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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 (IRS Employer
incorporation or organization) Identification No.)
3600 South Yosemite Street, Suite 350 80237
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
(303) 773-1221
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Common Stock,
par value $.01 per share American Stock Exchange, Inc.
(Title of each class) (Name of each exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 28, 1997, 10,315,809 shares of Commercial Assets, Inc. Common
Stock were outstanding, and the aggregate market value of the shares (based upon
the closing price of the Common Stock on that date as reported on the American
Stock Exchange, Inc.) held by non-affiliates was approximately $49,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K is incorporated by reference to the registrant's 1997
definitive proxy statement to be filed with the Securities and Exchange
Commission no later than 120 days after the end of the registrant's fiscal year.
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COMMERCIAL ASSETS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
Part I PAGE
ITEM 1. BUSINESS.
(a) General Development of Business.............................. 1
(b) Narrative Description of Business............................ 2
ITEM 2. PROPERTIES....................................................... 11
ITEM 3. LEGAL PROCEEDINGS................................................ 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 12
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREOWNER MATTERS............................................... 12
ITEM 6. SELECTED FINANCIAL DATA.......................................... 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................. 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................. 22
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 22
ITEM 11. EXECUTIVE COMPENSATION........................................... 22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................... 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 22
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K...................................................... 23
SIGNATURES....................................................... 26
(i)
<PAGE>
PART I
Item 1. BUSINESS.
(a) General Development of Business.
Commercial Assets, Inc. (the "Company") was incorporated under the laws
of Maryland on August 31, 1993, as a wholly-owned subsidiary of Asset Investors
Corporation, a Maryland corporation, which is listed on the New York Stock
Exchange, Inc. under the symbol "AIC" ("Asset Investors"). Pursuant to the
agreement dated August 20, 1993, between Asset Investors and the Company (the
"Contribution Agreement"), Asset Investors contributed $75,000,000 to the
initial capital of the Company, including $200,000 in cash. On October 12, 1993,
Asset Investors distributed approximately 70% of the outstanding common stock,
par value of $.01 per share, of the Company ("Common Stock") as a taxable
dividend to Asset Investors' shareowners. Prior to the distribution, the Company
had not engaged in any activities other than those related to its formation.
Asset Investors currently owns approximately 27% of the outstanding Common
Stock. The Common Stock is listed on the American Stock Exchange, Inc. ("AMEX")
under the symbol "CAX."
The Company's acquisition and other policies are determined by its
Board of Directors. The Company's By-laws, as amended, require that a specified
number of the Board of Directors and each committee thereof be comprised of
persons constituting Independent Directors. 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."
The Company's day-to-day operations are performed by Financial Asset
Management LLC, (the "Manager") pursuant to the Management Agreement, a
year-to-year agreement currently in effect through December 31, 1997. The
Management Agreement is subject to the approval of a majority of the Independent
Directors. Prior to April 1, 1996, the Company was managed by Financial Asset
Management Corporation, a wholly owned subsidiary of MDC Holdings, Inc. ("MDC").
Effective April 1, 1996, Financial Asset Management LLC assumed the obligations
of the Management Agreement. From April 1, 1996, through September 30, 1996,
Financial Asset Management LLC was 80% owned by two wholly owned subsidiaries of
MDC and 20% owned by Spencer I. Browne who was at the time the President, Chief
Executive Officer and a Director of the Company. On September 30, 1996, MDC
acquired Mr. Browne's 20% interest in Financial Asset Management LLC and then
sold 100% of the Manager to an investor group led by Terry Considine and Thomas
L. Rhodes. In connection with the sale, Larry A. Mizel resigned as Chairman of
the Board of Directors and Mr. Browne resigned as President, Chief Executive
Officer and a Director of the Company. Terry Considine and Thomas L. Rhodes were
elected as Co-Chairmen of the Board of Directors and Co-Chief Executive Officers
and Leslie B. Fox was elected as President of the Company. No change has been
made to the Management Agreement other than an extension, and Financial Asset
Management LLC will continue its obligations under the Management Agreement.
The Manager is subject to the supervision of the Board of Directors. As
part of its duties, the Manager presents the Company with asset acquisition
opportunities and furnishes the Board of Directors with information concerning
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the acquisition, holding and disposition of assets. The Company has no
employees. Certain employees of the Manager have been designated as officers of
the Company.
Since its inception, the Company has operated in a manner that
permitted it to qualify for the income tax treatment afforded to a real estate
investment trust ("REIT") as defined in the Internal Revenue Code of 1986, as
amended, (the "Code"). If it so qualifies, the Company's REIT income, with
certain limited exceptions, will not be subject to federal or state income tax
at the corporate level. To qualify as a REIT under the Code, the Company will be
required, among other things, to distribute annually to its shareowners at least
95% of its REIT income and to meet certain asset, income and stock ownership
tests.
The Company intends to conduct its operations so as not to become
regulated as an investment company under the Investment Company Act of 1940, as
amended, ("1940 Act"). See "Acquisition Restrictions" below.
(b) Narrative Description of Business.
General
The Company owns, and the Manager administers on the Company's behalf,
subordinate classes of Commercial Mortgage Backed Securities ("CMBS bonds").
The Company's goals are to: (i) generate income in order to pay
dividends to its shareowners by managing its ownership interests in securitized
mortgage loan pools comprised of multi-family and commercial real estate loans;
and (ii) preserve stockholders' equity. There can be no assurances the Company
will achieve its objectives.
Commercial mortgage loan securitizations generally are multi-class
issuances of debt instruments that are secured and funded as to the payment of
principal and interest by a specific group of mortgage loans on multi-family or
other commercial real estate. Monthly principal and interest payments of the
property owners constitute the source of principal and interest payments on the
debt instruments issued in the commercial mortgage loan securitization. To date,
the Company has acquired credit support classes of commercial securitizations
backed by mortgage loans on multi-family housing properties.
THE COMPANY'S CMBS BONDS, WHICH CONSTITUTE SUBSTANTIALLY ALL OF ITS
ASSETS, WERE ACQUIRED IN PRIVATE PLACEMENTS AND ARE SUBJECT TO SIGNIFICANT
RESTRICTIONS ON RESALE. ACCORDINGLY, THESE BONDS MAY POSE SPECIAL RISKS TO THE
COMPANY AS WELL AS TO INVESTORS IN THE COMPANY.
CMBS bonds. CMBS bonds generally are backed by mortgage loans on
commercial real estate. CMBS bonds may be debt obligations or multi-class
pass-through certificates issued by agencies or instrumentalities of the United
States Government, private originators or investors in mortgage loans. They are
evidenced by a series of bonds or certificates issued in multiple classes or
"tranches." The principal and interest payments on the underlying mortgage
assets are allocated among the several classes of a series of CMBS bonds.
Each class (or tranche) of CMBS bonds has a stated maturity or final
scheduled distribution date and may be issued with a specific fixed or variable
coupon interest rate. Principal prepayments on the underlying mortgage assets
may cause the CMBS bonds to be retired earlier (possibly substantially earlier)
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than their stated maturities or final scheduled distribution dates. Interest is
paid or accrues on the CMBS bonds generally monthly. The principal of and
interest on the mortgage assets may be allocated among the classes of a CMBS
bond issuance in many ways.
The allocation of cash flows on mortgage assets to the various classes
of a CMBS bond issuance creates a higher degree of predictability of cash flows
from CMBS bonds than the underlying mortgage assets. As a general matter, the
more predictable the cash flow is on a particular CMBS bond class, the lower the
yield will be on that class at the time of issuance relative to the yields of
classes of CMBS bond with less predictable cash flows.
As part of the process of creating more predictable cash flows on
certain tranches of a CMBS bond issuance, one or more tranches generally must be
created to absorb the first losses on the underlying mortgage assets. These are
the credit support tranches. The yields on these tranches are generally higher
than prevailing market yields on mortgage-backed bonds, instruments that
directly or indirectly, evidence interests in, or are secured by and payable
from, mortgage loans on real estate, with similar anticipated average lives.
Because of the uncertainty of the cash flows on such tranches, the market prices
of and yields on these tranches are more volatile.
THE CMBS BONDS THAT THE COMPANY OWNS HAVE NOT BEEN ISSUED OR GUARANTEED
BY AGENCIES OR INSTRUMENTALITIES OF THE UNITED STATES GOVERNMENT OR BY OTHER
GOVERNMENTAL ENTITIES AND, ACCORDINGLY, ARE SUBJECT TO, AMONG OTHER THINGS,
CREDIT RISKS.
The Company's Subordinate CMBS Bond Classes. The Company has acquired
subordinate tranches of commercial securitizations, including "first-loss"
tranches. These first-loss tranches bear the risk of default on the underlying
collateral and provide credit support for the more senior tranches. Subordinate
tranches of commercial securitizations are debt securities in multiple-class
CMBS bond issuances in which one or more classes are subordinate to other
classes as to the payment of principal and interest thereon, with defaults on
the underlying assets borne first by the holders (such as the Company) of the
most subordinate class. Subordinate tranches are entitled to receive repayment
of principal generally only after all required principal payments have been made
on the more senior tranches and also may have subordinate rights as to receipt
of interest distributions. Such subordinate tranches are subject to a greater
risk of non-payment of principal and interest than are more senior tranches and
presently have limited marketability.
The Company's CMBS Bonds are Backed by Mortgages on Multi-Family Real
Estate. The Company has acquired CMBS bond classes backed by mortgages on
multi-family dwellings. Bonds backed by mortgages on multi-family dwellings are
subject to risks generally not associated with mortgages on single-family homes
or other real estate, including certain types of credit risks, vacancy rates,
increases in operating expenses, regulatory requirements, natural disasters and
environmental liability issues.
Yield Considerations
Defaults. The yields on the CMBS bonds acquired by the Company will be
extremely sensitive to the amount and timing of defaults and the severity of
losses 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 take place after default on the loan when the proceeds from the
foreclosure sale of the real estate are less than the unpaid balance of the
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mortgage loan plus interest advances through the foreclosure sale and
foreclosure costs which include, among other things, repair and maintenance
costs during the foreclosure, brokerage fees, legal fees and taxes. Such losses
will be allocated first to the subordinate first-loss CMBS bonds prior to being
allocated to the more senior CMBS bond classes. Because of this, the CMBS bonds
which the Company owns are more speculative than more senior CMBS bond classes
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 CMBS bonds acquired by the Company have an actual default rate
and severity of loss on the mortgage collateral that are higher than those
anticipated by the Company when the bonds were acquired, their yield will be
lower than the Company initially anticipated and, in the event of substantial
losses, the Company may not recover 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 projection. In
general, the earlier a loss occurs, the greater the adverse effect on the
Company's yield.
The Company's yield on CMBS bonds also will be affected by interest
rate levels during the periods in which the mortgage loans collateralizing the
CMBS bonds mature. For example, if at the maturity date of a mortgage loan,
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 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 financing of the commercial
properties cannot be arranged at the maturity date of the current outstanding
mortgage due to poor property performance. These potential losses are referred
to as "balloon losses."
There can be no assurance as to the future rate of delinquency,
severity of loss or the timing of any such losses on the mortgage loans
collateralizing the CMBS bonds and, thus, no assurance as to the actual yield
received by the Company. See "FORWARD LOOKING INFORMATION" below.
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 paid to the
holders of any more senior classes of CMBS bonds before principal payments are
paid to the subordinate bond classes held by the Company. Because of this, 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. However, because the Company is acquiring the CMBS bonds at a significant
discount from their outstanding principal balance, prepayments of principal on
the Company's CMBS bonds may increase the Company's yield on its CMBS bonds.
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 such rate or the timing of
principal payments on the CMBS bonds the Company owns. See "FORWARD LOOKING
INFORMATION" below.
Loss Severity. While the rate of default and the rate and timing of
prepayments on the mortgage loans are important in determining the anticipated
yield on subordinate CMBS bonds, the anticipated severity of the loss on the
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mortgage loans (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 loans through a foreclosure
sale of the properties which generally are the only security for the mortgage
loans 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 property owner's equity
in the mortgaged real estate, the anticipated decline in market value of the
property, accrued and unpaid interest through the foreclosure process and
foreclosure costs. In addition, the higher the coupon rate of the mortgage loan,
the higher are the costs of interest advances from the date of default through
the foreclosure sale.
Illustration. The table below illustrates the ranges of potential
pre-tax yields-to-maturity on the mortgage loans underlying the Company's CMBS
bonds. The illustration was prepared assuming, among other things: (i)
prepayment rates of 0% and 5%; (ii) loss severity percentages of 20%, 30% and
40%; (iii) three levels of periodic defaults; and (iv) scenarios with and
without balloon defaults of 10%.
Illustration of Potential Pre-Tax Yields to Maturity of the Company's CMBS Bonds
<TABLE>
<CAPTION>
Pre-Tax Yield-to-Maturity
------------------------------------------------------------------------------
Assumed Periodic Double the Assumed
No Periodic Defaults Default Rate(3) Periodic Default Rate
--------------------- ---------------------- -----------------------
No 10% No 10% No 10%
Loss Severity Balloon Balloon Balloon Balloon Balloon Balloon
Prepayment Rate(1) Percentage(2) Defaults Defaults Defaults Defaults Defaults Defaults
----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0% 20% 15.6% 11.3% 13.1% 8.4% 10.7% 5.6%
0 30 15.6 8.5 11.9 3.9 8.3 (0.5)
0 40 15.6 6.1 10.7 (0.4) 6.0 (5.1)
5 20 15.4 11.2 13.2 8.6 11.1 6.9
5 30 15.4 9.1 12.1 6.1 8.8 3.0
5 40 15.4 7.8 11.0 3.4 6.6 (0.9)
<FN>
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1 Expressed as a constant prepayment rate ("CPR") percentage.
2 The rate of losses on the outstanding principal balance of defaulted
mortgage loans expressed as a percentage.
3 An assumption of default rates ranging from .29% to 1.56% per annum of the
outstanding principal balance of the underlying mortgage collateral.
</FN>
</TABLE>
The pre-tax yields set forth above were calculated by determining the
bond equivalent discount rate which, when applied to the projected stream of
cash flows to be paid on the Company's CMBS bonds beginning January 1, 1997,
would cause the discounted present value of such stream of future cash flows to
equal the amortized cost of the CMBS bonds at December 31, 1996 of $64,849,000.
THE ASSUMED DEFAULT PERCENTAGES, LOSS SEVERITY PERCENTAGES AND
PREPAYMENT RATES REFLECTED IN THE PRECEDING TABLE ARE FOR THE PURPOSES OF
ILLUSTRATION ONLY. IT IS HIGHLY UNLIKELY THAT THE MORTGAGE LOANS WILL BE
PREPAID, OR THAT CREDIT LOSSES WILL BE INCURRED, ACCORDING TO ANY PARTICULAR
PATTERN OR AMOUNT SET FORTH ABOVE. IN ADDITION, THE VARIOUS REMAINING TERMS TO
MATURITY OF THE MORTGAGE LOANS COULD PRODUCE SLOWER OR FASTER PRINCIPAL
DISTRIBUTIONS THAN INDICATED IN THE PRECEDING TABLES AT THE VARIOUS PREPAYMENT
RATES. FOR THIS REASON, AND BECAUSE THE TIMING OF CASH FLOWS IS CRITICAL TO
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DETERMINING YIELDS, THE PRE-TAX YIELDS ABOVE WILL DIFFER FROM THE ACTUAL YIELDS
ON THE COMPANY'S CMBS BONDS AND SUCH DIFFERENCES MAY BE MATERIAL, OR EVEN RESULT
IN NEGATIVE YIELDS.
Through February 28, 1997, one mortgage loan with a balance of $788,000
collateralizing the Company's CMBS bonds was foreclosed and subsequently
refinanced with a new property owner. Otherwise, there have been no
delinquencies. As of December 31, 1996, no credit losses have been realized. The
Company expects that the loss from the foreclosed mortgage loan will be either
$0 or approximately $425,000, dependent upon the recovery of indemnification
claims made against the bond underwriter. If a loss occurs, it will be charged
against the Company's allowance for credit losses.
Competition
The Company competes with others, including other REITs, mutual funds,
savings and loan associations, banks, pension funds, insurance companies,
investment banks and others, for the securities and other assets it may
determine to acquire. Many such entities have greater financial resources than
the Company. Furthermore, many of these entities may be conducting business
activities through corporations, master limited partnerships or other business
forms which may, among other things, not be subject to the operating
restrictions placed on REITs and thus may have more flexibility than the Company
in conducting their business operations, including more flexibility to sell
assets.
There are other REITs, mutual funds and financial institutions with
operations similar to those of the Company which may increase the demand for
mortgage-related assets suitable for acquisition by the Company. Additional
competition may increase the price the Company must pay for its assets.
Capital Resources
Asset Investors contributed $75,000,000 ($74,800,000 pursuant to the
Contribution Agreement plus $200,000 cash) to the initial capital of the
Company. The Company used this initial contribution to acquire CMBS bonds. The
Company plans to use its cash flow from the CMBS bonds it has acquired and
leverage to provide working capital to support its operations and for the
payment of dividends to its shareowners. See "Federal Income Taxation of the
Company" below. The Company may finance its operations by entering into credit
agreements or long-term borrowing arrangements and by issuing additional Common
Stock or Preferred Stock. In addition, the Company may issue notes or other debt
instruments, including CMBS bonds. See "FORWARD LOOKING INFORMATION" below.
Without further shareowner action, the Company is authorized to issue
up to 75,000,000 shares of Common Stock, of which 10,315,809 shares were issued
and outstanding as of February 28, 1997. Future offerings of Common Stock may
result in the reduction of the net tangible book value per outstanding share and
a reduction in the market price of the Common Stock. The Company is unable to
estimate the amount, timing or nature of such future offerings as any such
offerings will depend on general market conditions and other factors.
In addition, the Board of Directors is authorized to issue 25,000,000
shares of Preferred Stock, par value $.01 per share, without further action by
the Company's shareowners. Depending on the terms set by the Board of Directors,
the authorization and issuance of Preferred Stock could adversely affect
existing shareowners. The effects could include, among other things, dilution of
ownership interests, restrictions on dividends and preferences to holders of a
new class of stock in distributions, including preferences upon liquidation.
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Dividend Reinvestment Plan
The Company has an Automatic Dividend Reinvestment Plan administered by
Key Corp Shareholder Services, Inc. through January 31, 1997, and by Norwest
Shareowner Services beginning February 1, 1997. The plan provides the Company's
shareowners a method of investing cash dividends paid by the Company in
additional Common Stock purchased in the open market. The plan also permits
participants to make additional purchases of Common Stock with voluntary cash
payments.
Acquisition Restrictions
The Company intends to conduct its operations so as not to become
regulated as an investment company under the 1940 Act. The 1940 Act exempts
entities that are "primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real estate"
("Qualifying Interests"). Under current interpretations by the staff of the
Securities and Exchange Commission (the "Commission"), in order to qualify for
this exemption, the Company, among other things, must maintain at least 55% of
its assets in Qualifying Interests and may also be required to maintain an
additional 25% in Qualifying Interests or other real estate-related securities.
Therefore, the assets the Company may acquire may be limited by the provisions
of the 1940 Act. The Company's policy since its inception is to acquire CMBS
bonds collateralized by whole pools of mortgage loans or to obtain substantial
foreclosure rights with respect to the mortgage loans underlying its CMBS bonds.
As a result, the Company believes that such CMBS bonds constitute Qualifying
Interests for the purpose of the 1940 Act and that the Company should not be
required to register as an investment company. If the Commission or its staff
were to take a different position with respect to whether the Company's CMBS
bonds constitute Qualifying Interests, the Company could be required: (i) to
change the manner in which it conducts its operations to avoid being required to
register as an investment company; or (ii) to register as an investment company,
either of which could have an adverse effect on the Company and the market price
of its Common Stock.
Pursuant to restrictions set forth in its By-laws, the Company may not
"invest in unimproved real property (i.e., acquire an equity interest in
property for purposes other than producing income, which has no development or
construction in progress thereon nor is any development or construction planned
to commence thereon within the year; invest in mortgage loans but not including
mortgage-related securities, such as collateralized mortgage obligations,
pass-through securities, stripped mortgage-backed bonds and other securities
that, directly or indirectly, represent a participation in, or are secured by
and payable from, mortgage loans on real property) without an appraisal of the
underlying property; invest in real estate contracts of sale unless the same are
in recordable form; invest in or make a mortgage loan on property in excess of
100% of its appraised value (unless other mortgage loan underwriting criteria
would justify such investment); or invest in or make a mortgage loan subordinate
to a mortgage or equity interest in the property held by the advisor, the
sponsor, a director or an affiliate of any of the foregoing." These restrictions
may not be changed without the approval of the Board of Directors, which has the
power to modify or alter such policies without the consent of shareowners.
Although the Company has no present intention of modifying such policies, the
Board of Directors may, in the future, conclude that it would be advantageous
for the Company to modify such policies if it believes that such modifications
are in the best interests of the shareowners. See "FORWARD LOOKING INFORMATION"
below.
The Contribution Agreement entered into between the Company and Asset
Investors provides, among other things, that the Company will not acquire
interests in single-family (one- to four-unit) securitizations and that Asset
Investors will not acquire interests in commercial securitizations, including
commercial securitizations collateralized by multi-family residential
properties.
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Management Agreement
The Management Agreement has been extended through December 31, 1997.
Pursuant to the Management Agreement and subject to the supervision of the
Company's Board of Directors, the Manager performs certain services and
activities relating to the assets and operations of the Company including, among
other things, those described below.
The Manager obtains and manages for the Company, to the extent
available, ownership interests in issuances of commercial real estate
securitizations including, among others, classes of commercial securitizations
and participation in pools of, or mortgages on, commercial real estate. To a
lesser extent, the Manager may acquire for the Company fee interests in, or
acquire or originate mortgages on, commercial real estate which, among other
things, may be used as collateral for future securitizations.
The Manager advises the Company on its business and oversees its
day-to-day operations, subject to the supervision of the Board of Directors of
the Company. The Manager also is obligated to present to the Company asset
acquisition opportunities consistent with the policies and objectives of the
Company and to furnish the Board of Directors of the Company with information
concerning the acquisition, holding and disposition of assets.
The Management Agreement is approved by the Independent Directors. It
may be terminated by either party with or without cause at any time upon 60
days' written notice. In addition, the Company has the right to terminate the
Management Agreement upon the happening of certain specified events including,
among other things, a breach by the Manager of any material provision which
breach remains uncured for 30 days or the bankruptcy of the Manager. The
Management Agreement also may be terminated at any time by a majority vote of
the Independent Directors or holders of Common Stock. The Manager would be
entitled to certain termination payments in the event of an acquisition of the
Company which results in the termination of the Management Agreement.
The Manager receives various fees for advisory and other services
performed in connection with the Management Agreement. The Manager provides (at
its expense) all personnel and certain overhead items necessary to conduct the
regular business of the Company.
Pursuant to the Management Agreement, the Manager receives a Base Fee,
an Incentive Fee, an Acquisition Fee and an Administrative Fee. The Base Fee is
payable quarterly in an amount equal to 1% per annum of the "average invested
assets" of the Company. The Incentive Fee is based on the Company's
profitability and is intended to align compensation paid to the Manager with the
interests of the Company's shareowners. The Manager is entitled to the Incentive
Fee only after the Company's shareowners first have received a threshold 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 REIT income in excess of
this threshold return 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 portfolio assets acquired
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 of up to $10,000 per annum for
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 up to $2,500 per annum for each additional class.
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<PAGE>
The Company has agreed to indemnify the Manager and its affiliates with
respect to all expenses, losses, damages, liabilities, demands, charges or
claims of any nature in respect of acts or omissions of the Manager made in good
faith and in accordance with the standards set forth in the Management
Agreement.
Federal Income Taxation of the Company
General. The Company has operated and, in the future, intends to
operate in a manner that permits it to qualify for the income tax treatment
afforded to a REIT under the Code. To so qualify, among other things, the
Company must distribute annually (as determined under the Code), to its
shareowners, at least 95% of its REIT income. As a result, the Company expects
that, with limited exceptions, its REIT income distributed to shareowners will
not be subject to federal income tax at the corporate level. The Company will be
liable for corporate income tax to the extent of its REIT income which is not
distributed. If the Company fails to qualify as a REIT, it would be subject to
federal and state income tax on its REIT income at regular corporate rates
without any deduction for dividend distributions to shareowners.
In order to qualify as a REIT, the Company must satisfy various
requirements with respect to: (i) the nature of its assets ("Asset
Requirements") and income ("Income Requirements"); (ii) the amount of
distributions to shareowners ("Distribution Requirements"); and (iii) certain
organizational matters ("Organizational Requirements").
Asset Requirements. At least 75% of the assets of the Company must
consist of specified real estate assets, cash or government securities. For
purposes of this requirement, interests in a pass-through tax entity known as a
"real estate mortgage investment conduit" ("REMIC") created by the Tax Reform
Act of 1986 to facilitate the structuring of mortgage asset transactions, are
treated as real estate assets. Also, the Company cannot own equity securities of
any one issuer which represent: (i) more than 5% of the total value of the
Company's assets; or (ii) more than 10% of the outstanding voting securities of
any one issuer (in each case other than another REIT). Under certain
circumstances, if the Company fails to satisfy the Asset Requirement at the end
of any quarter of its taxable year such failure can be cured within 30 days
after the close of that quarter.
Income Requirements. The Income Requirements provide that at least 75%
of the Company's gross income must be derived from specified real estate
sources, including rents from real property and interest on mortgage
obligations. For purposes of this requirement, any amount included in income
with respect to an interest in a REMIC is treated as interest on a mortgage
obligation. Additionally, at least 95% of the Company's gross income must
consist of income derived from items that qualify for the 75% income test, plus
other specified types of passive income, such as interest, dividends and gains
from the sale or other disposition of stock and securities.
If the Company fails to satisfy the foregoing 75% and 95% tests of the
Income Requirements but: (i) the Company otherwise satisfies the requirements
for qualification as a REIT; (ii) such failure is held to be due to a reasonable
cause and not willful neglect; and (iii) certain other requirements are met,
then the Company will continue to qualify as a REIT but will be subject to a
100% tax on certain non-qualifying income.
The Income Requirements also require that less than 30% of the
Company's gross income be derived from the sale or other disposition of: (i)
stock or securities held for less than one year; (ii) property in a transaction
which is a "Prohibited Transaction;" and (iii) most real property held for less
than four years. In addition, the Code also generally imposes a 100% tax on net
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gain derived from Prohibited Transactions. No provision for maintaining REIT
status applies in the case of any failure to satisfy the 30% test.
Distribution Requirements. In general, the Company is required to
distribute annually at least 95% of its REIT income plus 95% of certain other
income. At least 85% of the annual REIT income must be distributed by January of
the following year (as long as the dividend is declared during the year) and the
remainder of the annual REIT income distribution requirement must be distributed
to shareowners before the Company's tax return is filed. Dividend distributions
may be made in cash, securities or property. Shareowners will be subject to tax,
in the year of declaration, on dividends declared by the Company during October,
November and December of a taxable year and paid before January 31 of the
subsequent taxable year. Due to the nature of the Company's income from its
assets and its deductions in respect of its obligations, the Company will
generate REIT income in excess of its cash flow.
BECAUSE OF THE ABOVE DISTRIBUTION REQUIREMENTS AND CERTAIN TAX RULES,
THE COMPANY MAY BE REQUIRED, AMONG OTHER THINGS, TO: (i) DISTRIBUTE TO ITS
SHAREOWNERS A PORTION OF ITS WORKING CAPITAL OR SECURITIES; OR (ii) BORROW FUNDS
OR SELL ASSETS TO MAKE REQUIRED DISTRIBUTIONS IN YEARS IN WHICH ITS REIT INCOME
EXCEEDS ITS CASH FLOW. BECAUSE OF THE DISTRIBUTION REQUIREMENTS RELATING TO REIT
INCOME, THESE DISTRIBUTIONS COULD REDUCE AMOUNTS AVAILABLE FOR FUTURE
ACQUISITIONS AND COULD REDUCE THE COMPANY'S INCOME IN THE FUTURE. IN THE EVENT
THAT THE COMPANY IS UNABLE TO DISTRIBUTE 95% OF ITS REIT INCOME ON AN ANNUAL
BASIS TO ITS SHAREOWNERS, IT WILL LOSE ITS STATUS AS A REIT.
Organizational Requirements. The Common Stock of the Company must be
held by a minimum of 100 persons for at least 335 days in each calendar year. No
more than 50% in value of the Common Stock can be owned, actually or
constructively, by five or fewer individuals at any time during the second half
of each taxable year. For this purpose an "individual" includes certain
tax-exempt entities, but excludes pension funds. To evidence compliance with
these requirements, the Company is required to maintain records and the Company
must demand written statements each year from the recordholders of designated
percentages of its Common Stock which would, among other things, disclose the
actual owners of such Common Stock.
Failure to Qualify as a REIT. The Company will be subject to tax
(including any applicable alternative minimum tax) on its REIT income at regular
corporate rates without any deduction for distributions to shareowners if it
fails to qualify as a REIT in any taxable year. Unless entitled to relief under
specific statutory provisions, the Company also will be disqualified from
treatment as a REIT for the following four taxable years. The failure to qualify
as a REIT for even one year could result in the Company incurring substantial
indebtedness in order to pay any resulting taxes, thus reducing the amount of
cash available for distribution to shareowners. Even if the Company is not
disqualified as a REIT as a result of a failure to satisfy any of the tests
described above, it may be subject to certain excise taxes.
THE PROVISIONS OF THE CODE ARE HIGHLY TECHNICAL. THIS SUMMARY IS NOT
INTENDED TO BE A DETAILED DISCUSSION OF ALL APPLICABLE PROVISIONS OF THE CODE,
RELATED RULES OR ADMINISTRATIVE AND JUDICIAL INTERPRETATIONS OF THE CODE. THIS
SUMMARY DOES NOT DISCUSS THE TREATMENT BY THE COMPANY'S SHAREOWNERS OF AMOUNTS
DISTRIBUTED TO THEM BY THE COMPANY. THIS SUMMARY IS NOT INTENDED TO BE A
SUBSTITUTE FOR PRUDENT TAX PLANNING, AND EACH SHAREOWNER OF THE COMPANY IS URGED
TO CONSULT SUCH SHAREOWNER'S OWN TAX ADVISER WITH RESPECT TO THESE AND OTHER
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FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF SHARES AND ANY POTENTIAL CHANGES IN APPLICABLE LAW.
Restrictions on and Redemptions of Common Stock
The Company must meet certain ownership tests with respect to the
Common Stock to qualify as a REIT. In addition, the corporate charter of the
Company, as amended, (the "Charter") provides that Common Stock may not be owned
by a person if the ownership of Common Stock by such person would result in the
imposition of a tax on the Company or on any other holder (nominee or otherwise)
of Common Stock. Provisions of the Code would impose such a tax if Common Stock
were owned, directly or indirectly, by the United States Government, any state
or political subdivision thereof, any foreign government, any international
organization, any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any organization exempt from tax under the Code that is not subject to
tax on its unrelated business taxable income.
The Charter empowers the Board of Directors, at its option, to redeem
Common Stock or to restrict transfers of Common Stock to bring or maintain
ownership of the Common Stock in conformity with the above-noted requirements.
The redemption price to be paid is the fair market value as reflected in the
latest quotations on any exchange on which the Common Stock is listed or, if the
Common Stock is not listed on any exchange, on the over-the-counter market or,
if no quotations are available, the net asset value of the Common Stock as
determined by the Board of Directors. The Charter also provides that any
acquisition of Common Stock that would result in the disqualification of the
Company as a REIT shall be void to the fullest extent permitted under applicable
law and the intended transferee of such shares shall be deemed never to have had
an interest therein. Furthermore, if such provision is determined to be void or
invalid, then the transferee of such Common Stock shall be deemed, at the option
of the Company, to have acted as agent on behalf of the Company in acquiring
such Common Stock and to hold such Common Stock on behalf of the Company.
The Charter provides that no person or group may beneficially own more
than 9.8% of the outstanding Common Stock, unless the Board of Directors exempts
such ownership from such limit after finding that the Company's qualification as
a REIT would not be jeopardized by such ownership.
Each shareowner is required, upon demand, to disclose to the Board of
Directors in writing such information with respect to direct and indirect
ownership of Common Stock as the Board of Directors deems prudent in protecting
the REIT status of the Company.
Employees
Pursuant to the Management Agreement, the Manager provides all
personnel necessary to conduct the regular business of the Company.
Consequently, the Company has no employees. Certain employees of the Manager
have been elected as officers of the Company.
Item 2. PROPERTIES.
The Company does not own or lease any real estate or physical property.
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<PAGE>
Item 3. LEGAL PROCEEDINGS.
At February 28, 1997, there were no legal proceedings, pending or
threatened, to which the Company was a party or to which any of its property was
subject.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareowners
during the fourth quarter of 1996.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREOWNER MATTERS.
The Common Stock of the Company is listed on the AMEX under the symbol
"CAX." The high and low closing sales prices of the Common Stock as reported in
published financial sources and certain dividend information for the periods
indicated were as follows:
<TABLE>
<CAPTION>
Regular Special
Dividends Dividends
1996 High Low Declared Declared
---- --- -------- --------
<S> <C> <C> <C> <C>
First Quarter $6-1/8 $5-3/4 $.17 $ --
Second Quarter 6-1/4 5-3/4 .17 --
Third Quarter 6-1/2 5-7/8 .17 .04
Fourth Quarter 6-3/4 6-3/16 .17 --
1995
First Quarter $6-3/8 $5-1/2 $.17 $--
Second Quarter 6-1/2 5-3/4 .17 --
Third Quarter 6-5/16 5-3/4 .17 --
Fourth Quarter 6 5-5/8 .17 --
</TABLE>
In general, the Company currently intends to pay quarterly cash
dividends on the Common Stock which in the aggregate (as determined under the
Code), will equal 100% of its REIT income. See "FORWARD LOOKING INFORMATION"
below.
As of February 28, 1997, 10,315,809 shares of Common Stock were issued
and outstanding and were held by 1,823 shareowners of record. The Company
estimates there were approximately 8,500 additional beneficial owners on that
date whose shares were held by banks, brokers or other nominees.
Item 6. SELECTED FINANCIAL DATA.
The Company's selected financial data, set forth below, has been
derived from and should be read in conjunction with the Company's audited
Financial Statements and the notes thereto. The data as of December 31, 1996 and
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<PAGE>
1995 and for each of the three years ended December 31, 1996, is included
elsewhere in this Annual Report on Form 10-K.
(In thousands, except per share data)
Statement of Operations Data:
<TABLE>
<CAPTION>
Period from
October 12,
Year Ended December 31, 1993(1) to
----------------------------------------------- December 31,
1996 1995 1994 1993
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues $ 10,157 $ 9,169 $ 7,064 $ 994
Net income 6,959 6,376 4,927 679
Net income per share .68 .63 .49 .07
Regular dividends per share .68 .68 .50 .07
Special dividends per share .04 -- .03 --
Weighted-average shares outstanding 10,247 10,104 10,047 10,039
<FN>
- ---------------------
1 Date operations commenced.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data: December 31,
---------------------------------------------------------------
1996 1995 1994 1993
--------- -------- --------- --------
<S> <C> <C> <C> <C>
CMBS bonds $ 61,460 $ 69,503 $ 74,046 $ 8,723
Total assets 72,406 71,590 87,604 75,216
Total stockholders' equity 71,919 70,465 74,672 74,976
Book value per share 6.97 6.95 7.43 7.47
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
The Company was incorporated under Maryland law on August 31, 1993, as
a wholly-owned subsidiary of Asset Investors. Asset Investors contributed
$75,000,000 pursuant to the Contribution Agreement (including $200,000 cash) to
the initial capital of the Company. On October 12, 1993, Asset Investors
distributed approximately 70% of the outstanding Common Stock to Asset
Investors' shareowners as taxable dividends. Prior to the distribution, the
Company had not engaged in any activities other than those related to its
formation. Asset Investors currently owns approximately 27% of the outstanding
Common Stock.
The Company's day-to-day operations are performed by Financial Asset
Management LLC, (the "Manager") pursuant to the Management Agreement, a
year-to-year agreement currently in effect through December 31, 1997. The
Management Agreement is subject to the approval of a majority of the Independent
Directors. Prior to April 1, 1996, the Company was managed by Financial Asset
Management Corporation, a wholly owned subsidiary of MDC Holdings, Inc. ("MDC").
Effective April 1, 1996, Financial Asset Management LLC assumed the obligations
of the Management Agreement. From April 1, 1996, through September 30, 1996,
Financial Asset Management LLC was 80% owned by two wholly owned subsidiaries of
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<PAGE>
MDC and 20% owned by Spencer I. Browne who was at the time the President, Chief
Executive Officer and a Director of the Company. On September 30, 1996, MDC
acquired Mr. Browne's 20% interest in Financial Asset Management LLC and then
sold 100% of the Manager to an investor group led by Terry Considine and Thomas
L. Rhodes. MDC received sales proceeds of $11,450,000, including $6,000,000 of
cash and $5,450,000 of subordinated convertible notes. The notes are payable at
specified dates during the next ten years and are convertible, under certain
circumstances, into as much as a 47.6% ownership interest in Financial Asset
Management LLC.
In connection with the sale, Larry A. Mizel resigned as Chairman of the
Board of Directors and Mr. Browne resigned as President, Chief Executive Officer
and a Director of the Company. Terry Considine and Thomas L. Rhodes were elected
as Co-Chairmen of the Board of Directors and Co-Chief Executive Officers and
Leslie B. Fox was elected as President of the Company. No change has been made
to the Management Agreement other than an extension, and Financial Asset
Management LLC will continue its obligations under the Management Agreement.
The Manager is subject to the supervision of the Board of Directors. 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, holding and disposition of assets. The Company has no
employees. Certain employees of the Manager have been designated as officers of
the Company.
The Company owns, and the Manager administers on the Company's behalf,
subordinate ownership interests in CMBS bonds issued in commercial mortgage loan
securitizations acquired with the proceeds from its initial capitalization.
Commercial mortgage loan securitizations generally are multi-class issuances of
debt securities which are secured and funded as to the payment of principal and
interest by a specific group of mortgage loans on multi-family or other
commercial real estate.
Results of Operations for the Years Ended December 31, 1996, 1995 and 1994
REIT Income
REIT income is taxable income computed as prescribed for REITs prior to
the dividends paid deduction (including the dividends paid deduction for
dividends related to capital gains). The Company's REIT income for the years
ended December 31, 1996, 1995 and 1994 was $8,491,000 ($.83 per share),
$7,039,000 ($.70 per share) and $5,274,000 ($.52 per share), respectively.
REIT income from CMBS bonds during 1996, 1995 and 1994 was $11,438,000
($1.12 per share), $9,657,000 ($.96 per share) and $6,208,000 ($.62 per share),
respectively. The increase in earnings from CMBS bonds from 1995 to 1996 was the
result of a $2,441,000 increase in amortization primarily due to: (i) the May
1996 redemption of two CMBS bonds (Aspen MHC, Series 1994-1, Class C and Class
D-1); and (ii) prepayments on two other CMBS bonds during 1996. The proceeds
from the redemption have been invested in short-term cash instruments resulting
in lower bond interest income subsequent to the redemption. The increase in
earnings from CMBS bonds from 1994 to 1995 was the result of the acquisition of
ten subordinate CMBS bonds for $65,724,000 ($91,971,000 par value) during 1994
with coupon interest rates ranging from 6.5% to 9.0% and a weighted-average
yield before credit losses for REIT purposes of 13.6%.
The yield 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 price of the CMBS bond was lower than its par value).
Accordingly, the Company amortizes a portion of the discount (the excess of the
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outstanding par amount over the net cost), as interest income, on a constant
effective yield under the interest method over the life of the CMBS bond.
Amortization of the discount into REIT income from certain of the Company's CMBS
bonds is limited to principal received.
As of February 28, 1997, one mortgage loan with an outstanding balance
of $788,000, which collateralizes two of the Company's CMBS bonds, has been in
foreclosure. Otherwise, there have been no delinquencies. As of December 31,
1996, there have been no credit losses charged to operations or write-downs
charged against the allowance for credit losses. The Company estimates that the
loss from the mortgage loan in foreclosure may range from $0 to $425,000,
dependent upon the recovery of indemnification claims made against the bond
underwriter. For REIT purposes, credit losses are reflected in income only when
they are realized. In future periods, the Company likely will be allocated
credit losses on its CMBS bonds, and as a result, REIT income may be adversely
impacted. See "FORWARD LOOKING INFORMATION" below.
Interest income in 1996, 1995 and 1994 was $319,000 ($.03 per share),
$189,000 ($.02 per share) and $1,126,000 ($.11 per share), respectively. The
increase in interest income in 1996 as compared to 1995 is due to investing the
proceeds from the May 1996 redemption of two CMBS bonds into highly liquid,
short-term investments. In 1994, prior to the acquisition of the Company's CMBS
bonds, the unused proceeds of the initial capitalization were invested in highly
liquid short-term investments. As the Company acquired CMBS bonds using liquid
short-term investments, interest income decreased. The average interest rate
earned on these funds was 5.14%, 5.08% and 4.28% in 1996, 1995 and 1994,
respectively.
General and administrative expenses of the Company were $873,000 ($.09
per share), $1,407,000 ($.14 per share) and $1,143,000 ($.11 per share),
respectively, for the years ended December 31, 1996, 1995 and 1994. General and
administrative expenses decreased in 1996 compared to prior years primarily due
to, among other things, elimination of the expense from the accrual of dividend
equivalent rights ("DERs") in May 1996 and lower costs for shareholder
relations. General and administrative expenses in 1995 included a one-time
expense of $313,000 ($.03 per share) incurred to have a third party assess the
fair value of the Company's net assets.
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, as defined in the Company's Stock Option
Plan which was established in 1993. 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 issuance of Common
Stock in exchange for the right to receive DERs resulted in a one-time charge to
income of $966,000 ($941,000 non-cash charge for the issuance of 157,413 shares
of Common Stock plus $25,000 of transaction costs) during the second quarter of
1996.
Management fees of the Company were $1,425,000 ($.14 per share),
$1,151,000 ($.11 per share), and $598,000 ($.06 per share), respectively, for
the years ended December 31, 1996, 1995 and 1994. The increase in management
fees during 1996 compared with 1995 was due to an increase of $378,000 in
Incentive Fees, offset by decreases of $97,000 in Base Fees and $7,000 in
Administrative Fees. The increase in Incentive Fees was due to a $1,830,000
increase in REIT income before incentive fees and a 14 basis point decrease in
the average Ten-Year U.S. Treasury Rate between 1995 and 1996. The decrease in
Base Fees was due primarily to a reduction of invested assets because of a
$4,245,000 unrealized holding loss on the CMBS bonds recorded at December 31,
1995, and because of the early redemption of the two CMBS bonds in the second
quarter of 1996. The decrease in Administrative Fees was also due to the May 1,
1996, redemption of the two CMBS bonds. The increase in management fees during
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<PAGE>
1995 compared with 1994 was due to: (i) $335,000 of Incentive Fees incurred
during 1995, while no Incentive Fees were incurred in 1994; and (ii) higher Base
and Administrative Fees from acquisitions of CMBS bonds throughout 1994.
During the years ended December 31, 1996, 1995 and 1994, interest
expense, including non-usage fees on the Company's secured loan agreement, was
$2,000 ($.00 per share), $249,000 ($.02 per share) and $319,000 ($.03 per
share), respectively. Due to the cash available from the early redemptions,
there were only limited borrowings in 1996. The decrease in interest expense in
1995 compared with 1994 was due to a decrease in the weighted average
outstanding balance of debt of $3,939,000 in 1995 compared with $6,795,000 in
1994, partially offset by the increase in the effective interest rate of the
Company's secured loans during 1995 of 9.18% compared with 6.40% in 1994.
Dividend Distributions
During 1996, 1995 and 1994, the Company declared regular dividends of
$.68 per share, $.68 per share and $.50 per share, respectively. Additionally,
in 1996 and 1994 special dividends of $.04 per share and $.03 per share,
respectively, were distributed.
Book Income
For the years ended December 31, 1996, 1995 and 1994, the Company
earned book income computed in accordance with generally accepted accounting
principles, ("GAAP") of $6,959,000 ($.68 per share), $6,376,000 ($.63 per share)
and $4,927,000 ($.49 per share), respectively, essentially from the same sources
as its REIT income.
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 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 Commission, the Company is required to report its financial
position and income in accordance with GAAP. The differences between REIT income
and book income are discussed below.
During the years ended December 31, 1996, 1995 and 1994, REIT income
exceeded book income by $1,532,000 ($.15 per share), $663,000 ($.07 per share)
and $347,000 ($.03 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 (as of December 31, 1996, no
credit losses had 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)
differences in the timing of recognition of the expense from DERs.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments generally
approximates their carrying basis, or amortized cost, except for the CMBS bonds.
Due to the complex nature of subordinate CMBS bonds, each instrument has a
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<PAGE>
discrete and unique risk/return profile. Not only do CMBS bonds vary
significantly from issuance to issuance, but the characteristics of the
individual mortgage loans underlying the securities of one issuance are distinct
from the mortgage loans underlying certificates of another issuance. As a
result, there is no exchange or other active market from which to obtain a
quoted market price for these financial instruments. The estimates of fair value
have been determined by the Company using available market information and
valuation methodologies. Considerable judgment is required to interpret the
market information and develop the estimates of fair value.
THE ESTIMATES OF FAIR VALUE PRESENTED HEREIN ARE NOT NECESSARILY
INDICATIVE OF THE AMOUNTS THE COMPANY COULD REALIZE IN A CURRENT MARKET
EXCHANGE. THE USE OF DIFFERENT MARKET ASSUMPTIONS, VALUATION METHODOLOGIES OR
BOTH MAY HAVE A MATERIAL EFFECT ON THE ESTIMATES OF FAIR VALUE. THE FAIR VALUE
ESTIMATES PRESENTED HEREIN ARE BASED ON PERTINENT INFORMATION AVAILABLE TO
MANAGEMENT AS OF DECEMBER 31, 1996. FUTURE ESTIMATES OF FAIR VALUE MAY DIFFER
SIGNIFICANTLY FROM AMOUNTS PRESENTED HEREIN.
The fair value of the Company's CMBS bonds will fluctuate over time due
to, among other things, changes in prevailing interest rates, changes in
collateral performance, liquidity in the CMBS bond market, paydowns on the
mortgage loans collateralizing the CMBS bonds and changes in real estate values
of the related commercial properties. The estimate of fair value was determined
by discounting the future cash flows before estimates of credit losses of the
CMBS bonds at interest rates equal to a spread over U.S. Treasury rates with
comparable terms to maturity. The discount rates range from 10% to 27%. The
interest rate spread over the U.S. Treasury rate was based upon current market
information of CMBS bonds with similar characteristics. See "FORWARD LOOKING
INFORMATION" below.
At December 31, 1996, the estimated fair value of the Company's CMBS
bonds was $61,460,000, or $3,389,000 less than their amortized cost of
$64,849,000, compared to the estimated fair value at December 31, 1995 of
$69,503,000, or $4,245,000 less than their amortized cost of $73,748,000. The
decrease in unrealized holding losses on the Company's two largest bonds is
partially offset by increased unrealized holding losses on the remaining bonds.
The improvement in fair value of the Company's two largest CMBS bonds
is attributed to prepayments on the underlying collateral which shortened the
term to maturity. The decline in value of the remaining CMBS bonds is primarily
attributed to the 76 basis point (0.76%) increase in interest rates offset by
the impact of lower spreads to treasuries from December 31, 1995 to December 31,
1996.
Liquidity and Capital Resources
The Company uses its cash flows from operating activities and other
capital resources to provide working capital to support its operations, for
making distributions to its shareowners, for the acquisition of portfolio assets
and for the repayment of short-term borrowings. The Company did not acquire any
CMBS bonds in 1995 or 1996, and does not plan to use leverage to acquire bonds
in the future without having a source of long-term financing in place. For the
years ended December 31, 1996, 1995 and 1994, cash flow provided by operating
activities was $5,920,000, $6,151,000 and $4,432,000, respectively. As of
December 31, 1996, the Company had $8,277,000 in cash and cash equivalents which
the Company currently intends to use to pay its expenses, make dividend
distributions to shareowners and acquire portfolio assets. See "FORWARD LOOKING
INFORMATION" below.
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<PAGE>
The Company was capitalized with $75,000,000 pursuant to the
Contribution Agreement (including $200,000 cash) from Asset Investors. During
1993, the Company acquired one CMBS bond at a cost of $8,709,000. During the
year ended December 31, 1994, the Company acquired ten additional CMBS bonds at
a cost of $65,724,000.
Two of the Company's CMBS bonds (Aspen MHC, Series 1994-1, Classes C
and D-1) with a total outstanding balance of $9,664,000 were redeemed in May
1996. The redemption of these 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 Company renewed its Loan and Security Agreement collateralized by
four CMBS bonds through November 29, 1997. No borrowings were outstanding on
this line at December 31, 1996 or 1995. Advances bear interest based upon a
spread over the London Interbank Offered Rate on Eurodollar deposits ("LIBOR").
The Loan and Security Agreement contains certain covenants with which the
Company was in compliance at December 31, 1996. The amount the Company will be
able to borrow under its secured credit facility is subject to lender approval
and will vary depending on the value of the collateral pledged to secure such
facility.
On July 19, 1996, the Company renewed a one-year, unsecured line of
credit with a bank for $1,000,000. Advances bear interest at prime. At December
31, 1996, no advances were outstanding on this line of credit.
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 which the Company generally owns. Significant principal
distributions to subordinate CMBS bonds generally are not anticipated before the
scheduled principal distributions.
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, obtaining new debt or equity capital, or
liquidating the existing portfolio of CMBS bonds. There is no assurance the
Company will be able to identify new asset 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, issuances of
debt or equity securities, liquidation of the current portfolio 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.
The Company anticipates its REIT income from CMBS bonds will exceed the
related cash flow due to the inherent structure and pricing of the subordinate
CMBS bonds. The subordinate classes of CMBS bonds purchased by the Company were
issued at a significant discount to their par value. In accordance with the
Code, this discount generally is amortized into income over the life of the CMBS
bond (a non-cash source of REIT income).
Under the Code, the Company has elected an income recognition
methodology for certain of its CMBS bonds that computes income attributable to
- 18 -
<PAGE>
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 $55,394,000 at December 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 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."
As the holder of subordinate CMBS bonds (which generally are allocated
all losses on the underlying mortgage loans until the principal balance of the
bond is exhausted), the Company has significant credit risk. These bonds are
subject to a greater risk of loss of principal and non-payment of interest than
the more senior bonds secured by the same assets. 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.
The management and the Board of Directors of the Company are continuing
to evaluate its existing structure and strategy and consider whether changes are
warranted. The goal of management and the Board of Directors is to invest in
assets with the greatest risk-adjusted rates of return. A change in the
Company's existing portfolio may impact the future REIT income and resulting
dividends of the Company. 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 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
take place after default on the loan, when the proceeds from the foreclosure
sale of the real estate are less than the unpaid balance of the mortgage loan
plus interest advances and foreclosure costs. Such losses will be allocated
first to the subordinate first-loss CMBS bonds prior to being allocated to the
more senior CMBS bond classes. As of February 28, 1997, one of the mortgages
with an outstanding balance of $788,000 that collateralizes two of the Company's
CMBS bonds was foreclosed and subsequently refinanced with a new property owner.
Otherwise, there have been no delinquencies. The CMBS bonds the Company owns are
- 19 -
<PAGE>
more speculative than the senior CMBS bond classes and may be subject to special
risks, including a substantially greater risk of loss of principal and
non-payment of interest.
If the CMBS bonds acquired by the Company have an actual default rate
and severity of loss on the mortgage collateral that are higher than those
anticipated by the Company when the bonds were acquired, their yield will be
lower than the Company initially anticipated and, in the event of substantial
losses, the Company may not recover 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 projection. In
general, the earlier a loss occurs, the greater the adverse effect on the
Company's yield.
The Company's yield on CMBS bonds also will be affected by interest
rate levels during the periods in which the mortgage loans collateralizing the
CMBS bonds mature. For example, if at the maturity date of a mortgage loan,
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 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 financing of the commercial
properties cannot be arranged at the maturity date of the current outstanding
mortgage due to poor property performance. These potential losses are referred
to as "balloon losses."
There can be no assurance as to the future rate of delinquency,
severity of loss or the timing of any such losses on the mortgage loans
collateralizing the CMBS bonds and, thus, no assurance as to the actual yield
received by the Company. See "FORWARD LOOKING INFORMATION" below.
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 paid to the holders of any
more senior classes of CMBS bonds before principal payments are paid to the
subordinate bond classes held by the Company. Because of this, 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.
However, because the Company is acquiring the CMBS bonds at a significant
discount from their outstanding principal balance, prepayments of principal on
the CMBS bonds the Company owns, may increase the Company's yield on its CMBS
bonds.
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. See "FORWARD LOOKING
INFORMATION" below.
Loss Severity
While the rate and timing of defaults and prepayments on the mortgage
collateral are important in determining the anticipated yield on subordinate
CMBS bonds, the anticipated severity of the loss on the mortgage loans (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
- 20 -
<PAGE>
important in determining the anticipated yield on a subordinate CMBS bond.
Losses on defaulted mortgage collateral are realized after the foreclosure sale
of the property which generally is the only security for the mortgage loan. The
severity of these losses 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
property owner's equity in the mortgaged real estate, the anticipated decline in
market value of the property, accrued and unpaid interest through the
foreclosure process and foreclosure costs. The higher the coupon rate of the
mortgage loan, the higher are the costs of interest advances from the date of
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 Company's CMBS bonds (including
a negative impact on the owner's ability to refinance debt secured by such
properties); 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.
FORWARD LOOKING INFORMATION
Certain statements in this Form 10-K Annual 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;
investment opportunities; 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
CMBS bonds do not exceed the Company's estimates.
- 21 -
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
COMMERCIAL ASSETS, INC.
Index to Financial Statements
PAGE
Report of Independent Auditors........................................... F-2
Balance Sheets as of December 31, 1996 and 1995.......................... F-3
Statements of Income for the years ended December 31,
1996, 1995 and 1994.................................................. F-4
Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994.................................... F-5
Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994................................................. F-6
Notes to Financial Statements............................................ F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareowners
Commercial Assets, Inc.
Denver, Colorado
We have audited the accompanying balance sheets of Commercial Assets,
Inc. as of December 31, 1996 and 1995, and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Commercial Assets,
Inc. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Phoenix, Arizona
February 10, 1997
F-2
<PAGE>
COMMERCIAL ASSETS, INC.
BALANCE SHEETS
(Dollar amounts in thousands)
December 31,
---------------------------
1996 1995
---------- ----------
Assets
Cash and cash equivalents $ 8,277 $ 598
Accrued interest receivable 597 675
Restricted cash 1,982 768
CMBS bonds 61,460 69,503
Other assets, net 90 46
---------- ----------
Total Assets $ 72,406 $ 71,590
========== ==========
Liabilities
Accounts payable and accrued liabilities $ 189 $ 133
Management fees payable 298 292
Short-term notes payable -- 700
---------- ----------
Total Liabilities 487 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 (20,295) (12,897)
Cumulative net income 18,941 11,982
---------- ----------
Dividends in excess of net income (1,354) (915)
---------- ----------
Net unrealized holding losses on CMBS bonds (3,389) (4,245)
---------- ----------
Total Stockholders' Equity 71,919 70,465
---------- ----------
Total Liabilities and Stockholders' Equity $ 72,406 $ 71,590
========== ==========
See Notes to Financial Statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC.
STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended December 31,
------------------------------------------------
Revenues 1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CMBS bonds $ 9,838 $ 8,980 $ 5,938
Interest 319 189 1,126
--------- --------- ---------
Total Revenues 10,157 9,169 7,064
--------- --------- ---------
Expenses
Management fees 1,425 1,151 598
General and administrative 805 1,393 1,220
Elimination of DERs 966 -- --
Interest 2 249 319
--------- --------- ---------
Total Expenses 3,198 2,793 2,137
--------- --------- ---------
Net Income $ 6,959 $ 6,376 $ 4,927
========= ========= =========
Net income per share $ .68 $ .63 $ .49
Weighted-average shares outstanding 10,247 10,104 10,047
Dividends per share
Regular dividends $ .68 $ .68 $ .50
Special dividends .04 -- .03
--------- --------- ---------
$ .72 $ .68 $ .53
========= ========= =========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
COMMERCIAL ASSETS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
Net
Unrealized
Additional Dividends In Holding Total
Common Stock Paid-In Excess of Losses on Stockholders'
Shares Amount Capital Net Income CMBS Bonds Equity
------ ------ ------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balances - December 31, 1993 10,039 $ 100 $ 74,900 $ (24) $ -- $ 74,976
Issuance of Common Stock 14 1 94 -- -- 95
Net income -- -- -- 4,927 -- 4,927
Dividends -- -- -- (5,326) -- (5,326)
------- ------ --------- -------- ------- ---------
Balances - December 31, 1994 10,053 101 74,994 (423) -- 74,672
Issuance of Common Stock 89 1 529 -- -- 530
Net income -- -- -- 6,376 -- 6,376
Dividends -- -- -- (6,868) -- (6,868)
Unrealized depreciation of CMBS bonds -- -- -- -- (4,245) (4,245)
------- ------ --------- -------- ------- ---------
Balances - December 31, 1995 10,142 102 75,523 (915) (4,245) 70,465
Issuance of Common Stock 174 1 1,036 -- -- 1,037
Net income -- -- -- 6,959 -- 6,959
Dividends -- -- -- (7,398) -- (7,398)
Unrealized appreciation of CMBS bonds -- -- -- -- 856 856
------- ------ --------- -------- ------- ---------
Balances - December 31, 1996 10,316 $ 103 $ 76,559 $ (1,354) $(3,389) $ 71,919
======= ====== ========= ======== ======= =========
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
COMMERCIAL ASSETS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Cash Flows From Operating Activities
<S> <C> <C> <C>
Net income $ 6,959 $ 6,376 $ 4,927
Adjustments to reconcile net income to net cash flows from
operating activities:
Amortization of discount on CMBS bonds and other assets (2,155) (638) (331)
Issuance of Common Stock for elimination of DERs 941 -- --
Decrease (increase) in accrued interest receivable 78 6 (569)
Increase in accounts payable and accrued liabilities 157 329 481
(Increase) decrease in other assets (60) 78 (76)
-------- -------- ---------
Net Cash Provided By Operating Activities 5,920 6,151 4,432
-------- -------- ---------
Cash Flows From Investing Activities
Principal collections from CMBS bonds 9,857 554 377
Acquisitions of CMBS bonds -- -- (65,628)
Acquisition of restricted cash -- -- (96)
-------- -------- ---------
Net Cash Provided By (Used In) Investing Activities 9,857 554 (65,347)
-------- -------- ---------
Cash Flows From Financing Activities
Dividends paid (7,398) (8,879) (3,315)
(Repayments) borrowings of short-term notes payable (700) (9,595) 10,295
-------- -------- ---------
Net Cash (Used In) Provided By Financing Activities (8,098) (18,474) 6,980
-------- -------- ---------
Cash and Cash Equivalents
Increase (decrease) 7,679 (11,769) (53,935)
Beginning of period 598 12,367 66,302
-------- -------- ---------
End of period $ 8,277 $ 598 $ 12,367
======== ======== =========
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
COMMERCIAL ASSETS, INC.
NOTES TO FINANCIAL STATEMENTS
A. Organization
Commercial Assets, Inc. ("the Company") 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
($74,800,000 pursuant to the Contribution Agreement plus $200,000 cash) 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 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 Financial Asset
Management LLC, (the "Manager") pursuant to the Management Agreement, a
year-to-year agreement currently in effect through December 31, 1997. The
Management Agreement is subject to the approval of a majority of the Independent
Directors. Prior to April 1, 1996, the Company was managed by Financial Asset
Management Corporation, a wholly owned subsidiary of MDC Holdings, Inc. ("MDC").
Effective April 1, 1996, Financial Asset Management LLC assumed the obligations
of the Management Agreement. From April 1, 1996, through September 30, 1996,
Financial Asset Management LLC was 80% owned by two wholly owned subsidiaries of
MDC and 20% owned by Spencer I. Browne who was at the time the President, Chief
Executive Officer and a Director of the Company. On September 30, 1996, MDC
acquired Mr. Browne's 20% interest in Financial Asset Management LLC and then
sold 100% of the Manager to an investor group led by Terry Considine and Thomas
L. Rhodes. In connection with the sale, Larry A. Mizel resigned as Chairman of
the Board of Directors and Mr. Browne resigned as President, Chief Executive
Officer and a Director of the Company. Terry Considine and Thomas L. Rhodes were
elected as Co-Chairmen of the Board of Directors and Co-Chief Executive Officers
and Leslie B. Fox was elected as President of the Company. No change has been
made to the Management Agreement other than an extension, and Financial Asset
Management LLC will continue its obligations under the Management Agreement.
The Manager is subject to the supervision of the Board of Directors. 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, holding and disposition of assets. The Company has no
employees. Certain employees of the Manager have been designated as officers of
the Company.
The Company owns, and the Manager administers on the Company's behalf,
subordinate ownership interests in Commercial Mortgage Backed Securities, "CMBS
bonds." The CMBS bonds are issued in commercial mortgage loan securitizations
which generally are multi-class issuances of debt securities which are secured
and funded as to the payment of principal and interest by a specific group of
mortgage loans on multi-family or other commercial real estate.
To date, the Company's primary emphasis has been on the acquisition of
credit support classes of commercial securitizations backed by mortgage loans on
multi-family real property.
F-7
<PAGE>
B. Summary of Significant Accounting Policies
CMBS bonds - Earnings from CMBS bonds are comprised of coupon interest
and the amortization of the purchase discount. Amortization of the purchase
discount is recognized by the interest method using a constant effective yield
and assumes an estimated rate of future prepayments, defaults and credit losses
which is adjusted for actual experience. The allowance for credit losses is
equal to the undiscounted total of future estimated credit losses. In the event
the Company adjusts the estimate of future credit losses, such adjustments would
be included in current period earnings.
The Company classifies its CMBS bonds as available-for-sale.
Accordingly, the CMBS bonds are carried at fair value in the financial
statements. Unrealized holding gains and losses on available-for-sale securities
are excluded from earnings and reported as a net amount in stockholders' equity
until realized. If the fair value of a CMBS bond declines below its amortized
cost basis and the decline is considered to be "other than temporary," the
amount of the write-down would be included in the Company's income (i.e.,
accounted for as a realized loss). The decline in fair value is considered to be
other than temporary if the cost basis exceeds the related projected cash flow
from the CMBS bond discounted at a risk-free rate of return.
Fair Value of Financial Instruments - The fair value of the Company's
CMBS bonds is discussed in Note C. The fair value of all other financial
instruments of the Company generally approximate their carrying basis or
amortized cost.
Income Taxes - The Company intends to operate in a manner that will
permit it to qualify for the income tax treatment accorded to a REIT. If it so
qualifies, the Company's REIT income, with certain limited exceptions, will not
be subject to federal or state income tax at the corporate level. Accordingly,
no provision for taxes has been made in the financial statements.
In order to maintain its status as a REIT, the Company is required,
among other things, to distribute annually to its shareowners at least 95% of
its REIT income and to meet certain asset, income and stock ownership tests.
Dividends declared in 1996, 1995 and 1994 represented ordinary income to the
shareowners, in accordance with the Code.
Net Income Per Share - Net income per share for the years ended
December 31, 1996, 1995 and 1994 was based upon the weighted-average number of
shares of Common Stock outstanding during each such period. In 1996, 1995 and
1994, the effect of unexercised stock options was not material with respect to
net income per share.
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 $8,000, $290,000 and $278,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
Non-cash investing and financing activities for the years ended
December 31, 1996, 1995 and 1994 were as follows (in thousands):
F-8
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Principal collections on CMBS bonds transferred to
restricted cash $ 1,214 $ 397 $ 275
Unrealized holding gains (losses) on CMBS bonds $ 856 $ (4,245) $ --
Distributions of Common Stock pursuant to DERs $ 96 $ 376 $ 227
Distributions of Common Stock as consideration for the
elimination of DERs $ 941 $ -- $ --
Dividends declared but not yet paid $ -- $ -- $ 2,011
</TABLE>
Use of Estimates - The preparation of the financial statements in
conformity with generally accepted accounting principals requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
C. CMBS Bonds
Based on the timing and amount of future credit losses estimated by the
Company, the weighted-average yield-to-maturity of the Company's CMBS bonds at
December 31, 1996 and 1995, was 11.9%. The yield-to-maturity on the CMBS bonds
acquired by the Company will be extremely sensitive to defaults on the mortgage
loans collateralizing such CMBS bonds and the severity of losses resulting from
such defaults. The losses are due to a decline in the value of the properties
collateralizing the mortgage loans underlying the Company's CMBS bonds. The
losses may not be apparent until the maturity dates of the mortgage loans as the
property owner attempts to refinance or sell the property to repay the mortgage
loan. The weighted-average lives of the mortgage loans generally coincide with
the weighted-average lives of the CMBS bonds owned by the Company. The
weighted-average lives listed in the table below indicate the approximate time
until the maturity date of the Company's CMBS bonds.
The Company's subordinate CMBS bonds provide credit support to the more
senior bond classes of the related commercial securitization and are
collateralized by mortgage loans on multi-family properties located throughout
the country. Generally, any loss on an individual mortgage loan, which comprises
a portion of the collateral for all bond classes in a CMBS issuance, is absorbed
by the Company to the extent of the principal balance and interest payments of
the Company's related CMBS bonds. The mortgage loans collateralizing certain
CMBS bonds are held by a group of related entities, none of which individually
represent greater than 10% of the mortgage loans collateralizing the Company's
CMBS bonds. The Company's exposure to loss from its CMBS bonds is limited to
their amortized cost and restricted cash.
In May 1996, two CMBS bonds (Aspen MHC, Series 1994-1, Classes 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 84.3% of their outstanding
principal balance. Since the bonds were redeemed at par, $1,426,000 of discount
amortization was included in earnings during the year ended December 31, 1996.
The outstanding balance of the mortgage loans collateralizing the CMBS
bonds and the outstanding principal of the CMBS bonds that are senior to the
F-9
<PAGE>
Company's CMBS bonds was $912,879,000 and $818,291,000, respectively, at
December 31, 1996. The Company provided an allowance for credit losses of
$12,720,000 at December 31, 1996 and 1995 on certain of its CMBS bonds. At
December 31, 1996, a mortgage loan with an outstanding balance of $788,000,
which collateralizes the Company's CMBS bonds, was foreclosed and subsequently
refinanced with a new property owner. During the years ended December 31, 1996
and 1995, there were no credit losses charged to operations or write-downs
charged against the allowance for credit losses. The mortgages which comprise
the collateral for the Company's subordinate CMBS bonds are secured by apartment
complexes in 36 states, with concentrations in Texas (26%), Arizona (13%) and
Georgia (8%).
Pursuant to the provisions of certain of the Company's CMBS bonds, cash
collections which would otherwise be attributable to the Company's interests are
required to be set aside in reserve accounts to support the eventual payment of
more senior classes of CMBS bonds. At December 31, 1996 and 1995, the amounts
set aside of $1,982,000 and $768,000, respectively, are shown as restricted cash
on the balance sheet.
Due to the complex nature of CMBS bonds, each instrument has a discrete
and unique risk/return profile. Not only do CMBS bonds vary significantly from
issuance to issuance, but the characteristics of the individual mortgage loans
underlying the securities of one issuance are distinct from the mortgage loans
underlying certificates of another issuance. There is no exchange or other
active market from which to obtain a quoted market price for these financial
instruments. The estimates of fair value have been determined by the Company
using available market information and valuation methodologies. Considerable
judgment was required to interpret the market information and develop the
estimates of fair value.
THE ESTIMATES OF FAIR VALUE PRESENTED HEREIN ARE NOT NECESSARILY
INDICATIVE OF THE AMOUNTS THE COMPANY COULD REALIZE IN A CURRENT MARKET
EXCHANGE. THE USE OF DIFFERENT MARKET ASSUMPTIONS, VALUATION METHODOLOGIES OR
BOTH MAY HAVE A MATERIAL EFFECT ON THE ESTIMATES OF FAIR VALUE. THE FAIR VALUE
ESTIMATES PRESENTED HEREIN ARE BASED ON PERTINENT INFORMATION AVAILABLE TO
MANAGEMENT AS OF DECEMBER 31, 1996. FUTURE ESTIMATES OF FAIR VALUE MAY DIFFER
SIGNIFICANTLY FROM THE AMOUNTS PRESENTED HEREIN.
The estimated fair value of the Company's CMBS bonds was $61,460,000 on
$89,297,000 of outstanding principal of bonds at December 31, 1996, and
$69,503,000 on $100,368,000 of outstanding principal of bonds at December 31,
1995. The estimate of fair value was determined by discounting the future cash
flows before estimates of credit losses of the CMBS bonds at interest rates
equal to a spread over U.S. Treasury rates with comparable terms to maturity.
The discount rates range from 10% to 27%. The interest rate spread over the U.S.
Treasury rate was based upon current market information of CMBS bonds with
similar characteristics. The fair value of CMBS bonds will fluctuate over time
due to, among other things, changes in prevailing interest rates, liquidity in
the CMBS bonds market, paydowns on the mortgage loans collateralizing the CMBS
bonds and changes in real estate values of the related commercial properties.
The decline in fair value below amortized cost is considered temporary, and,
accordingly, is excluded from earnings and reported as a component of
stockholders' equity.
Certain of the Company's CMBS bonds are pledged as collateral for the
Company's short-term notes payable (see Note D).
F-10
<PAGE>
Presented below is a schedule of the CMBS bonds owned by the Company as
of December 31, 1996 and 1995 (dollar amounts in thousands):
<TABLE>
<CAPTION>
Weighted- Outstanding Balance
Maturity Average Date Senior at December 31,
Description Coupon Date Life(5) Acquired Rating CMBS Bonds(4) 1996 1995
- -------------------------------------------- ------ -------- -------- -------- -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kidder, Peabody Acceptance Corporation I,
Series 1993-M2, Class E(1) 8.88% 8/2021 3.7 yrs 11/16/93 BB $ 79,744 $ 10,000 $ 10,000
Lehman Capital Corporation Trust
Certificate, Series 1994-2(2) 6.50% 10/2003 6.8 2/24/94 Unrated 2,143 2,143
Lehman Capital Corporation Trust
Certificate, Series 1994-3 6.50% 10/2003 6.8 2/24/94 Unrated 125,892 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 3.9 3/30/94 Unrated 321,980 10,704 11,587
Fannie Mae Multi-Family REMIC Trust
1994-M2, Class D(6) 8.18% 1/2004 6.7 3/30/94 Unrated 38,384 38,715
DLJ Mortgage Acceptance Corporation,
Series 1994-MF4, Class B-3 8.50% 4/2001 4.3 6/15/94 B 91,521 3,136 3,136
DLJ Mortgage Acceptance Corporation,
Series 1994-MF4, Class C 8.50% 4/2001 4.3 6/15/94 Unrated 4,183 4,183
Kidder, Peabody Acceptance Corporation I,
Series 1994-M1, Class C 8.25% 11/2002 4.6 11/29/94 B 199,154 8,930 8,930
Kidder, Peabody Acceptance Corporation I,
Series 1994-M1, Class D 8.25% 11/2002 4.9 11/29/94 Unrated 7,655 7,655
---- --- -------- -------- --------
Total outstanding balance 8.15% 5.5 yrs $818,291 89,297 100,368
==== === ========
Unamortized discount(7) (12,077) (14,393)
Allowance for credit losses(7) (12,720) (12,720)
Unamortized acquisition costs(7) 349 493
-------- --------
Amortized cost 64,849 73,748
Net unrealized holding losses(7) (3,389) (4,245)
-------- --------
Total net book value $ 61,460 $ 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 redeemed in May 1996.
4 The outstanding principal balance at December 31, 1996, of the 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 December 31, 1996.
6 Payment of principal and interest is not guaranteed by FNMA.
7 The amounts are specifically identified to individual CMBS bonds.
</FN>
</TABLE>
F-11
<PAGE>
D. Short-Term Notes Payable
The Company renewed its Loan and Security Agreement collateralized by
four CMBS bonds (FNMA 94-M2C, FNMA 94-M2D, Kidder 94-M1C and Kidder 94-M1D)
through November 29, 1997. No borrowings were outstanding on this line at
December 31, 1996 or 1995 and $21,616,000 was available to be borrowed. Advances
bear interest based upon a spread over the LIBOR. The Loan and Security
Agreement contains certain covenants with which the Company was in compliance at
December 31, 1996 and 1995. The amount the Company will be able to borrow under
its secured credit facility is subject to lender approval and will vary
depending on the value of the collateral pledged to secure such facility.
On July 19, 1996, the Company renewed a one-year, unsecured line of
credit with a bank for $1,000,000. Advances under this line bear interest at
prime. Two of the Company's Independent Directors were members of the Board of
Directors of the holding company of the bank during 1995 and 1996. At December
31, 1996, no advances were outstanding on this line of credit. At December 31,
1995, $700,000 was outstanding on this line of credit at an interest rate of
8.5% per annum.
E. Stock Option Plan
The Company has a Stock Option Plan for the issuance of non-qualified
stock options to its directors and officers which as of January 1, 1997 and
1996, permits the issuance of up to an aggregate of 947,693 and 701,948,
respectively, shares of Common Stock. The exercise price for stock options may
not be less than 100% of the fair market value of the shares of Common Stock at
the date of the grant. Each of the stock options granted to date has a five-year
term.
Prior to May 30, 1996, stock options granted under the Stock Option
Plan automatically accrued dividend equivalent rights ("DERs") based on: (i) the
number of shares underlying the unexercised portion of the option; (ii)
dividends declared on the outstanding shares of the Company between the option
grant date and the option exercise date; and (iii) the market price of the
shares on the dividend record date. DERs were paid in shares of Common Stock (or
in other property that constituted the dividend) at the time of each dividend
distribution. During the years ended December 31, 1996, 1995 and 1994, the
Company incurred $96,000, $376,000 and $227,000, respectively, of general and
administrative expenses from DERs covering 16,362, 63,566 and 36,485,
respectively, shares of Common Stock which were subject to issuance pursuant to
options granted under the 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 non-cash charge from the issuance of 157,413 shares of Common Stock
plus $25,000 of transactions costs) during 1996.
Presented below is a summary of the changes in stock options for the
three years ended December 31, 1996. The options outstanding at December 31,
1993 were granted at the inception of the Company. As of December 31, 1996, the
outstanding options have exercise prices ranging from $5.62 to $7.50 and have a
remaining weighted-average life of 2.1 years.
F-12
<PAGE>
Average
Exercise Price
Shares
Outstanding - December 31, 1993 $ 7.50 311,500
Granted 6.32 169,500
------ -------
Outstanding - December 31, 1994 7.09 481,000
Granted 6.15 92,500
------ ---------
Outstanding - December 31, 1995 6.94 573,500
Granted 5.86 82,500
Forfeited 6.68 8,500
------ ---------
Outstanding - December 31, 1996 $ 6.80 647,500
====== =======
As of December 31, 1996, no options have been exercised. Options granted
to date vest over a two year period. As of December 31, 1996, 1995 and 1994,
453,500, 484,875, and 318,375, respectively, of the outstanding options were
exercisable.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options rather than the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation." Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using an option pricing model.
Option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
During the years ended December 31, 1996 and 1995, the estimated
weighted-average, grant-date fair value of options granted was $.45 and $.23,
respectively, and the estimated total fair value of options granted was $27,000
and $30,000, respectively. The pro forma net income of the Company reflecting
the fair value of options granted was $6,932,000 ($.68 per share) and $6,346,000
($.63 per share) for the years ended December 31, 1996 and 1995, respectively.
The estimated fair value of the options is amortized to expense over the
options' vesting period. The Company assumed a life of five years and risk-free
interest rate equal to the Five-Year U.S. Treasury rate on the date the options
were granted. In addition, the expected stock price volatility and dividends
growth rates were estimated based upon historical averages over the three years
ended December 31, 1996.
F-13
<PAGE>
F. Other Matters
The Company operates under a Management Agreement with the Manager,
pursuant to which the Manager advises the Company on its business and oversees
its day-to-day operations, subject to the supervision of the Company's Board of
Directors.
The Company's day-to-day operations are performed by Financial Asset
Management LLC, (the "Manager") pursuant to the Management Agreement, a
year-to-year agreement currently in effect through December 31, 1997. The
Management Agreement is subject to the approval of a majority of the Independent
Directors. Prior to April 1, 1996, the Company was managed by Financial Asset
Management Corporation, a wholly owned subsidiary of MDC Holdings, Inc. ("MDC").
Effective April 1, 1996, Financial Asset Management LLC assumed the obligations
of the Management Agreement. From April 1, 1996, through September 30, 1996,
Financial Asset Management LLC was 80% owned by two wholly owned subsidiaries of
MDC and 20% owned by Spencer I. Browne who was at the time the President, Chief
Executive Officer and a Director of the Company. On September 30, 1996, MDC
acquired Mr. Browne's 20% interest in Financial Asset Management LLC and then
sold 100% of the Manager to an investor group led by Terry Considine and Thomas
L. Rhodes. MDC received sales proceeds of $11,450,000, including $6,000,000 of
cash and $5,450,000 of subordinated convertible notes. The notes are payable at
specified dates during the next ten years and are convertible, under certain
circumstances, into as much as a 47.6% ownership interest in Financial Asset
Management LLC.
In connection with the sale, Larry A. Mizel resigned as Chairman of the
Board of Directors and Mr. Browne resigned as President, Chief Executive Officer
and a Director of the Company. Terry Considine and Thomas L. Rhodes were elected
as Co-Chairmen of the Board of Directors and Co-Chief Executive Officers and
Leslie B. Fox was elected as President of the Company. No change has been made
to the Management Agreement other than an extension, and Financial Asset
Management LLC will continue its obligations under the Management Agreement.
During the years ended December 31, 1996, 1995 and 1994, the Company's
total management fees were $1,425,000, $1,151,000 and $924,000, respectively,
consisting of: (i) Base Fees of $654,000, $751,000 and $556,000, respectively;
(ii) Administrative Fees of $58,000, $65,000 and $42,000, respectively; and
(iii) Incentive Fees of $713,000, $335,000 and $0, respectively. There were no
acquisition fees incurred during 1996 and 1995 while $326,000 were incurred
during 1994. Acquisition Fees are capitalized as part of the cost of acquiring
CMBS bonds.
The Company's Charter authorizes the Board of Directors to issue
25,000,000 shares, par value $.01 per share, of Preferred Stock. To date, the
Company has not issued any classes of stock other than its Common Stock and has
not determined the terms under which any other classes would be issued. The
Charter of the Company authorizes the Board of Directors, without further
shareowner action, to fix the terms of the Preferred Stock, including
preferences, powers and rights (including voting rights) senior to the Common
Stock.
The officers and certain directors of the Company also serve as
officers, employees, directors or all three of Asset Investors and the Manager.
At December 31, 1995, the shares of Common Stock owned by MDC
represented 0.8% of the outstanding shares of Common Stock.
F-14
<PAGE>
G. Selected Quarterly Financial Data (unaudited)
Presented below is selected quarterly financial data for the years
ended December 31, 1996 and 1995 (in thousands, except per share data).
<TABLE>
<CAPTION>
Three Months Ended,
-----------------------------------------------------------------------
December 31, September 30, June 30, March 31,
1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues 2,146 2,167 3,526 2,318
Net income 1,595 1,765 1,992 1,607
Net income per share .16 .17 .19 .16
Regular dividends declared per share .17 .17 .17 .17
Special dividends declared per share -- .04 -- --
Stock prices(1)
High 6-3/4 6-1/2 6-1/4 6-1/8
Low 6-3/16 5-7/8 5-3/4 5-3/4
Common Stock outstanding 10,315,809 10,315,809 10,315,809 10,158,396
1995
- --------------------------------------------------------------------------------------------------------------------
Revenues $2,325 $2,243 $2,240 $2,349
Net income 1,508 1,686 1,649 1,533
Net income per share .15 .17 .16 .15
Regular dividends declared per share .17 .17 .17 .17
Stock prices(1)
High 6 6-5/16 6-1/2 6-3/8
Low 5-5/8 5-3/4 5-3/4 5-1/2
Common Stock outstanding 10,142,034 10,124,698 10,092,674 10,078,468
<FN>
- -----------------------
1 Daily closing prices as reported on the AMEX Composite Tape.
</FN>
</TABLE>
F-15
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the Company's Proxy Statement
for its 1997 Annual Meeting of Shareowners.
Item 11. EXECUTIVE COMPENSATION.
Information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the Company's Proxy Statement
for its 1997 Annual Meeting of Shareowners.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the Company's Proxy Statement
for its 1997 Annual Meeting of Shareowners.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the Company's Proxy Statement
for its 1997 Annual Meeting of Shareowners.
- 22 -
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. The following Financial Statements of the Company are included
in Part II, Item 8 of this Annual Report on Form 10-K:
PAGE
Report of Independent Auditors......................... F-2
Balance Sheets as of December 31, 1996 and 1995........ F-3
Statements of Income for the years ended
December 31, 1996, 1995 and 1994....................... F-4
Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994................. F-5
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994....................... F-6
Notes to Financial Statements.......................... F-7
2. Schedules to Financial Statements:
All financial statement schedules have been omitted
because they are inapplicable or the information is provided
in the Company's Financial Statements and notes thereto,
included in Part II, Item 8, of this Annual Report on Form
10-K.
3. Exhibits:
Exhibit
No. Description
3.1 Amended and Restated Charter of Commercial Assets,
Inc. (the "Registrant"), (incorporated herein by
reference to Exhibit 3.1 to Amendment No. 1 to the
Registrant's Registration Statement on Form 10 (as
amended, the "Form 10") of the Registrant,
Commission File No. 1-22262, filed on August 31,
1993).
3.2 By-laws of the Registrant, (incorporated herein by
reference to Exhibit 3.2 to Amendment No. 1 to the
Form 10 of the Registrant, Commission File No.
1-22262, filed on August 31, 1993).
3.3 Amendment to the By-laws of the Registrant dated as
of January 14, 1997.
- 23 -
<PAGE>
4.1 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, 1994).
4.2 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).
10.1 Contribution Agreement, dated as of August 20, 1993,
between the Registrant and Asset Investors
(incorporated herein by reference to Exhibit 10.1 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 10Q, Commission 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).
10.3(c)* Amendment to the Management Agreement dated as of
January 1, 1997, between the Registrant 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).
10.4(a)* First Amendment to Commercial Assets, Inc. 1993
Stock Option Plan (incorporated herein by reference
to Exhibit 10.4(a) to the Registrants Quarterly
Report on Form 10-Q for the period ended June 30,
1996, Commission File No. 1-22262, filed on August
13, 1996).
- 24 -
<PAGE>
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 Registrant 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 August 28, 1995, between the Registrant and
PaineWebber Real Estate Securities, Inc.
(incorporated herein by reference to exhibit 10.8(a)
to the Registrants Annual Report on Form 10-K,
commission File No. 1-22262, filed on March 28,
1996).
10.8(b) Amendment to the Loan and Security Agreement, dated
as of October 25, 1996, between the Registrant and
PaineWebber Real Estate Securities, Inc.
23 Independent Auditors' Consent - Ernst & Young LLP.
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the Registrant
during the fourth quarter of 1996 covered by this Annual Report on Form 10-K.
- 25 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 24, 1997 By /s/Terry Considine
---------------------------
Terry Considine
Co-Chief Executive Officer
Date: March 24, 1997 By /s/Thomas L. Rhodes
---------------------------
Thomas L. Rhodes
Co-Chief Executive Officer
Date: March 24, 1997 By /s/Kevin J. Nystrom
---------------------------
Kevin J. Nystrom
Chief Financial Officer
Date: March 24, 1997 By /s/Diane Schott Armstrong
---------------------------
Diane Schott Armstrong
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Capacity Date
/s/Terry Considine Director March 24, 1997
- ---------------------------------
Terry Considine
/s/Thomas L. Rhodes Director March 24, 1997
- ---------------------------------
Thomas L. Rhodes
/s/Donald L. Kortz Director March 24, 1997
- ---------------------------------
Donald L. Kortz
/s/Raymond T. Baker Director March 24, 1997
- ---------------------------------
Raymond T. Baker
/s/Robert J. Malone Director March 24, 1997
- ---------------------------------
Robert J. Malone
/s/Bruce D. Benson Director March 24, 1997
- ---------------------------------
Bruce D. Benson
/s/Thomas C. Fries Director March 24, 1997
- ---------------------------------
Thomas C. Fries
- 26 -
AMENDMENT TO BY-LAWS
OF
COMMERCIAL ASSETS, INC.
This Amendment, dated January 14, 1997, to the By-laws (the "By-laws")
of Commercial Assets, Inc. (the "Company") was approved and adopted by the
Company's Board of Directors at a meeting duly called and held on January 14,
1997.
The first sentence, second paragraph of Section 3.01 of the Company's
By-laws is amended to be and read at follows:
During all periods in which the Company seeks to be qualified to be
taxed as a real estate investment trust ("REIT") under the Internal Revenue Code
of 1986 (as amended), the Board of Directors shall include Independent Directors
(as defined below). The number of Independent Directors shall not be: (i) less
than four (4) if the number of Directors is eight (8) or greater; (ii) less than
three (3) if number of Directors is six (6) or seven (7); and (iii) less than
two (2) if the number of Directors is less than six (6).
The By-laws of the Company, as amended, shall remain in full force and
effect.
COMMERCIAL ASSETS, INC.
By: /s/John C. Singer
--------------------------------
John C. Singer
Secretary
AMENDMENT TO MANAGEMENT AGREEMENT
AMENDMENT as of January 1, 1997, to the Management Agreement dated as
of January 1, 1995, as amended, (the "Management Agreement"), between COMMERCIAL
ASSETS, INC., a Maryland corporation (the "Company"), and FINANCIAL ASSET
MANAGEMENT LLC, a Colorado corporation (the "Manager"), assigned from Financial
Asset Management Corporation on April 1, 1996.
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 for the mutual agreements herein set
forth, the parties hereto agree as follows:
1. Section 16 of the Management Agreement is amended and restated
hereby as follows:
"This Agreement shall continue in force until December 31, 1997,
unless otherwise renewed or extended."
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/Leslie B. Fox
-----------------------------
/s/John C. Singer Name: Leslie B. Fox
- ----------------------------- Title: President and Chief
John C. Singer, Secretary Operating Officer
<PAGE>
FINANCIAL ASSET MANAGEMENT LLC
By: /s/Kevin J. Nystrom
-----------------------------
Name: Kevin J. Nystrom
Title: Senior Vice President and
Chief Financial Officer
PaineWebber Incorporated
1285 Avenue of the Americas
New York, NY 10019-6028
PaineWebber
October 25, 1996
COMMERCIAL ASSETS, INC.
3600 S. Yosemite, Suite 900
Denver, Colorado 80237
RE: Amendment to Loan and Security Agreement
Ladies and Gentleman:
This letter is to confirm the understanding and agreement between you
and Pain Webber Real Estate Securities Inc. ("Lender") relating to that certain
Loan and Security Agreement dated as of November 29, 1994, by and between
Commercial Assets, Inc. ("Borrowers") and Lender (the "Agreement"). Each
initially capitalized term used and not defined herein shall have the meaning
specified therefor in the Agreement.
In consideration of Lender agreeing to extend the Termination Date on
the terms and conditions specified herein, and for other good and valuable
consideration, Borrower and Lender hereby agree to amend the Agreement as
follows:
1. Section 1.1 of the Agreement is amended by deleting the definition of
the "Initial Committed Amount" and replacing it with the following:
"Initial Committed Amount" means $4,000,000; provided, however, that
effective as of November 29, 1995, the Initial Committed Amount shall be $0."
2. Section 1.1 of the Agreement is further amended by deleting the
definition of the term "Termination Date" and replacing it with the following:
"Termination Date" means November 28, 1997 or such later date as may be
set pursuant to the terms of Section 3.5."
3. Section 3.1 of the Agreement is amended by deleting the third
sentence in its entirety and by replacing it with the following:
"Effective as of November 29, 1996, Lender's Commitment shall equal $O.,
and Lender shall have no obligation to make any Advance to or for the account of
Borrower."
<PAGE>
PaineWebber
4. Section 3.5 of the Agreement is amended by deleting the date "August 29,
1995" on the second line thereof and by replacing such date with "August 28,
1997".
Please acknowledge your agreement with the foregoing terms and
conditions by signing and returning a signed copy of this letter to PAINE WEBBER
REAL ESTATE SECURITIES INC., 1285 Avenue of the Americas, New York, N.Y. 10019,
attention: George Mangiaracina, First Vice President
Very truly yours,
PAINE WEBBER REAL
ESTATE SECURITIES INC.
By: /s/George Mangiaracina
------------------------------
Name: George Mangiaracina
----------------------------
Title: First Vice President
---------------------------
Accepted and agreed to
this ____day of _______, 1996:
COMMERCIAL ASSETS, INC.
By: /s/Kevin Nystrom
------------------------------
Name: Kevin Nystrom
----------------------------
Title: Senior Vice President and
---------------------------
Chief Financial Officer
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-74689) of Commercial Assets, Inc. of our report dated February 10,
1997, with respect to the financial statements of Commercial Assets, Inc.
included in this Annual Report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Phoenix, Arizona
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000910675
<NAME> COMMERCIAL ASSETS, INC.
<S> <C>
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0
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