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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-22262
COMMERCIAL ASSETS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Maryland 84-1240911
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3410 Galena Street, Suite 210 80231
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (303) 614-9410
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, American Stock Exchange, Inc.
par value $.01 per share
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 27, 1998, 10,342,009 shares of 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 $48,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1998 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report.
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<PAGE>
COMMERCIAL ASSETS, INC.
Table of Contents
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 1997
Item Page
PART I
1. Business
Manager.......................................................... 2
Taxation of the Company.......................................... 2
Competition...................................................... 3
Financial Information about Industry Segments.................... 3
Capital Resources................................................ 3
Dividend Reinvestment Plan....................................... 4
Restrictions on and Redemptions of Common Stock.................. 4
Employees........................................................ 4
2. Properties............................................................ 5
3. Legal Proceedings..................................................... 5
4. Submission of Matters to a Vote of Security Holders................... 5
PART II
5. Market For Registrant's Common Equity and Related
Stockholder Matters................................................. 5
6. Selected Financial Data............................................... 5
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 6
8. Financial Statements and Supplementary Data........................... 9
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................. 9
PART III
10. Directors and Executive Officers of the Registrant................... 9
11. Executive Compensation............................................... 10
12. Security Ownership of Certain Beneficial Owners and Management....... 10
13. Certain Relationships and Related Transactions....................... 11
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 11
Signatures........................................................... 15
(i)
<PAGE>
PART I
Introduction
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements in certain circumstances. Certain information
included in this Report, the Company's Annual Report to Stockholders and other
Company filings (collectively, the "SEC Filings") under the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended (as well
as information communicated orally or in writing between the dates of such SEC
Filings) contains or may contain information that is forward looking, including,
without limitation, statements regarding the effect of acquisitions, the
Company's future financial performance and the effect of government regulations.
Actual results may differ materially from those described in the forward looking
statements and will be affected by a variety of risks and factors including,
without limitation, national and local economic conditions, the general level of
interest rates, terms of governmental regulations that affect the Company and
interpretations of those regulations, the competitive environment in which the
Company operates, financing risks, including the risk that the Company's cash
flow from operations may be insufficient to meet required payments of principal
and interest, real estate risks, including variations of real estate values and
the general economic climate in local markets and competition for tenants in
such markets, acquisition and development risks, including failure of such
acquisitions to perform in accordance with projections, and possible
environmental liabilities. In addition, the Company's continued qualification as
a real estate investment trust involves the application of highly technical and
complex provisions of the Internal Revenue Code. Readers should carefully review
the Company's financial statements and the notes thereto, as well as the risk
factors described in the SEC Filings.
Item 1. Business.
Commercial Assets, Inc., a Maryland corporation formed in August 1993, (together
with its consolidated subsidiaries, the "Company") is a real estate investment
trust ("REIT"). Initially, it was a wholly-owned subsidiary of Asset Investors
Corporation ("Asset Investors"). Asset Investors contributed $75 million to the
initial capital of the Company and in October 1993, it distributed approximately
70% of the Company's outstanding common stock ("Common Stock") as a taxable
dividend to Asset Investors' stockholders. Asset Investors currently owns
approximately 27% of the outstanding Common Stock and provides certain
management services to the Company. The Common Stock is listed on the American
Stock Exchange, Inc. ("AMEX") under the symbol "CAX."
Historically, the Company owned subordinate classes of Commercial Mortgage
Backed Securities ("CMBS bonds"). CMBS bonds generally are backed by mortgage
loans on commercial real estate. The principal and interest payments on the
underlying mortgage assets are allocated among the several classes or "tranches"
of a series of CMBS bonds. The Company's subordinate tranches of CMBS bonds
included "first-loss" tranches, which bore the risk of default on the underlying
collateral and provided credit support for the more senior tranches.
In 1997, the Company announced that it intended to redeploy its assets from
subordinate CMBS bonds in order to achieve greater risk adjusted rates of return
from other types of real estate-related investments. As a result thereof, the
Company restructured its subordinate CMBS bonds in November 1997 by selling,
redeeming and resecuritizing various CMBS bonds. The Company received $77.7
million in cash and a small residual interest in two CMBS bonds from such
restructuring. The Company has temporarily invested its funds in government
securities and other cash equivalents until such time as it determines which
type of assets to invest in.
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The Company's goals are to: (i) generate income in order to pay dividends to its
stockholders by managing its assets; and (ii) preserve stockholders' equity.
Since the Company's funds are temporarily invested in short-term, liquid
investments, the return from such investments is likely to be less than returns
in prior years. Once the Company determines which assets to invest its funds in
on a long term basis, it expects to increase its returns. There can be no
assurance, however, that the Company will achieve its objectives.
The Company's principal executive offices are located at 3410 S. Galena Street,
Suite 210, Denver, Colorado 80231 and its telephone number is (303) 614-9410.
Manager
The Company's day-to-day operations are performed by a manager (the "Manager")
pursuant to a year-to-year management agreement currently in effect through
March 31, 1998 (the "Management Agreement"). From inception through September
1996, the Manager was related to MDC Holdings, Inc. ("MDC"). In September 1996,
an investor group led by Terry Considine, Thomas L. Rhodes and Bruce D. Benson
acquired Financial Asset Management, LLC ("FAM"), the Manager at such time, from
MDC. In November 1997, the assets of FAM, including the Management Agreement,
were acquired by Asset Investors who is now the current Manager. Messrs.
Considine and Rhodes are the Co-Chairmen of the Board of Directors and Co-Chief
Executive Officers of both the Company and Asset Investors and Mr. Benson is a
director of both companies.
The Management Agreement is approved by the Company's independent directors and
may be terminated by either party with or without cause at any time upon 60
days' written notice. The Manager provides all personnel and related overhead
necessary to conduct the regular business of the Company. Pursuant to the
Management Agreement, the Manager receives a "Base Fee," an "Incentive Fee," and
an "Acquisition Fee." The Base Fee is payable quarterly in an amount equal to 1%
per annum of the Company's "average invested assets." At the present time, no
Base Fee is being paid to the Manager as effectively all of the Company's assets
are cash equivalents. Once the Company determines what assets it will invest its
cash balances in, the Base Fee is expected to resume. The Incentive Fee equals
20% of the amount by which the Company's REIT income exceeds the amount
calculated by multiplying the Company's "average net worth" by the "Ten-Year
United States Treasury rate" plus 1%. The Company does not expect to pay
Incentive Fees until the Company's funds are reinvested. The Manager receives an
Acquisition Fee equal to 1/2 of 1% of the cost of each asset acquired. The
Company expects to pay Acquisition Fees in 1998.
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.
Taxation of the Company
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), and the Company intends to continue to operate in
such a manner. The Company's current and continuing qualification as a REIT
depends on its ability to meet the various requirements imposed by the Code,
through actual operating results, distribution levels and diversity of stock
ownership.
If the Company qualifies for taxation as a REIT, it will generally not be
subject to Federal corporate income tax on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
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investment in a corporation. If the Company fails to qualify as a REIT in any
taxable year, its taxable income will be subject to Federal income tax at
regular corporate rates on its taxable income (including any applicable
alternative minimum tax). Even if the Company qualifies as a REIT, it may be
subject to certain state and local income taxes and to Federal income and excise
taxes on its undistributed income.
If in any taxable year the Company fails to qualify as a REIT and incurs
additional tax liability, the Company might need to borrow funds or liquidate
certain investments in order to pay the applicable tax and the Company would not
be compelled to make distributions under the Code. Unless entitled to relief
under certain statutory provisions, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. Although the Company currently intends to operate in a
manner designed to qualify as a REIT, it is possible that future economic,
market, legal, tax or other considerations may cause the Company to fail to
qualify as a REIT or may cause the Board of Directors to revoke the REIT
election.
The Company and its stockholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the Federal income tax treatment.
Competition
The Company is likely to compete with others, including other REITs, for the
assets it ultimately determines to invest its funds in. Such entities are likely
to have greater financial resources than the Company and may be conducting
business activities through business forms, which may, among other things, not
be subject to the operating restrictions placed on REITs. Competition with such
entities may increase the price the Company pays for the assets it elects to
invest in.
Financial Information about Industry Segments
The Company has operated in one industry segment, the ownership of CMBS bonds
backed by mortgage loans on commercial real estate. See the consolidated
financial statements and notes thereto included in Item 8 of this Report on Form
10-K for financial information relating to the Company.
Capital Resources
The Company received $77.7 million from the restructuring of its subordinate
CMBS bonds in November 1997. The Company plans to use such funds to provide
working capital to support its operations, to make investments and for the
payment of dividends to its stockholders. 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.
Without further stockholder action, the Company is authorized to issue up to
75,000,000 shares of Common Stock, of which 10,342,009 shares were issued and
outstanding as of February 27, 1998. 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 or 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 stockholders. Depending on the terms set by the Board of Directors,
the authorization and issuance of Preferred Stock could adversely affect
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<PAGE>
existing stockholders. 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.
At this time, the Company does not expect to issue Preferred Stock.
Dividend Reinvestment Plan
The Company has an Automatic Dividend Reinvestment Plan administered by Norwest
Shareowner Services. The plan provides the Company's stockholders a method of
investing cash dividends paid by the Company in additional shares of Common
Stock purchased in the open market. The plan also permits participants to
purchase Common Stock in the open market with voluntary cash payments.
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 stockholder 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 serve as officers of
the Company.
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<PAGE>
Item 2. Properties.
The Company does not own or lease any real estate or physical property.
Item 3. Legal Proceedings.
At February 28, 1998, there were no legal proceedings, pending or threatened, to
which the Company or any of its subsidiaries were a party.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder 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 Capital Gain
Dividends Dividends Dividends
1997 High Low Declared Declared Declared
---- --- -------- -------- --------
<S> <C> <C> <C> <C> <C>
First Quarter $ 7 $ 6-3/8 $ .17 $ -- $ --
Second Quarter 6-11/16 6-3/16 .17 -- --
Third Quarter 7-3/16 6-5/8 .17 -- --
Fourth Quarter 7-11/16 6-9/16 .17 .26 .17
1996
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 -- --
</TABLE>
As of February 27, 1998, 10,342,009 shares of Common Stock were issued and
outstanding and were held by 1,650 stockholders of record. The Company estimates
there were an additional 8,000 beneficial owners on that date whose shares were
held by banks, brokers or other nominees.
The Company, as a REIT, is required to distribute annually to holders of Common
Stock at least 95% of its "real estate investment trust taxable income," which,
as defined by the Code and Treasury regulations, is generally equivalent to net
taxable ordinary income. The future payment of dividends by the Company will be
at the discretion of the Board of Directors and will depend on numerous factors
including the Company's financial condition, its capital requirements, and
annual distribution requirements under the provisions of the Code applicable to
REITs and such other factors as the Board of Directors deems relevant.
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 consolidated
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financial statements and the notes thereto. The data as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997, is
included elsewhere in this Report on Form 10-K.
(In thousands, except per share data)
<TABLE>
<CAPTION>
Operating Data:
Period from
October 12,
Year Ended December 31, 1993(1) to
---------------------------------------------------- December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 10,117 $10,157 $ 9,169 $ 7,064 $ 994
Gain on restructuring of bonds 5,786 -- -- -- --
Net income 13,706 6,959 6,376 4,927 679
Basic earnings per share 1.32 .68 .63 .49 .07
Diluted earnings per share 1.32 .68 .63 .49 .07
Regular dividends per share .68 .68 .68 .50 .07
Special dividends per share .26 .04 -- .03 --
Capital gain dividends per share .17 -- -- -- --
Weighted-average common shares outstanding 10,332 10,247 10,104 10,047 10,039
Weighted-average common shares and common
share equivalents outstanding 10,371 10,254 10,108 10,048 10,039
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<FN>
1 Date operations commenced.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data: December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 74,153 $ 8,277 $ 598 $ 12,367 $ 66,302
CMBS bonds 1,981 61,460 69,503 74,046 8,723
Total assets 78,148 72,406 71,590 87,604 75,216
Total stockholders' equity 77,705 71,919 70,465 74,672 74,976
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The following discussion and analysis of consolidated results of operations and
financial condition should be read in conjunction with the consolidated
financial statements of the Company included elsewhere herein.
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
CMBS Bonds
Income from CMBS bonds was $9,172,000 during 1997 compared to $9,838,000 in
1996. Earnings from CMBS bonds decreased by $1,138,000 because there were no
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earnings in November or December 1997 subsequent to the restructuring of the
CBMS bond portfolio. This decrease was partially offset by higher income prior
to the restructuring. The income from the CMBS bonds prior to the restructuring
was higher due to August 1997 prepayments on one bond and earnings on bonds
acquired in March 1997 offset by income from the early redemption of two bonds
in May 1996 and prepayments on another bond in 1996.
Interest Income
Interest income in 1997 and 1996 was $945,000 and $319,000, respectively. The
increase in interest income in 1997 as compared to 1996 is due to investing the
proceeds from the restructuring of the CMBS bonds into highly liquid, short-term
investments. The average interest rate earned on these funds was 5.44% and 5.14%
in 1997 and 1996, respectively.
Management Fees
Management fee expenses were $1,678,000 and $1,425,000, respectively, for 1997
and 1996. The increase in management fees during 1997 compared with 1996 was due
to an increase of $311,000 in Incentive Fees, offset by a decrease of $58,000 in
Base Fees and Administrative Fees. Prior to the restructuring of the CMBS bond
portfolio, the Manager received an Administrative Fee of up to $10,000 per annum
for each CMBS bond. The increase in Incentive Fees was due to higher REIT income
before Incentive Fees partially offset by an increase in the average Ten-Year
U.S. Treasury Rate between 1996 and 1997. The increase in REIT income was
primarily a result of gains associated with the restructuring of the CMBS bonds
and nonrecurring expenses incurred in 1996 while the increase in the average
Ten-Year U.S. Treasury Rate had the effect of raising the threshold above which
Incentive Fees are paid. The decrease in Base Fees was due to the decrease in
average invested assets as a result of the restructuring of the Company's CMBS
bonds.
General and Administrative
General and administrative expenses of the Company were $519,000 and $805,000,
respectively, for 1997 and 1996. General and administrative expenses decreased
in 1997 compared to 1996 primarily due to lower stockholder relations expenses,
lower consulting and accounting expenses and the elimination of the expense from
dividend equivalent rights ("DERs") pursuant to the May 1996 amendment to the
Company's stock option plan.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
CMBS Bonds
Income from CMBS bonds was $9,838,000 during 1996 compared to $8,980,000 in
1995. The increase in earnings from CMBS bonds was the result of a $1,518,000
increase in discount amortization primarily due to: (i) the May 1996 redemption
of two CMBS bonds; and (ii) prepayments on two other CMBS bonds during 1996. The
proceeds from the redemption were invested in short-term cash instruments
resulting in lower bond interest income subsequent to the redemption.
Interest Income
Interest income in 1996 and 1995 was $319,000 and $189,000, 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. The average interest rate earned on these funds was
5.14% and 5.08% in 1996 and 1995, respectively.
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<PAGE>
Management Fees
Management fees expenses were $1,425,000 and $1,151,000, respectively, for 1996
and 1995. 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 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
1996 redemption of the two CMBS bonds.
General and Administrative
General and administrative expenses of the Company were $805,000 and $1,393,000,
respectively, for 1996 and 1995. General and administrative expenses decreased
in 1996 compared to 1995 primarily due to, among other things, elimination of
the expense from the accrual of DERs in May 1996 and lower costs for stockholder
relations. In addition, general and administrative expenses in 1995 included a
one-time expense of $313,000 incurred to have a third party assess the fair
value of the Company's net assets.
Elimination of DERs
In May 1996, the Company's stockholders approved an amendment to the Company's
stock option plan which permitted the Company to issue shares of Common Stock to
the holders of stock options who voluntarily gave up their rights to receive
DERs 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 1996.
Interest Expense
During 1996 and 1995, interest expense, including non-usage fees on the
Company's secured loan agreement, was $2,000 and $249,000, respectively. Due to
the cash available from the early redemptions, there were only limited
borrowings in 1996.
Dividend Distributions
During each of 1997, 1996 and 1995, the Company declared regular dividends of
$.68 per share. In addition, the Company declared special dividends of $.26 per
share and $.04 per share in 1997 and 1996, respectively, and a capital gains
dividend of $.17 per share in 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company has cash and cash equivalents of
$74,153,000. The Company's principal demands for liquidity include normal
operating activities and dividends paid to stockholders. In addition, the
Company intends to invest such funds in a class of assets that it has not yet
determined.
Net cash provided by operating activities was $4,428,000 during 1997, compared
to $5,920,000 during 1996. The decrease was primarily a result of changes in
other assets. Net cash provided by investing activities was $72,892,000 during
1997 compared to $9,857,000 in 1996. Investing activities in 1997 included
$77,693,000 of net cash provided from the restructuring of its CMBS bonds. Net
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cash used in financing activities increased to $11,444,000 in 1997 compared to
$8,098,000 in 1996 primarily due to increased dividends.
The Company had a Loan and Security Agreement, collateralized by four CMBS
bonds, which was cancelled in November 1997 upon the sale and resecuritization
of the CMBS bonds. No borrowings were outstanding on this line at December 31,
1996. In addition, the Company has an unsecured line of credit with a bank for
$1,000,000 that expires on July 31, 1998. Advances under this line bear interest
at prime. No advances were outstanding on this line of credit at December 31,
1997 or 1996.
YEAR 2000 COMPLIANCE
The Company utilizes numerous accounting and reporting software packages and
computer hardware to conduct its business, the majority of which already comply
with year 2000 requirements. Management believes that the cost of modification
or replacement of non-compliant accounting and reporting software and hardware
will not be material to the Company's financial position or results of
operations.
Item 8. Financial Statements and Supplementary Data.
The independent auditor's reports, consolidated financial statements and
schedules listed in the accompanying index are filed as part of this Report on
Form 10-K and incorporated herein by reference. See "Index to Financial
Statements" on page F-1.
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.
The information set forth under the caption "Board of Directors and Officers" in
the Proxy Statement in connection with the Company's 1998 Annual Meeting of
Stockholders which is to be filed by the Company after the date this Report on
Form 10-K is filed (the "Proxy Statement") is hereby incorporated by reference.
Executive Officers of the Registrant
The Executive Officers of the Company as of February 28, 1998 are:
Name Age Position with the Company
- --------------------------------------------------------------------------------
Terry Considine 50 Co-Chairman of the Board of Directors and Co-Chief
Executive Officer
Thomas L. Rhodes 58 Co-Chairman of the Board of Directors and Co-Chief
Executive Officer
David M. Becker 38 Chief Financial Officer
Terry Considine has been Co-Chairman of the Board of Directors and Co-Chief
Executive Officer of the Company and Asset Investors since September 1996. He is
the sole owner of Considine Investment Co. and has also been the Chairman of the
Board of Directors and Chief Executive Officer of Apartment Investment and
Management Company ("AIMCO"), one of the largest apartment REITs in the United
States since July 1994. Mr. Considine has been and remains involved as a
principal in a variety of real estate activities, including the acquisition,
renovation, development and disposition of properties. Mr. Considine has also
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controlled entities engaged in other businesses such as television broadcasting,
gasoline distribution and environmental laboratories. Mr. Considine received a
B.A. from Harvard College and a J.D. from Harvard Law School and is admitted as
a member of the Massachusetts Bar.
Mr. Considine has had substantial real estate experience. From 1975 through July
1994, partnerships or other entities in which Mr. Considine had controlling
interests invested in approximately 35 multifamily apartment properties and
commercial real estate properties. Six of these real estate assets (four of
which were multifamily apartment properties and two of which were office
properties) did not generate sufficient cash flow to service their related
indebtedness and were foreclosed upon by their lenders, causing pre-tax losses
of approximately $11.9 million to investors and losses of approximately $2.7
million to Mr. Considine.
Thomas L. Rhodes has been Co-Chairman of the Board of Directors and Co-Chief
Executive Officer of the Company and Asset Investors since September 1996. Mr.
Rhodes has also been a Director of AIMCO since July 1994. Mr. Rhodes has served
as the President and a Director of National Review magazine since 1992. From
1976 to 1992, he held various positions at Goldman, Sachs & Co. and was elected
a General Partner in 1986. He currently serves as a Director of Delphi Financial
Group, Inc. and its subsidiaries, Delphi International, Ltd., Oracle Reinsurance
and The Lynde and Harry Bradley Foundation. Mr. Rhodes is Chairman of the Empire
Foundation for Policy Research, a Trustee of The Heritage Foundation and a
Trustee of The Manhattan Institute.
David M. Becker has functioned as Chief Financial Officer for the Company and
Asset Investors since December 1997. From September 1995 until joining the
Company, he was both the Chief Financial Officer of Westfield Development
Company, Inc. and Vice President-Finance of the Frederick Ross Co., related
companies involved in commercial real estate development, brokerage and
management. Prior to September 1995, he held various executive positions with
CONCORD Services, Inc., a privately-held company involved in multiple businesses
including trading, manufacturing and finance. CONCORD Services, Inc. declared
bankruptcy in February 1995. In addition, Mr. Becker was Chief Financial Officer
and General Counsel of Ramtron International Corporation, a publicly-held
semiconductor manufacturer, from October 1989 to July 1994. Mr. Becker is an
attorney and certified public accountant. He received a B.A. from the University
of Northern Iowa and a J.D. from the University of Denver.
There are no family relationships between any of the executive officers,
directors or persons nominated or chosen by the Company to become a director or
executive officer and there are no arrangements or understandings pursuant to
which any of them were selected as directors or officers. None of the directors,
persons nominated to become directors or executive officers of the Company have
been involved in any legal proceedings during the past five years that are
material to an evaluation of the ability or integrity of such persons.
Item 11. Executive Compensation.
The information required by this item is presented under the captions "Summary
Compensation Table", "Options/SAR Grants in Last Fiscal Year" and "Aggregate
Option/SAR Exercises in Last Fiscal Year and Fiscal Year-end Options/SAR Values"
in the Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is presented under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement
and is incorporated herein by reference.
- 10 -
<PAGE>
Item 13. Certain Relationships and Related Transactions.
The information required by this item is presented under the caption "Certain
Relationships and Related Transactions" in the Proxy Statement and is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) The financial statements listed in the Index to Financial Statements on
Page F-1 of this report are filed as part of this report.
(a)(2) All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(a)(3) The Exhibit Index is included on page 12 of this report.
(b) Reports on Form 8-K for the quarter ended December 31, 1997:
Current Report on Form 8-K, dated November 3, 1997
- 11 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
COMMERCIAL ASSETS, INC. Page
Financial Statements:
Report of Independent Auditors.................................. F-2
Consolidated Balance Sheets as of December 31, 1997
and 1996................................................... F-3
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and
1995........................................................ F-4
Consolidated Statements of Stockholders' Equity for
the years ended December 31,
1997, 1996 and 1995......................................... F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996
and 1995.................................................... F-6
Notes to Consolidated Financial Statements...................... F-7
F - 1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Commercial Assets, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Commercial
Assets, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Commercial Assets, Inc. as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
February 6, 1998
F - 2
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
1997 1996
---- ----
ASSETS
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 74,153 $ 8,277
RESTRICTED CASH -- 1,982
CMBS BONDS 1,981 61,460
OTHER ASSETS, NET 2,014 687
---------- ----------
$ 78,148 $ 72,406
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 368 $ 189
MANAGEMENT FEES PAYABLE 75 298
NOTES PAYABLE TO BANKS -- --
---------- ----------
443 487
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share, 25,000 shares authorized; no shares
issued or outstanding -- --
Common stock, par value $.01 per share, 75,000 shares authorized; 10,342 and
10,316 shares issued and outstanding, respectively 104 103
Additional paid-in capital 76,724 76,559
Retained earnings (dividends in excess of accumulated earnings) 877 (1,354)
Net unrealized holding losses on CMBS bonds -- (3,389)
---------- ----------
77,705 71,919
---------- ----------
$ 78,148 $ 72,406
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F - 3
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended December 31,
1997 1996 1995
---- ---- ----
REVENUES
<S> <C> <C> <C>
CMBS bonds $ 9,172 $ 9,838 $ 8,980
Interest 945 319 189
--------- --------- ---------
10,117 10,157 9,169
--------- --------- ---------
EXPENSES
Management fees 1,678 1,425 1,151
General and administrative 519 805 1,393
Elimination of DERs -- 966 --
Interest -- 2 249
--------- --------- ---------
2,197 3,198 2,793
--------- --------- ---------
INCOME BEFORE GAIN ON RESTRUCTURING OF BONDS 7,920 6,959 6,376
Gain on restructuring of bonds 5,786 -- --
--------- --------- ---------
NET INCOME $ 13,706 $ 6,959 $ 6,376
========= ========= =========
BASIC EARNINGS PER SHARE $ 1.32 $ .68 $ .63
DILUTED EARNINGS PER SHARE $ 1.32 $ .68 $ .63
DIVIDENDS DECLARED PER SHARE
Regular dividends $ .68 $ .68 $ .68
Special dividends .26 .04 --
Capital gain dividends .17 -- --
--------- --------- --------
$ 1.11 $ .72 $ .68
========= ========= =========
Weighted-Average Common Shares Outstanding 10,332 10,247 10,104
Weighted-Average Common Shares and Common Share
Equivalents Outstanding 10,371 10,254 10,108
</TABLE>
See Notes to Consolidated Financial Statements.
F - 4
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
(In thousands)
Retained Net
Earnings Unrealized
(Dividends In Holding
Additional Excess of Losses Total
Common Stock Paid-In Accumulated on Stockholders'
Shares Amount Capital Earnings) CMBS Bonds Equity
------ ------ ------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
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
Issuance of common stock 26 1 165 -- -- 166
Net income -- -- -- 13,706 -- 13,706
Dividends -- -- -- (11,475) -- (11,475)
Reversal of unrealized holding losses
upon restructuring of bonds -- -- -- -- 3,389 3,389
------- ------ --------- -------- ------- ---------
BALANCES - DECEMBER 31, 1997 10,342 $ 104 $ 76,724 $ 877 $ -- $ 77,705
======= ====== ========= ======== ======= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F - 5
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 13,706 $ 6,959 $ 6,376
Adjustments to reconcile net income to net cash flows
from operating activities:
Amortization of discount on CMBS bonds and other
assets (2,381) (2,155) (638)
Issuance of common stock for elimination of DERs -- 941 --
Increase in accounts payable and accrued liabilities 216 157 329
(Increase) decrease in other assets (1,327) 18 84
Gain on restructuring of bonds (5,786) -- --
-------- -------- --------
Net cash provided by operating activities 4,428 5,920 6,151
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collections from CMBS bonds -- 9,857 554
Acquisitions of CMBS bonds (4,801) -- --
Proceeds from restructuring of bonds 77,693 -- --
-------- -------- --------
Net cash provided by investing activities 72,892 9,857 554
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (11,475) (7,398) (8,879)
Repayments of short-term notes payable -- (700) (9,595)
Proceeds from the issuance of common stock 31 -- --
-------- -------- --------
Net cash used in financing activities (11,444) (8,098) (18,474)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 65,876 7,679 (11,769)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,277 598 12,367
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 74,153 $ 8,277 $ 598
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F - 6
<PAGE>
COMMERCIAL ASSETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Organization
Commercial Assets, Inc. (the "Company") is a Maryland corporation which
commenced operations in 1993 when Asset Investors Corporation ("Asset
Investors") contributed $75,000,000 to the Company and distributed approximately
70% of the Company's Common Stock to Asset Investors' stockholders. The Common
Stock is listed on the American Stock Exchange under the symbol "CAX."
The Company's day-to-day operations are performed by a manager (the "Manager")
pursuant to a year-to-year management agreement currently in effect through
March 1998 ("the Management Agreement"). Prior to October 1996, the Company was
managed by subsidiaries of MDC Holdings, Inc. ("MDC"). In September 1996, MDC
sold Financial Asset Management LLC ("FAM"), the Manager at such time, to an
investor group led by Terry Considine, Thomas L. Rhodes and Bruce D. Benson. In
November 1997, the assets of FAM, including the Management Agreement, were
acquired by Asset Investors, who is now the current Manager. Mr. Considine and
Mr. Rhodes are Co-Chairmen of the Board of Directors and Co-Chief Executive
Officers of both the Company and Asset Investors. Mr. Benson is a director of
both companies. No change has been made to the Management Agreement other than
an extension.
The Management Agreement is subject to the approval of a majority of the
Company's independent directors and can be terminated by either party, without
cause, with 60 days' notice. Since the Company has no employees, certain
employees of the Manager have been designated as officers of the Company.
Historically, the Company owned subordinate classes of Commercial Mortgage
Backed Securities ("CMBS bonds"). The CMBS bonds were issued in commercial
mortgage loan securitizations involving multi-class issuances of debt securities
which were 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. In 1997, the Company decided to restructure its asset base and cease to
invest in subordinate CMBS bonds. In November 1997, the Company restructured its
subordinate CMBS bond portfolio by selling, redeeming or resecuritizing its
various CMBS bonds. The restructuring resulted in the Company receiving
$77,693,000 cash and retaining an equity interest in an owner trust arising from
a resecuritization transaction (see Note C). The Company has temporarily
invested the proceeds from such restructuring in government securities and other
cash equivalents until the Company decides what class of assets it will reinvest
such funds in.
B. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
F - 7
<PAGE>
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 real estate investment trust ("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 stockholders at least 95% of its REIT
income and to meet certain asset, income and stock ownership tests. Regular and
special dividends declared in 1997, 1996 and 1995 represented ordinary taxable
income to the stockholders. In addition, the Company declared a capital gains
dividend of $.17 per share in 1997.
Earnings Per Share
Basic earnings per share for 1997, 1996 and 1995 are based upon the
weighted-average number of shares of Common Stock outstanding during each such
year. Diluted earnings per share reflect the effect of any dilutive, unexercised
stock options in 1997, 1996 and 1995.
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 $0, $8,000 and
$290,000 for 1997, 1996 and 1995, respectively.
Non-cash investing and financing activities for 1997, 1996 and 1995 were as
follows (in thousands):
F - 8
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ------
Principal collections on CMBS bonds transferred to
<S> <C> <C> <C>
restricted cash $ 6,227 $ 1,214 $ 397
Unrealized holding gains and losses on CMBS bonds 3,389 856 (4,245)
Distributions of Common Stock pursuant to DERs -- 96 376
Distributions of Common Stock as consideration for the
elimination of DERs -- 941 --
Distributions of Common Stock 135 -- --
</TABLE>
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles 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.
Accounting Standards Not Yet Adopted by the Company
The Financial Accounting Standards Board ("FASB") has issued several new
pronouncements that are not yet adopted by the Company.
In June 1997 the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," to establish standards for
reporting and display of comprehensive income (all changes in equity during a
period except those resulting from investments by and distributions to owners)
and its components in financial statements. This new standard, which will be
effective for the Company for the year ending December 31, 1998, is not
currently anticipated to have a significant impact on the Company's consolidated
financial statements based on the current financial structure and operations of
the Company.
In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," to establish standards for reporting
information about operating segments in annual financial statements, selected
information about operating segments in interim financial reports and
disclosures about products and services, geographic areas and major customers.
This new standard, which will be effective for the Company for the year ending
December 31, 1998, will require the Company to report financial information on
the basis that is used internally for evaluating segment performance and
deciding how to allocate resources to segments and is currently not anticipated
to result in significantly more detailed information in the notes to the
Company's consolidated financial statements than is currently required and
provided.
C. CMBS Bonds
As of December 31, 1996, the outstanding balance of the Company's CMBS bonds was
$89,297,000 while unamortized purchase discounts, acquisition costs and
allowance for credit losses totaled $24,448,000. Additionally, the Company
recorded unrealized holding losses of $3,389,000 on the CMBS bonds as of
December 31, 1996.
The estimated fair value of the Company's CMBS bonds of $61,460,000 at December
31, 1996, 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
then current market information of CMBS bonds with similar characteristics. The
fair value of CMBS bonds fluctuated over time due to, among other things,
F - 9
<PAGE>
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 Company provided an allowance for credit losses of $12,720,000 at December
31, 1996 on certain of its CMBS bonds. During 1997, 1996 and 1995, there were no
credit losses charged to operations or write-downs charged against the allowance
for credit losses.
Pursuant to the provisions of certain of the Company's CMBS bonds, 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, $1,982,000 was set
aside and is shown as restricted cash on the balance sheet.
In May 1996, two CMBS bonds with an outstanding principal balance of $9,664,000
and net carrying value of $8,723,000 were redeemed earlier than anticipated. The
bonds were acquired in March 1994, for $9,088,000, or 84.25% of their
outstanding principal balance. Since the bonds were redeemed at par, $1,426,000
of discount amortization was included in earnings during 1996.
In March 1997, the Company contributed its ownership interest in two CMBS bonds
(Lehman Capital Corporation Trust Certificate, Series 1994-2 and Series 1994-3)
into a newly created trust (Blaylock Mortgage Capital Corporation Multifamily
Trust). Interests in bond classes within the same CMBS issuance which were owned
by another party were also contributed into the trust. The trust then issued
seven classes of CMBS bonds collateralized by the CMBS bond classes contributed
into the trust. The Company received an interest in five of the new bond
classes, which corresponded to the Company's ownership interests in the two
bonds contributed to the trust. The Company also acquired the remaining
$5,737,000 principal balance of two of the new bond classes rated "BB" and "B"
at a cost of $4,801,000, which resulted in the Company having 100% ownership in
the five new subordinate classes.
In August 1997, three mortgages underlying one of the Company's CMBS bonds were
prepaid. As a result of the prepayment, the Company recognized $482,000 of
income from a prepayment penalty received and $2,305,000 of income from
accelerated discount amortization. The $5,853,000 of principal collections from
the repaid mortgages was transferred to restricted cash pursuant to the terms of
the indenture.
In November 1997, the Company restructured its portfolio of CMBS bonds. Nine
bonds were sold for $28,472,000 in cash. One bond which had an outstanding
principal balance of $10,000,000 and net carrying value prior to unrealized
holding gains of $9,244,000 was redeemed by the bond issuer at par. The
remaining two CMBS bonds were resecuritized by contributing the bonds and
related restricted cash to an owner trust in which the Company retained an
equity interest. In a private placement, the trust then sold for $39,952,000 in
cash, debt securities representing senior interests in the trust's assets. The
principal balance of the equity interest retained by the Company is $5,000,000.
However, since the equity interest represents the first-loss class of the
portfolio and provides credit support for the senior debt securities, the
Company established an allowance for credit losses of $3,000,000 and valued the
equity interest at its estimated fair value of $2,000,000. As a result of the
sale and resecuritization transactions, the Company recognized a $5,786,000
gain, net of related costs and management fees, in the fourth quarter of 1997.
In addition, since the one bond was redeemed at par, $756,000 of discount
amortization was included in earnings during the fourth quarter of 1997.
The following unaudited pro-forma information has been prepared assuming the
restructuring of the CMBS bonds had been completed at the beginning of the
periods presented. The pro-forma information is presented for information
purposes only and is not necessarily indicative of what would have occurred if
F - 10
<PAGE>
the restructuring had been completed as of those dates. In addition, the
pro-forma information is not intended to be a projection of future results. The
unaudited, pro-forma results of operations for the years ended December 31, 1997
and 1996 are as follows (in thousands, except per share data):
1997 1996
---------- ----------
Revenues $ 5,615 $ 6,788
========== ==========
Net income before gain on restructuring of bonds $ 5,133 $ 4,940
Gain on restructuring of bonds 6,069 5,786
---------- ----------
Net income $ 11,202 $ 10,726
========== ==========
Net income per share $ 1.08 $ 1.05
========== ==========
Prior to the restructuring, certain of the Company's CMBS bonds were pledged as
collateral for the Company's short-term notes payable (see Note D).
D. Short-Term Notes Payable
The Company had a Loan and Security Agreement, collateralized by four CMBS
bonds, that was cancelled in November 1997 upon the sale and resecuritization of
the bonds. No borrowings were outstanding on this line at December 31, 1996.
The Company has an unsecured line of credit with a bank for $1,000,000 that
expires on July 31, 1998. Advances under this line bear interest at prime. Two
of the Company's independent directors are members of the Advisory Board of the
bank. No advances were outstanding on this line of credit at December 31, 1997
or 1996.
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, 1998 and 1997,
permitted the issuance of up to an aggregate of 1,025,000 and 948,000 shares of
Common Stock, respectively, of which 717,000 and 648,000 related to outstanding
stock options, respectively. 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 1996 and 1995, the Company incurred $96,000 and $376,000,
respectively, of general and administrative expenses from DERs covering 16,000
and 64,000, respectively, shares of Common Stock which were subject to issuance
pursuant to options granted under the plan.
On May 30, 1996, the Company's stockholders 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. As a result of the amendment, the Company incurred a $966,000 charge
during 1996.
F - 11
<PAGE>
Presented below is a summary of the changes in stock options for the three years
ended December 31, 1997. As of December 31, 1997, the outstanding options have
exercise prices ranging from $5.62 to $7.50 and have a remaining
weighted-average life of 1.8 years.
Weighted
Average
Exercise Price Shares
-------------- ------
Outstanding - December 31, 1994 $ 7.09 481,000
Granted 6.15 93,000
------ --------
Outstanding - December 31, 1995 6.94 574,000
Granted 5.86 83,000
Forfeited 6.68 (9,000)
------ --------
Outstanding - December 31, 1996 6.80 648,000
Granted 6.30 87,000
Forfeited 7.30 (13,000)
Exercised 6.12 (5,000)
------ --------
Outstanding - December 31, 1997 $ 6.74 717,000
====== ========
As of December 31, 1997, no options have expired. Options granted to date vest
over a two-year period. As of December 31, 1997, 1996 and 1995, 660,000, 454,000
and 485,000, 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 SFAS 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
SFAS No. 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 1997, 1996 and 1995, the estimated weighted-average, grant-date fair
value of options granted was $.42, $.45 and $.23, respectively, and the
estimated total fair value of options granted was $36,000, $27,000 and $30,000,
respectively. The pro forma net income of the Company reflecting the fair value
of options granted was $13,670,000 ($1.32 per share), $6,932,000 ($.68 per
share) and $6,346,000 ($.63 per share) for 1997, 1996 and 1995, respectively.
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,
1997.
F - 12
<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.
During 1997, 1996 and 1995, the Company's management fees were $1,701,000,
$1,425,000 and $1,151,000, respectively, consisting of: (i) Base Fees of
$598,000, $654,000 and $751,000, respectively; (ii) Administrative Fees of
$56,000, $58,000 and $65,000, respectively; (iii) Incentive Fees of $1,024,000,
$713,000 and $335,000, respectively; and (iv) Acquisition Fees of $23,000, $0
and $0, respectively. Acquisition Fees were capitalized as part of the cost of
acquiring CMBS bonds. In addition, the Company incurred $426,000 of Incentive
Fees during 1997 relating to the gain on the restructuring of the 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. The Board of Directors is
authorized to fix the terms of the Preferred Stock, including preferences,
powers and rights (including voting rights) senior to the Common Stock. To date,
the Company has not issued any shares of Preferred Stock.
G. Selected Quarterly Financial Data (unaudited)
Presented below is selected quarterly financial data for the years ended
December 31, 1997 and 1996 (in thousands, except per share data).
F - 13
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended,
-------------------
December 31, September 30, June 30, March 31,
1997
- -------------------------------------------- ----------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Revenues $ 2,246 $ 3,474 $ 2,242 $ 2,155
Gain on restructuring of bonds 5,786 -- -- --
Net income 7,677 2,484 1,810 1,735
Basic earnings per share .74 .24 .17 .17
Diluted earnings per share .74 .24 .17 .17
Regular dividends declared per share .17 .17 .17 .17
Special dividends declared per share .26 -- -- --
Capital gains dividends declared per share .17 -- -- --
Stock prices 1
High 7-11/16 7-3/16 6-11/16 7
Low 6-9/16 6-5/8 6-3/16 6-3/8
Weighted-average common shares outstanding 10,342 10,342 10,326 10,316
Weighted-average common shares and common
share equivalents outstanding 10,408 10,381 10,348 10,351
1996
- -------------------------------------------- ----------------- ------------------ --------------- ------------------
Revenues $2,146 $2,167 $3,526 $2,318
Net income 1,595 1,765 1,992 1,607
Basic earnings per share .16 .17 .19 .16
Diluted earnings per share .15 .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
Weighted-average common shares outstanding 10,316 10,316 10,214 10,142
Weighted-average common shares and common
share equivalents outstanding 10,331 10,325 10,219 10,146
<FN>
- ---------------
1 Daily closing prices as reported on the AMEX Composite Tape.
</FN>
</TABLE>
F - 14
<PAGE>
EXHIBIT INDEX
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 (incorporated herein by
reference to Exhibit 3.3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1996, Commission File No. 1-22262, filed on March
24, 1997).
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 Registrant's
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 Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 1996,
Commission File No. 1-22262, filed on May 15,
1996).
- 12 -
<PAGE>
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 Registrant's 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 (incorporated herein
by reference to Exhibit 10.3(c) to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1996, Commission File No. 1-22262,
filed on March 24, 1997).
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 Registrant's Quarterly
Report on Form 10-Q for the period ended June 30,
1996, Commission File No. 1-22262, filed on August
13, 1996).
10.4(b)* Second Amendment to Commercial Assets, Inc. 1993
Stock Option Plan (incorporated herein by reference
to Exhibit 10.4(b) to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30,
1997, Commission File No. 1-22262, filed on August
7, 1997).
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's
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 Registrant's Annual Report on Form
10-K, commission File No. 1-22262, filed on March
28, 1996).
- 13 -
<PAGE>
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.
(incorporated herein by reference to Exhibit 108(b)
to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996, Commission File
No. 1-22262, filed on March 24, 1997).
10.9 Trust Agreement, dated as of November 3, 1997,
between CAX DTR Securitization Corp. and Wilmington
Trust Company (incorporated herein by reference to
Exhibit 10.9 to the Registrant's Current Report on
Form 8-K dated November 3, 1997, Commission File
No. 1-22262, filed on November 14, 1997).
10.9(a) Note Purchase Agreement, dated as of November 3,
1997, among Structured Mortgage Trust 1997-2, CAX
DTR Securitization Corp., and PaineWebber
Incorporated Company (incorporated herein by
reference to Exhibit 10.9(a) to the Registrant's
Current Report on Form 8-K dated November 3, 1997,
Commission File No. 1-22262, filed on November 14,
1997).
10.9(b) Trust Indenture and Security Agreement, dated as of
November 3, 1997, between Structured Mortgage Trust
1997-2 and LaSalle National Bank, as Indenture
Trustee Company (incorporated herein by reference
to Exhibit 10.9(b) to the Registrant's Current
Report on Form 8-K dated November 3, 1997,
Commission File No. 1-22262, filed on November 14,
1997).
10.9(c) Contribution Agreement, dated as of November 3,
1997, between Commercial Assets, Inc. and CAX DTR
Securitization Corp. Company (incorporated herein
by reference to Exhibit 10.9(c) to the Registrant's
Current Report on Form 8-K dated November 3, 1997,
Commission File No. 1-22262, filed on November 14,
1997).
10.9(d) Securitization Cooperation Agreement, dated as of
November 3, 1997, among CAX DTR Securitization
Corp., Commercial Assets, Inc., Structured Mortgage
Trust 1997-2, and PaineWebber Incorporated Company
(incorporated herein by reference to Exhibit
10.9(d) to the Registrant's Current Report on Form
8-K dated November 3, 1997, Commission File No.
1-22262, filed on November 14, 1997).
10.9(e) Side Letter Agreement, dated as of November 3,
1997, between Commercial Assets, Inc. and
PaineWebber Incorporated Company (incorporated
herein by reference to Exhibit 10.9(e) to the
Registrant's Current Report on Form 8-K dated
November 3, 1997, Commission File No. 1-22262,
filed on November 14, 1997).
23 Independent Auditors' Consent - Ernst & Young LLP.
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
- 14 -
<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 30, 1998 By /s/Terry Considine
--------------------
Terry Considine
Co-Chief Executive Officer
Date: March 30, 1998 By /s/Thomas L. Rhodes
---------------------
Thomas L. Rhodes
Co-Chief Executive Officer
Date: March 30, 1998 By /s/David M. Becker
--------------------
David M. Becker
Chief Financial Officer
Date: March 30, 1998 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 30, 1998
- -----------------------------------
Terry Considine
/s/Thomas L. Rhodes Director March 30, 1998
- -----------------------------------
Thomas L. Rhodes
Director March 30, 1998
- -----------------------------------
Donald L. Kortz
/s/Raymond T. Baker Director March 30, 1998
- -----------------------------------
Raymond T. Baker
/s/Robert J. Malone Director March 30, 1998
- -----------------------------------
Robert J. Malone
/s/Bruce D. Benson Director March 30, 1998
- -----------------------------------
Bruce D. Benson
Director March 30, 1998
- -----------------------------------
Thomas C. Fries
- 15 -
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 6,
1998, with respect to the financial statements of Commercial Assets, Inc.
included in this Annual Report (Form 10-K) for the year ended December 31, 1997.
Ernst & Young LLP
Phoenix, Arizona
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JAN-01-1997
<CASH> 74,153
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 74,153
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 78,148
<CURRENT-LIABILITIES> 443
<BONDS> 0
0
0
<COMMON> 104
<OTHER-SE> 77,601
<TOTAL-LIABILITY-AND-EQUITY> 78,148
<SALES> 0
<TOTAL-REVENUES> 10,117
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,197
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,706
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,706
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,706
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 1.32
</TABLE>
