SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-2262
COMMERCIAL ASSETS, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1501789
(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 July 31, 1999, 10,368,029 shares of common stock were outstanding.
<PAGE>
COMMERCIAL ASSETS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of June 30, 1999 (unaudited) and December 31,
1998.............................................................1
Statements of Income for the three and six months ended June
30, 1999 and 1998 (unaudited)....................................2
Statements of Cash Flows for the six months ended June 30,
1999 and 1998 (unaudited)........................................3
Notes to Financial Statements (unaudited)..........................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................11
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders...............22
Item 6. Exhibits and Reports on Form 8-K..................................22
(i)
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30, December 31,
1999 1998
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,092 $ 3,292
Short-term investments 15,078 45,066
Real estate, net of accumulated depreciation of $371 and $50 51,323 12,628
Investments in participating mortgages 10,381 9,328
Investment in real estate joint venture 1,304 1,280
Investment in Asset Investors 1,435 --
Investment in and note receivable from Westrec 4,011 4,011
CMBS bonds 1,676 1,739
Other assets, net 1,903 890
---------- ----------
Total Assets $ 88,203 $ 78,234
========== ==========
LIABILITIES
Secured long-term notes payable $ 9,619 $ --
Secured short-term financing 214 --
Accounts payable and accrued liabilities 1,475 872
Management fees payable to related parties 123 108
---------- ----------
11,431 980
---------- ----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 615 --
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; 10,393 and
10,364 shares issued; and 10,345 and 10,364 shares outstanding, respectively 104 104
Additional paid-in capital 77,018 76,874
Retained earnings (dividends in excess of accumulated earnings) (707) 276
Treasury stock, 48 and 0 shares at cost (258) --
---------- ----------
76,157 77,254
---------- ----------
Total Liabilities and Stockholders' Equity $ 88,203 $ 78,234
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Rental property operations
<S> <C> <C> <C> <C>
Rental and other property revenues $ 437 $ -- $ 437 $ --
Income from participating mortgages and leases 603 -- 1,190 --
Property operating expenses (174) -- (174) --
------- -------- -------- --------
Income from rental property operations before depreciation 866 -- 1,453 --
Depreciation (232) -- (321) --
-------- -------- -------- --------
Income from rental property operations 634 -- 1,132 --
-------- -------- -------- --------
Interest and other income 520 1,042 1,221 2,095
Interest expense (58) -- (58) --
General and administrative expenses (140) (88) (273) (174)
Management fees paid to manager (114) (12) (194) (17)
Equity in earnings of Asset Investors 5 -- 5 --
CMBS bonds revenue 39 44 77 84
-------- -------- -------- --------
Income from operations 886 986 1,910 1,988
Acquisition fees paid to manager (152) -- (194) --
-------- -------- -------- --------
Net income $ 734 $ 986 $ 1,716 $ 1,988
======== ========= ======== ========
Basic and diluted earnings per share $ 0.07 $ 0.09 $ 0.16 $ 0.19
======== ========= ======== ========
Weighted average common shares outstanding 10,362 10,359 10,363 10,350
Weighted average common shares and common share equivalents
outstanding 10,362 10,387 10,363 10,382
Dividends paid per share $ 0.13 $ 0.13 $ 0.26 $ 0.13
======== ========= ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months
Ended June 30,
--------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,716 $ 1,988
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation 321 --
Amortization of premium on short-term investments 65 11
Accrued income on participating mortgages (277) --
Accrued income on CMBS bonds (15) --
Equity in earnings of Asset Investors (5) --
Increase in accounts payable and accrued liabilities 228 89
Decrease (increase) in other assets (142) 48
--------- --------
Net cash provided by operating activities 1,891 2,136
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of real estate (33,486) --
Purchases of Asset Investors' common stock (1,433) --
Collections on short-term investments 8,011 --
Proceeds from sale of short-term investments 21,912 --
Acquisitions of short-term investments -- (58,166)
Investments in participating mortgages, net (776) --
Investment in real estate joint venture (24) --
Capital replacements (97) --
Investment in Westrec -- (2,580)
Dividends from Asset Investors 3 --
Collections on CMBS bonds 78 126
-------- --------
Net cash used in investing activities (5,812) (60,620)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from secured long-term notes payable 4,800 --
Dividends paid (2,699) (1,347)
Payment of loan costs (122) --
Repurchase of Common Stock (258) --
-------- --------
Net cash provided by (used in) financing activities 1,721 (1,347)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,200) (59,831)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,292 74,153
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,092 $ 14,322
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<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 Delaware corporation that has interests in manufactured home
communities and has elected to be taxed as a real estate investment trust
("REIT"). Prior to June 10, 1999, CAX was a Maryland corporation. Effective June
10, 1999, the Company's stockholders approved its reincorporation in Delaware.
The Company's common stock, par value $.01, (the "Common Stock") is listed on
the American Stock Exchange under the symbol "CAX."
Prior to 1998, the Company owned subordinate classes of Commercial Mortgage
Backed Securities ("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 I). The Company has temporarily
invested the proceeds from such restructuring until invested in manufactured
home communities.
In the third quarter of 1998, the Company decided to invest in manufactured home
communities and as of June 30, 1999 has invested approximately $62 million in
interests in 11 manufactured home communities and adjoining land with 1,790
developed homesites, 220 sites ready for homes and 1,240 sites available for
future development.
The Company's daily operations are performed by a manager pursuant to an
agreement currently in effect through December 31, 1999 ("the Management
Agreement"). Since November 1997, Asset Investors Corporation (together with its
subsidiaries, "Asset Investors") has been the manager. Asset Investors owns 27%
of the Company's Common Stock. For 1999, the Management Agreement has been
amended to provide that the Incentive Fee is based on Funds From Operations,
less an annual capital replacement reserve of at least $50 per developed
homesite. In general, Funds From Operations is equal to net income plus
depreciation, amortization and acquisition fees. No other change was made to the
Management Agreement other than its extension to December 31, 1999 (see Note L).
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, the officers of
Asset Investors are also officers of the Company.
B. Presentation of Financial Statements
The Condensed Consolidated Financial Statements of the Company have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. These financial statements reflect all
adjustments, consisting of only normal recurring accruals, which, in the opinion
of management, are necessary to present fairly the financial position, results
of operations and cash flows of the Company as of June 30, 1999, for the three
and six month periods 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 financial 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, 1998.
- 4 -
<PAGE>
Certain reclassifications have been made in the 1998 Condensed Consolidated
Financial Statements to conform to the classifications used in the current year.
The effect of such reclassifications on amounts previously reported is
immaterial.
C. Summary of Significant Accounting Policies
Principles of Consolidation
The Condensed 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. The Company's
investment in Asset Investors is recorded under the equity method.
Rental Properties and Depreciation
Rental properties are 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. In addition, the
Company capitalizes direct and indirect costs (including interest, taxes and
other costs) in connection with the development of additional homesites within
its manufactured home communities. 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 June 30, 1999, there has been no impairment of the Company's investment in
real estate.
Revenue Recognition
The Company derives its income from the rental of homesites. The leases entered
into by residents for the rental of the site are generally for terms not longer
than one year and the rental revenues associated with the leases are recognized
when earned and due from residents.
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 provides reserves as
necessary. As of June 30, 1999, there is no reserve for uncollected interest on
the participating mortgages. Rent on ground leases is recognized when earned and
due from lessee.
Deferred Financing Costs
Fees and costs incurred in obtaining financing are capitalized. Such costs are
amortized over the terms of the related loan agreements and are charged to
interest expense.
- 5 -
<PAGE>
Income Taxes
CAX has elected to be taxed as a REIT as defined under the Internal Revenue Code
of 1986, as amended (the "Code"). In order for CAX to qualify as a REIT, at
least 95% of its gross income in any year must be derived from qualifying
sources.
As a REIT, CAX generally will not be subject to federal income taxes at the
corporate level if it distributes at least 95% of its REIT taxable income to its
stockholders. REITs are also subject to a number of other organizational and
operational requirements. 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 (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.
Earnings Per Share
Basic earnings per share for the three and six months ended June 30, 1999 and
1998 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.
Treasury Stock
Asset Investors owns 27% of the Company's Common Stock. During the second
quarter of 1999, the Company purchased 114,000 shares of Asset Investors' common
stock. Consequently, the Company has an interest in 48,000 shares of its Common
Stock and has recorded this as treasury stock.
Statements of Cash Flows
For purposes of reporting 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. The Company made
interest payments of $27,000 and $0 during the six months ended June 30, 1999
and 1998, respectively.
Non-cash operating and investing activities for the six months ended June 30,
1999 and 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------- --------
<S> <C> <C>
Accrued initial capital expenditures on real estate purchases $ 300 $ --
Issuance of Common Stock for services 144 150
Escrow of long-term debt proceeds 300 --
Real estate purchase price paid with note payable 4,519 --
Real estate and other assets purchased by assuming debt and minority
interests in subsidiaries 920 --
</TABLE>
D. Short-term Investments
During 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 June 30, 1999 approximates the
carrying value of $15,078,000.
- 6 -
<PAGE>
E. Real Estate
Real estate at June 30, 1999 and December 31, 1998 was (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Land $ 8,552 $ 3,798
Land improvements and buildings 43,142 8,880
---------- ----------
51,694 12,678
Less accumulated depreciation (371) (50)
---------- ----------
Real estate, net $ 51,323 $ 12,628
========== ==========
</TABLE>
Land improvements and buildings consist primarily of infrastructure, roads,
landscaping, clubhouses, maintenance buildings and common amenities. Two
manufactured home communities have been leased to a third party. The first lease
involves a community acquired by the Company at a cost of $1.4 million and is
for a term of 50 years. The Company receives initial annual lease payments equal
to 9% of its cost. The annual lease payments increase by 4% per annum over the
prior year's lease payments until the annual lease payment equals 13% of the
Company's cost. In addition, the Company receives additional rent equal to 50%
of the lessee's net cash flow from the property. In the event of a sale of the
property, the Company receives all proceeds until it has realized its total
purchase price of the property plus a 13% per annum rate of return. The Company
then receives 50% of any sales proceeds in excess of such amount. The Company
may terminate the lease after five years by paying to the lessee 50% of the
amount by which the fair market value of the property exceeds the sum of the
Company's total purchase price plus any unpaid rents due from the lessee.
The other leased community involves two phases and has been leased to the same
third party for 50 years. Phase One has 221 developed homesites and 23 sites
ready for homes. Phase Two involves 840 sites available for future development.
Initial annual lease payments on Phase One are $890,000, increasing by 4% per
annum. There are no lease payments on Phase Two until the sites are ready for
homes, at which time, the annual lease payments on Phase Two will be equal to
10% times the costs incurred in developing Phase Two. In addition, the lessee
pays to the Company additional rent equal to 50% of the lessee's net cash flow
from the property. In the event of a sale, the Company receives 50% of any sales
proceeds in excess of the Company's cost. The Company may terminate the lease
after five years by paying to the lessee 50% of the amount by which the fair
market value of the property exceeds the sum of the Company's total purchase
price plus any unpaid rents due from the lessee.
F. Investments in Participating Mortgages
As of June 30, 1999, 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 2007 and 2008. The Company also receives
additional interest equal to 50% of the net profits and cash flows from the
properties. In addition, as of June 30, 1999, the Company has investments in
participating mortgages secured by individual homes and home sites within two
manufactured home communities. These mortgages accrue interest at 10% and pay
interest from the cash flows from the homesites. The Company also receives
additional interest equal to 50% of the net profits and cash flows from the
homesites. As of June 30, 1999, the Company had investments in participating
mortgages of $10,381,000 and income of $344,000 and $675,000, respectively, from
these mortgages for the three and six months ended June 30, 1999.
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<PAGE>
G. Investment in Real Estate Joint Venture
The Company has an interest in a joint venture involving the development of 30
homesites. The Company receives a priority return from the venture until the
Company has received a per annum amount equal to 9% times $1,250,000. The
Company's subsequent annual priority return increases by 5% over the prior
year's amount. The other venturer then receives a similar percentage return on
$300,000. In the event the property is sold, the Company receives all proceeds
until it has received its investment plus 20% per annum. The other venturer then
receives all proceeds until it has received its investment plus 20% per annum.
Any excess sales proceeds are then shared equally. The Company did not record
any income from this real estate joint venture during the three and six months
ended June 30, 1999.
H. Investment in Asset Investors
During the three months ended June 30, 1999, the Company purchased 114,000
shares (approximately 2%) of the common stock of Asset Investors. The Company
has recorded its investment in Asset Investors under the equity method because
Asset Investors manages the Company and owns approximately 27% of the Company's
Common Stock.
Summarized financial information of Asset Investors as reported by Asset
Investors is (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
Balance Sheets 1999 1998
---------------- ----------------
<S> <C> <C>
Real estate $ 96,818 $ 98,563
Investments in participating mortgages 30,843 27,604
Investment in Commercial Assets 19,994 20,706
Cash and cash equivalents 2,501 1,426
Other assets 8,722 9,927
---------- ----------
Total assets 158,878 158,226
Secured long-term notes payable 48,568 40,506
Secured short-term financing 6,200 10,500
Other liabilities 3,107 2,935
Minority interest 15,529 25,649
---------- ----------
Stockholders' equity $ 85,474 $ 78,636
========== ==========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income from rental property operations before depreciation $ 3,168 $ 2,065 $6,217 $ 3,799
Depreciation (924) (495) (1,844) (888)
-------- -------- -------- --------
Income from rental property operations 2,244 1,570 4,373 2,911
-------- -------- -------- --------
Property management income, net 50 33 104 83
Management fees from Commercial Assets 195 7 284 10
Equity in earnings of Commercial Assets 265 266 560 534
Amortization of management contracts (689) (689) (1,378) (1,516)
General and administrative expenses (371) (336) (709) (658)
Interest and other income 50 219 103 602
Interest expense (957) (268) (1,898) (476)
-------- -------- -------- --------
Income from operations 787 802 1,439 1,490
Income tax benefit 100 -- 100 --
Loss from early extinguishment of debt (75) -- (75) --
Minority interest (125) (175) (235) (318)
-------- -------- -------- --------
Net income $ 687 $ 627 $ 1,229 $ 1,172
======== ======== ======== ========
</TABLE>
I. CMBS Bonds
In November 1997, the Company restructured its portfolio of CMBS bonds and
retained a $5,000,000 equity interest in the owner trust used in the
restructuring. Since the equity interest represents the first-loss class of the
portfolio and provides credit support for the senior debt securities, the
Company valued the equity interest at its then estimated fair market value of
$2,000,000. During the six months ended June 30, 1999 and 1998, the Company
received $141,000 and $210,000, respectively, of which $78,000 and $126,000,
respectively, was recorded as a reduction in the net book value of the retained
equity interest. The net book value at June 30, 1999 is $1,676,000 which the
Company believes approximates fair market value.
J. Investment in and Note 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 and made a loan to an affiliate of Westrec. In the third quarter of
1998, the Company decided to invest in manufactured home communities instead of
marinas. The Company has recorded its investment in and note receivable from
Westrec at the sum of the amount the Company can re-sell its interest in Westrec
plus the outstanding balance of the note receivable.
K. Secured Long-Term Notes Payable
In May 1999, the Company borrowed $5,100,000 in the form of a 7.1%, non-recourse
note payable, maturing in May 2019. The note is secured by one manufactured home
community which has a net carrying value of $8,253,000 at June 30, 1999. The
note requires $300,000 to be held in escrow until certain improvements have been
- 9 -
<PAGE>
made to the property securing the note. This amount is included in other assets.
In June 1999, the Company acquired a manufactured home community for a total
amount of $7,245,000. The terms of the purchase provided that the Company paid
$2,000,000 up-front with the balance in three annual installments. The Company
discounted the future payments at a 7.0% per annum interest rate in order to
record the purchase price and related $4,519,000 secured long-term note payable.
The future payments are secured by the property.
Scheduled payments of principal on the notes payable subsequent to June 30, 1999
are as follows (in thousands):
1999 $ 59
2000 846
2001 1,868
2002 2,205
2003 154
Thereafter 4,487
---------
$ 9,619
L. Management Fees
The Company operates under a management agreement, pursuant to which the manager
advises the Company on its business and oversees its daily operations, subject
to the supervision of the Company's Board of Directors. Asset Investors has been
the manager since November 1997. The Management Agreement has been extended
through December 31, 1999 and 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 net book value of
real estate-related assets. The Acquisition Fee equals 0.5% of the cost of each
real estate-related asset acquired. Acquisition Fees are expensed because such
fees are paid to Asset Investors, owner of 27% of the Company's Common Stock.
These fees would be capitalized if they were paid to an unrelated third party.
For 1999, the Incentive Fee equals 20% of the amount by which the Company's
Funds From Operations, less an annual capital replacement reserve of at least
$50 per developed homesite, exceeds the amount calculated by multiplying the
Company's average net worth by a percentage equal to the Ten-Year United States
Treasury rate plus 1%. In general, Funds From Operations is equal to net income
plus depreciation, amortization and acquisition fees. During 1998, the Incentive
Fee was based on the Company's REIT taxable income instead of Funds From
Operations. Management fees during the three and six months ended June 30, 1999
and 1998 were (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Base Fees $ 119 $ 12 $ 194 $ 17
Acquisition Fees 152 -- 194 --
Incentive Fees (5) -- -- --
-------- ------ -------- ------
$ 266 $ 12 $ 388 $ 17
======== ====== ======== ======
</TABLE>
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<PAGE>
M. 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.
The earn-out agreement terminates in 2048.
The Company has agreed to acquire from time to time ground leases related to
individual homesites. The purchase price for each lease will be equal to the
base annual rent provided for in each such ground lease divided by 9%. The
Company is not required to acquire such leases in groups of less than 10 leases.
The maximum number of leases the Company might purchase is approximately 500 for
total consideration of approximately $20 million.
N. Operating Segments
The Company has recently begun investing in manufactured home communities and
management assesses the performance of the Company as one operating segment.
O. Common Stock and Dividends
During the three and six months ended June 30, 1999, the Company paid $0.13 and
$0.26 per share dividends on Common Stock totaling $1,352,000 and $2,699,000,
respectively. Dividends paid during the same periods in 1998 were $0.13 and
$0.13 per share totaling $1,347,000 and $1,347,000, respectively.
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, our Quarterly Report to Stockholders and our filings
with the Securities Exchange Commission 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, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements may include
projections of our 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 our actual results, performance
or achievements 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 our
investment criteria; our ability to reduce expense levels, implement rent
increases, use leverage and other risks set forth in our SEC filings.
In this report, the words "the Company," "we," "our" and "us" refer to
Commercial Assets, Inc., a Delaware corporation, our predecessor, Commercial
Assets, Inc., a Maryland corporation and, where appropriate, our subsidiaries.
- 11 -
<PAGE>
Business
Company Background
We have been a Delaware corporation since June 10, 1999. Prior to this, we were
a Maryland corporation that was formed in August 1993. We have elected to be
treated for United States federal income tax purposes as a real estate
investment trust or "REIT". We are engaged in the ownership, acquisition,
development and expansion of manufactured home communities. Initially, we were a
wholly-owned subsidiary of Asset Investors Corporation. Asset Investors
contributed $75 million to our initial capital and in October 1993, Asset
Investors distributed 70% of our common stock to Asset Investors' stockholders.
Asset Investors currently owns 27% of our outstanding common stock and provides
management services to us. Our shares of common stock are listed on the American
Stock Exchange, Inc. under the symbol "CAX."
Prior to 1998, we owned subordinate classes of Commercial Mortgage Backed
Securities ("CMBS bonds"). CMBS bonds generally are debt instruments that 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. Our subordinate tranches of
CMBS bonds included "first-loss" tranches, which bore the most risk in the event
of a default on the underlying mortgages and provided credit support for the
more senior tranches. In 1997, we decided to redeploy our assets into other
types of real estate investments in order to reduce the risk of our portfolio.
We restructured our CMBS bonds in November 1997 by selling, redeeming and
resecuritizing our various CMBS bonds from which we received $77.7 million in
cash and retained a small residual interest in two CMBS bonds. During most of
1998, we invested our funds in short-term investments pending our decision as to
the type of real estate assets in which we would invest.
In the third quarter of 1998, we decided to acquire interests in manufactured
home communities. As of June 30, 1999, we held interests as owner, ground lessor
or mortgage lender (including participating mortgages) in 11 manufactured home
communities with a total of 1,790 developed homesites (sites with homes in
place), 220 sites ready for homes and 1,240 sites available for future
development. We expect to continue acquiring interests in manufactured home
communities during 1999.
Industry Background
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
activities and recreation and other amenities, which may include golf courses,
swimming pools, shuffleboard courts and laundry facilities. Utilities are
provided by or arranged for by the owner of the community. Community lifestyles,
primarily promoted by resident managers, include a wide variety of social
activities that 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. Manufactured home communities are primarily
characterized as "all age" communities and "adult" communities. Adult
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<PAGE>
communities typically require that at least 80% of the tenants must be at least
55 years old, and in all age communities there is no age restriction on tenants.
The owner of a home in our communities leases from us the site on which the home
is located. Typically, the leases are on a month-to-month or year-to-year basis,
renewable upon the consent of both parties or, in some instances, as provided by
statute. In some circumstances, we offer a 99-year lease to tenants in order to
enable the tenant to have some benefits of an owner of real property, including
creditor protection laws in some states. These leases can be cancelled,
depending on state law, for non-payment of rent, violation of community rules
and regulations or other specified defaults. Generally, rental rate increases
are made on an annual basis. The size of these rental rate increases depends
upon the policies that are in place at each community. Rental increases may be
based on fixed dollar amounts, percentage amounts, inflation indexes, or they
may depend entirely on local market conditions. We own interests in the
underlying land, utility connections, streets, lighting, driveways, common area
amenities and other capital improvements and are responsible for enforcement of
community guidelines and maintenance. Each homeowner within the manufactured
home communities is responsible for the maintenance of his or her home and
leased site, including lawn care in some communities.
The ownership of manufactured home communities, once fully occupied, tends to be
a stable, predictable asset class. The cost and effort involved in relocating a
home to another manufactured home community generally encourages the owner of
the home to resell it within the community.
Recent Developments
Manufactured Home Community Acquisitions
During the second quarter of 1999, we acquired four manufactured home
communities for $25.4 million cash and $4.5 million of debt. These communities
have 835 developed homesites, 165 sites ready for homes and 175 sites available
for future development. As of June 30, 1999, we have interests in 11
manufactured home communities with a total of 1,790 developed homesites, 220
sites ready for homes, 1,240 sites available for future development. We expect
to acquire additional manufactured home communities during 1999.
Growth and Operating Strategies
We measure our economic profitability based on Funds From Operations ("FFO"),
less an annual capital replacement reserve of at least $50 per developed
homesite. We believe that FFO, less a capital replacement reserve, provides
investors with an understanding of our ability to incur and service debt and to
make capital expenditures. The Board of Governors of the National Association of
Real Estate Investment Trusts (also known as NAREIT) defines FFO as net income
(loss), computed in accordance with generally accepted accounting principles,
excluding gains and losses from debt restructuring and sales of property, plus
real estate related depreciation and amortization (excluding amortization of
financing costs), and after adjustments for unconsolidated partnerships and
joint ventures. We calculate FFO in a manner consistent with NAREIT's
definition. In our calculation we include adjustments for fees incurred in
connection with property acquisitions.
FFO should not be considered an alternative to net income or net cash flows from
operating activities, as calculated in accordance with generally accepted
accounting principles, as an indication of our performance or as a measure of
liquidity. FFO is not necessarily indicative of cash available to fund future
cash needs.
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<PAGE>
Our primary objective is to maximize stockholder value by increasing the amount
and predictability of our FFO on a per share basis, less a reserve for capital
replacements. We seek to achieve this objective primarily by:
o improving net operating income from our existing portfolio of manufactured
home communities; and
o acquiring additional communities at values that are accretive on a per share
basis.
Management has adopted specific policies to accomplish our objective of
increasing the amount and predictability of our FFO on a per share basis, less a
reserve for capital replacements. These policies include:
o reducing our exposure to downturns in regional real estate markets by
obtaining a geographically diverse portfolio of communities;
o ensuring the continued maintenance of our communities by providing a minimum
$50 per homesite per year for capital replacements;
o using debt leverage to increase our financial returns;
o reducing our exposure to interest rate fluctuations by utilizing long-term,
fixed-rate, fully-amortizing debt instead of higher cost, short term debt;
o selectively acquiring manufactured home communities that have potential
long-term appreciation of value through, among other things, rent increases,
expense efficiencies and in-part homesite development;
o improving the profitability of our communities through aggressive management
of occupancy, community development and maintenance and expense controls;
o developing and maintaining resident satisfaction and a reputation for
quality communities through maintenance of the physical condition of our
communities and providing activities that improve the community lifestyle;
and
o recruiting and retaining capable community management personnel.
Future Acquisitions
In 1998, when we decided to enter the manufactured home community business, we
began to implement a business plan which called for the investment of our
capital in the acquisition of manufactured home communities. We have focused on
identifying acquisition opportunities that we believe provide returns that are
accretive to our stockholders. We plan on continuing this business plan during
1999, and hope to have largely invested our capital in manufactured home
communities during this year.
Our acquisition of interests in manufactured home communities takes many forms.
In many cases we acquire fee title to the community. When a community has a
significant number of unleased homesites, we seek a stable return from the
community during the development and lease-up phase while also seeking to
participate in future increased earnings after development is completed and the
sites are leased. We seek to accomplish this goal by making loans to development
companies in return for participating mortgages that are non-recourse to the
borrowers and secured by the property. In general, our participating mortgages
earn interest at fixed rates and, in addition, participate in the profits or
revenues from the community. This profit participation right generally entitles
us to 50% of the net income and cash flow generated by the community. As an
alternative, we sometimes enter into ground leases with development companies
having similar terms to our participating mortgages.
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<PAGE>
We believe that acquisition opportunities for manufactured home communities are
attractive at this time because of the increasing acceptability of and demand
for manufactured homes and the continued constraints on development of new
manufactured home communities. We are actively seeking to acquire additional
communities and are currently engaged in various stages of negotiations relating
to the possible acquisition of a number of communities. The acquisition of
interests in additional communities could also result in our becoming
increasingly leveraged as we incur debt in connection with these transactions.
As of June 30, 1999, we have invested approximately $62 million to acquire
interests in 11 manufactured home communities that are located in Arizona,
Florida and California. These communities have a total of 1,790 developed
homesites (sites with homes in place), 220 sites ready for homes and 1,240 sites
available for future development.
When evaluating potential acquisitions, we consider such factors as:
o the location and type of property;
o the value of the homes located on the leased land;
o the improvements, such as golf courses and swimming pools, at the property;
o the current and projected cash flow of the property and our ability to
increase cash flow;
o the potential for capital appreciation of the property;
o the terms of tenant leases, including the potential for rent increases;
o the tax and regulatory environment of the community in which the property is
located;
o the potential for expansion of the physical layout of the property and the
number of sites;
o the occupancy and demand by residents for properties of a similar type in
the vicinity;
o the credit of the residents in a community;
o the prospects for liquidity through sale, financing or refinancing of the
property;
o the competition from existing manufactured home communities;
o the potential for the construction of new communities in the area; and
o the replacement cost of the property.
Expansion of Existing Communities
We will seek to increase the number of homesites and the amount of earnings
generated from our existing portfolio of manufactured home communities through
marketing campaigns aimed at increasing occupancy. We will also seek expansion
through future acquisitions and 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.
Manager
Our daily operations are performed by a manager pursuant to a management
agreement currently in effect through December 31, 1999. The manager also
identifies and performs due diligence on potential manufactured home community
investments for us. Since November 1997, Asset Investors has been our manager.
In addition to being our manager and a principal stockholder, Asset Investors
separately owns, acquires, develops and manages manufactured home communities,
including providing property management services on our communities.
Consequently, we and Asset Investors are involved in the same industry. The two
companies have agreed that we shall invest at least $50 million in manufactured
home communities before Asset Investors makes any additional acquisitions of
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<PAGE>
manufactured home communities. Following our investment of $50 million, the two
companies will coordinate their efforts to acquire manufactured home
communities. Asset Investors may acquire communities if a material portion of
the purchase price is paid for in units of limited partnership in Asset
Investors Operating Partnership ("OP Units") or Asset Investors' common stock.
As of June 30, 1999, we have invested approximately $62 million in manufactured
home communities and, therefore, we and Asset Investors are coordinating our
acquisitions at this time.
The management agreement was approved by our 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 our regular business, and in return, the manager is paid
the following fees:
o Acquisition Fees equal to 0.5% of the cost of each real estate-related asset
acquired by us;
o Base Fees equal to 1% per year of the net book value of our real
estate-related assets;
o Incentive Fees equal to 20% of the amount by which our FFO, less an annual
capital replacement reserve of at least $50 per developed homesite, exceeds
(a) our average net worth, multiplied by (b) 1% over the ten year United
States Treasury rate.
During the three and six months ended June 30, 1999 and 1998, we paid the
following fees to our manager (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Base Fees $ 119 $ 12 $ 194 $ 17
Acquisition Fees 152 -- 194 --
Incentive Fees (5) -- -- --
-------- ------ -------- ------
$ 266 $ 12 $ 388 $ 17
======== ====== ======== ======
</TABLE>
Prior to 1999, the Incentive Fee was based on REIT income instead of FFO. The
Incentive Fee for 1999 is based on FFO, less an annual capital replacement
reserve of at least $50 per developed homesite, because we believe this is a
better measure of our economic profitability and, therefore, is a more
appropriate incentive for Asset Investors even if increased management fees
result.
We 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.
Properties
The manufactured home communities in which we have interests are primarily
located in Arizona and Florida. We hold interests in these communities as owner,
ground lessor or mortgage lender (including participating mortgages).
- 16 -
<PAGE>
The following table sets forth the states in which the communities in which we
held an interest on June 30, 1999 are located:
<TABLE>
<CAPTION>
Number of Sites
-----------------------------------------------------------------
Available for
Number of Ready for Homes Future
Communities Developed Development
------------------ ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Arizona 6 953 101 206
Florida 4 834 123 1,001
California 1 -- -- 30
--- ----- ----- ------
Total 11 1,787 224 1,237
=== ===== ===== ======
</TABLE>
The following table sets forth information regarding each manufactured home
community in which we own an interest:
<TABLE>
<CAPTION>
Average
Monthly
Developed Rent Sites Ready Sites Available
Community Location Homesites Occupancy per Site for Homes for Development
- ------------------------------------------------------------------------------------------------------------------
Owned Communities
<S> <C> <C> <C> <C> <C>
Cypress Greens (1) Lakeland, FL 85 100% $190 22 --
La Casa Blanca Apache Junction, AZ 198 100 150 -- --
La Casa Blanca East Apache Junction, AZ 106 100 200 101 --
Lakeshore Villas Tampa, FL 290 96 323 -- --
Rancho Mirage Apache Junction, AZ 312 100 175 -- --
Riverside (1) Ruskin, FL 221 99 401 23 837
Royal Palm Haines City, FL 231 98 216 55 164
--------------------------------------------------------------------
Subtotal 1,443 99 244 201 1,001
--------------------------------------------------------------------
Participating Mortgage and Joint
Venture Communities
Fiesta Village Mesa, AZ 175 98 273 -- 206 (2)
Casa Encanta Mesa, AZ 111 87 350 -- -- (2)
Southern Palms Mesa, AZ 51 100 203 -- -- (2)
Savanna Club Port St. Lucie, FL 7 100 165 19 --
Sun Lake Grand Island, FL -- -- -- 4 --
Cannery Village Newport Beach, CA -- -- -- -- 30
--------------------------------------------------------------------
Subtotal 344 95 283 23 236
--------------------------------------------------------------------
Total Communities 1,787 98% $252 224 1,237
====================================================================
<FN>
(1) We have leased this community to a third party under a long-term lease in
which we receive a base rent plus 50% of any profits from the community.
(2) We intend 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.
</FN>
</TABLE>
Taxation of the Company
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986,
as amended (the "Code"), and we intend to operate in a manner which will allow
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<PAGE>
us to avail ourselves of the beneficial tax provisions applicable to REITs. Our
qualification as a REIT depends on our ability to meet various requirements
imposed by the Code, such as specifications relating to actual operating
results, distribution levels and diversity of stock ownership. In addition, our
ability to qualify as a REIT depends in part upon the actions of third parties
over which we have no control, or only limited influence. For instance, our
qualification depends upon the conduct of certain entities with which we have a
direct or indirect relationship, in our capacity as a lender, lessor, or holder
of non-controlling equity interests.
If we qualify for taxation as a REIT, we will generally not be subject to
Federal corporate income tax on our 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 investment in
a corporation. If we fail to qualify as a REIT in any taxable year, we will be
subject to Federal income tax at regular corporate rates on our taxable income
(including any applicable alternative minimum tax). Even if we qualify as a
REIT, we may be subject to certain state and local income and other taxes and to
Federal income and excise taxes on our undistributed income.
RESULTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Comparison of Three and Six Months Ended June 30, 1999 to Three and Six Months
Ended June 30, 1998
Rental Property Operations
Income from rental property operations totaled $634,000 and $1,132,000 during
the three and six months ended June 30, 1999. There were no such activities
during the same periods in 1998 as our first investment in manufactured home
communities was in August 1998. As of June 30, 1999, we had invested
approximately $62 million in 11 communities.
Interest and Other Income
Interest and other income during the three and six months ended June 30, 1999
was $520,000 and $1,221,000 compared to $1,042,000 and $2,095,000 for the same
periods in 1998, respectively. The decrease is due to a reduction in cash and
short-term investments used to fund investments in manufactured home communities
beginning in August 1998. The average interest rate earned on these funds was
4.8% and 5.4% during the six months ended June 30, 1999 and 1998, respectively.
Interest Expense
Interest expense was $58,000 for both the three and six months ended June 30,
1999 due to $5.1 million of long-term notes payable secured by one of our
communities. We had no interest expense during the same periods in 1998 as we
did not have any debt on manufactured home communities until May 1999. We
anticipate borrowing additional amounts in the future in the form of secured
long-term notes payable.
General and Administrative Expenses
Our general and administrative expenses were $140,000 and $273,000 for the three
and six months ended June 30, 1999 compared to $88,000 and $174,000 for the same
periods in 1998, respectively. These expenses increased for the 1999 periods
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<PAGE>
compared to 1998 primarily due to increased costs related to shareholder
relations and due diligence costs on potential acquisitions that were not
completed.
Management Fees
During the three and six months ended June 30, 1999, our management fees were
$114,000 and $194,000 compared to $12,000 and $17,000 during the same periods in
1998, respectively. The increase in management fees is primarily due to our
acquisitions of manufactured home communities during this period. We did not
make any real estate-related acquisitions during the 1998 periods and such fees
are not paid on cash and short-term investments, which is what we held during
the 1998 periods.
CMBS Bonds
Income from CMBS bonds during the three and six months ended June 30, 1999 was
$39,000 and $77,000 and is comparable to the same periods in 1998. This income
is from our retained equity interest in two CMBS bonds.
Dividend Distributions
During the three and six months ended June 30, 1999, we paid dividends totaling
$1,352,000 ($.13 per share) and $2,699,000 ($0.26 per share) compared to
$1,347,000 ($0.13 per share) and $1,347,000 ($0.13 per share) for the same
periods in 1998, respectively. We did not pay dividends during the first quarter
of 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, we had cash and cash equivalents of $1,092,000 and
short-term investments of $15,078,000. Our principal activities that demand
liquidity include our normal operating activities, payments of principal and
interest on outstanding debt, acquisitions of or additional investments in
properties and payments of dividends to stockholders.
During the six months ended June 30, 1999, the net cash provided by operating
activities was $1,891,000 compared to $2,136,000 during the same period in 1998.
The decrease during the first six months of 1999 was primarily due to lower net
income as a result of management fees paid on 1999 real estate investments and
an increase in general and administrative expenses.
Net cash used in investing activities was $5,812,000 during the six months ended
June 30, 1999 compared to uses of $60,620,000 during the same period in 1998.
The net cash used in the 1999 period was primarily due to acquisitions of
interests in manufactured home communities, net of sales of short-term
investments used to fund such acquisitions, whereas the funds used in the 1998
period were for the purchase of short-term investments.
Net cash provided by financing activities was $1,721,000 during the six months
ended June 30, 1999 compared to uses of $1,347,000 during the same period in
1998. The net cash provided in the 1999 period was due to $4.8 million in
proceeds from long-term borrowings, net of dividends paid of $2.7 million. The
net cash used in the 1998 period was due to dividends paid. The increase in
dividends between the periods occurred primarily because we did not pay a
quarterly dividend during the first quarter of 1998.
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<PAGE>
We expect to meet our long-term liquidity requirements through our cash
balances, short-term investments, long-term, secured borrowings, cash generated
by operations and issuance of equity securities.
FUNDS FROM OPERATIONS
We measure our economic profitability based on FFO, less an annual capital
replacement reserve of at least $50 per developed homesite. We believe that FFO,
less a reserve, provides investors with an understanding of our ability to incur
and service debt and make capital expenditures. The Board of Governors of NAREIT
defines FFO as net income (loss), computed in accordance with generally accepted
accounting principles, excluding gains and losses from debt restructuring and
sales of property, plus real estate related depreciation and amortization
(excluding amortization of financing costs), and after adjustments for
unconsolidated partnerships and joint ventures. We calculate FFO in a manner
consistent with NAREIT's definition. In our calculation we include adjustments
for fees incurred in connection with property acquisitions.
FFO should not be considered an alternative to net income or net cash flows from
operating activities, as calculated in accordance with generally accepted
accounting principles, as an indication of our performance or as a measure of
liquidity. FFO is not necessarily indicative of cash available to fund future
cash needs.
For the three and six months ended June 30, 1999 and 1998, our FFO was (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 734 $ 986 $ 1,716 $ 1,988
Real estate depreciation 232 -- 321 --
Acquisition fees 152 -- 194 --
Amortization of CMBS bonds 20 66 78 126
Equity in Asset Investors' adjustments for FFO 14 -- 14 --
------- ------- ------- -------
Funds From Operations (FFO) $ 1,152 $ 1,052 $ 2,323 $ 2,114
======= ======= ======= =======
Weighted average common shares outstanding 10,362 10,359 10,363 10,350
======= ======= ======= =======
</TABLE>
For the six months ended June 30, 1999 and 1998, net cash flows were as follows
(in thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Cash provided by operating activities $ 1,891 $ 2,136
Cash used in investing activities (5,812) (60,620)
Cash provided by (used in) financing activities 1,721 (1,347)
</TABLE>
YEAR 2000 COMPLIANCE
Year 2000 issues have arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
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<PAGE>
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous results. The following disclosure provides information
regarding the current status of our Year 2000 compliance program.
Our critical hardware and software systems are currently Year 2000 compliant.
Upon failure of any system, 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 and within a
reasonable time period. Consequently, we would be able to continue our business
operations without any material interruption or material effect on our business,
results of operations or financial condition. In addition, we anticipate that
any hardware or software that we acquire (including upgrades to existing
systems) between now and December 31, 1999 will be Year 2000 compliant.
Disruptions in the economy generally resulting from Year 2000 issues could also
materially adversely affect us. Moreover, because a large number of our tenants
may be dependent on social security payments to pay their rents, a failure of
the Social Security Administration to cause their systems to be Year 2000
compliant may result in a material adverse effect on our operations. The Social
Security Administration has announced that they will have their systems Year
2000 compliant before January 1, 2000.
We believe that the cost of modification or replacement of our less essential
accounting and reporting software and hardware that is not currently compliant
with Year 2000 requirements, if any, will not be material to our financial
position or results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal exposure to market risk is through our various debt instruments
and borrowings. The following is a list of these debt instruments and borrowing
arrangements.
We have a $5.1 million fixed rate, non-recourse, secured long-term note payable
that matures in 2019. The interest rate on this note is 7.1%. We do not have
significant exposure to changing interest rates on this note as the rate is
fixed and the note is fully amortizing.
We have a $4.5 million fixed rate, recourse, secured long-term note payable that
is repayable in three annual installments. The implied interest rate on this
note is 7.0%. We do not have significant exposure to changing interest rates on
this note as the rate is fixed and the note is fully amortizing. In the future,
we intend to borrow additional non-recourse, secured, fixed rate, fully
amortizing debt in connection with the refinancing of the existing note payable.
While changes in interest rates would affect the cost of funds borrowed in the
future to refinance the existing debt, we believe that the effect, if any, of
near-term changes in interest rates on our financial position, results of
operations or cash flows would not be material as the existing debt is fixed
rate until June 2002.
We invest funds primarily in government securities and other short-term
investments with interest rates of approximately 0.25% above the London
Interbank Offered Rate ("LIBOR"). Accordingly, changes in interest rates could
affect the returns from such investments. We intend to invest funds in
manufactured home communities during 1999, however, the timing and amount of
such investments will depend on a number of factors. See "Item 2. - Business -
Growth and Operating Strategies - Future Acquisitions."
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<PAGE>
We intend to borrow additional non-recourse, secured, fixed rate, fully
amortizing debt in connection with acquisitions of communities. Accordingly,
changes in interest rates will affect the cost of future borrowings incurred in
connection with future acquisitions.
PART II
OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Our 1999 Annual Meeting of Stockholders was held on June 9, 1999. At the
meeting, Messrs. Terry Considine and Bruce E. Moore were elected as Class III
Directors to terms expiring in 2002 and Mr. Robert J. Malone was elected as a
Class II Director to a term expiring in 2001. There were 9,953,140, 9,956,944
and 9,962,459 votes cast "for" the election of Messrs. Considine, Moore and
Malone, respectively, and 239,269, 235,465 and 229,950 votes were withheld,
respectively. In addition, the stockholders approved our reincorporation from
Maryland to Delaware. Of the votes cast, 8,387,771 were cast "for" approval of
the reincorporation and 132,757 were cast "against" approval of the
reincorporation with 71,076 abstentions. In addition, 1,600,805 shares were not
voted in connection with the reincorporation. Under Maryland law, all votes cast
as abstentions and all unvoted shares constituted votes "against" approval of
the reincorporation.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
2.1 Agreement and Plan of Merger, dated as of March 12, 1999,
between Commercial Assets, Inc., a Maryland corporation and
Commercial Assets, Inc., a Delaware corporation (incorporated
herein by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K, dated June 10, 1999, Commission File No.
1-2262, filed on June 10, 1999).
3.1 Amended and Restated Certificate of Incorporation of Commercial
Assets, Inc. (the "Registrant"), (incorporated herein by
reference to Exhibit 3.1 to the Registrant's Current Report on
Form 8-K, dated June 10, 1999, Commission File No. 1-2262, filed
on June 10, 1999).
3.2 Amended and Restated By-laws of Commercial Assets, Inc.
(incorporated herein by reference to Exhibit 3.2 to the
Registrant's Current Report on Form 8-K, dated June 10, 1999,
Commission File No. 1-2262, filed on June 10, 1999).
27 Financial Data Schedule
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed by the
Registrant during the period covered by this Quarterly Report on
Form 10-Q:
Current Report on Form 8-K dated April 21, 1999, reporting our
intent to acquire shares of Asset Investors Corporation.
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<PAGE>
Current Report on Form 8-K dated March 31, 1999 reporting the
acquisition of manufactured home community assets which
included: Statement of Excess of Revenues Over Specific
Operating Expenses of the Lakeshore Villas Manufactured Home
Community for the year ended September 30, 1998 (audited) and
the period from October 1, 1998 to December 31, 1998
(unaudited).
Current Report on Form 8-K dated May 7, 1999 reporting the
acquisition of manufactured home community assets which
included: Statement of Excess of Revenues Over Specific
Operating Expenses of the Rancho Mirage Mobile Home Park for the
Year Ended December 31, 1998 (audited) and the period from
January 1, 1999 to March 31, 1999 (unaudited).
Current Report on Form 8-K dated June 10, 1999 reporting our
reincorporation in Delaware.
Current Report on Form 8-K dated June 30, 1999 reporting the
acquisition of manufactured home community assets which
included: Statement of Excess of Revenues Over Specific
Operating Expenses of the La Casa Blanca Manufactured Home
Communities for the Year Ended December 31, 1998 (audited) and
the period from January 1, 1999 to March 31, 1999 (unaudited).
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCIAL ASSETS, INC.
(Registrant)
Date: August 5, 1999 By /s/ David M. Becker
--------------------------
David M. Becker
Chief Financial Officer
- 23 -
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