASSET MANAGEMENT
CORPORATION
By:/s/Kevin J. Nystrom
--------------------------
Name: Kevin J. Nystrom
Title: Vice President and Chief
Accounting Officer
ASSIGNMENT
OF
MANAGEMENT AGREEMENTS
This Agreement is entered into effective as of April 1, 1996, by and
between Financial Asset Management Corporation, a Delaware corporation ("Old
FAMC"), MDC Residual Holdings, Inc., a Delaware corporation ("MDC Sub"), and
Financial Asset Management LLC, a Colorado limited liability company ("FAMC").
Recitals
A. Old FAMC is a party to two Management Agreements, each dated as of
January 1, 1995 and amended effective as of January 1, 1996, with Commercial
Assets, Inc. ("CAI") and with Asset Investors Corporation ("AIC") (the
"Management Agreements").
B. Old FAMC, MDC Sub and Spencer I. Browne formed FAMC effective as of
April 1, 1996.
C. Old FAMC desires to convey to MDC Sub an undivided 1.25% interest in
the Management Agreements (the "MDC Sub Interest"). Old FAMC desires to convey
to FAMC an undivided 98.75% interest in the Management Agreements (the "Old FAMC
Interest") and MDC Sub desires to convey to FAMC the MDC Sub Interest, together
with all goodwill associated therewith, including without limitation all rights
to the name "Financial Asset Management" and rights under the Management
Agreements, including without limitation rights to renew such agreements in
accordance with their terms, and such other rights or assets as may be specified
in a separate document executed by Old FAMC, MDC Sub and FAMC (collectively, the
"Transferred Interests") in exchange for a 79% membership interest in FAMC as to
Old FAMC and a 1% membership interest as to MDC Sub. FAMC is willing to accept
the Transferred Interests and become a party to and to adopt and agree to comply
with the terms of the Management Agreements.
Assignment and Acceptance
For good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, Old FAMC, MDC Sub and FAMC agree as follows:
1. Assignment. Old FAMC assigns and transfers to MDC Sub the MDC Sub
Interest. Old FAMC and MDC Sub assign and transfer to FAMC the Transferred
Interests. Old FAMC and MDC Sub covenant and agree not to take any action that
would interfere with FAMC's continuing relationship with CAI and AIC. Old FAMC
-1-
<PAGE>
and MDC Sub shall execute and deliver to FAMC such further assignments,
acknowledgments and documents as FAMC reasonably may request in order to confirm
or give notice of the transfers effected by this Agreement.
2. Acceptance. FAMC accepts the assignment of the Transferred Interests
made by paragraph 1 of this Agreement, and agrees to be bound by all of the
terms of the Management Agreements. FAMC agrees to execute and deliver a
counterpart of the Management Agreements. FAMC shall faithfully perform any and
all obligations of the Manager as such term is defined in the Management
Agreements.
3. Reliance by CAI and AIC. CAI and AIC shall be entitled to rely upon
and enforce the covenants and obligations of FAMC as stated in paragraph 2
above, and FAMC shall execute and deliver such further instruments as CAI and
AIC shall consider necessary or appropriate to effect FAMC's admission as
Manager under the Management Agreements.
4. Consent of Unaffiliated Directors. Old FAMC, MDC Sub and FAMC
acknowledge that the assignment and acceptance of the Management Agreements set
forth herein shall be subject to the consent to such assignment by the
Unaffiliated Directors of CAI and AIC as evidenced by a Consent to Assignment in
the forms attached hereto.
5. Miscellaneous. Capitalized terms used in this Agreement without
definition have the meanings given in the Management Agreements. This Agreement
shall inure to the benefit of and be binding upon the parties and their
successors, heirs, personal representatives and assigns. This Agreement is
governed by the laws of the State of Colorado. This Agreement may be executed in
counterparts.
Old FAMC and FAMC have executed this Agreement as of the date first
above written.
FINANCIAL ASSET MANAGEMENT CORPORATION
By:/s/Leslie B. Fox
-------------------
Name: Leslie B. Fox
Title: Senior Vice President
MDC RESIDUAL HOLDINGS, INC.
By:/s/Daniel S. Japha
---------------------
Name: Daniel S. Japha
Title: Vice President
2
<PAGE>
FINANCIAL ASSET MANAGEMENT LLC
By:/s/Spencer I. Browne
-----------------------
Name: Spencer I. Browne
Title: Manager
3
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