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 June 30, 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 July 31, 1996, 10,315,809 shares of Commercial Assets, Inc.
Common Stock were outstanding.
<PAGE>
COMMERCIAL ASSETS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Financial Statements:
Balance Sheets as of June 30, 1996
(Unaudited) and December 31, 1995...................... 1
Statements of Income for the three and six months
ended June 30, 1996 and 1995 (Unaudited)............... 2
Statements of Cash Flows for the six months ended
June 30, 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......... 7
Definitions.............................................. 16
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders...... 18
Item 6. Exhibits and Reports on Form 8-K......................... 18
(i)
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC.
CONDENSED BALANCE SHEETS
(Dollar amounts in thousands)
June 30, December 31,
1996 1995
--------- --------
Assets (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 11,033 $ 598
Accrued interest receivable 597 675
Restricted cash 1,764 768
CMBS bonds 60,814 69,503
Other assets, net 52 46
---------- ----------
Total Assets $ 74,260 $ 71,590
========== ==========
Liabilities
Accounts payable and accrued liabilities $ 50 $ 133
Management fees payable 452 292
Dividends payable 1,754 --
Short-term notes payable -- 700
---------- ----------
Total Liabilities 2,256 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;
10,315,809 and 10,142,034 shares issued and outstanding, respectively 103 102
Additional paid-in capital 76,559 75,523
Cumulative dividends declared (16,375) (12,897)
Cumulative net income 15,581 11,982
---------- ----------
Dividends in excess of net income (794) (915)
---------- ----------
Net unrealized holding losses on CMBS bonds (3,864) (4,245)
---------- ----------
Total Stockholders' Equity 72,004 70,465
---------- ----------
Total Liabilities and Stockholders' Equity $ 74,260 $ 71,590
========== ==========
</TABLE>
See Notes to Condensed Financial Statements.
- 1 -
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC.
CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
1996 1995 1996 1995
--------- -------- --------- --------
Revenues
<S> <C> <C> <C> <C>
CMBS bonds $ 3,462 $ 2,209 $ 5,773 $ 4,419
Interest 64 31 71 170
-------- -------- -------- -------
Total Revenues 3,526 2,240 5,844 4,589
-------- -------- -------- -------
Expenses
Management fees 452 284 830 517
General and administrative 114 272 444 665
Elimination of DERs 966 -- 966 --
Interest 2 35 5 225
-------- -------- -------- -------
Total Expenses 1,534 591 2,245 1,407
-------- -------- -------- --------
Net Income $ 1,992 $ 1,649 $ 3,599 $ 3,182
======== ======== ======== ========
Net income per share $ .19 $ .16 $ .35 $ .31
Weighted-average shares outstanding 10,214 10,093 10,178 10,086
Dividends per share $ .17 $ .17 $ .34 $ .34
</TABLE>
See Notes to Condensed Financial Statements.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
--------------------
1996 1995
---- ----
Cash Flows From Operating Activities
<S> <C> <C>
Net income $ 3,599 $ 3,182
Adjustments to reconcile net income to net cash flows from operating
activities:
Amortization of discount on CMBS bonds and other assets (1,775) (240)
Issuance of Common Stock for elimination of DERs 941 --
Decrease in accrued interest receivable 78 2
Increase in accounts payable and accrued liabilities 173 142
------- ---------
Net Cash Provided By Operating Activities 3,016 3,086
------- ---------
Cash Flows From Investing Activities
Principal collections from CMBS bonds 9,857 468
------- ---------
Cash Flows From Financing Activities
Dividends paid (1,724) (3,429)
Repayments of short-term notes payable (700) (10,592)
Increase in other assets (14) (166)
------- ---------
Net Cash Used In Financing Activities (2,438) (14,187)
-------- ---------
Cash and Cash Equivalents
Increase (decrease) 10,435 (10,633)
Beginning of period 598 12,367
------- ---------
End of period $ 11,033 $ 1,734
======== =========
</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 Securities and Exchange 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 June 30, 1996 and for
the six 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 $7,000
and $267,000 for the six months ended June 30, 1996 and 1995, respectively.
For the six months ended June 30, 1996 and 1995, the Company had
non-cash investing activities of: (i) $996,000 and $194,000, respectively, from
principal collections on CMBS bonds transferred to restricted cash; and (ii)
$381,000 and $0, respectively, from the change in unrealized losses on the CMBS
bonds. During the six months ended June 30, 1996 and 1995, the Company had
non-cash financing activities of: (i) $96,000 and $181,000, respectively, from
distributions of Common Stock pursuant to DERs; (ii) $941,000 and $0,
respectively, from the issuance of Common Stock for the elimination of the DERs;
and (iii) $1,754,000 and $1,716,000, respectively, from the declaration of
dividends not paid until subsequent periods.
D. CMBS Bonds
As of June 30, 1996 and December 31, 1995, the outstanding balance
of the Company's CMBS bonds was $89,515,000 and $100,368,000, respectively,
while unamortized purchase discounts, acquisition costs and allowance for credit
losses totaled $24,837,000 and $26,620,000, respectively. Additionally,
unrealized holding losses on the CMBS bonds as of June 30, 1996 and December 31,
1995 were $3,864,000 and $4,245,000, respectively.
- 4 -
<PAGE>
In May 1996, two CMBS bonds (Aspen MHC, Series 1994-1 Class C and
D-1) with an outstanding principal balance of $9,664,000 and net carrying value
of $8,723,000 were redeemed eight years earlier than anticipated. The bonds were
acquired on March 8, 1994, for $9,088,000, or 84.25% of their outstanding
principal balance. Since the bonds were redeemed at par, $1,426,000 of discount
amortization was included in earnings during the three months ended June 30,
1996.
At June 30, 1996, the outstanding principal balance of the mortgage
loans collateralizing the CMBS bonds was $988,871,000 and the outstanding
principal balance of the CMBS bonds that are senior to the Company's CMBS bonds
was $894,065,000. The aggregate allowance for credit losses on the Company's
CMBS bonds was $12,720,000 at both June 30, 1996 and December 31, 1995. At June
30, 1996, one of the mortgage loans with an outstanding balance of $788,000,
which collateralizes the Company's CMBS bonds, was in foreclosure. There have
been no credit losses charged to operations or write-downs charged against the
allowance for credit losses.
Pursuant to the provisions of certain of the Company's CMBS bonds,
principal payments 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 June 30, 1996 and December 31, 1995, $1,764,000 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 June 30, 1996. At
December 31, 1995 and June 30, 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. The line of credit was renewed for an
additional year on July 19, 1996. Advances bear interest at prime. Two of the
Company's Independent Directors are members of the Board of Directors of the
bank. At June 30, 1996, no advance was outstanding on this line of credit. 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 six months ended June 30, 1996 and 1995, the Company's
total management fees pursuant to the Management Agreement were $830,000 and
$517,000, respectively. Management fees during the six months ended June 30,
1996 and 1995 included: (i) Base Fees of $335,000 and $376,000, respectively;
(ii) Administrative Fees of $32,000 and $33,000, respectively; and (iii)
Incentive Fees of $463,000 and $108,000, respectively. No Acquisition Fees were
incurred during the six months ended June 30, 1996 or 1995.
- 5 -
<PAGE>
G. Stock Option Plan
On May 30, 1996, the Company's shareowners approved an amendment to
the Stock Option Plan which provided for the issuance of Common Stock in
exchange for the elimination of the accrual of DERs for options granted under
the Stock Option Plan. Pursuant to the amendment, the Company incurred a
$966,000 charge (a $941,000 of non-cash charge from the issuance of 157,413
shares of Common Stock plus $25,000 of transaction costs) during the three
months ended June 30, 1996. Additionally, during the three months ended March
31, 1996 and the six months ended June 30, 1995, the grant of DERs resulted in
non-cash charges to general and administrative expense of $96,000 and $181,000,
respectively, covering 16,362 and 29,806 shares, respectively, of Common Stock
which were subject to issuance pursuant to options granted under the Stock
Option Plan.
- 6 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 original 11 CMBS bonds acquired by the Company are
from six commercial mortgage loan securitizations acquired at a cost of
$74,433,000. On May 1, 1996, two of the bonds from one commercial mortgage loan
securitization acquired at a cost of $9,088,000 were redeemed. The Company's
remaining nine CMBS bonds had an outstanding principal balance of $89,515,000 at
June 30, 1996 and an estimated weighted-average yield-to-maturity before credit
losses of 13.6%. The weighted-average yield-to-maturity of the Company's CMBS
bonds is adversely impacted by the amortization of $465,000 in acquisition costs
capitalized by the Company.
Approximately 75% of the Company's CMBS bonds are unrated, and the
remaining 25% 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
in 36 states. Approximately 26%, 12% and 8% of the mortgage loans are
collateralized by properties in Texas, Arizona and Florida, 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 1993 and 1994 was generally less available than in 1995 and
1996 because of, among other things, the reduced funding of such loans by
traditional real estate lenders (e.g. banks, thrifts, pension funds, etc.) in
response to 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. See "FORWARD LOOKING
INFORMATION" below.
Presented below is a schedule of the CMBS bonds owned by the
Company as of June 30, 1996 and December 31, 1995 (dollar amounts in thousands).
- 7 -
<PAGE>
<TABLE>
<CAPTION>
Weighted- Senior Outstanding
Average Date CMBS Bonds(4) Balance at
Description Coupon Maturity Life(5) Acquired Rating 6/30/96 6/30/96 12/31/95
----------------------------------------------- ------ -------- --------- -------- ------ ------- ------- --------
Kidder, Peabody Acceptance Corporation I,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Series 1993-M2, Class E(1) 8.88% 8/2021 4.2 yrs 11/16/93 BB $ 93,035 $10,000 $ 10,000
Lehman Capital Corporation Trust Certificate,
Series 1994-2(2) 6.50 10/2003 7.3 2/24/94 Unrated 126,685 2,143 2,143
Lehman Capital Corporation Trust Certificate,
Series 1994-3 6.50 10/2003 7.3 2/24/94 Unrated 4,162 4,162
Aspen MHC, Series 1994-1, Class C(3) -- 6,261
Aspen MHC, Series 1994-1, Class D-1(3) -- 3,596
Fannie Mae Multi-Family REMIC Trust 1994-M2,
Class C(6) 7.99 1/2001 4.3 3/30/94 Unrated 346,397 10,753 11,587
Fannie Mae Multi-Family REMIC Trust 1994-M2,
Class D(6) 8.18 1/2004 7.1 3/30/94 Unrated 38,553 38,715
DLJ Mortgage Acceptance Corporation, Series
1994-MF4, Class B-3 8.50 4/2001 4.8 6/15/94 B 92,474 3,136 3,136
DLJ Mortgage Acceptance Corporation, Series
1994-MF4, Class C 8.50 4/2001 4.8 6/15/94 Unrated 4,183 4,183
Kidder, Peabody Acceptance Corporation I,
Series 1994-M1, Class C 8.25 11/2002 5.1 11/29/94 B 235,474 8,930 8,930
Kidder, Peabody Acceptance Corporation I,
Series 1994-M1, Class D 8.25 11/2002 5.4 11/29/94 Unrated 7,655 7,655
---- ---- ---------- -------- ------
Total outstanding balance 8.15% 5.9 yrs $ 894,065 89,515 100,368
==== ==== =========
Unamortized discount (12,499) (14,393)
Allowance for credit losses (12,720) (12,720)
Unamortized acquisition costs 382 493
-------- -------
Amortized cost 64,678 73,748
Net unrealized holding losses (3,864) (4,245)
--------- -------
Total net book value $ 60,814 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 These bonds were redeemed in May 1996.
4 The amount of CMBS bonds senior to the Company's subordinate
CMBS bond classes. The amount is aggregated for classes of a
single issuance.
5 Remaining weighted-average life at June 30, 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
AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
REIT Income
The Company's REIT income for the three and six months ended June
30, 1996 was $2,546,000 ($.25 per share) and $4,605,000 ($.45 per share),
respectively, compared with $1,786,000 ($.18 per share) and $3,490,000 ($.35 per
share), respectively, for the same periods in 1995.
REIT income from CMBS bonds for the three and six months ended June
30, 1996 was $4,022,000 ($.39 per share) and $6,847,000 ($.67 per share),
respectively, compared with $2,406,000 ($.24 per share) and $4,808,000 ($.48 per
share), respectively, for the same periods in 1995. The increase in REIT income
from CMBS bonds resulted from an increase in the amortization into income of the
pricing discount due to: (i) the May 1996 redemption of two CMBS bonds acquired
for $9,088,000 on March 8, 1994; and (ii) prepayments on one other CMBS bond
during the first half of 1996.
In May 1996, two CMBS bonds (Aspen MHC, Series 1994-1 Class C and
D-1), with an outstanding principal balance of $9,664,000, were redeemed eight
years earlier than anticipated. As a result, the yield on the bonds increased to
18.1% from an expected yield of 11.8%. The early redemption of these two bonds
resulted in $1,455,000 of REIT income from acceleration of discount amortization
on the CMBS bonds.
Additionally, during the first half of 1996, the Company received
principal prepayments on one of its CMBS bonds. For this particular bond, the
Company previously had elected, under the Code, to limit the amount of
amortization of the market discount to the lesser of principal received or
computed amortization. During the six months ended June 30, 1996, there were
$755,000 of principal prepayments from a mortgage collateralizing this bond. As
a result of the election, amortization during the first six months of 1996 was
$627,000 higher than the same period in 1995 due to prepayments.
The CMBS bonds have coupon interest rates ranging from 6.5% to 8.9%
and a weighted-average yield-to-maturity before credit losses for REIT purposes
of 13.6%. The yield from CMBS bonds exceeds the coupon interest rate because the
subordinate CMBS bonds were acquired by 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 June 30, 1996, one mortgage loan with a balance of $788,000
collateralizing the Company's CMBS bonds was in foreclosure. Otherwise, there
have been no delinquencies. To date, no credit losses have been realized. The
Company expects that the loss from the mortgage loan in foreclosure may range
from $0 to $200,000. See "FORWARD LOOKING INFORMATION" below.
The proceeds from the redemption have been invested in short-term
cash instruments until a long-term strategy is determined. Except for the
increased discount amortization from the early redemption and prepayments of the
bonds in the first half of 1996, future quarterly income from CMBS bonds will be
approximately $120,000 ($.01 per share) less than when the two bonds were
outstanding. See "FORWARD LOOKING INFORMATION" below.
Interest income during the three and six months ended June 30, 1996
was $64,000 ($.01 per share) and $71,000 ($.0.1 per share), respectively,
compared with $31,000 ($.00 per share) and $170,000 ($.02 per share),
respectively, for the same periods in 1995. The Company had $12,367,000 of cash
on hand at December 31, 1994, a portion of which it used to pay down notes
payable during the first half of 1995.
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<PAGE>
General and administrative expenses of the Company during the three
and six months ended June 30, 1996, were $145,000 ($.01 per share) and $537,000
($.05 per share), respectively, compared with $332,000 ($.03 per share) and
$743,000 ($.07 per share), respectively, for the same periods in 1995. General
and administrative expenses decreased during the three and six months ended June
30, 1996 compared with the same periods of 1995 primarily due to discontinuing
the DERs in May 1996, lower costs for shareholder relations and reduced
accounting expenses.
On May 30, 1996, the Company's shareowners approved an amendment to
the Stock Option Plan at its annual meeting permitting the Company to issue
shares of Common Stock in the second quarter of 1996 to the holders of stock
options who voluntarily gave up their DERs. The amendment also eliminated
provisions in the Stock Option Plan that would have permitted the issuance of
DERs in connection with stock options granted in the future. The effect of the
amendment will be to reduce general and administrative expenses from the accrual
of DERs from options granted under the Stock Option Plan by approximately
$300,000 for the remainder of 1996 and approximately $400,000 per year in
subsequent years. The issuance of Common Stock in exchange for the right to
receive DERs resulted in a one-time, non-cash charge to income of $966,000
($941,000 for the issuance of 157,413 shares of Common Stock plus $25,000 of
transaction costs) during the second quarter of 1996. See "FORWARD LOOKING
INFORMATION" below.
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 $452,000 ($.04 per share) and
$830,000 ($.08 per share), respectively, for the three and six months ended June
30, 1996, compared with $284,000 ($.03 per share) and $517,000 ($.05 per share),
respectively, for the same periods in 1995. The increase in management fees
during the first six months of 1996 compared with 1995 was due to an increase of
$355,000 of Incentive Fees, offset by a $41,000 decrease in Base Fees. The
increase in Incentive Fees was due to a $1,115,000 increase in REIT income and a
73 basis point decrease in the average Ten-Year U.S. Treasury Rate between the
first half of 1995 and the first half of 1996. The $966,000 charge for the
elimination of DERs described above reduced the second quarter 1996 Incentive
Fee by $193,000 ($.02 per share). The decrease in Base Fees was due primarily to
a reduction of invested assets because of $4,245,000 of unrealized holding
losses on the CMBS bonds recorded at December 31, 1995 and the early redemption
of two CMBS bonds (Aspen MHC, Series 1994-1, Class C and D-1) in the second
quarter of 1996.
During the three and six months ended June 30, 1996, interest
expense on the Company's short-term notes payable was $2,000 and $5,000,
respectively, compared with $35,000 and $225,000, respectively, for the same
periods in 1995. The decrease primarily was the result of paydowns of the notes
payable during the first half of 1995.
Dividend Distributions
In June 1996, the Company declared a second quarter dividend of
$.17 per share which was paid on July 10, 1996 to shareowners of record on June
28, 1996. This was the seventh consecutive regular quarterly dividend of $.17
per share.
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<PAGE>
Book Income
For the three and six months ended June 30, 1996, the Company
earned book income computed in accordance with GAAP of $1,992,000 ($.19 per
share) and $3,599,000 ($.35 per share), respectively, compared with $1,649,000
($.16 per share) and $3,182,000 ($.31 per share), respectively, for the same
periods in 1995. The $417,000 ($.04 per share) increase in book income for the
six months was due primarily to the same factors which resulted in the changes
in REIT income previously discussed.
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 Securities and Exchange
Commission, the Company also is required to report its financial position and
income in accordance with GAAP.
During the three and six months ended June 30, 1996, REIT income
exceeded book income by $554,000 ($.06 per share) and $1,006,000 ($.10 per
share), respectively. 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 (to date, no credit losses have been realized) 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; (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 may be 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 the Company's
operations; (ii) for making distributions to its shareowners; and (iii) for the
repayment of short-term borrowings. For the six months ended June 30, 1996 and
1995, cash flows provided by operating activities were $3,016,000 and
$3,086,000, respectively. As of June 30, 1996, the Company had $11,033,000 in
cash and cash equivalents, which the Company currently intends to use to pay its
expenses and make dividend distributions to shareowners. See "FORWARD LOOKING
INFORMATION" below.
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 June 30, 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 June 30, 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. See
"FORWARD LOOKING INFORMATION" below.
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<PAGE>
On July 19, 1995, the Company entered into a one-year, unsecured
line of credit with a bank for $1,000,000. The line of credit was renewed for an
additional year on July 19, 1996. Advances bear interest at prime. Two of the
Company's Independent Directors are members of the Board of Directors of the
bank. At June 30, 1996, no advance was outstanding on this line of credit.
Two of the Company's CMBS bonds (Aspen MHC, Series 1994-1, Class C
and D-1) with an outstanding balance of $9,664,000 were redeemed in May 1996.
The redemption of the CMBS bonds occurred eight years earlier than anticipated.
The proceeds from the bond redemption have been invested in short-term cash
instruments until a long-term strategy is determined.
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 the Company generally owns. 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
the Company will be able to raise additional funds, whether from principal
prepayments, borrowings, debt securities, Common Stock or Preferred Stock
issuances or other sources. See "FORWARD LOOKING INFORMATION" below.
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.
Undistributed REIT income through the second quarter of 1996
(cumulative REIT income in excess of cumulative distributions to shareowners)
was $1,301,000 ($.13 per share). The Company, in general, is required to
distribute: (i) at least 85% of its annual REIT income by January of the
following year (as long as the dividend is declared during the year); and (ii)
the balance of its REIT income (at least 95%) before the Company's tax return is
filed.
Under the Code, the Company has elected an income recognition
methodology for certain of its CMBS bonds that determines REIT income
attributable to the amortization of market discount as the lesser of: (i) the
amount of principal received from the CMBS bond; 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 $55,610,000 at June 30, 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 restrict the Company's
ability to sell assets within four years of their acquisition. Under the Code, a
redemption or prepayment does not constitute a "sale".
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<PAGE>
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
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. See "FORWARD LOOKING
INFORMATION" below.
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. One of the mortgages with an outstanding balance of
$788,000 that collateralizes one of the Company's CMBS bonds was in foreclosure
at June 30, 1996. Otherwise, there have been no delinquencies. The Company
expects that the loss from the mortgage loan in foreclosure may range from $0 to
$200,000. 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. See "FORWARD LOOKING INFORMATION" below.
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.
- 13 -
<PAGE>
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.
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. Generally, all payments of principal,
including prepayments, on the mortgage loans will be used to reduce the
outstanding principal balance of the more senior classes before principal
payments are paid to the subordinate bond classes held by the Company. 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
generally 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, if any, on the CMBS bonds the Company owns or may acquire. See
"FORWARD LOOKING INFORMATION" below.
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.
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<PAGE>
FORWARD LOOKING INFORMATION
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
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.
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<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.
DERs - Dividend equivalent rights, as defined in the Company's Stock Option
Plan. Prior to adoption of an amendment to the Stock Option Plan that eliminated
DERs, option holders earned 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
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."
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<PAGE>
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.
- 17 -
<PAGE>
PART II
OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's 1996 Annual Meeting of Shareowners was held on
May 30, 1996. At the meeting, Messrs. Larry A. Mizel and
Robert J. Malone were elected as Class III directors to terms
expiring in 1999. There were 9,521,402 and 9,519,590 votes
cast "for" the election of Larry A. Mizel and Robert J.
Malone, respectively, as Class III directors and 137,664 and
139,476 votes, respectively, were "withheld." At the meeting,
the shareowners also approved an amendment to the Stock Option
Plan to eliminate Dividend Equivalent Rights, to permit the
grant of shares of the Company's Common Stock in connection
therewith, and to increase the total number of shares for
which options, rights, limited rights and stock may be granted
under the Stock Option Plan from 701,948 to 1,001,948. Of the
votes cast, 8,740,601 were cast "for" the amendment and
524,266 were cast "against" the amendment. There were 98,561
votes cast "abstain."
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 June 30, 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 for the period ended
March 31, 1995, Commission File No.
1-22262, filed on May 12, 1995).
10.3(a) Amendment to the Management Agreement dated as of January 1,
1996 between the Registrant and Financial Asset Management
Corporation (incorporated herein by reference to Exhibit
10.3(a) to the Registrants Quarterly Report on Form 10-Q for
the period ended March 31, 1996, Commission File No. 1-22262,
filed on May 15, 1996).
10.3(b) Assignment of the Management Agreement dated as of April 1,
1996 between Financial Asset Management Corporation and
Financial Asset Management LLC (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 15, 1996).
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<PAGE>
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).
10.4(a) First Amendment to Commercial Assets, Inc. 1993 Stock Option
Plan.
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.
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<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: August 12, 1996 By /s/ Paris G. Reece III
------------------------
Paris G. Reece III
Chief Financial Officer
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FIRST AMENDMENT TO
COMMERCIAL ASSETS, INC.
1993 STOCK OPTION PLAN
First Amendment to the Commercial Assets, Inc. 1993 Stock Option Plan
as approved by the Board of Directors of the Corporation on March 6, 1996 (the
"Plan"). Capitalized terms used herein shall have the meanings ascribed in the
Plan unless otherwise defined herein.
The following amendments were adopted by the Board of Directors on
March 6, 1996 subject to receipt of stockholder approval, which approval was
received at the Annual Meeting of Shareowners of the Corporation held on May 30,
1996 and became effective March 6, 1996.
1. Subsection (j) of Section "2. Definitions" is amended by deleting
the text of such subsection and inserting in its stead the following: "Provision
rescinded by the First Amendment to this Plan dated March 6, 1996.".
2. Subsection (h) of Section "6. Terms and Conditions of Options" is
amended by deleting the text of such subsection and inserting in its stead the
following: "Provision rescinded by the First Amendment to this Plan dated March
6, 1996.
3. Section "5. Stock" hereby is amended to add appropriate reference to
Stock Grants and provide for an increase in the number of shares available under
the Plan by deleting Section 5 in its entirety and substituting the following:
The stock subject to Options, Rights, Limited Rights and Stock
Grants hereunder shall be shares of the Corporation's Common Stock.
Such shares may, in whole or in part, be authorized but unissued shares
or shares that shall have been or that may be reacquired by the
Corporation. The aggregate number of shares of Common Stock as to which
Options, Rights and Limited Rights may be granted and Stock Grants
awarded to Participants shall not exceed (1) 1,001,948 shares plus (2)
with respect to each calendar year after 1996 during the term of the
Plan, a number of share determined by multiplying .01 by the number of
shares of Common Stock outstanding as of midnight Denver time on
December 31 of the previous year (the "Annual Allocation"). Stock
Grants shall be awarded to Participants only in consideration of their
consent to the elimination of future dividend equivalent rights. The
limitations established by the preceding sentences shall be subject to
any adjustment provided for in Section 11(a) hereof.
If any outstanding Option under the Plan should for any reason
expire, be canceled or be forfeited (other than in connection with the
exercise of a Stock Appreciation Right or Limited Right), without
having been exercised in full, the shares of Common Stock allocable to
<PAGE>
the unexercised portion of such Option (unless the Plan shall have been
terminated) shall become available for subsequent grants of Options,
Rights and Limited Rights under the Plan.
4. The following new Section 11 is adopted and subsequent existing
sections of the Plan shall be renumbered accordingly.
Section 11. Stock Grants; Terms and Conditions of Stock
Grants.
In consideration of Recipients consenting to the Corporation
eliminating their future dividend equivalent rights pursuant to
subsection (h) of Section 6, which subsection has been rescinded by the
Board of Directors, each Participant who holds an outstanding Option
with dividend equivalent rights shall be awarded hereunder a one time
fully vested stock grant ("Stock Grant") based on the remaining term of
the Option.
In addition to the foregoing amendments which were adopted
subject to receipt of shareholder approval, the Board of Directors of the
Corporation adopted the following amendments which were not subject to
shareholder approval and became effective on March 6, 1996.
5. Section "1. Purpose; Types of Awards; Construction" hereby is
amended to add the following sentence as the last sentence of this section:
In addition to Options which may be granted hereunder, the
Committee in its discretion may authorize Stock Grants to Plan
Participants in consideration of their consent to eliminate future
dividend equivalent rights.
6. Section "2. Definitions" is amended to add the following definition
and renumber the existing definitions accordingly, so as to be in alphabetical
order.
(a) "PARTICIPANT" means any person awarded an Option or Stock Grant
hereunder.
7. Section "3. Administration" hereby is amended to add appropriate
references to Stock Grants in the second sentence of the first paragraph of the
section by deleting this sentence in its entirety and substituting the
following:
The Committee shall have the authority in its discretion,
subject to and not inconsistent with the express provisions of the
Plan, to administer the Plan and to exercise all powers and authorities
either specifically granted to it under the Plan or necessary or
advisable in the administration of the Plan, including, without
limitation, the authority to grant Options or make Stock Grants in
consideration of the elimination of future dividend equivalent rights;
to determine which Options shall constitute Incentive Stock Options and
which Options shall constitute Nonqualified Stock Options; to determine
2
<PAGE>
which Options (if any) shall be accompanied by Rights or Limited
Rights; to determine the purchase price of the shares of Common Stock
covered by each Option (the "Option Price"); to determine the persons
to whom, and the time or times at which, Options shall be granted; to
determine the number of shares to be covered by each Option; to
interpret the Plan; to prescribe, amend and rescind rules and
regulations relating the to Plan; to determine the terms and provisions
of the Option Agreements (which need not be identical) entered into in
connection with Options granted under the Plan; and to make all other
determinations deemed necessary or advisable for the administration of
the Plan.
8. Section "3. Administration" is further amended to add the words
"Stock Grant or" between the words "any" and "award" in the fourth paragraph of
this section.
9. Section "4. Eligibility" is amended to add appropriate reference to
Stock Grants by deleting this section in its entirety and substituting the
following:
Options may be granted or Stock Grants may be awarded to
officers or employees of the Company or a Subsidiary, except as
proscribed by the Exchange Act or the Code. In determining the persons
to whom Options shall be granted and the number of shares to be covered
by each Option and any accompanying Rights or Limited Rights, the
Committee shall take into account the duties of the respective persons,
their present and potential contributions to the success of the
Corporation and such other factors as the Committee shall deem relevant
in connection with accomplishing the purpose of the Plan. Options shall
also be granted to Non-Officer Directors pursuant to Section 14.
No Option may be granted, or Stock Grant awarded, to any
person who, upon exercise of the Option, or receipt of the Stock Grant,
would own more than 9.8% of the Common Stock outstanding of the
Corporation. Prior to the grant of an Option or Stock Grant by the
Corporation, any director, officer or employee who is to receive the
Option or Stock Grant must provide an affidavit or otherwise certify to
the Corporation that the grant of the Option or award of the Stock
Grant to the director, officer or employee will not result in the
director, officer or employee, directly or indirectly, having ownership
of more than 9.8% of the outstanding shares of Common Stock, as
determined pursuant to the Corporation's Articles of Incorporation.
10. Section "11. Effect of Certain Changes" will be renumbered as
Section 12 and is amended to add appropriate references to Stock Grants by
deleting subparagraph (a) in its entirety and substituting the following:
3
<PAGE>
(a) In the event of any extraordinary dividend, stock
dividend, recapitalization, merger, consolidation, stock split, warrant
or rights issuance, or combination or exchange of such shares, or other
similar transactions, the number of shares of Common Stock available
for awards and Stock Grants, the number of such shares covered by
outstanding awards and Stock Grants, and the price per share of Options
or the applicable market value of Stock Appreciation Rights or Limited
Rights shall be equitably adjusted by the Committee to reflect such
event and preserve the value of such awards; provided, however, that
any fractional shares resulting from such adjustment shall be
eliminated.
11. Section "11. Effect of Certain Changes" is further amended to add
the words "Stock Grant or" between the words "any" and "Option" in the first
sentence of subparagraph (b) of this section.
12. Section "13. Period During Which Awards May Be Granted" will be
renumbered as Section 14 and is amended to add appropriate references to Stock
Grants. The following is the text of the provision which shall become effective
with this Amendment:
Except as otherwise provided in Section 8(c) hereof, Options,
Rights and Limited Rights may be granted (and in consideration of the
elimination of future dividend equivalent rights the Stock Grants may
be awarded) pursuant to the Plan from time to time until the Plan is
terminated by the Board.
13. Section "15. Nontransferability" will be renumbered as Section 16
and the first sentence of the section is amended to reflect which awards
under the Plan are restricted in their transferability:
Options, Stock Appreciation Rights and Limited Rights granted
under the Plan shall not be transferable otherwise than by will or by
the laws of descent and distribution, and awards may be exercised or
otherwise realized, during the lifetime of the Recipient, only by the
Recipient or by such Recipient's guardian or legal representative.
14. Section "16. Agreement by Optionee Regarding Withholding Taxes"
will be renumbered as Section 17 and is amended to add appropriate references to
Stock Grants by deleting this section in its entirety and substituting the
following:
If the Committee shall so require as a condition of exercise
of any Option, Stock Appreciation Right, Limited Right granted
hereunder, or the receipt of a Stock Grant in consideration of
Recipient's consent to the elimination of future dividend equivalent
rights (each a "Tax Event"), each Recipient (other than Non-Officer
directors) shall agree that no later than the date of the Tax Event,
the Recipient will pay to the Company or make arrangements satisfactory
4
<PAGE>
to the Committee regarding payment of any federal, state or local taxes
of any kind required by law to be withheld upon the Tax Event.
Alternatively, the Committee may provide that a Recipient may elect, to
the extent permitted or required by law, to have the Company deduct
federal, state and local taxes of any kind required by law to be
withheld upon the Tax Event from any payment of any kind otherwise due
to the Recipient. The withholding obligation may be satisfied by
withholding or delivery of Common Stock.
15. Section "17. Amendment and Termination of the Plan" will be
renumbered as Section 18 and hereby is amended to add appropriate references to
Stock Grants by deleting this section in its entirety and substituting the
following:
The Board at any time and from time to time may suspend,
terminate, modify or amend the Plan; provided, however, that any
amendment that would materially increase the aggregate number of shares
of Common Stock as to which Options, Rights and Limited Rights or Stock
Grants under the Plan, or materially increase the benefits accruing to
the participants under the Plan, or materially modify the requirements
as to eligibility for participation in the Plan shall be subject to
approval of the holders of Common Stock, as provided by the
Corporation's Articles of Incorporation and Bylaws and the Rule, except
that any such increase or modification that may result from adjustments
authorized by Section 12(a) hereof shall not require such approval.
Except as provided in Section 12 hereof, no suspension, termination,
modification or amendment of the Plan may adversely affect any Option,
Right or Limited Right previously granted, or Stock Grant previously
awarded, unless the written consent of the Recipient is obtained.
The Committee shall be authorized to restate the Plan from
time to time provided that all amendments incorporated into any
restatement of the Plan first shall have been approved by the Board of
Directors of the Corporation and the shareholders of the Corporation,
to the extent required by applicable law.
16. Section"18. Rights as a Shareholder" will be renumbered as Section
19 and hereby is amended by deleting this section in its entirety and
substituting the following:
A Recipient or a transferee of an award shall have no rights
as a shareholder with respect to any shares covered by the award until
the date of the issuance of a stock certificate to him for such shares.
No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distribution of other
rights for which the record date is prior to the date of such stock
certificate is issued, except as provided in Section 12(a) hereof.
5
<PAGE>
17. Section "19. No Rights to Continued Position" will be renumbered as
Section 20 and hereby is amended to add appropriate references to Stock Grants
by deleting this section in itsentirety and substituting the following:
Nothing in the Plan or in any award granted, Stock Grant or
agreement entered into pursuant hereto shall confer upon any Recipient
the right to continue as an officer or employee of the Company or any
Subsidiary or as a member of the Board, or to be entitled to any
remuneration or benefits not set forth in the Plan or such Agreement or
to interfere with or limit in any way the right of the Company or any
such Subsidiary to terminate such Recipient's officer status or
employment or membership on the Board. Awards granted under the Plan
and Stock Grants shall not be affected by any change in duties or
position of a Recipient as long as such Recipient continues to be an
officer of, or employed by, the Company or any Subsidiary or a member
of the Board.
18. Throughout the Plan, as applicable, references to "Grantee" shall
be deleted and replaced with "Recipient."
6
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 11,033
<SECURITIES> 0
<RECEIVABLES> 597
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<CURRENT-ASSETS> 11,630
<PP&E> 0
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0
0
<COMMON> 103
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<TOTAL-LIABILITY-AND-EQUITY> 74,260
<SALES> 0
<TOTAL-REVENUES> 5,844
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<INCOME-TAX> 0
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<EXTRAORDINARY> 0
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<NET-INCOME> 3,599
<EPS-PRIMARY> .35
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