SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-22262
COMMERCIAL ASSETS, INC.
(Exact name of registrant as specified in its charter)
Maryland 84-1240911
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3410 South Galena Street, Suite 210 80231
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
(303) 614-9410
(Registrant's telephone number, including area code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
As of October 30, 1998, 10,364,029 shares of Commercial Assets, Inc. Common
Stock were outstanding.
<PAGE>
COMMERCIAL ASSETS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of September 30, 1998 (Unaudited)
and December 31, 1997.................................. 1
Statements of Income for the three and nine months
ended September 30, 1998 and 1997 (Unaudited)........ 2
Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 (Unaudited).............. 3
Notes to Financial Statements (Unaudited).............. 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 9
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K....................... 16
(i)
<PAGE>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 2,641 $ 74,153
Short-term investments 59,564 --
Investment in participating mortgages and leases 9,514 --
Investments in and notes receivable from Westrec 3,959 1,710
CMBS bonds 1,795 1,981
Other assets, net 779 304
---------- ----------
Total Assets $ 78,252 $ 78,148
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 570 $ 368
Management fees payable to related parties 48 75
---------- ----------
618 443
---------- ----------
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; 10,364 and 104 104
10,342 shares issued and outstanding, respectively
Additional paid-in capital 76,874 76,724
Retained earnings 656 877
---------- ----------
77,634 77,705
---------- ----------
Total Liabilities and Stockholders' Equity $ 78,252 $ 78,148
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 1 -
<PAGE>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
RENTAL PROPERTY OPERATIONS
<S> <C> <C> <C> <C>
Income from participating mortgages and leases $ 151 $ -- $ 151 $ --
Management fees paid to manager (16) -- (16) --
------ --------- -------- --------
Income from property operations before depreciation 135 -- 135 --
Depreciation (4) -- (4) --
-------- --------- -------- --------
Income from property operations 131 -- 131 --
-------- --------- -------- --------
OTHER ACTIVITIES
Interest and other income 1,012 51 3,107 211
CMBS bonds revenue 40 3,423 124 7,660
General and administrative expenses (129) (104) (303) (348)
Management fees paid to manager (7) (886) (24) (1,494)
------ --------- -------- --------
Income from other activities 916 2,484 2,904 6,029
------ --------- -------- --------
OPERATING INCOME 1,047 2,484 3,035 6,029
Acquisition fees paid to manager (61) -- (61) --
Reserve for costs related to potential marina investments (500) -- (500) --
------ --------- -------- --------
NET INCOME 486 2,484 2,474 6,029
Other comprehensive income-unrealized holding gains on CMBS
bonds -- 6,431 -- 8,389
-------- --------- --------- --------
COMPREHENSIVE INCOME $ 486 $ 8,915 $ 2,474 $ 14,418
======== ========= ======== ========
BASIC EARNINGS PER SHARE $ 0.05 $ 0.24 $ 0.24 $ 0.58
DILUTED EARNINGS PER SHARE $ 0.05 $ 0.24 $ 0.24 $ 0.58
DIVIDENDS DECLARED PER SHARE $ 0.13 $ 0.17 $ 0.26 $ 0.51
Weighted-Average Common Shares Outstanding 10,364 10,342 10,355 10,328
Weighted-Average Common Shares and Common Share Equivalents
Outstanding 10,373 10,381 10,378 10,360
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 2 -
<PAGE>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 2,474 $ 6,029
Adjustments to reconcile net income to net cash flows from operating
activities:
Amortization of premium/discount on CMBS bonds and short-term investments 135 (1,542)
Accrued income on participating mortgages and leases (151) --
Depreciation 4 --
Increase in accounts payable and accrued liabilities 174 565
Decrease (increase) in other assets (157) 46
---------- --------
Net cash provided by operating activities 2,479 5,098
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of short-term investments (70,151) --
Collections on short-term investments 6,129 --
Proceeds from sale of short-term investments 4,156 --
Investments in participating mortgages, net (7,999) --
Purchases of real estate (1,368) --
Investments in Westrec stock (2,249) --
Collections on CMBS bonds 186 --
Acquisitions of CMBS bonds -- (4,801)
--------- --------
Net cash used in investing activities (71,296) (4,801)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (2,695) (5270)
Issuance of Common Stock -- 31
--------- --------
Net cash used in financing activities (2,695) (5,239)
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (71,512) (4,942)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 74,153 8,277
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,641 $ 3,335
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
COMMERCIAL ASSETS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. Organization
Commercial Assets, Inc. ("CAX" and, together with its subsidiaries, the
"Company") is a Maryland corporation which has elected to be taxed as a real
estate investment trust ("REIT"). The Company 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 management agreement currently in effect through December 1998
("the Management Agreement"). Prior to November 1997, the Company was managed by
Financial Asset Management LLC ("FAM"). An investor group led by Terry
Considine, Thomas L. Rhodes and Bruce D. Benson acquired FAM in September 1996.
In November 1997, the assets of FAM, including the Management Agreement, were
acquired by Asset Investors, which is now the Manager. Mr. Considine is Chairman
of the Board of Directors and Chief Executive Officer of both the Company and
Asset Investors. Mr. Rhodes is Vice Chairman and 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 G). The Company has temporarily
invested the proceeds from such restructuring in government securities and
short-term investments until the funds can be fully reinvested.
During the third quarter of 1998, the Company decided to invest in manufactured
home communities and invested $9.4 million in four manufactured housing
communities and adjoining land with approximately 420 developed homesites, 20
sites ready for homes and 360 sites available for future development (see Note
E).
B. Presentation of Financial Statements
The Condensed Consolidated Financial Statements of the Company presented herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements reflect all adjustments, consisting of only normal recurring
accruals, which, in the opinion of management, are necessary to present fairly
- 4 -
<PAGE>
the financial position, results of operations and cash flows of the Company as
of September 30, 1998, for the three and nine months then ended, and for all
prior periods presented. These statements are condensed and do not include all
the information required by generally accepted accounting principles ("GAAP") in
a full set of financial statements. These statements should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
Certain reclassifications have been made in the Condensed Consolidated Financial
Statements to conform to the classifications currently used. The effect of such
reclassifications on amounts previously reported is immaterial.
C. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Real Estate and Depreciation
Real estate is recorded at cost less accumulated depreciation. Depreciation is
computed using the straight line method over an estimated useful life of 25
years for land improvements and buildings. Significant renovations and
improvements, which improve or extend the useful life of the asset, are
capitalized and depreciated over the remaining estimated life. Maintenance,
repairs and minor improvements are expensed as incurred.
When conditions exist which indicate that the carrying amount of a property may
be impaired, the Company will evaluate the recoverability of its net investment
in the property by assessing current and future levels of income and cash flows.
As of September 30, 1998, there has been no impairment of the Company's
investment in real estate.
Revenue Recognition
Interest on participating mortgages is recorded based upon outstanding balances
and interest rates per the terms of the mortgages. In addition, the Company
evaluates the collectibility of any unpaid interest and establishing reserves as
necessary. As of September 30, 1998, there is no reserve for uncollected
interest on the participating mortgages. Rent on ground leases is recognized
when earned and due from lessee.
Income Taxes
CAX 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, CAX's REIT income, with
certain limited exceptions, will not be subject to federal 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, CAX 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.
- 5 -
<PAGE>
Earnings Per Share
Basic earnings per share for the three and nine months ended September 30, 1998
and 1997 are based upon the weighted-average number of shares of Common Stock
outstanding during each such period. Diluted earnings per share reflect the
effect of any dilutive, unexercised stock options in each such period.
Use of Estimates
The preparation of the financial statements in conformity with GAAP 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.
Statements of Cash Flows
Cash maintained in bank accounts, money market funds and highly-liquid
investments with an initial maturity of three months or less are considered to
be cash and cash equivalents for purposes of reporting cash flows.
Non-cash investing and financing activities for the nine months ended September
30, 1998 and 1997 were as follows (in thousands):
1998 1997
---- ----
Principal collections on CMBS bonds transferred
to restricted cash $ -- $ 6,192
Unrealized holding gains on CMBS bonds -- 8,389
Issuance of Common Stock for services 150 135
D. Short-term Investments
During the second and third quarters of 1998, the Company acquired short-term
investments consisting of mortgage-backed bonds guaranteed by Federal Home Loan
Mortgage Corporation and Federal National Mortgage Association. These
investments are classified as available-for-sale, and the fair market value at
September 30, 1998 approximates the carrying value of $59,564,000.
E. Investments in Participating Mortgages and Leases
As of September 30, 1998, the Company has investments in participating mortgages
secured by three manufactured home communities and adjoining land. The notes
accrue interest at 15% per annum and pay interest at 9% per annum through August
1999, with the pay rate increasing 1% each year thereafter to a maximum of 12%
per annum. The loans mature in September 2007. The Company also receives
additional interest of 50% of the net profits from the properties. As of
September 30, 1998, the Company had investments in participating mortgages of
$8,139,000 and during the three and nine months then ended, income of $140,000
from these mortgages.
In addition, as of September 30, 1998, the Company owned a manufactured home
community which was leased to a third party for 50 years. The Company earns
annual base rent calculated based on the acquisition cost of the leased property
and a rent percentage that increases over 10 years from 9% to 13% per annum. In
addition, the Company receives 50% of the net profits and cash flow of the
property.
- 6 -
<PAGE>
Real estate leased under a long-term lease as of September 30, 1998 was as
follows (in thousands):
Land $ 240
Land improvements and buildings 1,128
---------
1,368
Less accumulated depreciation (4)
---------
Investment in ground lease, net $ 1,364
=========
F. Investments in and Notes Receivable from Westrec
Prior to deciding to acquire manufactured home communities, the Company
evaluated acquiring interests in marinas and, in connection with this, acquired
a 12% interest in Westrec Marina Management Inc. ("Westrec") for approximately
$2,500,000 in March 1998. During the third quarter of 1998, the Company decided
to invest in manufactured housing communities and not to invest in marinas. At
September 30, 1998, the Company valued its investment in Westrec common stock at
$2,128,000; the price at which the Company can re-sell such stock to Westrec.
The Company has expensed $500,000 for the portion of its investment in Westrec
in excess of the sales price plus additional due diligence, legal, and other
costs incurred in connection with investigating investments in marinas. The
Company also has notes and interest receivable from affiliates of Westrec of
$1,831,000 and $1,710,000 at September 30, 1998 and December 31, 1997,
respectively. In May 1998, the Company issued to an affiliate of Westrec
warrants to purchase 322,000 shares of Common Stock at $6.60 per share.
G. CMBS Bonds
In November 1997, the Company restructured its portfolio of CMBS bonds. Nine
bonds were sold, one bond was redeemed and 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 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 in order to
value the equity interest at its then estimated fair value of $2,000,000. During
the nine months ended September 30, 1998, the Company received $310,000 of which
$186,000 was recorded as a reduction in the net book value of the retained
equity interest.
H. Management Fees
The Company operates under a Management Agreement, 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. Asset Investors
has been the Manager since November 1997. Prior to November 1997, FAM was the
Manager. The Management Agreement provides that the Manager receives a "Base
Fee," an "Acquisition Fee" and an "Incentive Fee." The Base Fee is payable
quarterly in an amount equal to 1% per annum of the Company's average invested
assets excluding cash and short-term investments of cash. The Acquisition Fee
equals 0.5% of the cost of each real estate asset acquired. The Incentive Fee
equals 20% of the amount by which the Company's REIT (taxable) income exceeds
the amount calculated by multiplying the Company's "average net worth" by the
"Ten-Year United States Treasury rate" plus 1%. In 1997, the Manager also
received "Administrative Fees" on each CMBS bond outstanding. Administrative
Fees were terminated in connection with the November 1997 restructuring of the
CMBS bond portfolio.
- 7 -
<PAGE>
Fees paid to the Manager were (in thousands):
For the Nine Months Ended
September 30,
--------------------------------
1998 1997
--------------- -------------
Base Fees $ 40 $ 527
Acquisition Fees 61 23
Incentive Fees -- 921
Administrative Fees -- 46
------ --------
$ 101 $ 1,517
====== ========
The Acquisition Fees incurred in 1997 were capitalized as part of the cost of
acquiring CMBS bonds.
I. Commitments
In connection with the acquisition of a manufactured home community, the Company
entered into an earn-out agreement with respect to 154 unoccupied homesites. The
Company will pay $17,000 to the former owner for each newly occupied homesite.
- 8 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 "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 projections of the Company's future
financial performance, cash flow, dividends and anticipated returns on real
estate investments. 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: general economic and business
conditions; interest rate changes; financing and refinancing risks; risks
inherent in owning real estate or debt secured by real estate; future
development rate of homesites; competition; the availability of real estate
assets at prices which meet the Company's investment criteria; the Company's
ability to reduce expense levels, implement rent increases and use leverage; and
other risks set forth in the Company's Securities and Exchange Commission
filings. Readers should carefully review the Company's financial statements and
the notes thereto, as well as the risk factors described in the SEC Filings.
Business.
Commercial Assets, Inc., a Maryland corporation formed in August 1993, ("CAX"
and, 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, Asset
Investors distributed approximately 70% of the Company's outstanding common
stock ("Common Stock") to Asset Investors' stockholders. Asset Investors
currently owns approximately 27% of the outstanding Common Stock and provides
certain management services to the Company pursuant to the terms of a management
agreement. See "Manager." 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 decided to reduce its exposure to the risks associated with its
subordinate CMBS bonds and to increase stockholders' risk adjusted returns by
investing in a different type of real estate asset. In connection with this, the
Company restructured its subordinate CMBS bonds in November 1997 by selling,
redeeming and resecuritizing its various CMBS bonds and received $77.7 million
in cash and a small residual interest in two CMBS bonds from such restructuring.
The Company temporarily invested its funds in government securities and
short-term investments until such time as it determines the type of real estate
assets in which it will invest.
- 9 -
<PAGE>
In the third quarter of 1998, the Company decided to invest in manufactured home
communities. The Company believes that this business can provide predictable,
growing cash flows with returns to stockholders that can be enhanced with
property-related, long-term debt financing. Asset Investors is also in the
manufactured home community business, and the Company believes that Asset
Investors' experience will enhance the Company's investments in this asset
class. The Company and Asset Investors have agreed that the Company will invest
$50 million in manufactured home communities before Asset Investors will acquire
additional manufactured home communities for cash. Thereafter, the companies
will coordinate future acquisitions.
A manufactured home community is a residential subdivision designed and improved
with sites for the placement of manufactured homes and related improvements and
amenities. Manufactured homes are detached, single-family homes which are
produced off-site by manufacturers and installed on sites within the community.
Manufactured homes are available in a variety of designs and floor plans,
offering many amenities and custom options.
Modern manufactured home communities are similar to typical residential
subdivisions containing centralized entrances, paved streets, curbs and gutters
and parkways. The communities frequently provide a clubhouse for social and
recreation activities and other amenities, which may include golf courses,
swimming pools, shuffleboard courts and laundry facilities. Utilities are
provided or arranged for by the owner of the community. Community lifestyles,
primarily promoted by resident managers, include a wide array of social
activities that serve to promote a sense of neighborhood. The communities
provide an attractive and affordable housing alternative for retirees, empty
nesters and start-up or single-parent families.
The owner of each home in the Company's communities leases the site on which the
home is located. The typical lease entered into between the tenant and one of
the Company's manufactured home communities for the rental of a site is
month-to-month or year-to-year, renewable upon the consent of both parties or,
in some instances, as provided by statute. The Company owns the underlying land,
utility connections, streets, lighting, driveways, common area amenities and
other capital improvements and is responsible for enforcement of community
guidelines and maintenance. Each homeowner within the manufactured home
community is responsible for the maintenance of his home and leased site
including lawn care in some communities.
The Company believes that manufactured home communities, once fully occupied,
tend to achieve a stable rate of occupancy. The cost and effort involved in
relocating a home to another community generally encourages the owner of the
home to resell it within the community.
The Company believes that even though the cash returns to be earned from equity
interests in manufactured home communities may be less than the returns
previously earned on the CMBS bonds, the change in assets will reduce the
Company's exposure to credit risks and may result in increased opportunities for
capital appreciation. There can be no assurance that the Company will acquire
any additional manufactured home communities due to a number of factors
including, but not limited to, differences between the Company's valuation of
the property and the purchase price required by the property owner or the price
that other purchasers may be willing to pay, the Company's determination that
the return it expects from a property is inadequate for the risk associated with
owning and operating the property, or other investment opportunities that may
become available to the Company in the future. In addition, there can be no
assurance that the value of manufactured home communities purchased by the
Company will appreciate. The failure to achieve expected returns or a decrease
in the value of such manufactured home communities could have a material adverse
effect on the Company.
- 10 -
<PAGE>
Recent Developments
Manufactured Home Community Acquisitions
During the third quarter of 1998, CAX acquired interests in four manufactured
home communities and adjoining land, for total consideration of $9.4 million.
The communities consist of 420 developed homesites, 20 sites ready for homes and
360 homesites available for future development. Of such properties, one
community is located in Florida, and three are in Arizona.
Marina Investments
During 1998, the Company considered investing in marinas. In connection with
this, the Company (i) acquired 12% of the outstanding common stock of Westrec
Marina Management, Inc. ("Westrec"), a marina management company, (ii) issued
warrants to an affiliate of Westrec to purchase 322,000 shares of the Company's
Common Stock at a per share price of $6.60, and (iii) lent $1,750,000 to an
affiliate of Westrec. During the third quarter of 1998, the Company decided that
it would acquire manufactured home communities and no longer planned to invest
in marinas. Accordingly, the Company reserved $500,000 for costs related to
previously considered marina investments and to value the Company's shares of
Westrec at the $2,128,000 price at which the Company can re-sell such shares to
Westrec.
Future Acquisitions
From time to time, the Company evaluates acquisition opportunities in the
manufactured home community industry and expects to acquire additional
properties as opportunities can be identified on terms considered beneficial by
management. The acquisition of interests in additional communities could also
result in the Company becoming leveraged as it incurs debt in connection with
these transactions.
When evaluating potential acquisitions, the Company considers such factors as:
(i) the geographic area and type of property; (ii) the location, construction
quality, condition and design of the property; (iii) the current and projected
cash flow of the property and the ability to increase cash flow; (iv) the
potential for capital appreciation of the property; (v) the terms of tenant
leases, including the potential for rent increases; (vi) the potential for
economic growth and the tax and regulatory environment of the community in which
the property is located; (vii) the potential for expansion of the physical
layout of the property and/or the number of sites; (viii) the occupancy and
demand by residents for properties of a similar type in the vicinity and the
residents' profile; (ix) the prospects for liquidity through sale, financing or
refinancing of the property; (x) competition from existing manufactured home
communities in the area; and (xi) the replacement cost of the property.
Expansion of Existing Communities
The Company also seeks to increase the number of homesites and earnings
generated from its existing portfolio of manufactured home communities and from
future acquisitions by expanding the number of sites available to be leased to
residents if justified by local market conditions and permitted by zoning and
other applicable laws. As of September 30, 1998, the Company has an interest in
four communities with 24 sites ready for homes and 360 sites available for
future development.
- 11 -
<PAGE>
Properties
The manufactured home communities in which the Company has interests are located
in Florida and Arizona. The following tables set forth certain information as of
September 30, 1998, with respect to the Company's communities and principal
markets:
<TABLE>
<CAPTION>
Average Sites Sites Available
Developed Monthly Rent Ready for for
Community Location Homesites Occupancy per Site Homes Development
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cypress Greens Lakeland, FL 84 100% $184 24 154
Fiesta Village Mesa, AZ (2) 175 98 273 -- 206 (1)
Casa Encanta Mesa, AZ (2) 111 87 350 -- -- (1)
Southern Palms Mesa, AZ (2) 51 100 203 -- -- (1)
---- ---- ---- --- ----
421 96% $262 24 360
==== ==== ==== === ====
<FN>
(1) The Company intends to redevelop the Fiesta Village, Casa Encanta, and
Southern Palms communities along with adjoining vacant land. The combined
redevelopment will result in the additional 206 spaces.
(2) The Company holds notes receivable secured by the communities. The notes
earn interest and participate in profits from the communities.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Number of Sites
-------------------------------------------------------------
Available for
Number of Ready for Future
Communities Developed Homes Development
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Arizona 3 337 -- 206
Florida 1 84 24 154
---- ------ ---- ----
Total 4 421 24 360
==== ====== ==== ====
</TABLE>
Manager
The Company's day-to-day operations are performed by a manager (the "Manager")
pursuant to a management agreement currently in effect through December 1998
("the Management Agreement"). Prior to November 1997, the Company was managed by
Financial Asset Management LLC ("FAM"). An investor group led by Terry
Considine, Thomas L. Rhodes and Bruce D. Benson acquired FAM in September 1996.
In November 1997, the assets of FAM, including the Management Agreement, were
acquired by Asset Investors, which is now the Manager. Mr. Considine is Chairman
of the Board of Directors and Chief Executive Officer of both the Company and
Asset Investors. Mr. Rhodes is Vice Chairman and Mr. Benson is a director of
both companies. 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.
The Management Agreement provides that the Manager receives a "Base Fee," an
"Acquisition Fee" and an "Incentive Fee." The Base Fee is payable quarterly in
an amount equal to 1% per annum of the Company's average invested assets
excluding cash and short-term investments. The Acquisition Fee equals 0.5% of
the cost of each real estate asset acquired. The Incentive Fee equals 20% of the
- 12 -
<PAGE>
amount by which the Company's REIT (taxable) income exceeds the amount
calculated by multiplying the Company's "average net worth" by the "Ten-Year
United States Treasury rate" plus 1%. In 1997, the Manager also received
"Administrative Fees" on each CMBS bond outstanding. Administrative Fees were
terminated in connection with the November 1997 restructuring of the CMBS bond
portfolio. During the third quarter of 1998, the Company paid Base Fees of
$16,000 and Acquisition Fees of $61,000 on its investments in manufactured home
communities. The Company expects to pay additional Base Fees and Acquisition
Fees during 1998. It may pay Incentive Fees based on the Company's results.
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 CAX
CAX has elected to be taxed as a REIT under the Internal Revenue Code of 1986,
as amended (the "Code"), and CAX intends to continue to operate in such a
manner. CAX'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 CAX 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. If CAX 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 CAX
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.
RESULTS OF OPERATIONS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Due to the change in the Company's business from investing in CMBS bonds to
owning and managing manufactured home communities, the results of operations for
the three and nine months ended September 30, 1998 are not comparable to the
same periods in 1997.
The Company does not believe that changes in inflation rates would have a
material impact on the net income of the Company.
Rental Property Operations
During the three and nine months ended September 30, 1998, the Company had
$131,000 of income from rental property operations arising from its initial
investments in manufactured home communities.
Interest and Other Income
Interest and other income during the three and nine months ended September 30,
1998 was $1,012,000 and $3,107,000, respectively, compared to $51,000 and
$211,000, respectively, for the same periods in 1997. The increase is due to
temporarily investing the $77.7 million cash proceeds received in November 1997
from the restructuring of the CMBS bonds. The average interest rates earned on
these short-term investments were 5.4% and 5.3% during the nine months ended
September 30, 1998 and 1997, respectively.
- 13 -
<PAGE>
CMBS Bonds
Income from CMBS bonds was $40,000 and $124,000 during the three and nine months
ended September 30, 1998, respectively, compared to $3,423,000 and $7,660,000
for the same periods in 1997. Earnings during 1998 represent the income from the
retained equity interest from the resecuritization of two CMBS bonds. All other
income from the CMBS bonds ceased subsequent to the restructuring of the CMBS
bonds in November 1997.
General and Administrative
General and administrative expenses of the Company were $129,000 and $303,000
for the three and nine months ended September 30, 1998, respectively, compared
to $104,000 and $348,000, respectively, for the same periods in 1997. General
and administrative expenses increased for the three months ended September 30,
1998 compared to the same period in 1997 primarily due to higher professional
fees. General and administrative expenses decreased for the first nine months in
1998 compared to 1997 primarily due to lower accounting and other expenses
related to the ownership of CMBS bonds.
Management Fees
During the three and nine months ended September 30, 1998, the Company incurred
Base Fees of $7,000 and $24,000, respectively, on the retained equity interest
from the CMBS bond resecuritization and the investment in Westrec. During the
nine months ended September 30, 1997, the Company's management fees were
$1,494,000 consisting of Base Fees of $527,000, Incentive Fees of $921,000 and
Administrative Fees of $46,000. The large decrease in management fees is because
the Company does not incur such fees on cash equivalents and short-term
investments of the Company's cash resources.
Acquisition Fees
During the three and nine months ended September 30, 1998 the Company incurred
Acquisition Fees with the Manager of $61,000 as a result of the Company's
investments in manufactured home communities. During the nine months ended
September 30, 1997, the Company incurred Acquisition Fees of $23,000 on
acquisitions of CMBS bonds. The Acquisition Fees incurred in 1997 were
capitalized as part of the cost of acquiring CMBS bonds. Acquisition Fees were
not capitalized in 1998 because the Manager is Asset Investors, owner of 27% of
the Company.
Reserve for Costs Related to Potential Marina Investments
As noted above, during the third quarter of 1998, the Company decided that it
would no longer seek to acquire interests in marinas and reserved $500,000 for
costs related to previously considered marina investments.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company has cash and cash equivalents of
$2,641,000 and short-term investments of $59,564,000. The Company's principal
demands for liquidity include normal operating activities and dividends paid to
stockholders. In addition, during the nine months ended September 30, 1998, the
Company invested $9,367,000 in manufactured home communities. The Company may
invest a significant portion, if not all, of its cash and short-term investments
in manufactured home communities.
- 14 -
<PAGE>
In April and July 1998, the Company declared $0.13 per common share dividends
for the first and second quarters of 1998 totaling $2,695,000. In October 1998,
the Company declared a $0.13 per common share dividend for the third quarter of
1998 which will be paid in November 1998. During each of the first three
quarters of 1997, a dividend of $0.17 per common share was declared and paid.
During 1997, the Company had a Loan and Security Agreement, collateralized by
four CMBS bonds, which was cancelled in November 1997 upon the restructuring of
the CMBS bonds. The Company also had an unsecured line of credit with a bank for
$1,000,000 that expired on July 31, 1998. No advances were made under this line
of credit during 1998.
The Company believes that even though the cash returns to be earned from
interests in manufactured home communities may be less than the returns
previously earned on the CMBS bonds, the change in assets will reduce the
Company's exposure to credit risks associated with its former CMBS bonds and may
result in increased opportunities for capital appreciation. There can be no
assurance, however, that the value of the manufactured home communities will
appreciate, and any drop in the value of the manufactured home communities could
have a material adverse effect on the Company.
YEAR 2000 COMPLIANCE
The Company's hardware and software systems that are critical to its business
operations are currently Year 2000 compliant. Upon failure of any system, any
data included in critical software (such as rent-rolls and certain
record-keeping systems) could be transferred to alternative commercially
available software at a reasonable cost to the Company and within a reasonable
time period to enable the Company to continue its business operations without
any material interruption or material effect on its business, results of
operations or financial condition. In addition, management anticipates that any
hardware or software that the Company acquires (including in order to upgrade
existing systems) between now and December 31, 1999 will be Year 2000 compliant.
Management believes that the cost of modification or replacement of its
accounting and reporting software and hardware that is not compliant with year
2000 requirements will not be material to the Company's financial position or
results of operations.
- 15 -
<PAGE>
PART II
OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 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 the 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).
27 Financial Data Schedule.
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the Registrant during the period
covered by this Quarterly Report on Form 10-Q.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCIAL ASSETS, INC.
(Registrant)
Date: November 13, 1998 By /s/ David M. Becker
---------------------
David M. Becker
Chief Financial Officer
- 16 -
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0
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