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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
X SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 1-2262
COMMERCIAL ASSETS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 84-1501789
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3410 Galena Street, Suite 210 80231
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (303) 614-9410
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, American Stock Exchange, Inc.
par value $.01 per share
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 17 2000, 10,368,029 shares of common stock were
outstanding, and the aggregate market value of the shares (based upon the
closing price of the Common Stock on that date as reported on the American Stock
Exchange, Inc.) held by non-affiliates was approximately $36,000,000.
Documents Incorporated by Reference
Portions of the proxy statement for the Registrant's 2000 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report.
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<PAGE>
COMMERCIAL ASSETS, INC.
Table of Contents
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 1999
Item Page
PART I
1. Business................................................................ 1
Company Background................................................. 1
Proposed Merger with Asset Investors............................... 2
Industry Background................................................ 2
Financial Information about Industry Segments...................... 3
Growth and Operating Strategies.................................... 3
Manager............................................................ 5
Competition........................................................ 6
Taxation of the Company............................................ 6
Regulations........................................................ 7
Insurance.......................................................... 8
Capital Resources.................................................. 8
Restrictions on and Redemptions of Common Stock.................... 8
Employees.......................................................... 9
2. Properties.............................................................. 9
3. Legal Proceedings....................................................... 12
4. Submission of Matters to a Vote of Security Holders..................... 13
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters... 13
6. Selected Financial Data................................................. 14
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 15
Results of Operations.............................................. 15
Liquidity and Capital Resources.................................... 18
Funds From Operations.............................................. 18
Year 2000 Compliance............................................... 19
7a. Quantitative and Qualitative Disclosures About Market Risk.............. 20
8. Financial Statements and Supplementary Data............................. 21
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................. 21
PART III
10. Directors and Executive Officers of the Registrant...................... 21
11. Executive Compensation.................................................. 24
12. Security Ownership of Certain Beneficial Owners and Management.......... 26
13. Certain Relationships and Related Transactions.......................... 26
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........ 28
(i)
<PAGE>
PART I
Introduction
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements in certain circumstances. Certain information
included in this report, our Annual 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, and our predecessor, Commercial
Assets, Inc., a Maryland corporation and, where appropriate, our subsidiaries.
Item 1. 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. ("AMEX") 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 resecuritized our CMBS bonds in November 1997 from which we received $77.7
million in cash and a small residual interest in two CMBS bonds. During most of
1998, we invested our funds in short-term government securities and other
short-term investments pending our decision as to the type of real estate assets
in which we would invest.
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In the third quarter of 1998, we decided to acquire interests in manufactured
home communities. As of December 31, 1999, we held interests as owner, ground
lessor or mortgage lender (including participating mortgages) in 12 manufactured
home communities with a total of 1,840 developed homesites (sites with homes in
place) and 1,370 undeveloped homesites. We expect to continue acquiring
interests in manufactured home communities during 2000.
Our principal executive offices are located at 3410 S. Galena Street, Suite 210,
Denver, Colorado 80231 and our telephone number is (303) 614-9410.
Proposed Merger with Asset Investors
In August 1999, we agreed to merge with Asset Investors. Asset Investors has
agreed to issue 0.4075 shares of its common stock for each share of our common
stock. Alternatively, our stockholders may elect to receive $5.75 per share in
cash for up to 3,549,868 shares of our common stock with any remaining shares of
our common stock receiving 0.4075 shares of Asset Investors common stock. Asset
Investors and the officers and directors of Asset Investors and Commercial
Assets have agreed to elect to receive Asset Investors common stock for all
shares of our common stock that they own. The merger requires the approval by a
majority of the outstanding shares of Asset Investors common stock and
two-thirds of the outstanding shares of our common stock. Asset Investors owns
27% of our common stock and has agreed to vote these shares in favor of the
merger. The stockholders meetings for both companies to vote on the merger are
expected to occur during the second quarter of 2000.
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. In adult
communities, as 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 four-year lease, as required by
statute, and a 99-year lease to tenants in order to enable the tenant to have
some of the benefits an owner of real property enjoys, 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
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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.
Financial Information about Industry Segments
We operate in one industry segment, the ownership and management of real estate.
See the consolidated financial statements including their notes in Item 8 of
this report on Form 10-K.
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. This reserve is management's estimate based on its experience in
owning, operating and managing manufactured home communities. We believe that
the presentation of FFO, when considered with the financial data determined in
accordance with generally accepted accounting principles, provides a useful
measure of our performance. However, FFO does not represent cash flow and is not
necessarily indicative of cash flow or liquidity available to us, nor should it
be considered as an alternative to net income as an indicator of operating
performance. 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 beginning with the NAREIT definition and include
adjustments for:
o property acquisition fees paid to Asset Investors which were expensed
under generally accepted accounting principles because Asset Investors
is an affiliate; and
o nonrecurring costs related to the abandonment of potential marina
investments.
We believe that the presentation of FFO provides investors with measurements
which help facilitate an understanding of our ability to make required dividend
payments, capital expenditures and principal payments on our debt. Since FFO
excludes unusual and nonrecurring expenses as well as depreciation and other
real estate related expenses, FFO may be materially different from net income.
Therefore, FFO should not be considered as 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 operating performance or
liquidity.
FFO is not necessarily indicative of cash available to fund our cash needs,
including our ability to make distributions. We use FFO in measuring our
operating performance because we believe that the items that result in a
difference between FFO and net income do not impact the ongoing operating
performance of a real estate company. Also, we believe that other real estate
companies, analysts and investors utilize FFO in analyzing the results of real
estate companies. Our basis of computing FFO is not necessarily comparable with
that of other REITs.
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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 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 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;
o improving the profitability of our communities through aggressive
management of occupancy, community development and maintenance and
expense controls;
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 ensuring the continued maintenance of our communities by providing a
minimum $50 per homesite per year for capital replacements;
o reducing our exposure to downturns in regional real estate markets by
diversifying our portfolio of communities since substantially all of
our properties are in Florida and Arizona; 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. During 1998, we invested $23 million in
manufactured home communities (including participating mortgages and real estate
joint ventures). We invested an additional $47 million in manufactured home
communities during 1999. We plan on continuing to acquire manufactured home
communities during 2000.
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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We believe that acquisition opportunities for manufactured home communities are
attractive at this time because of:
o the increasing acceptability of and demand for manufactured homes, as
shown by the growth in the number of individuals living in manufactured
homes; and
o 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.
From August 1998 through December 1999, we invested $70 million to acquire
interests in 12 manufactured home communities (including participating mortgages
and real estate joint ventures) that are located in Arizona, Florida and
California. These communities have a total of 1,840 developed homesites (sites
with homes in place) and 1,370 undeveloped homesites.
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. As of December 31, 1999, we held interests in
six communities with 1,370 undeveloped homesites.
Manager
Our daily operations are performed by a manager pursuant to a management
agreement currently in effect through December 31, 2000. The manager 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
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Asset Investors are involved in the same industry. The two companies agreed we
shall invest at least $50 million in manufactured home communities before Asset
Investors makes any additional acquisitions of manufactured home communities.
Thereafter, the two companies will make a determination with respect to each
acquisition on a case-by-case basis. At December 31, 1999, we have invested
approximately $70 million in manufactured home communities (including
participating mortgages and real estate joint ventures). Therefore, the two
companies are determining acquisitions on a case-by-case basis.
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 1999, we paid $565,000 in Base Fees and $205,000 in Acquisition Fees to
Asset Investors. We paid $87,000 in Base Fees and $124,000 in Acquisition Fees
during 1998. We did not pay any Incentive Fees in 1999 or 1998. For 1999, the
management agreement relating to the Incentive Fee was amended to provide that
such fee was based on our FFO, less an annual capital replacement reserve of at
least $50 per developed homesite, instead of REIT income as was the case in
1998. The change was made because we believe this is a better measure of our
economic profitability and would, therefore, be a more appropriate incentive for
Asset Investors even if increased management fees result. The management
agreement has been extended to December 31, 2000 with the same terms as those
used in 1999. The management agreement will terminate if our merger with Asset
Investors occurs.
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.
Competition
There are numerous housing alternatives that compete with our manufactured home
communities in attracting residents. Our properties compete for residents with
other manufactured home communities, multifamily rental apartments, single
family homes and condominiums. The number of competitors in a particular area
could have a material effect on our ability to attract and maintain residents
and on the rents we are able to charge for homesites. In acquiring assets, we
compete with other REITs, pension funds, insurance companies, and other
investors, many of which have greater financial resources than we do. In
addition, Asset Investors is also involved in acquiring manufactured home
communities.
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
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.
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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.
If in any taxable year we fail to qualify as a REIT and as a result, incur a tax
liability, we might need to borrow funds or liquidate certain investments in
order to pay the applicable tax. In this situation, we would not be compelled to
make distributions as required for entities claiming REIT status under the Code.
Moreover, unless we would be entitled to relief under certain statutory
provisions, we would be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification is lost. Although we
currently intend to operate in a manner designed to qualify as a REIT, it is
possible that future economic, market, legal, tax or other considerations may
cause us to fail to qualify as a REIT, or may cause the Board of Directors to
revoke the REIT election.
We and our stockholders may be subject to state or local taxation in various
state or local jurisdictions, including those in which we or they transact
business or reside. The state and local tax treatment conferred upon us and our
stockholders may not conform to the Federal income tax treatment.
Regulations
General
Manufactured home communities, like other housing alternatives, are subject to
various laws, ordinances and regulations, including regulations relating to
recreational facilities such as swimming pools, clubhouses and other common
areas. We believe that we have obtained the necessary permits and approvals to
operate each of our properties in conformity with these laws.
Americans with Disabilities Act
Our current properties and any newly acquired communities must comply with the
Americans with Disabilities Act (the "ADA"). The ADA generally requires that
public facilities such as clubhouses, swimming pools and recreation areas be
made accessible to people with disabilities. As we previously mentioned, many of
our communities have public facilities. In order to comply with the ADA
requirements, we have made improvements at our communities in order to remove
barriers to access. If we should ever fail to comply with ADA regulations, we
could be fined or we could be forced to pay damages to private litigants. We
have made those changes required by the ADA which we believe are appropriate,
and we believe that our properties are in compliance with the requirements of
the ADA. We believe that any further costs related to ADA compliance can be
covered by cash flow from the individual properties without causing any material
adverse effect. If ongoing changes involve a greater expenditure than we
currently anticipate, or if the changes must be made on a more accelerated basis
than we anticipate, our ability to make expected distributions could be
adversely affected.
Rent Control Legislation
State and local laws, principally in Florida, might limit our ability to
increase rents on some of our properties, and thereby, limit our ability to
recover increases in operating expenses and the costs of capital improvements.
Enactment of rent control laws has been considered from time to time in
jurisdictions in which we operate. We presently expect to maintain manufactured
home communities and may purchase additional properties in markets that are
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either subject to rent control laws or in which such legislation may be enacted.
Insurance
We believe that our properties are covered by adequate fire, flood and property
insurance policies. It is our policy to purchase insurance policies which
contain commercially reasonable deductibles and limits from reputable insurers.
We also believe that we have obtained adequate title insurance policies insuring
fee title to properties we have acquired.
Capital Resources
We have used our available cash balances, our FFO and our short-term investments
to provide working capital to support our operations, to pay dividends and to
acquire assets. Future acquisitions will be financed by the most appropriate
sources of capital, perhaps including our available cash and short-term
investment balances; undistributed FFO; long-term, secured debt; short-term,
secured debt; and the issuance of additional equity securities. This flexibility
allows us to offer more choices of "acquisition currency" to potential sellers
of manufactured home communities, including the ability to defer some or all of
the tax consequences of a sale. We believe that this flexibility may offer
sellers an incentive to enter into transactions with us on favorable terms.
Without further stockholder approval, we are authorized to issue up to
75,000,000 shares of common stock. As of March 17, 2000, 10,368,029 shares of
common stock were outstanding. Future offerings of common stock may result in
the reduction of the net tangible book value per outstanding share and a
reduction in the market price of the common stock. We are unable to estimate the
amount, timing or nature of such future offerings as any such offerings will
depend on general market conditions or other factors.
In addition, the Board of Directors is authorized to issue 25,000,000 shares of
preferred stock, par value $.01 per share. Depending on the terms set by the
Board of Directors, the authorization and issuance of preferred stock could
adversely affect existing stockholders. The effects on existing stockholders
could include, among other things, dilution of ownership interests, restrictions
on dividends to be issued on common stock and preferences to holders of a new
class of stock in the distribution of assets upon liquidation. We do not
presently intend to issue preferred stock during 1999. As of March 17, 2000, we
have not authorized or issued additional classes of stock.
Restrictions on and Redemptions of Common Stock
To qualify to be taxed as a REIT, we must comply with certain ownership
limitations with respect to shares of our common stock. Our Certificate of
Incorporation provides that shares of common stock generally may not be owned by
a person if the ownership of shares by such person would exceed 9.8% of our
outstanding shares or would result in the imposition of a tax on us. The Board
of Directors has waived this restriction with respect to Asset Investors'
ownership of 27% of our common stock.
Our Certificate of Incorporation empowers the Board of Directors, at its option,
to redeem shares of common stock or to restrict transfers of shares to comply
with the requirements described above. The redemption price we would pay if the
Board of Directors exercises this option to redeem shares would be the fair
market value of the common stock as reflected in the latest quotations on the
American Stock Exchange. Our Certificate of Incorporation also provides that if
anyone acquires shares of our common stock in a manner or in a volume that would
result in our disqualification as a REIT under the Code, that acquisition is
deemed void to the fullest extent permitted under the law and the acquirer will
be deemed never to have had an interest in the shares. Furthermore, if a
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transaction is determined to be void or invalid, the acquirer may be deemed to
have acted as agent on our behalf in acquiring such shares and may be deemed to
hold such shares on our behalf.
Each stockholder is required, upon demand, to disclose to the Board of Directors
in writing any information with respect to the direct and indirect ownership of
shares of our common stock as the Board of Directors deems necessary or prudent
in order to protect our tax status.
Employees
Pursuant to the management agreement, the manager provides all personnel
necessary to conduct our regular business. Consequently, we have no employees.
Certain employees of Assets Investors, the manager, serve as our officers.
Item 2. 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). The
following table sets forth the states in which the communities in which we held
an interest on December 31, 1999 are located:
<TABLE>
<CAPTION>
Number of Sites
--------------------------------------
Number of
Communities Developed Undeveloped
----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Arizona 7 982 310
Florida 4 854 1,031
California 1 -- 30
--- ----- ------
Total 12 1,836 1,371
=== ===== ======
</TABLE>
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The following table sets forth information regarding each manufactured home
community in which we own an interest:
<TABLE>
<CAPTION>
Average
Monthly
Developed Rent Undeveloped Year
Community Location Homesites Occupancy per Site Homesites Developed
- --------------------------------------------------------------------------------------------------------------------
Owned Communities
<S> <C> <C> <C> <C> <C> <C>
Casa Encanta Mesa, AZ 106 97% $345 -- (1) 1970
Cypress Greens Lakeland, FL 88 98 188 19 1986
Desert Harbor Apache Junction, AZ 103 100 203 104 1997
Fiesta Village Mesa, AZ 170 94 274 206 (1) 1962
La Casa Blanca Apache Junction, AZ 198 100 150 -- 1993
Lakeshore Villas Tampa, FL 290 96 323 -- 1972
Rancho Mirage Apache Junction, AZ 312 100 174 -- 1994
Riverside Ruskin, FL 223 99 397 767 1984
Royal Palm Haines City, FL 233 98 216 217 1971
Southern Palms Mesa, AZ 36 100 208 -- (1) 1961
----------------------------------------------------------
Subtotal 1,759 98 252 1,313
----------------------------------------------------------
Participating Mortgage and Joint
Venture Communities
Savanna Club (2) Port St. Lucie, FL 20 100 154 23 1999
Sun Lake (2) Grand Island, FL -- -- -- 5 1980
Cannery Village Newport Beach, CA -- -- -- 30 (3) 1999
White Sands Apache Junction, AZ 57 96 208 -- 1984
----------------------------------------------------------
Subtotal 77 97 194 58
----------------------------------------------------------
Total Communities 1,836 98% $250 1,371
==========================================================
<FN>
1 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.
2 We hold notes receivable secured by individual homes and homesites
within this community.
3 This community is currently being redeveloped.
</FN>
</TABLE>
10% Owned Properties. At December 31, 1999, we owned two manufactured home
communities which each exceeded 10% of our total assets. The first property,
known as Riverside Club, is located in the Tampa, Florida region and was
purchased in November 1998. The property has 223 developed homesites which are
99% occupied and 767 undeveloped homesites. The property offers residents a
range of amenities including:
o a 9-hole golf course,
o swimming pool,
o tennis courts,
o clubhouse, and
o marina.
The developed homesites are leased to the owner of the home located on each
homesite. The leases are annual leases and can be renewed by the tenant provided
that he or she complies with the rules and regulations of the property and pays
the required rent. At December 31, 1999, the average monthly rent for a homesite
was $397. We can increase rent based on either (a) rents charged by comparable
- 10 -
<PAGE>
properties in the surrounding area or (b) increases in our costs associated with
the property. The cost of the property has been allocated as follows:
o $3,558,000 to land and
o $7,866,000 to buildings and land improvements.
We depreciate buildings and land improvements over 25 years using the straight
line method. For federal income tax purposes, we depreciate buildings over 40
years and land improvements over 15 years using the straight line method for
both categories. At December 31, 1999, our net book value in this property was
$11,080,000 which is approximately the same as our basis in the property for
federal income taxes. Annual real estate taxes for this property are
approximately $180,000 at a 2.5% realty tax rate. Estimated realty taxes on
future improvements are expected to have a similar tax rate.
Effective November 1998, we leased this property to a third party for 50 years.
The lease provides for an initial annual rent payment of $890,000, increasing by
4% per annum. As additional homesites are developed, the annual lease payment
increases by an amount equal to 10% of the costs incurred in developing the
homesites. In addition, we received additional rent equal to 50% of the lessee's
net cash flow from the property and 50% of any sales proceeds in excess of our
historical cost of the property and subsequent improvements. Effective January
1, 2000, we terminated the lease in exchange for the cancellation of $186,000 of
loans to the lessee.
In September 1999, we borrowed $5,500,000 in the form of a non-recourse, fully
amortizing mortgage secured by 221 developed and 23 undeveloped homesites
located at this property. This indebtedness has a 6.7% interest rate and is
repayable in 240 equal monthly installments of principal and interest through
October 2019. The principal amount of the mortgage indebtedness payable in 2000
is $137,000. The mortgage indebtedness may not be prepaid for the first five
years. During years 6-10, the mortgage indebtedness may be prepaid in full, but
we will be required to pay an amount sufficient to allow the lender to realize a
6.7% return for the remainder of the term of the mortgage indebtedness based on
the difference between 6.7% and the then interest rate on a U.S. Treasury Note
or Bond for a similar period of time. The mortgage indebtedness may be prepaid
in full during years 11-20 provided we pay a prepayment penalty based on the
outstanding principal of the mortgage indebtedness as follows:
Prepayment
Penalty
Year(s) Percentage
------- ----------
11-12 5%
13 4%
14 3%
15 2%
16-20 1%
See financial statements included elsewhere in this report on Form 10-K for
additional information about our indebtedness.
We intend to further develop this property over the next five to ten years. The
development is expected to include development of the undeveloped homesites plus
the completion of the golf course into an 18-hole course. The estimated cost to
fully develop the property is $8 million. We expect to finance the development
with our existing cash and short-term investments, proceeds from secured
long-term notes payable on our various properties and cash flow from our
operations.
- 11 -
<PAGE>
The other property which exceeded 10% of our total assets is known as Rancho
Mirage and is located in the Phoenix, Arizona region. This property was
purchased in May 1999 and has 312 developed homesites which are 100% occupied.
The property offers residents a range of amenities including:
o a 6-hole pitch-and-putt golf course;
o swimming pool;
o tennis courts; and
o clubhouse.
The developed homesites are leased to the owner of the home located on each
homesite. The leases are annual leases and can be renewed by the tenant provided
that he or she complies with the rules and regulations of the property and pays
the required rent. At December 31, 1999, the average monthly rent for a homesite
was approximately $174. We can increase rent based on rents charged by
comparable properties in the surrounding area. Effective January 1, 2000, the
average monthly rent was increased to $295. The cost of the property has been
allocated as follows:
o $930,000 to land and
o $10,987,000 to buildings and land improvements.
We depreciate buildings and land improvements over 25 years using the straight
line method. For federal income tax purposes, we depreciate buildings over 40
years and land improvements over 15 years using the straight line method for
both categories. At December 31, 1999, our net book value in this property was
$11,627,000 which is approximately the same as our basis in the property for
federal income taxes. Annual real estate taxes for this property are
approximately $30,000 at a 0.6% realty tax rate. Estimated realty taxes on
future improvements are expected to have a similar tax rate. We do not intend to
further develop this property in the future.
Other Owned Properties. At December 31, 1999, we owned eight additional
manufactured home communities containing 1,224 developed homesites and 546
undeveloped homesites. These properties contain, on average, 153 developed
homesites, with the largest property containing 290 developed homesites. These
properties offer residents a range of amenities, including swimming pools,
clubhouses and tennis courts.
At December 31, 1999, four of these properties are encumbered by mortgage
indebtedness totaling $14,964,000. These properties represent 43.4% of our
developed homesites. The four properties securing our mortgage indebtedness have
a combined net book value of $24,246,000 and the indebtedness has a weighted
average interest rate of 7.5%. The principal amount of our mortgage indebtedness
payable in 2000 is $1,081,000. See our financial statements included elsewhere
in this report on Form 10-K at December 31, 1999 for additional information
about our indebtedness.
Item 3. Legal Proceedings.
In September 1999, four of our stockholders, individually and as purported
representatives of all of our stockholders, except Asset Investors and its
affiliates, filed three purported class action lawsuits in the Court of Chancery
in the State of Delaware against us and the members of the board of directors
and specified officers of us and Asset Investors. These lawsuits alleged that
the defendants breached their fiduciary duties to our stockholders in connection
with our proposed merger with Asset Investors on the terms then proposed and our
recent reincorporation from Maryland to Delaware. In October 1999, the
plaintiffs filed an amended complaint. In November 1999, the Court of Chancery
approved consolidation of these lawsuits as a single lawsuit.
- 12 -
<PAGE>
In March 2000, the parties entered into a settlement agreement. The settlement
agreement specified that we and Asset Investors would amend the merger agreement
in the following respects:
o our stockholders, other than Asset Investors and the officers and
directors of Asset Investors and Commercial Assets, may elect to
receive $5.75 per share in cash, subject to proration, for up to
3,549,868 shares of our common stock as opposed to .4075 shares of
Asset Investors common stock; and
o the percentage of votes of our common stock necessary to approve the
merger was increased from a simple majority to two-thirds.
The settlement agreement is subject to the approval of the Court of Chancery. If
approved by the Court of Chancery, the settlement agreement will release the
defendants from further liability relating to the merger.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of our stockholders during the fourth
quarter of 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock is listed on the AMEX under the symbol "CAX." The high and low
closing sales prices of the shares of common stock as reported in published
financial sources and certain dividend information for the periods indicated
were as follows:
Regular
Dividends
High Low Declared
---- --- --------
1999
First Quarter $ 6-1/16 $ 4-15/16 $ .13
Second Quarter 5-13/16 4-7/8 .13
Third Quarter 5-11/16 4-15/16 .13
Fourth Quarter 5-3/8 4-1/8 .13
1998
First Quarter $ 7 $ 6-7/16 $ --
Second Quarter 7 6-1/4 .13
Third Quarter 6-7/8 5-9/16 .13
Fourth Quarter 6-1/4 5-1/8 .13
As of March 17, 2000, 10,368,029 shares of common stock were issued and
outstanding and were held by 1,210 stockholders of record. We estimate there
were an additional 10,000 beneficial owners on that date whose shares were held
by banks, brokers or other nominees.
We, as a REIT, are required to distribute annually to stockholders at least 95%
of our "REIT taxable income," which, as defined by the Code and Treasury
regulations, is generally equivalent to net taxable ordinary income. We measure
our economic profitability and intend to pay regular dividends to our
stockholders based on FFO, less an annual capital replacement reserve of at
least $50 per developed homesite, during the relevant period. The future payment
of dividends, however, will be at the discretion of the Board of Directors and
will depend on numerous factors including, our financial condition, capital
- 13 -
<PAGE>
requirements, the annual distribution requirements under the provisions of the
Code applicable to REITs and such other factors as the Board of Directors deems
relevant.
On April 20, 1999, 28,500 shares of common stock were issued to non-executive
directors in lieu of annual director fees as a private placement of our
securities. The $5-1/16 per share value was equal to the closing stock price on
April 20, 1999.
Item 6. Selected Financial Data.
Our selected financial data, set forth below, has been derived from and should
be read in conjunction with our audited consolidated financial statements
including their notes. Financial data as of December 31, 1999 and 1998 and for
each of the three years in the period ended December 31, 1999, is included
elsewhere in this report on Form 10-K.
Balance Sheet and Operating Data (in thousands, except per share data):
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Real estate, before accumulated depreciation $ 65,602 $ 12,678 $ -- $ -- $ --
Investments in participating mortgages and joint
ventures 4,080 10,608 -- -- --
Cash equivalents and short-term investments 17,166 48,358 74,153 8,277 598
Investment in Asset Investors 1,396 -- -- -- --
Investment in and note receivable from Westrec 3,563 4,011 1,710 -- --
CMBS bonds 1,753 1,739 1,981 61,460 69,503
Total assets 97,083 78,234 78,148 72,406 71,590
Secured long-term notes payable 20,442 -- -- -- --
Minority interest in subsidiaries 615 -- -- -- --
Total stockholders' equity 74,081 77,254 77,705 71,919 70,465
Year Ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- ---------- ---------- ---------- ----------
RENTAL PROPERTY OPERATIONS:
Rental and other property revenues $ 2,538 $ -- $ -- $ -- $ --
Income from participating mortgages and leases 1,971 587 -- -- --
Property operating expenses (1,114) -- -- -- --
Depreciation (1,279) (50) -- -- --
--------- ---------- ---------- ---------- ----------
Income from rental property operations 2,116 537 -- -- --
--------- ---------- ---------- ---------- ----------
Interest and other income 1,913 3,874 945 319 189
CMBS bonds revenues 154 161 9,172 9,838 8,980
General and administrative expenses (519) (420) (519) (1,771) (1,393)
Management fees (770) (211) (1,678) (1,425) (1,151)
Interest expense (273) -- -- (2) (249)
Gain on sale of bonds -- -- 5,786 -- --
Net income 2,524 3,441 13,706 6,959 6,376
Per share amounts:
Basic and diluted earnings $ .24 $ .33 $ 1.32 $ .68 $ .63
Regular dividends $ .52 $ .39 $ .68 $ .68 $ .68
Special dividends $ -- $ -- $ .26 $ .04 $ --
Capital gain dividends $ -- $ -- $ .17 $ -- $ --
- 14 -
<PAGE>
Year Ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- ---------- ---------- ---------- ----------
Weighted average common shares outstanding 10,342 10,357 10,332 10,247 10,104
Weighted average common shares and common share
equivalents outstanding 10,342 10,372 10,371 10,254 10,108
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The following discussion and analysis of consolidated results of operations and
financial condition should be read in conjunction with our consolidated
financial statements included elsewhere in this report. In 1997, we decided to
change our business from the ownership of high-risk CMBS bonds to the ownership
of real estate. In November 1997, we resecuritized our portfolio of CMBS bonds
and had substantially ceased to be in this business. We temporarily invested the
proceeds from the resecuritization in money market and other short-term
investments while we decided which real estate asset class we would redeploy our
capital into. This decision helped us to avoid the volatility incurred by other
owners of CMBS bonds following the capital market crisis in the third quarter of
1998. Since August 1998, we have been focused on the investment of our capital
in the acquisition of manufactured home communities. Through December 31, 1999,
we have invested approximately $70 million in manufactured home communities
(including participating mortgages and real estate joint ventures) but have not
yet redeployed all of our capital into this asset class. Since our capital has
not yet been entirely invested into this new business, our financial
performance, and consequently our stock price, has been adversely affected
during this period. We believe that the investment of our capital will be
substantially completed during 2000, and we are hopeful that this will result in
improved performance.
Results of 1999 are not comparable to 1998 because our 1998 operations were
primarily the result of investments in money market accounts and other
short-term investments. During 1999, we had more investments in manufactured
home communities. Results of 1998 are not comparable to 1997 results because
during 1997, we were in the business of investing in CMBS bonds.
Inflation
We do not believe that changes in inflation rates would have a material adverse
effect on our business. In fact, we believe that inflation may positively impact
our business, in light of the fact that manufactured home communities represent
a more affordable housing choice for many people than other alternatives
available, increased inflation rates may allow us to demand increased rents
without losing tenants.
Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998
Rental Property Operations
Income from rental property operations totaled $2,116,000 for 1999 as compared
to $537,000 for 1998. Our first investment in manufactured home communities was
in August 1998. As of December 31, 1999, we had invested approximately $70
million in 12 communities (including participating mortgages and real estate
joint ventures).
- 15 -
<PAGE>
Interest and Other Income
Interest and other income was $1,913,000 in 1999 and $3,874,000 in 1998. The
$1,961,000 decrease is due to a reduction in cash and short-term investments as
a result of investments in manufactured home communities beginning in August
1998. The average interest rate earned on our cash and short-term investments
was 5.1% in 1999 and 5.4% in 1998.
Interest Expense
Interest expense was $273,000 during 1999 due to long-term notes payable secured
by our communities. We had no interest expense during 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 $519,000 in 1999 and $420,000 in
1998. The $99,000 increase was primarily due to increased costs related to
shareholder relations and due diligence costs on potential acquisitions that
were not completed.
Related-Party Management Fees
Management fees paid to Asset Investors were $565,000 in 1999 and $87,000 in
1998. The $478,000 increase in management fees is primarily due to our
investments in manufactured home communities since August 1998. Management fees
are not paid on cash and short-term investments, which is what we primarily held
during 1998.
CMBS Bonds
Income from CMBS bonds during 1999 was $154,000 and is comparable to 1998. This
income is from our retained residual interest in two CMBS bonds.
Related-Party Acquisition Fees
We expensed real estate acquisition fees paid to Asset Investors of $205,000 in
1999 and $124,000 in 1998. The change in fees is a result of the amount we
invested in manufactured home communities during these years. These fees would
be capitalized if they had been paid to an unrelated third party. Because they
are paid to Asset Investors, an affiliate, these fees are expensed under
generally accepted accounting principles.
Reincorporation Costs
In 1999, we reincorporated in Delaware from Maryland. We incurred $120,000 of
nonrecurring costs in connection with the reincorporation.
Costs Related to Abandonment of Potential Marina Investments
During the third quarter of 1998, we decided that we would no longer seek to
acquire interests in marinas and recorded a $500,000 nonrecurring expense
related to the abandonment of potential marina investments.
- 16 -
<PAGE>
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997
Rental Property
During 1998, income from rental properties totaled $537,000, arising from our
initial investments in manufactured home communities.
Interest and Other Income
Interest and other income during 1998 was $3,874,000 compared to $945,000 for
1997. The $2,929,000 increase is due to our temporary investment of the $77.7
million of cash proceeds received in November 1997 from the resecuritization of
our CMBS bonds. The average interest rates earned on these short-term
investments was 5.4% during 1998 and 1997.
CMBS Bonds
Income from CMBS bonds was $161,000 during 1998 compared to $9,172,000 for 1997.
The 1998 amount represents the income from our retained residual interest in two
CMBS bonds. All other income from the CMBS bonds ceased after the sale of the
CMBS bonds in November 1997.
General and Administrative Expenses
Our general and administrative expenses were $420,000 in 1998 compared to
$519,000 in 1997. General and administrative expenses decreased by $99,000 in
1998 compared to 1997 primarily due to lower accounting and other expenses
related to the ownership of CMBS bonds.
Management Fees
During 1998, we incurred base fees of $87,000 on investments in manufactured
home communities, the retained residual interest from the CMBS bond
resecuritization and the investment in Westrec Marina Management, Inc. We
incurred no incentive fees or administrative fees in 1998. During 1997, we
incurred management fees of $1,678,000, consisting of base fees of $598,000,
incentive fees of $1,024,000 and administrative fees of $56,000. We experienced
a large decrease in management fees during 1998 because we do not pay these fees
on cash and short-term investments.
Acquisition Fees
During 1998, we incurred acquisition fees of $124,000 as a result of our
investments in manufactured home communities. During 1997, we 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.
The 1998 acquisition fees were expensed because our manager was Asset Investors,
owner of 27% of our common stock. If these fees had been paid to an unrelated
third party, then the fees would have been capitalized under generally accepted
accounting principles.
Costs Related to Abandonment of Potential Marina Investments
During the third quarter of 1998, we decided that we would no longer seek to
acquire interests in marinas, and we expensed $500,000 of costs related to
previously considered marina investments.
- 17 -
<PAGE>
Dividend Distributions
During 1999, 1998 and 1997, we declared regular dividends of $.52, $.39 and $.68
per share, respectively. In addition, we declared special dividends of $.26 per
share and a capital gains dividend of $.17 per share in 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, we had cash and cash equivalents of $4,664,000 and
short-term investments of $12,502,000. 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.
In 1999, the net cash provided by operating activities was $2,671,000 compared
to $4,182,000 during 1998. The $1,511,000 decrease was primarily a result of an
increase in other assets. The primary increases in other assets were (i)
$750,000 in deferred financing costs, (ii) $360,000 in refundable deposits on
potential manufactured home community acquisitions, and (iii) $360,000 in
deferred merger costs.
Net cash used in investing activities was $7,209,000 during 1999 compared to
$71,001,000 in 1998. The net cash used in 1999 was primarily due to acquisitions
of manufactured home communities, net of sales of short-term investments used to
fund such acquisitions. The funds used in 1998 were primarily for the purchase
of short-term investments.
Net cash provided by financing activities was $5,910,000 during 1999 and was
primarily due to approximately $12,100,000 in net proceeds from long-term
borrowings less (i) dividends paid of $5,400,000 and (ii) treasury stock
purchases of $441,000. Net cash used in financing activities during 1998 was
$4,042,000 and was the payment of dividends.
We had long-term debt of $20,442,000 and no short-term debt at December 31,
1999. All of our debt was fixed rate and the weighted average interest rate was
7.5% at December 31, 1999. Debt encumbered 55% of our real estate and 36% of our
total assets at December 31, 1999. Our secured long-term notes payable had a
weighted average maturity of 9.5 years at December 31, 1999.
We expect to meet our long-term liquidity requirements in excess of 12 months
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 the
presentation of FFO, when considered with the financial data determined in
accordance with generally accepted accounting principles, provides a useful
measure of our performance. However, FFO does not represent cash flow and is not
necessarily indicative of cash flow or liquidity available to us, nor should it
be considered as an alternative to net income as an indicator of operating
performance. 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 beginning with the NAREIT definition and include
adjustments for:
- 18 -
<PAGE>
o property acquisition fees that were expensed under generally accepted
accounting principles because the fees were paid to Asset Investors, an
affiliate; and
o nonrecurring costs related to the abandonment of potential marina
investments.
We believe that the presentation of FFO provides investors with measurements
which help facilitate an understanding of our ability to make required dividend
payments, capital expenditures and principal payments on our debt. Since FFO
excludes unusual and nonrecurring expenses as well as depreciation and other
real estate related expenses, FFO may be materially different from net income.
Therefore, FFO should not be considered as 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 operating performance or
liquidity.
FFO is not necessarily indicative of cash available to fund our cash needs,
including our ability to make distributions. We use FFO in measuring our
operating performance because we believe that the items that result in a
difference between FFO and net income do not impact the ongoing operating
performance of a real estate company. Also, we believe that other real estate
companies, analysts and investors utilize FFO in analyzing the results of real
estate companies. Our basis of computing FFO is not necessarily comparable with
that of other REITs.
For 1999, 1998 and 1997, our FFO was as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income $ 2,524 $ 3,441 $ 13,706
Real estate depreciation 1,279 50 --
Real estate acquisition fees 205 124 --
Gain on sale of bonds -- -- (5,786)
Costs related to abandonment of potential marina investments -- 500 --
Equity in Asset Investors' FFO adjustments 73 -- --
--------- --------- ---------
Funds From Operations (FFO) $ 4,081 $ 4,115 $ 7,920
========= ========= =========
Weighted average common shares outstanding 10,342 10,357 10,332
========= ========= =========
</TABLE>
For 1999, 1998 and 1997, our net cash flows were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Cash provided by operating activities $ 2,671 $ 4,182 $ 4,428
Cash provided by (used in) investing activities (7,209) (71,001) 72,892
Cash provided by (used in) financing activities 5,910 (4,042) (11,444)
</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"
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 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
- 19 -
<PAGE>
without any material interruption or material effect on our business, results of
operations or financial condition. We have not experienced any Year 2000
problems through March 17, 2000.
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 have received oral representations
from our third party vendors indicating that they are substantially Year 2000
compliant. We have not experienced any Year 2000 problems through March 17,
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 7A. Quantitative and Qualitative Disclosures About Market Risk
Our principal exposure to market risk is through our short-term investments and
our various debt instruments and borrowings. The following is a list of these
short-term investments, debt instruments and borrowing arrangements.
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 or "LIBOR". Accordingly, changes in interest rates could
affect the returns from such investments. If LIBOR decreased immediately by 1%,
our annual net income and cash flows would decrease by $125,000, based on the
amount of short-term investments at December 31, 1999. Because we intend to
redeploy our short-term investments by acquiring manufactured home communities
during 2000, however, our primary objective with respect to our short-term
investments is to minimize the risk that the principal amount of these
investments could decrease. Therefore, we have short-term investments whose
principal amount is expected to be less affected by changes in interest rates
than other potential investments. The timing and amount of such investments will
depend on a number of factors. See "Item 2. - Business - Growth and Operating
Strategies - Future Acquisitions."
We have $12.8 million of fixed rate, non-recourse, secured long-term notes
payable that mature in 2019. We do not have significant exposure to changing
interest rates on these notes as the rates are fixed and the notes are fully
amortizing.
We have a $2.9 million fixed-rate, non-recourse, partially amortizing, secured
long-term note payable that matures in 2007. We do not have significant exposure
to changing interest rates on this note as the rate is fixed and the balance due
at maturity is $2.6 million.
We have a $4.7 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.
- 20 -
<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.
Item 8. Financial Statements and Supplementary Data.
The report of independent auditors, consolidated financial statements and
schedules listed in the accompanying index are filed as part of this report and
incorporated herein by reference. See "Index to Financial Statements" on page
F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
We have had no changes in nor any disagreements with our accountants relating to
accounting or financial disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information with respect to our directors and executive officers appears below
and was furnished in part by each such person. Each of our executive officers
serves for a term of one year and until his or her successor is elected and
qualified or until his or her earlier resignation or removal by the Board of
Directors. There are no family relationships among any of our directors and
executive officers.
<TABLE>
<CAPTION>
Name Age First Elected Position(s) Held with the Company
--- ------------- ---------------------------------
<S> <C> <C> <C>
Terry Considine 52 September 1996 Chairman of the Board of Directors (Class III) and Chief
Executive Officer
Thomas L. Rhodes 60 September 1996 Vice Chairman of the Board of Directors (Class I)
Bruce E. Moore 57 October 1998 Director (Class III), President and Chief Operating Officer
Raymond T. Baker 48 August 1993 Independent Director (Class I) and Member of the Audit and
Compensation Committees
Bruce D. Benson 61 September 1996 Director (Class II) and Member of the Compensation Committee
Thomas C. Fries 55 December 1996 Independent Director (Class I) and Member of the Audit and
Compensation Committees
Donald L. Kortz 59 August 1993 Independent Director (Class II) and Member of the Audit and
Compensation Committees
Robert J. Malone 55 August 1993 Independent Director (Class II) and Member of the Audit and
Compensation Committees
David M. Becker 40 December 1997 Chief Financial Officer, Secretary and Treasurer
</TABLE>
Terry Considine has been our Chairman of the Board of Directors and Chief
Executive Officer since April 1998. From September 1996 to April 1998 Mr.
Considine served as Co-Chairman of the Board of Directors and Co-Chief Executive
Officer. He is the sole owner of Considine Investment Co. Since July 1994, Mr.
Considine has also been the Chairman of the Board of Directors and Chief
Executive Officer of Apartment Investment and Management Company ("AIMCO").
Thomas L. Rhodes has been our Vice Chairman of the Board of Directors of the
Company and Asset Investors since April 1998. From September 1996 to April 1998,
Mr. Rhodes served as Co-Chairman of the Board of Directors and Co-Chief
- 21 -
<PAGE>
Executive Officer of the Company and Asset Investors. Mr. Rhodes has also been a
Director of AIMCO since July 1994. Mr. Rhodes has served as the President and a
Director of National Review magazine since 1992. From 1976 to 1992, he held
various positions at Goldman, Sachs & Co. and was elected a General Partner in
1986. He currently serves as a Director of Delphi Financial Group, Inc. and its
subsidiaries, Delphi International, Ltd., Oracle Reinsurance and The Lynde and
Harry Bradley Foundation. Mr. Rhodes is Trustee of The Heritage Foundation.
Bruce E. Moore was appointed our President and Chief Operating Officer in
October 1998 and has been a Director since January 1999. Mr. Moore has been the
Chief Operating Officer, President and a Director of Asset Investors since
February 1998. Mr. Moore is the founder and was the Chief Executive Officer of
Brandywine Financial Services Corporation and its affiliates ("Brandywine"), a
private real estate firm specializing in various aspects of the real estate
industry, including asset management, consulting, development, property
management, brokerage and capital formation. He is a certified public
accountant, holds a Masters in Accounting and a Bachelor of Science in Economics
from the Wharton School of the University of Pennsylvania. Mr. Moore is a
director and past president of the Media Youth Center, and a past advisory-board
member for the Department of Recreation and Intercollegiate Athletics for the
University of Pennsylvania. In addition, Moore is a member of the National
Association of Real Estate Investment Trusts and the International Council of
Shopping Centers.
David M. Becker has functioned as our Chief Financial Officer, Treasurer and
Secretary since December 1997 and was appointed to such position in April 1998.
From September 1995 until joining the Company, he was both the Chief Financial
Officer of Westfield Development Company, Inc. and Vice President-Finance of The
Frederick Ross Co., related companies involved in commercial real estate
development, brokerage and management. Prior to September 1995, he held various
executive positions with CONCORD Services, Inc., a privately-held company
involved in multiple businesses, including trading, manufacturing and finance.
CONCORD Services, Inc. declared bankruptcy in February 1995. In addition, Mr.
Becker was Chief Financial Officer and General Counsel of Ramtron International
Corporation, a publicly-held semiconductor manufacturer, from October 1989 until
July 1994. Mr. Becker is an attorney and certified public accountant. He
received a B.A. from the University of Northern Iowa and a J.D. from the
University of Denver.
Raymond T. Baker has served as a Director of the Company, as a member of its
compensation committee and as Chairman of its audit committee since the Company
was organized in 1993. He served as a Director of Asset Investors from December
1991 until August 1993. He has been a partner of Gold Crown Management Co., a
Denver-based property management company, since 1974. Mr. Baker was a member of
the Colorado Economic Development Commission Advisory Board, was a member and
Chairman of the Colorado Economic Development Commission, is Chairman of the
Metropolitan Football Stadium District, is a member and Chairman of the Denver
Metropolitan Major League Baseball District and is a director of Alpine Bank. He
serves as Chairman and member of the Denver Zoological Board and Chairman and
member of the Gold Crown Youth Foundation.
Bruce D. Benson has served as Director of the Company and Asset Investors since
October 1996 and previously served as a Director of Asset Investors from
February 1992 through February 1994. In February 1998, Mr. Benson became a
member of the Company's compensation committee. For the past 32 years, he has
been President and owner of Benson Mineral Group, Inc., a domestic oil and gas
production company located in Denver, Colorado. He is also Chairman, Chief
Executive Officer and President of United States Exploration, Inc., an oil and
gas exploration company listed on the American Stock Exchange. He serves on
numerous Boards of Trustees and Boards of Directors, including Chairman, Denver
Zoological Foundation; Past Chairman and Past President, Boy Scouts of America,
Denver Area Council; Trustee and Past President of the Board of Trustees,
Berkshire School, Sheffield, Massachusetts; Past Trustee, Smith College,
Northampton, Massachusetts; Past Chairman, Colorado Commission on Higher
- 22 -
<PAGE>
Education; and past member, Board of Directors, University of Colorado
Foundation; and Chairman of the Total Learning Environmental Capital Campaign of
the University of Colorado. In 1994, he was the Republican nominee for the
Governor of Colorado.
Thomas C. Fries has served as a Director of the Company and a member of its
audit and compensation committees since December 1996. Since 1986, Mr. Fries has
been the President and Owner of CP Company, a regional distributor and lessor of
refrigeration equipment located in Denver, Colorado. From 1980 to 1995, Mr.
Fries served as President and Owner of Cummins Power, Inc., the Rocky Mountain
area distributor for Cummins Engine Company, Inc. He has served as Board
Chairman of Colorado Outward Bound School and Junior Achievement. He is a Board
member of Mountain States Employers Council, Colorado Outward Bound School and
the Denver Museum of Natural History, and he is a member of the American Alpine
Club.
Donald L. Kortz has served as a Director of the Company and a member of its
audit and compensation committees since its organization in 1993. He served as a
Director of Asset Investors from June 1988 until August 1993. Mr. Kortz served
as President and Chief Executive Officer of Fuller & Company, a Denver-based
commercial real estate broker, from April 1987 until October 1995, when he was
appointed President and Chief Executive Officer of Rose Community Foundation.
Mr. Kortz returned to Fuller & Company as the Chairman of its Board of Directors
in January 1999. Previously, Mr. Kortz served as Chairman of the Board of
Trustees of the Rose Health Care Systems, the holding company of Rose Medical
Center, Denver, Colorado and as a member of the Denver Board of Water
Commissioners. Mr. Kortz also is a member of the Society of Fellows of the
University of Denver and is a member of local, state and federal bar
associations and realtors associations and is a member of Key Bank, N.A.,
District of Colorado, Advisory Board.
Robert J. Malone has served as a Director of the Company and a member of the
audit and compensation committees since the Company was organized in 1993. He
served as a Director of Asset Investors from February 1992 until August 1993.
Mr. Malone is Chairman of US Bank (formerly Colorado National Bank, Denver,
Colorado). From 1969 to 1993, Mr. Malone served in various capacities, including
chief executive and senior executive capacities, with Central Banks/Bank
Western, Western Capital Investment Corporation, First Interstate Bank of
Denver, First Interstate Bank of Idaho and Bank of America, Los Angeles,
California. He also serves on the boards of numerous civic and charitable
organizations including Chairman of the Board of Directors of Colorado's Ocean
Journey, past Trustee and member of the Executive Committee of the Denver Art
Museum, Director of Colorado UpLIFT and Trustee and Chairman of the Nominating
Committee of the Denver Zoological Foundation.
Compliance With Section 16(a) of the Exchange Act
Our executive officers and directors, and persons who own more than 10% of the
Company's common stock, are required under the Securities Exchange Act of 1934
to file reports of ownership and changes in ownership of securities of the
Company with the Securities and Exchange Commission and the American Stock
Exchange, Inc. Copies of those reports also must be furnished to us. Based
solely upon a review of the copies of reports furnished to us, we believe that
for the year ended December 31, 1999, all filing requirements were timely met by
our executive officers, directors and beneficial owners of more than ten percent
of our stock.
Executive Compensation
In the year ended December 31, 1999, none of Messrs. Considine, Rhodes, Moore or
Becker received any compensation in his capacity as Chief Executive Officer,
Vice Chairman, President and Chief Operating Officer, or Chief Financial
Officer, Secretary and Treasurer.
- 23 -
<PAGE>
Through the end of 1999, none of Messrs. Considine, Rhodes, Moore or Becker had
at any time been granted options to acquire shares of our common stock. Messrs.
Considine and Rhodes are each a stockholder of the Company and Asset Investors.
Messrs. Moore and Becker are each a stockholder of Asset Investors but neither
is a stockholder of the Company.
Director Compensation
During 1999, each of our non-employee directors received 5,700 shares of our
common stock, plus $300 for each meeting of the Board of Directors or committee
thereof attended. The closing stock price on the date these shares were issued
was $5-1/16. In addition, all directors are reimbursed for expenses related to
attending Board of Directors and committee meetings.
Under the existing 1998 Stock Incentive Plan, all of our non-employee directors
received an automatic grant of options to acquire 7,500 shares of the Company's
common stock with an exercise price equal to the closing price of the Company's
common stock on the date of the 1999 annual stockholders meeting. Such options
were immediately exercisable and have a term of ten years.
Under the 1998 Stock Incentive Plan, all of our non-employee directors
automatically receive annual grants of market-price options to acquire 7,500
shares of the Company's common stock on the date of each annual stockholders
meeting. These options will be immediately exercisable upon grant and have a
term of ten years.
Compensation Committee Interlocks and Insider Participation
During 1999, Mr. Considine served as Chief Executive Officer and Chairman of the
Board of the Company and Asset Investors and Mr. Rhodes served as Vice Chairman
of the Board of the Company and Asset Investors. Mr. Considine is Chairman of
the Board and Chief Executive Officer of Apartment Investment and Management
Company ("AIMCO"), and Mr. Rhodes serves on the compensation committee of AIMCO.
Mr. Benson served as a director of the Company and Asset Investors during 1999.
Mr. Moore served as President, Chief Operating Officer and a director of the
Company and Asset Investors during 1999.
Item 11. Executive Compensation.
We do not pay a salary, bonus or any other compensation to our executive
officers because Asset Investors, as our manager, provides all personnel
necessary to conduct our regular business at Asset Investors' expense. We have
the same executive officers as Asset Investors. We pay various fees to Asset
Investors for the services performed by Asset Investors under our management
agreement. All salaries, bonuses and other compensation received by our
executive officers is paid by Asset Investors and it has not allocated any
portion of the compensation paid by it to these executive officers specifically
for their services to us. The following is a description of our management
agreement with Asset Investors.
The Management Agreement. We entered into a management agreement (the
"Management Agreement") with predecessors of Financial Asset Management LLC
("FAM") on August 20, 1993, under which FAM performed the services and
activities described below, among others, relating to our assets and operations
through November 1997. In September 1996, an investor group led by Messrs.
Considine, Rhodes and Benson acquired FAM. In November 1997, Asset Investors
acquired the assets of FAM, including the Management Agreement, and became our
manager. Mr. Considine is the Chairman of the Board of Directors and Chief
Executive Officer of both Asset Investors and the Company, Mr. Rhodes is the
Vice Chairman of the Board of Directors of both Asset Investors and the Company,
- 24 -
<PAGE>
and Mr. Benson is a director for both companies. The Management Agreement
provided for an initial term of one year, subject to extension by agreement
between us and Asset Investors. The Management Agreement has been extended
through December 31, 2000 provided, however, if the proposed merger between us
and Asset Investors occurs then the Management Agreement will automatically
terminate.
Asset Investors, as our manager, advises us on our business and oversees our
day-to-day operations, subject to the supervision of our Board of Directors.
Asset Investors also is obligated to present to us asset acquisition
opportunities consistent with our policies and objectives and to furnish our
Board of Directors with information concerning the acquisition, holding and
disposition of our assets.
The Management Agreement is approved annually by our Independent Directors. It
may be terminated by either party with or without cause at any time upon 60
days' written notice. In addition, we have the right to terminate the Management
Agreement upon the occurrence of certain specified events including, among other
things, a breach by Asset Investors of any material provision which breach
remains uncured for 30 days or the bankruptcy of Asset Investors. The Management
Agreement also may be terminated at any time by a majority vote of our
Independent Directors or holders of our common stock (excluding shares held by
Asset Investors). Asset Investors is entitled to certain termination payments in
the event of an acquisition of us which results in the termination of the
Management Agreement. These payments do not apply if we merge with Asset
Investors.
Asset Investors receives various fees for the advisory and other services
performed in connection with the Management Agreement. Asset Investors, at its
expense, provides all personnel and certain overhead items necessary to conduct
our regular business.
We have agreed to indemnify Asset Investors 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 Asset Investors made in good faith and
in accordance with the standards set forth in the Management Agreement.
Under the Management Agreement, Asset Investors may receive a base fee, an
acquisition fee, an incentive fee, and an administrative fee. The base fee,
payable quarterly, is 1% of our average real estate-related invested assets for
such year. We paid base fees totaling $565,000 in 1999 and $87,000 in 1998.
The acquisition fee equals 1% of the acquisition cost of each real estate asset
which Asset Investors assists us in acquiring. The purpose of the acquisition
fee is to reimburse Asset Investors for its employee costs related to the due
diligence procedures it performs in connection with our acquisition of real
estate assets. We paid acquisition fees totaling $205,000 in 1999 and $124,000
in 1998.
The incentive fee is based on our profitability. Asset Investors is entitled to
the incentive fee only after our Funds from Operations (or FFO), less a capital
replacement reserve of at least $50 per developed homesite, exceeds a return on
our "Average Net Worth" equal to the "Ten-Year U.S. Treasury Rate" plus 1%. For
1999, 20% of the amount by which our FFO, less a capital replacement reserve of
$50 per developed homesite, exceeds the above described return on our Average
Net Worth is paid to Asset Investors as the incentive fee. The base fee and the
incentive fee are subject to reduction in the event that our expenses exceed
certain amounts. We paid no incentive fees in 1999.
Asset Investors also may perform certain bond administration and other related
services for us under the Management Agreement and receives an administrative
fee for such services in relation to the complexity of the transaction and the
services required. We paid no administrative fees in 1999.
- 25 -
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The table below sets forth, as of March 17, 2000, the number of shares of our
common stock beneficially owned by (1) each person known by us to be a
beneficial owner of more than 5% of the our common stock; (2) all directors,
individually, and each executive officer that holds our common stock,
individually; and (3) all of our directors and executive officers as a group,
which information was furnished in part by each such person.
<TABLE>
<CAPTION>
Amount and
Nature of Beneficial Percent of
Name of Beneficial Owner (1) Ownership(2) Class (3)
- ---------------------------- ------------ ---------
<S> <C> <C>
Asset Investors Operating Partnership, L.P. 2,761,126 26.6%
Terry Considine(4) 161,815 1.6%
Thomas L. Rhodes(5) 72,148 *
Bruce E. Moore 0 *
Raymond T. Baker(6) 100,418 1.0%
Bruce D. Benson(7) 133,186 1.3%
Thomas C. Fries(8) 103,716 1.0%
Donald L. Kortz(6) 99,316 1.0%
Robert J. Malone(6) 91,982 *
All directors and executive officers as a group (9 persons) 762,581 7.2%
- -----------------------
<FN>
* Denotes ownership of less than 1% of the outstanding shares of our
common stock.
(1) Unless otherwise indicated, the address for each stockholder is 3410
South Galena Street, Suite 210, Denver, Colorado 80231.
(2) Includes, where applicable, shares of our common stock owned by such
person's minor children and spouse and by other related individuals and
entities. Unless otherwise indicated, such person has sole voting and
investment power as to the shares listed.
(3) All shares of our common stock which a person had the right to acquire
within 60 days after March 17, 2000 were deemed to be outstanding for
the purpose of computing the "Percent of Class" owned by such person
but were not deemed to be outstanding for the purpose of computing the
"Percent of Class" owned by any other person. On March 17, 2000,
10,368,029 shares of our common stock were outstanding.
(4) Includes 107,571 shares of our common stock held by Titahotwo Limited
Partnership, in which Mr. Considine serves as general partner, and
28,244 options exercisable within 60 days which are held by Titahotwo.
(5) Includes 10,950 options exercisable within 60 days.
(6) Includes 37,500 options exercisable within 60 days.
(7) Includes 68,306 options exercisable within 60 days.
(8) Includes 47,500 options exercisable within 60 days.
</FN>
</TABLE>
Item 13. Certain Relationships and Related Transactions.
Transactions involving Asset Investors. The Company was formed in August 1993 as
a wholly owned subsidiary of Asset Investors. In October 1993, Asset Investors
distributed approximately 70% of our outstanding shares of common stock to the
stockholders of Asset Investors (the "Distribution"). At the time of the
Distribution, our shares were approved for listing on the American Stock
Exchange, Inc. and, thereafter, we commenced operations. As reflected in the
table under "Security Ownership of Certain Beneficial Owners and Management,"
Asset Investors currently owns approximately 27% of the Company's common stock.
Messrs. Considine, Rhodes and Moore and our officers are directors and officers
of Asset Investors, respectively. In addition, Mr. Benson is a director of the
Company and Asset Investors. Our day-to-day operations are performed by Asset
Investors. See "The Management Agreement" above.
- 26 -
<PAGE>
In connection with our formation, Asset Investors and the Company entered into a
Contribution Agreement under which, among other things, Asset Investors
contributed approximately $75 million to our capital. Each party agreed to
indemnify the other against certain liabilities and obligations.
We have determined that Asset Investors' ownership of our common stock does not
jeopardize our qualification as a REIT, and have exempted Asset Investors from
any restrictions on ownership of our common stock which may be adopted by us,
unless there is a change in law or regulation that causes Asset Investors'
ownership of our common stock to jeopardize our status as a REIT. If such a
change in law or regulation should occur, we may adopt such provisions as are
necessary to maintain our status as a REIT, provided that such provisions, and
the enforcement of such provisions, shall be in such a manner as to cause the
least interference with Asset Investors' ownership of our securities and shall
provide for the payment to Asset Investors of an amount at least equal to: (1)
the closing price of our common stock on the last business day prior to the
redemption date on the principal national securities exchange on which our
common stock is listed or admitted to trading; or (2) if not so listed or
admitted to trading, the closing bid price on such last business day as reported
on the NASDAQ System, if quoted thereon; or (3) if not otherwise determinable,
the net asset value of our common stock redeemed, as determined in good faith by
our Board of Directors for any such securities to be redeemed. Notwithstanding
the foregoing, in no event may the redemption price of our common stock be
greater than the net asset value of our common stock redeemed, as determined in
good faith by our Board of Directors.
Transactions involving Asset Investors and Mr. Moore. Property management and
accounting for our communities is performed by AIC Community Management
Partnership ("AICCMP"). Asset Investors owns 50% of AICCMP and Mr. Moore,
President, Chief Operating Officer and a director of both the Company and Asset
Investors, indirectly owned 17.5% of AICCMP. During 1999, our communities paid
$172,000 in fees to AICCMP. Effective January 1, 2000, Asset Investors acquired
the 50% of AICCMP that it did not already own for $380,000.
Brandywine Homes Sales Corporation ("Homesales Corp.") provided real estate
brokerage services for both new home sales and existing home resales in our
communities and Asset Investors communities. Mr. Moore owned 50% of Homesales
Corp. and it received commissions from our communities, Asset Investors
communities or the homeowner depending on the circumstances. During 1999, our
communities paid $46,000 in commissions, Asset Investors communities paid
$45,000 in commissions and homeowners located in the communities paid $293,000
in commissions to Homesales Corp. Effective January 1, 1999, Asset Investors
acquired Homesales Corp.'s inventory of homes, its activities and personnel for
a total price of $657,000.
Brandywine Commercial Services, Inc. ("Services Corp.") provided maintenance
services to our communities and Asset Investors communities during 1999. Mr.
Moore owned 50% of Services Corp. Our communities paid $658,000 in fees and
Asset Investors communities paid $1,725,000 in fees during 1999 for maintenance
services provided by Services Corp. Effective January 1, 2000, Asset Investors
acquired the equipment and activities of Services Corp. for $30,000.
Transactions involving Mr. Rhodes. During 1999, Commercial Assets paid finder's
fees of $225,000 to Thomas L. Rhodes II, the adult son of the Vice Chairman of
Commercial Assets and Asset Investors. These fees were paid in connection with
our acquisition of manufactured home communities and represent 1% of the cost of
acquisition. Our management believes the finder's fees paid were consistent with
similar arrangements in the industry.
- 27 -
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) The financial statements listed in the Index to Financial Statements on
Page F-1 of this report are filed as part of this report.
(a)(2) The financial statement schedules listed in the Index to Financial
Statements on Page F-1 of this report are filed as part of this report.
All other schedules are omitted since they are not applicable, not
required, or the information required to be set forth therein is
included in the financial statements, or in notes thereto.
(a)(3) The Exhibit Index is included on page 29 of this report.
(b) Reports on Form 8-K for the quarter ended December 31, 1999:
No current reports on Form 8-K were filed by the Company during the
fourth quarter of 1999.
- 28 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
COMMERCIAL ASSETS, INC. Page
Financial Statements:
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998........... F-3
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997................................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997................................... F-5
Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998 and 1997............................................ F-6
Notes to Consolidated Financial Statements............................. F-7
Financial Statement Schedules:
Schedule III - Real Estate and Accumulated Depreciation................ F-20
Schedule IV - Mortgage Loans on Real Estate............................ F-22
F - 1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Commercial Assets, Inc.
We have audited the accompanying consolidated balance sheets of Commercial
Assets, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. Our audits also
included the consolidated financial statement schedules listed in the
accompanying index. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Commercial Assets, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ERNST & YOUNG LLP
Denver, Colorado
January 21, 2000, except for
Note O, as to which the date
is March 7, 2000
F - 2
<PAGE>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
ASSETS
<S> <C> <C>
Real estate, net of accumulated depreciation of $1,329 and $50 $ 64,273 $ 12,628
Investments in participating mortgages 2,148 9,328
Investment in real estate joint ventures 1,932 1,280
Short-term investments 12,502 45,066
Cash and cash equivalents 4,664 3,292
Investment in and note receivable from Westrec 3,563 4,011
Investment in Asset Investors 1,396 --
CMBS bonds 1,753 1,739
Other assets, net 4,852 890
---------- ----------
Total Assets $ 97,083 $ 78,234
========== ==========
LIABILITIES
Secured long-term notes payable $ 20,442 $ --
Accounts payable and accrued liabilities 1,747 872
Related-party management fees payable 198 108
---------- ----------
22,387 980
---------- ----------
COMMITMENTS AND CONTINGENCIES -- --
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 10,320 and 10,364 shares outstanding, respectively 104 104
Additional paid-in capital 77,018 76,874
Retained earnings (dividends in excess of accumulated earnings) (2,600) 276
Treasury stock, 73 and 0 shares at cost (441) --
---------- ----------
74,081 77,254
---------- ----------
Total Liabilities and Stockholders' Equity $ 97,083 $ 78,234
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F - 3
<PAGE>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Rental property operations
<S> <C> <C> <C>
Rental and other property revenues $ 2,538 $ -- $ --
Income from participating mortgages and leases 1,971 587 --
Property operating expenses (1,114) -- --
Depreciation (1,279) (50) --
--------- --------- --------
Income from rental property operations 2,116 537 --
--------- --------- --------
Interest and other income 1,913 3,874 945
CMBS bonds revenue 154 161 9,172
Equity in earnings of Asset Investors 23 -- --
General and administrative expenses (519) (420) (519)
Related-party management fees (565) (87) (1,678)
Interest expense (273) -- --
Related-party acquisition fees (205) (124) --
Reincorporation expenses (120) -- --
Costs related to abandonment of potential marina investments -- (500) --
Gain on sale of bonds -- -- 5,786
--------- --------- --------
Net income $ 2,524 $ 3,441 $ 13,706
========= ========= ========
Basic and diluted earnings per share $ .24 $ .33 $ 1.32
========= ========= ========
Weighted average common shares outstanding 10,342 10,357 10,332
Weighted average common shares and common share equivalents outstanding 10,342 10,372 10,371
Dividends paid per share:
Regular dividends $ .52 $ .39 $ .68
Special dividends -- -- .26
Capital gain dividends -- -- .17
--------- --------- --------
$ .52 $ .39 $ 1.11
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F - 4
<PAGE>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Retained
Earnings
(Dividends In Accumulated
Common Stock Additional Excess of Other Total
------------------------- Paid-In Accumulated Treasury Comprehensive Stockholders'
Shares Amount Capital Earnings) Stock Income Equity
---------- ----------- ----------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES - DECEMBER 31, 1996 10,316 $ 103 $ 76,559 $ (1,354) $ -- $(3,389) $ 71,919
Comprehensive Income
Net income -- -- -- 13,706 -- -- 13,706
Reversal of unrealized holding
losses upon restructuring of
bonds -- -- -- -- -- 3,389 3,389
------- ------ --------- -------- ------- ------- ---------
Comprehensive Income -- -- -- 13,706 -- 3,389 17,095
------- ------ --------- -------- ------- ------- ---------
Issuance of common stock 26 1 165 -- -- -- 166
Dividends -- -- -- (11,475) -- -- (11,475)
------- ------ --------- ------- ------- ------- ---------
BALANCES - DECEMBER 31, 1997 10,342 104 76,724 877 -- -- 77,705
Issuance of common stock 22 -- 150 -- -- -- 150
Net income -- -- -- 3,441 -- -- 3,441
Dividends -- -- -- (4,042) -- -- (4,042)
------- ------ --------- -------- ------- ------- ---------
BALANCES - DECEMBER 31, 1998 10,364 104 76,874 276 -- -- 77,254
Issuance of common stock 29 -- 144 -- -- -- 144
Purchase of treasury stock -- -- -- -- (441) -- (441)
Net income -- -- -- 2,524 -- -- 2,524
Dividends -- -- -- (5,400) -- -- (5,400)
------- ------ --------- -------- ------- ------- ---------
BALANCES - DECEMBER 31, 1999 10,393 $ 104 $ 77,018 $ (2,600) $ (441) $ -- $ 74,081
======= ====== ========= ======== ======= ======= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F - 5
<PAGE>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 2,524 $ 3,441 $ 13,706
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization 1,289 50 --
Amortization of premium on short-term investments 91 274 --
Amortization of discount on secured long-term notes payable 158 -- --
Amortization of discounts on CMBS bonds -- -- (2,381)
Accrued income on participating mortgages (418) (443) --
Accrued income on CMBS bonds (92) -- --
Equity in earnings of real estate joint ventures (9) -- --
Equity in earnings of Asset Investors (23) -- --
Gain on sale of bonds -- -- (5,786)
Increase in accounts payable and accrued liabilities 286 537 216
(Increase) decrease in other assets (1,135) 323 (1,327)
-------- -------- --------
Net cash provided by operating activities 2,671 4,182 4,428
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of real estate (34,292) (12,671) --
Purchases of Asset Investors' common stock (1,433) -- --
Collections on short-term investments 10,059 30,313 --
Notes receivable advances (1,339) (477) --
Proceeds from sale of short-term investments 22,411 16,085 --
Acquisitions of short-term investments -- (91,946) --
Investments in participating mortgages, net (1,380) (8,959) --
Investment in real estate joint ventures (648) (1,280) --
Capital replacements and improvements (1,178) (7) --
Investment in Westrec -- (2,301) --
Collections on note receivable from Westrec 448 -- --
Dividends from real estate joint ventures 5 -- --
Dividends from Asset Investors 60 -- --
Proceeds from sale of bonds -- -- 77,693
Acquisition of CMBS bonds -- -- (4,801)
Collections on CMBS bonds 78 242 --
-------- -------- --------
Net cash provided by (used in) investing activities (7,209) (71,001) 72,892
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from secured long-term notes payable 12,600 -- --
Dividends paid (5,400) (4,042) (11,475)
Payment of loan costs (541) -- --
Purchase of treasury stock (441) -- --
Principal paydowns on secured short-term financing (214) -- --
Principle paydowns on secured long-term notes payable (94) -- --
Proceeds from issuance of Common Stock -- -- 31
-------- -------- --------
Net cash provided by (used in) financing activities 5,910 (4,042) (11,444)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,372 (70,861) 65,876
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,292 74,153 8,277
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,664 $ 3,292 $ 74,153
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F - 6
<PAGE>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, the Company 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 resecuritized
its subordinate CMBS bond portfolio. This resulted in the Company receiving
$77,693,000 cash and retaining a residual interest in an owner trust arising
from the resecuritization. In the third quarter of 1998, the Company decided to
invest in manufactured home communities and as of December 31, 1999 has invested
approximately $70 million in 12 manufactured home communities (including
investments in participating mortgages and real estate joint ventures) with
1,840 developed homesites and 1,370 undeveloped homesites.
The Company's daily operations are performed by a manager pursuant to an
agreement currently in effect through December 2000 ("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. No change was made to the Management Agreement
during 1998. For 1999, the Incentive Fee was amended to provide that it is based
on Funds From Operations, less an annual capital replacement reserve of at least
$50 per developed homesite, instead of the Company's REIT income. In general,
FFO is net income plus depreciation, amortization and real estate acquisition
fees. The Management Agreement has been extended to December 31, 2000 with the
same terms as 1999 except that the Management Agreement will automatically
terminate if the Company merges with Asset Investors. 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, officers of Asset Investors are also
officers of the Company.
B. Proposed Merger with Asset Investors
The Company and Asset Investors have agreed to merge, subject to the approval by
both (a) a majority of Asset Investors' outstanding shares and (b) two-thirds of
the Company's outstanding shares. Asset Investors owns approximately 27% of the
Company's outstanding shares and has agreed to vote these shares in favor of the
merger. Asset Investors will issue 0.4075 shares of its common stock for each
outstanding share of the Company's Common Stock. Alternatively, the Company's
stockholders may elect to receive $5.75 per share in cash for up to 3,549,868
shares of the Company's Common Stock with any remaining shares receiving 0.4075
shares of Asset Investors common stock. Asset Investors and the officers and
directors of Asset Investors and the Company have agreed to elect to receive
shares of Asset Investors common stock for all shares of the Company's Common
Stock that they own. The stockholder meetings are expected to occur in the
second quarter of 2000.
F - 7
<PAGE>
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. The Company's investment in
Asset Investors is recorded under the equity method.
Real Estate and Depreciation
Rental properties are recorded at cost less accumulated depreciation, unless
considered impaired. If events or circumstances indicate that the carrying
amount of a property may be impaired, the Company will make an assessment of its
recoverability by estimating the future undiscounted cash flows, excluding
interest charges, of the property. If the carrying amount exceeds the aggregate
future cash flows, the Company would recognize an impairment loss to the extent
the carrying amount exceeds the fair value of the property. As of December 31,
1999, management believes that no impairment losses exist based on periodic
reviews. No impairment losses were recognized in 1999 or 1998.
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.
Investments in Participating Mortgages
The Company has loans secured by real estate which provide for an interest rate
return plus up to 50% of net profits, cash flows and sales proceeds from the
underlying real estate. The Company accounts for these investments as loans when
(a) the Company does not have an interest in the borrower and either (b) the
borrower has a substantial equity investment in the real estate collateral or
(c) the Company has recourse to other substantial tangible assets of the
borrower. As such, the Company records interest income based on the rate
provided for in the loan and records its share of any net profits or gains from
the sale of the underlying real estate when realized. If the above requirements
are not met, then the loan is accounted for as an equity investment in real
estate under the equity method of accounting.
Investments in Real Estate Joint Ventures
Investments in real estate joint ventures in which the Company does not control
the joint venture's activities are accounted for under the equity method of
accounting.
Investment in and Note Receivable from Westrec
The Company classifies its investment in and note receivable from Westrec as
available-for-sale and carries this at estimated fair value in the financial
statements. The Company believes that the contractual amounts provided for in
the note receivable and the agreement under which the Company can sell its
shares of Westrec common stock approximates fair value at December 31, 1999.
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 associated rental revenues are recognized when earned and
due from residents.
F - 8
<PAGE>
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 December 31, 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. These costs are
amortized over the terms of the related loan and are charged to interest
expense.
Capitalized Interest
Interest is capitalized on development projects during periods of construction
or development. During 1999, capitalized interest was $417,000. There was no
capitalized interest in 1998 or 1997.
CMBS Bonds
Earnings from CMBS bonds was comprised of coupon interest and the amortization
of the purchase discount. Amortization of the purchase discount was recognized
by the interest method using a constant effective yield and assumed an estimated
rate of future prepayments, defaults and credit losses which was adjusted for
actual experience. The allowance for credit losses was equal to the undiscounted
total of future estimated credit losses. In the event the Company adjusted the
estimate of future credit losses, such adjustments would be included in current
period earnings.
The Company classifies its CMBS bonds as available-for-sale. Accordingly, the
CMBS bonds are carried at fair value in the financial statements. Unrealized
holding gains and losses on available-for-sale securities are excluded from
earnings and reported as a net amount in stockholders' equity until realized. If
the fair value of a CMBS bond declines below its amortized cost basis and the
decline is considered to be "other than temporary," the amount of the write-down
would be included in the Company's income. The decline in fair value is
considered to be other than temporary if the cost basis exceeds the related
projected cash flow from the CMBS bond discounted at a risk-free rate of return.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments generally approximate
their carrying basis or amortized cost.
Income Taxes
The Company intends to operate in a manner that will permit it to qualify for
the income tax treatment accorded to a REIT. If it so qualifies, the Company's
net income, with certain limited exceptions, will not be subject to federal or
state income tax at the corporate level. Accordingly, no provision for taxes has
been made in the financial statements.
In order to maintain its status as a REIT, the Company is required, among other
things, to distribute annually to its stockholders at least 95% of its REIT
income and to meet certain asset, income and stock ownership tests.
Ninety percent of dividends paid in 1999 represented ordinary taxable income to
stockholders and 10% represented a return of capital for income tax purposes
(unaudited). Regular and special dividends paid in 1998 and 1997 represented
F - 9
<PAGE>
ordinary taxable income to the stockholders (unaudited). In addition, the
Company paid a capital gains dividend of $.17 per share in 1997 (unaudited).
Earnings Per Share
Basic earnings per share for 1999, 1998 and 1997 are based upon the
weighted-average number of shares of Common Stock outstanding during each such
year. Diluted earnings per share reflect the effect of dilutive, unexercised
stock options of 0, 15,000 and 39,000 in 1999, 1998 and 1997, respectively.
Stock options of 62,000, 43,000 and 28,000 for 1999, 1998 and 1997,
respectively, have been excluded from diluted earnings per share as their effect
would be anti-dilutive.
Treasury Stock
Treasury stock is recorded at cost. In addition, the Company purchased 114,000
shares of Asset Investors' common stock during 1999. Because Asset Investors
owns 27% of the Company's Common Stock, the Company is deemed to have an
interest in 48,000 shares of the Company's Common Stock and has also 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 are considered to be cash and cash
equivalents. The Company paid $565,000 in interest during 1999. The Company paid
no interest in 1998 or 1997.
Non-cash operating, investing and financing activities for 1999, 1998 and 1997
were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Accrued initial capital expenditures on real estate purchases $ 400 $ -- $ --
Issuance of Common Stock for services 144 150 135
Escrow of long-term debt proceeds 300 -- --
Acquisitions of real estate by:
Issuance of note payable 4,519 -- --
Assumption of debt and minority interest in subsidiaries 4,068 -- --
Cancellation of participating mortgages 8,978 -- --
Principal collections on CMBS bonds transferred to restricted cash -- -- 6,227
Unrealized holding gains and losses on CMBS bonds -- -- 3,389
</TABLE>
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States 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.
Reclassifications
Certain reclassifications have been made in the 1998 and 1997 consolidated
financial statements to conform to the classifications currently used. The
effect of such reclassifications on amounts previously reported is immaterial.
F - 10
<PAGE>
D. Short-term Investments
The Company has 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 December 31, 1999 approximates the carrying value
of $12,502,000. During 1999 and 1998, the Company had no unrealized gains
(losses) on these investments. The Company had $22,411,000 and $16,085,000 in
proceeds from the sale of short-term investments during 1999 and 1998,
respectively, and realized no gains (losses) from such sales. The Company
determined its basis in these sold investments using the specific identification
method. At December 31, 1999, these investments had the following maturities:
Amount Maturity
------------------- ---------------
$3,395,000 2000
$9,107,000 2003
E. Investments in Manufactured Home Communities
During 1999, the Company acquired eight manufactured home communities with
approximately 1,450 developed homesites and 500 undeveloped homesites. The
Company had participating mortgages on three of these communities in 1998. The
total investment was $52,257,000 consisting of $34,292,000 cash, $8,587,000 of
assumed debt, $8,978,000 by canceling participating mortgages and $400,000 of
estimated initial capital expenditures. During 1998, the Company paid
$12,671,000 to acquire two manufactured home communities with approximately 310
developed homesites and 790 undeveloped homesites. These investments are
recorded as real estate.
The Company made $8,959,000 of participating mortgages in 1998 involving three
manufactured home communities and adjacent land involving approximately 310
developed homesites and 210 undeveloped homesites. These non-recourse mortgages
were secured by the three manufactured home communities, adjacent land,
commercial real estate, two additional manufactured home communities and one
recreational vehicle park. These investments are recorded as participating
mortgages. In 1999, the Company cancelled these participating mortgages in
connection with the purchase of these manufactured home communities and the
adjoining land.
The following unaudited pro-forma information has been prepared assuming the
acquisition of the manufactured home communities had been completed at the
beginning of the periods presented. The unaudited pro-forma information is
presented for informational purposes only and is not necessarily indicative of
what would have occurred if the restructurings and the acquisitions had been
completed as of those dates. In addition, the pro-forma information is not
intended to be a projection of future results.
The unaudited, pro-forma results of operations for 1999 and 1998 are as follows
(in thousands, except per share data):
1999 1998
-------- --------
Revenues $ 6,927 $ 5,775
======== ========
Net income $ 1,252 $ 391
======== ========
Basic and diluted earnings per share $ .12 $ .04
======== ========
The Company is actively seeking to acquire additional communities and currently
is engaged in negotiations relating to the possible acquisition of a number of
communities. At any time, these negotiations are at various stages of
F - 11
<PAGE>
completion, which may include outstanding contracts to acquire certain
manufactured home communities, subject to satisfactory completion of the
Company's due diligence review.
F. Real Estate
Real estate at December 31, 1999 and 1998, is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land $ 15,290 $ 3,798
Land improvements and buildings 50,312 8,880
---------- ----------
65,602 12,678
Less accumulated depreciation (1,329) (50)
---------- ----------
Investment in real estate, net $ 64,273 $ 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
terminated the lease on January 1, 2000 by canceling $187,000 in loans to the
lessee.
The other leased community involves two phases and has been leased to the same
third party for 50 years. Annual lease payments on the first phase during 1999
was $890,000 and increases in later years by 4% per annum. There are no lease
payments on the second phase until the sites are developed, at which time, the
annual lease payments on the second phase will be equal to 10% times the costs
incurred in developing this phase. 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 terminated the lease on January 1, 2000 by
canceling $186,000 in loans to the lessee.
G. Investments in Participating Mortgages
During 1998, the Company made investments in participating mortgages secured by
three manufactured home communities and adjoining land. The non-recourse notes
accrued interest at 15% per annum and paid 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 were scheduled to mature in September 2007. The
Company also received additional interest of 50% of the net profits and cash
flows from the properties. In August 1999, the Company purchased the three
communities and adjoining land by canceling the participating mortgages and
releasing additional collateral pledged on the mortgages.
F - 12
<PAGE>
The following table provides unaudited summary financial information of the
borrower with respect to these participating mortgages for the period from
August 1998 (date of participating mortgages) to December 31, 1998 and January
1999 to August 1999 (date the Company acquired the properties):
<TABLE>
<CAPTION>
January 1999 to August 1998 to
August 1999 December 1998
-------------------- --------------------
(in thousands)
(unaudited)
<S> <C> <C>
Rental and other property revenues $ 828 $ 458
Property operating expenses (369) (234)
Depreciation expense (52) (31)
------- -------
Income from rental property operations 407 193
------- -------
Net loss (384) (108)
</TABLE>
The Company also has investments in participating mortgages secured by
individual homes and homesites within two manufactured home communities. These
mortgages accrue interest at 10% and pay interest from the cash flows from the
homes and homesites. The Company also receives additional interest equal to 50%
of the net profits and cash flows from the homes and homesites.
As of December 31, 1999, the Company had investments in participating mortgages
of $2,148,000. During 1999 and 1998, the Company had income of $920,000 and
$451,000, respectively, from participating mortgages.
H. Investments in Real Estate Joint Ventures
The Company has a $1,304,000 investment in a joint venture involving a
manufactured home community. The Company receives a priority return from the
venture until the Company has received an amount equal to 9% times $1,250,000
for 1999. 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 its $300,000 investment in the venture. 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 in 1999 or 1998 as the property is under development.
In November 1999, the Company invested $624,000 in a joint venture involving a
manufactured home community. The Company receives a priority annual return from
the venture equal to 9% times $690,000 through 2000. After 2000, the Company's
priority return increases by 4% annually. Thereafter, the Company receives 20%
of any profits and cash flows of the venture in excess of the above priority
returns. During 1999, the Company recorded $10,000 in income from this joint
venture.
I. Investment in Asset Investors
During 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. In 1999, the
Company recorded $23,000 in equity in earnings of Asset Investors.
F - 13
<PAGE>
J. CMBS Bonds
In November 1997, the Company resecuritized its portfolio of retained interests
in prior securitizations that are in the form of CMBS bonds. Nine bonds were
sold, one bond was redeemed and the remaining two CMBS bonds were resecuritized
by transferring the bonds and related restricted cash to an owner trust in which
the Company retained a residual interest. In a private placement, the trust then
sold debt securities representing senior interests in the trust's assets. The
Company recorded the resecuritization of its portfolio as a sale. The Company
received $77,693,000 in cash proceeds and recorded a $5,786,000 gain from the
sale. The Company determined its basis in the CMBS bonds using the specific
identification method. The Company paid $426,000 in incentive fees to its
manager in connection with the sale. These incentive fees were netted against
the gain.
The estimated fair value of the residual interest retained by the Company was
$2,000,000. During 1999 and 1998, the Company received $141,000 and $403,000,
respectively, of which $78,000 and $242,000, respectively, was recorded as a
reduction in the net book value of the retained residual interest. The net book
value at December 31, 1999 was $1,753,000 which approximates fair value. The
Company had no unrealized gains (losses) on its CMBS bonds at December 31, 1999
and 1998. The maturity dates of the CMBS bonds range from 2001 to 2004 and the
Company had no sales of CMBS bonds during 1999 or 1998.
In 1997, three mortgages underlying one of the Company's CMBS bonds were
prepaid. As a result of the prepayment, the Company recognized $482,000 of
income from a prepayment penalty received and $2,305,000 of income from
accelerated discount amortization.
K. 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 for which the Company can re-sell its interest
in Westrec plus the outstanding balance of the note receivable. In 1998, the
Company expensed $500,000 for due diligence, legal, and other costs incurred in
connection with investigating investments in marinas.
L. Secured Long-Term Notes Payable
The following table summarizes the Company's secured long-term notes payable (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
------------- ------------
Fixed rate, ranging from 6.70% to 7.77%, fully-amortizing, non-recourse notes
<S> <C> <C>
maturing at various dates in 2019 $ 12,815 $ --
7.67% fixed rate, partially-amortizing, non-recourse note maturing in 2007 2,950 --
Recourse, fully-amortizing note discounted at 7.00%, maturing in 2002 4,677 --
-------- ---------
$ 20,442 $ --
======== =========
</TABLE>
Real estate assets which secure the long-term notes payable had a net book value
of $35,326,000 at December 31, 1999. The Company had $522,000 in escrow for real
estate taxes and property improvements at December 31, 1999.
F - 14
<PAGE>
Scheduled principal payments after December 31, 1999 for the secured long-term
notes payable are (in thousands):
2000 $ 1,218
2001 2,098
2002 2,453
2003 419
2004 449
Thereafter 13,805
---------
$ 20,442
=========
M. Stock Option Plan
The Company has a Stock Incentive Plan for the issuance of non-qualified stock
options to its directors and officers, employees and consultants which as of
December 31, 1999, permitted the issuance of up to an aggregate of 3,000,000
shares of Common Stock, of which 331,000 and 454,000 related to outstanding
stock options as of December 31, 1999 and 1998, respectively. The exercise price
for stock options may not be less than 100% of the fair market value of the
shares of Common Stock at the date of the grant. The stock options have various
terms ranging up to 10 years.
Presented below is a summary of the changes in stock options for the three years
ended December 31, 1999. As of December 31, 1999, the outstanding options have
exercise prices ranging from $5.625 to $6.625 and have a remaining
weighted-average life of 3.0 years.
Weighted
Average
Exercise Price Shares
-------------- ------
Outstanding - December 31, 1996 $ 6.80 648,000
Granted 6.30 87,000
Forfeited 7.30 (13,000)
Exercised 6.12 (5,000)
------ ----------
Outstanding - December 31, 1997 6.74 717,000
Granted 6.62 38,000
Forfeited 7.50 (290,000)
Expired 7.25 (11,000)
------ ----------
Outstanding - December 31, 1998 6.23 454,000
Granted 6.50 38,000
Expired 6.32 (161,000)
------ ----------
Outstanding - December 31, 1999 $ 6.22 331,000
====== ==========
Options granted to date vest over various periods up to two years. As of
December 31, 1999, 1998 and 1997, 331,000, 445,000 and 660,000, respectively, of
the outstanding options were exercisable and the weighted average exercise price
of exercisable options was $6.22, $6.22 and $6.78, respectively.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options rather than the alternative fair
value accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
F - 15
<PAGE>
value for these options was estimated at the date of grant using an
option-pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- ------------------
<S> <C> <C> <C>
Range of risk free interest rates 5.3% to 6.5% 5.8% to 6.1% 5.7% to 6.8%
Expected dividend yield 9.8% 8.3% 10.0%
Volatility factor of the expected market price of
the Company's common stock 0.200 0.200 0.200
Weighted average expected life of options 10.0 years 10.0 years 5.0 years
</TABLE>
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
During 1999, 1998 and 1997, the estimated weighted-average, grant-date fair
value of options granted was $.26, $.41 and $.47, respectively. The Company
assumed lives of five to ten years and risk-free interest rates equal to the
Five- or Ten-Year U.S. Treasury rate on the date the options were granted
depending on option term. In addition, the expected stock price volatility and
dividend growth rates were estimated based upon historical averages over the two
years ended December 31, 1999, adjusted for changes based upon the Company's
investment in manufactured home community assets.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for per share data):
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Pro forma net income $ 2,514 $3,426 $ 13,664
Pro forma basic earnings per share $ 0.24 $ 0.33 $ 1.32
Pro forma diluted earnings per share $ 0.24 $ 0.33 $ 1.31
</TABLE>
N. 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 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. For 1997
and 1998, 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%.
During 1999, the Incentive Fee was amended to provide that this fee was based on
the Company's Funds From Operations, less an annual capital replacement reserve
of at least $50 per developed homesite, instead of REIT income. In general,
Funds From Operations is equal to net income plus depreciation, amortization and
acquisition fees. 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. The Management
Agreement has been extended through December 31, 2000. The terms are the same as
provided for in 1999.
F - 16
<PAGE>
Fees paid to the manager during 1999, 1998 and 1997 were (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- --------------
<S> <C> <C> <C>
Base Fees $ 565 $ 87 $ 598
Acquisition Fees 205 124 23
Incentive Fees -- -- 1,024
Administrative Fees -- -- 56
------ ------ --------
$ 770 $ 211 $ 1,701
====== ====== ========
</TABLE>
Acquisition Fees incurred in 1997 were capitalized as part of the cost of
acquiring CMBS bonds. In addition, the Company incurred $426,000 of Incentive
Fees in 1997 relating to the gain on the restructuring of the CMBS bonds.
Acquisition Fees incurred in 1999 and 1998 were expensed because such fees were
paid to Asset Investors, owner of 27% of the Company's Common Stock.
O. Commitments and Contingencies
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.
During 1999 and 1998, the Company paid $17,000 and $0, respectively, for
homesites that became occupied.
The Company has agreed to acquire from time-to-time homesites subject to ground
leases. The purchase price for each homesite will be equal to the base annual
rent provided for in the ground lease divided by 9%. The Company is not required
to acquire these homesites in groups of less than 10. The maximum number of
homesites the Company might purchase is approximately 500 for total
consideration of approximately $20 million. The Company purchased no homesites
during 1999 or 1998.
The Company has agreed to invest up to an additional $680,000 in a real estate
joint venture in four equal, annual installments of $170,000 beginning in
November 2000.
In connection with the acquisition of a property, the Company entered into an
earn-out agreement whereby it will pay the former owner an amount equal to the
increase in the property's net operating income divided by 9.5% until the
Company pays a total of $2,160,000. No amount was paid during 1999.
In September 1999, four of the Company's stockholders, individually and as
purported representatives of the Company's stockholders, except Asset Investors
and its affiliates, filed three purported class action lawsuits in Delaware
against the Company, the members of the board of directors and certain officers
of Asset Investors and the Company. These lawsuits alleged that the defendants
breached their fiduciary duties to the Company's stockholders in connection with
the Company's proposed merger with Asset Investors and the Company's recent
reincorporation in Delaware. In November 1999, these lawsuits were consolidated
into a single lawsuit. On March 7, 2000, the parties entered into a settlement
agreement, subject to the court's approval which, amended the merger agreement
as follows:
o the Company's stockholders, other than Asset Investors and the officers and
directors of Asset Investors and the Company, may elect to receive $5.75 in
cash per share for up to 3,549,868 shares of the Company's Common Stock
with any remaining shares to receive 0.4075 shares of Asset Investors
common stock; and
o the percentage of votes of the Company's Common Stock needed to approve the
merger was increased from a majority to two-thirds.
P. Operating Segments
Investments in manufactured home communities constitute substantially all of the
Company's investments. Management assesses the performance of the Company as one
operating segment.
F - 17
<PAGE>
Q. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each type of financial instrument. The estimates of fair value have been
determined by the Company using available market information and valuation
methodologies.
o Cash and cash equivalents, accounts payable and accrued liabilities, and
secured short-term financing - the carrying amounts approximate fair value
because of the short maturity of these instruments.
o Investment in Asset Investors - the fair value was determined based upon
the closing price of Asset Investors common stock on the New York Stock
Exchange, Inc. as of the end of 1999.
o Secured long-term notes payable - based upon borrowing rates currently
available to the Company, the carrying value of its secured long-term notes
payable approximates their fair value.
The carrying values and fair values of the Company's investment in Asset
Investors at December 31, 1999 is as follows (in thousands):
1999
------------------------------
Carrying Value Fair Value
-------------- ----------
Investment in Asset Investors $ 1,396,000 $ 1,270,000
=========== ===========
R. Other Matters
The Company's Charter authorizes the Board of Directors to issue 25,000,000
shares, par value $.01 per share, of preferred stock. The Board of Directors is
authorized to fix the terms of the preferred stock, including preferences,
powers and rights (including voting rights) senior to the Common Stock. To date,
the Company has not issued any shares of preferred stock.
S. Selected Quarterly Financial Data (unaudited)
Presented below is selected quarterly financial data for the years ended
December 31, 1999 and 1998 (in thousands, except per share data).
<TABLE>
<CAPTION>
Three Months Ended,
-----------------------------------------------------------------
1999 December 31, September 30, June 30, March 31,
- --------------------------------------------------- -------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Rental and other property revenues $ 1,156 $ 945 $ 437 $ --
Income from participating mortgages and leases 326 455 603 587
Property operating expenses (512) (428) (174) --
Depreciation (493) (465) (232) (89)
------- -------- ------- --------
Income from rental property operations 477 507 634 498
------- -------- ------- --------
Interest and other income 343 349 520 701
General and administrative expenses (115) (131) (140) (133)
Related-party management fees (190) (181) (114) (80)
Interest expense (154) (61) (58) --
Related-party acquisition fees (8) (3) (152) (42)
Net income 400 408 734 982
Basic and diluted earnings per share .04 .04 .07 .09
Weighted average common shares outstanding 10,320 10,325 10,362 10,364
Weighted average common shares and common share
equivalents outstanding 10,320 10,325 10,362 10,365
F - 18
<PAGE>
Three Months Ended,
-----------------------------------------------------------------
1998 December 31, September 30, June 30, March 31,
- --------------------------------------------------- -------------- ----------------- --------------- ----------------
Income from participating mortgages and leases $ 436 $ 151 $ -- $ --
Depreciation (46) (4) -- --
------- -------- ------- --------
Income from rental property operations 390 147 -- --
------- -------- ------- --------
Interest and other income 767 1,012 1,042 1,053
General and administrative expenses (117) (129) (88) (86)
Related-party management fees (47) (23) (12) (5)
Related-party acquisition fees (63) (61) -- --
Costs related to abandonment of potential marina
investments -- (500) -- --
Net income 967 486 986 1,002
Basic and diluted earnings per share .09 .05 .09 .10
Weighted average common shares outstanding 10,364 10,364 10,359 10,342
Weighted average common shares and common share
equivalents outstanding 10,366 10,373 10,387 10,378
</TABLE>
T. Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133. Accounting for Derivative Instruments
and Hedging Activities ("Statement 133"). Statement 133 requires recording all
derivative instruments as assets or liabilities, measured at fair value.
Statement 133 is effective beginning after 2000. The Company has elected not to
early adopt the provisions of Statement 133 as of December 31, 1999 and when
Statement 133 is adopted, the Company does not expect Statement 133 to have a
significant impact on its financial position and results of operations.
F - 19
<PAGE>
COMMERCIAL ASSETS, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(In Thousands Except Site Data)
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------
Cost Total
Capital- Cost
Initial Cost ized Total Cost Net of
---------------- Subsequ- --------------------- Accumu- Accumu-
Number Buildings uent Buildings lated lated
Date Year of and to and Depreci- Depreci- Encum-
Property Name Acquired Location Developed Sites Land Improvements Acquis. Land Improvements Total ation ation brances
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Casa Encanta 1999 Mesa, AZ 1970 106 $ 315 $ 1,152 $ -- $ 315 $ 1,152 $ 1,467 $ 17 $ 1,450 $ --
Cypress Greens 1998 Lakeland, FL 1986 107 240 1,129 28 240 1,157 1,397 60 1,337 --
Desert Harbor 1999 Apache Junction, 1997 207 621 6,169 700 1,058 6,432 7,490 124 7,366 4,677
AZ
Fiesta Development 1999 Mesa, AZ -- 206 4,804 -- 136 4,804 136 4,940 -- 4,940 --
Fiesta Village 1999 Mesa, AZ 1962 170 498 4,029 -- 498 4,029 4,527 61 4,466 2,950
La Casa Blanca 1999 Apache Junction, 1993 198 594 6,698 91 594 6,789 7,383 133 7,250 --
AZ
La Casa Mini 1999 Apache Junction, -- -- 495 175 -- 495 175 670 1 669 --
Storage AZ
Lakeshore Utilities1999 Tampa, FL -- -- 50 100 -- 50 100 150 3 147 --
Lakeshore Villas 1999 Tampa, FL 1972 290 870 6,990 293 870 7,283 8,153 219 7,934 5,041
Marina Dunes 1999 Marina, CA -- -- 306 -- 13 306 13 319 -- 319 --
Rancho Mirage 1999 Apache Junction, 1994 312 930 10,879 108 930 10,987 11,917 290 11,627 --
AZ
Riverside 1998 Ruskin, FL 1984 990 3,558 7,744 122 3,558 7,866 11,424 344 11,080 5,478
Royal Palm 1999 Haines City, FL 1971 450 1,383 3,027 131 1,383 3,158 4,541 61 4,480 2,296
Southern Palms 1999 Mesa, AZ 1961 36 189 1,035 -- 189 1,035 1,224 16 1,208 --
-----------------------------------------------------------------------------------
Total 3,072 $14,853 $49,127 $ 1,622 $15,290 $50,312 $65,602 $1,329 $64,273 $20,442
===================================================================================
</TABLE>
F - 20
<PAGE>
COMMERCIAL ASSETS, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Real Estate
<S> <C> <C> <C>
Balance at beginning of year $ 12,678 $ -- $ --
Additions during the year:
Real estate acquisitions 51,309 12,671 --
Additions 1,615 7 --
Dispositions -- -- --
---------- ---------- ---------
Balance at end of year $ 65,602 $ 12,678 $ --
========== ========== =========
Accumulated Depreciation
Balance at beginning of year $ (50) $ -- $ --
Additions during the year:
Depreciation (1,279) (50) --
Dispositions -- -- --
---------- ---------- ---------
Balance at end of year $ (1,329) $ (50) $ --
========== ========== =========
</TABLE>
F - 21
<PAGE>
COMMERCIAL ASSETS, INC.
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Principal
Amount of
Loans
Subject to
Final Periodic Face Carrying Delinquent
Interest Maturity Payment Prior Amount of Amount of Principal or
Description Rate Date Terms Liens Mortgages Mortgages Interest
- --------------------- ------------ ---------- ---------- --------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Savanna Club 10% 9/2018 (1) $ -- $ 1,896 $ 1,913 $ --
Sun Lake 10% 9/2018 (1) -- 222 235 --
--------- -------------- --------------- ---------------
$ -- $ 2,118 $ 2,148 $ --
<FN>
========= ============== =============== ===============
(1) Interest is paid from any cash flows from the property.
</FN>
</TABLE>
F - 22
<PAGE>
COMMERCIAL ASSETS, INC.
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 9,328 $ -- $ --
Additions during period:
Investments in participating mortgages 1,866 8,913 --
Accrued interest 925 371 --
Loan costs -- 70 --
Deductions during period:
Collections of principal (486) (20) --
Collections of interest (503) (2) --
Amortization of loan costs (4) (4) --
Cancellation of debt in connection with purchase of property (8,978) -- --
---------- ---------- ---------
Balance at close of period $ 2,148 $ 9,328 $ --
========== ========== =========
</TABLE>
F - 23
<PAGE>
EXHIBIT INDEX
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).
2.2 Agreement and Plan of Merger, dated as of August 31, 1999, by
and between the Registrant and Asset Investors Corporation
(incorporated herein by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K, dated August 31,
1999, Commission File No. 1-2262, filed on September 3, 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).
4.1 Form of certificate representing common stock of the
Registrant (incorporated herein by reference to Exhibit 4.2 to
the Form 10-Q for the period ended March 31, 1994, of the
Registrant, Commission File No. 1-2262, filed on May 16,
1994).
10.1 Contribution Agreement, dated as of August 20, 1993, between
the Registrant and Asset Investors (incorporated herein by
reference to Exhibit 10.1 to Amendment No. 1 to the Form 10 of
the Registrant, Commission File No. 1-2262, filed on August
31, 1993).
10.3* Management Agreement, dated as of January 1, 1995, between the
Registrant and Financial Asset Management Corporation
(incorporated herein by reference to Exhibit 10.3(b) to the
Registrant's Quarterly Report on Form 10Q, Commission filed on
May 12, 1995).
10.3(a)* Amendment to the Management Agreement dated as of January 1,
1996 between the Registrant and Financial Asset Management
Corporation (incorporated herein by reference to Exhibit
10.3(a) to the Registrant's Quarterly Report on Form 10-Q for
the period ended March 31, 1996, Commission File No. 1-2262,
filed on May 15, 1996).
10.3(b)* Assignment of the Management Agreement dated as of April 1,
1996 between Financial Asset Management Corporation and
Financial Asset Management LLC (incorporated herein by
reference to Exhibit 10.3(b) to the Registrant's Quarterly
Report on Form 10-Q, Commission File No. 1-2262, filed on May
15, 1996).
10.3(c)* Amendment to the Management Agreement dated as of January 1,
1997, between the Registrant and Financial Asset Management
LLC (incorporated herein by reference to Exhibit 10.3(c) to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, Commission File No. 1-2262, filed on March
24, 1997).
- 29 -
<PAGE>
10.4* 1998 Stock Incentive Plan of the Registrant (incorporated
herein by reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q, Commission File No. 1-2262,
filed on July 31, 1998).
10.7* Form of Indemnification Agreement between the Registrant and
each Director of the Registrant (incorporated herein by
reference to Exhibit 10.5 to Amendment No. 1 to the Form 10 of
the Registrant, Commission File No. 1-2262, filed on August
31, 1993).
10.8 Trust Agreement, dated as of November 3, 1997, between CAX DTR
Securitization Corp. and Wilmington Trust Company
(incorporated herein by reference to Exhibit 10.9 to the
Registrant's Current Report on Form 8-K dated November 3,
1997, Commission File No. 1-2262, filed on November 14, 1997).
10.8(a) Note Purchase Agreement, dated as of November 3, 1997, among
Structured Mortgage Trust 1997-2, CAX DTR Securitization
Corp., and PaineWebber Incorporated Company (incorporated
herein by reference to Exhibit 10.9(a) to the Registrant's
Current Report on Form 8-K dated November 3, 1997, Commission
File No. 1-2262, filed on November 14, 1997).
10.8(b) Trust Indenture and Security Agreement, dated as of November
3, 1997, between Structured Mortgage Trust 1997-2 and LaSalle
National Bank, as Indenture Trustee Company (incorporated
herein by reference to Exhibit 10.9(b) to the Registrant's
Current Report on Form 8-K dated November 3, 1997, Commission
File No. 1-2262, filed on November 14, 1997).
10.8(c) Contribution Agreement, dated as of November 3, 1997, between
Commercial Assets, Inc. and CAX DTR Securitization Corp.
Company (incorporated herein by reference to Exhibit 10.9(c)
to the Registrant's Current Report on Form 8-K dated November
3, 1997, Commission File No. 1-2262, filed on November 14,
1997).
10.8(d) Securitization Cooperation Agreement, dated as of November 3,
1997, among CAX DTR Securitization Corp., Commercial Assets,
Inc., Structured Mortgage Trust 1997-2, and PaineWebber
Incorporated Company (incorporated herein by reference to
Exhibit 10.9(d) to the Registrant's Current Report on Form 8-K
dated November 3, 1997, Commission File No. 1-2262, filed on
November 14, 1997).
10.8(e) Side Letter Agreement, dated as of November 3, 1997, between
Commercial Assets, Inc. and PaineWebber Incorporated Company
(incorporated herein by reference to Exhibit 10.9(e) to the
Registrant's Current Report on Form 8-K dated November 3,
1997, Commission File No. 1-2262, filed on November 14, 1997).
10.9 Asset Purchase Agreement effective as of November 20, 1998,
between The Moorings of Manatee, Inc. and Community
Acquisition & Development Corp. (incorporated herein by
reference to Exhibit 10.10 to the Registrant's Current Report
on Form 8-K dated November 20, 1998, Commission File No.
1-2262, filed on December 4, 1998).
10.9(a) Assignment of Agreement effective as of November 20, 1998,
between Community Acquisition & Development Corp. and CAX
Riverside, L.L.C. (incorporated herein by reference to Exhibit
10.10(a) to the Registrant's Current Report on Form 8-K dated
November 20, 1998, Commission File No. 1-2262, filed on
December 4, 1998).
- 30 -
<PAGE>
10.9(b) Agreement for Assignment of Contracts and Convenant not to
Compete effective as of November 20, 1998, between Moorings
Development and Marketing Corporation, Riverside Sod and
Supply Company, Barry Spencer and Community Acquisition &
Development Corp. (incorporated herein by reference to Exhibit
10.10(b) to the Registrant's Current Report on Form 8-K dated
November 20, 1998, Commission File No. 1-2262, filed on
December 4, 1998).
10.9(c) Assignment of Agreement effective as of November 20, 1998,
between Community Acquisition & Development Corp. and CAX
Riverside, L.L.C. (incorporated herein by reference to Exhibit
10.10(c) to the Registrant's Current Report on Form 8-K dated
November 20, 1998, Commission File No. 1-2262, filed on
December 4, 1998).
10.9(d) Riverside Master Lease Agreement, dated as of November 20,
1998, between CAX Riverside, L.L.C. as lessor and Riverside
Golf Course Community, L.L.C. as lessee (incorporated herein
by reference to Exhibit 10.9(d) to the Registrant's Annual
Report on Form 10-K/A Amendment No. 1 dated December 31, 1999,
Commission File No. 1-2262, filed on March 8, 2000).
10.10 Securities Purchase Agreement, dated as of March 26, 1998,
between Registrant and Westrec Marina Management, Inc.
(incorporated herein by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q dated March 31,
1998, Commission File No. 1-2262, filed on May 14, 1998).
10.10(a) Put and Call Agreement dated as of November 30, 1998, between
the Registrant and Westrec Marina Management, Inc. and Michael
M. Sachs (incorporated herein by reference to Exhibit 10.10(a)
to the Registrant's Annual Report on Form 10-K dated December
31, 1998, Commission File No. 1-2262, filed on March 25,
1999).
10.10(b) Secured Promissory Note dated as of November 30, 1998, between
the Registrant and Michael M. Sachs (incorporated herein by
reference to Exhibit 10.10(a) to the Registrant's Annual
Report on Form 10-K dated December 31, 1998, Commission File
No. 1-2262, filed on March 25, 1999).
10.11 Form of Amended and Restated Promissory Note entered into in
connection with investments in mortgages on three manufactured
home communities and adjoining land (incorporated herein by
reference to Exhibit 10.10(a) to the Registrant's Annual
Report on Form 10-K dated December 31, 1998, Commission File
No.
1-2262, filed on March 25, 1999).
10.11(a) Amended and Restated Combination Deed of Trust, Assignment of
Rents, Security Agreement and Fixture Financing Statement
entered into in connection with investments in mortgages on
three manufactured home communities and adjoining land
(incorporated herein by reference to Exhibit 10.10(a) to the
Registrant's Annual Report on Form 10-K dated December 31,
1998, Commission File No. 1-2262, filed on March 25, 1999).
10.12 Restated Purchase Agreement dated as of April 20, 1998,
between Lake Shore Villas, Inc., The Inn at Lakeshore Villas,
Ltd., and Lakeshore Villa Health Care, LTD. and Senior Care
Group, Inc., Heights Healthcare Company, L.L.C., Community
Acquisition and Development Corporation, CAX Lakeshore, L.L.C.
and Lakeshore Utilities, L.L.C. (incorporated herein by
reference to Exhibit 10.12 to the Registrant's Current Report
on Form 8-K dated March 31, 1999, Commission File No. 1-2262,
filed on April 13, 1999).
- 31 -
<PAGE>
10.12(a) Seventh Amendment to Purchase Agreement dated as of March 30,
1999, between Heights Healthcare Company, L.L.C., CAX
Lakeshore, L.L.C., Lakeshore Utilities, L.L.C. and Senior Care
Group, Inc. and Lake Shore Villas, Inc., The Inn at Lakeshore
Villas, LTD. and Lakeshore Villa Health Care, LTD.
(incorporated herein by reference to Exhibit 10.12(a) to the
Registrant's Current Report on Form 8-K dated March 31, 1999,
Commission File No. 1-2262, filed on April 13, 1999).
10.12(b) Agreement to Assign dated as of March 31, 1999, between
Heights Healthcare Company, L.L.C. and CAX Lakeshore, L.L.C.
(incorporated herein by reference to Exhibit 10.12(b) to the
Registrant's Current Report on Form 8-K dated March 31, 1999,
Commission File No. 1-2262, filed on April 13, 1999).
10.13 Agreement of Sale dated March 1, 1999, between Rancho Mirage
Mobile Home Park and Community Acquisition & Development Corp.
(incorporated herein by reference to Exhibit 10.13 to the
Registrant's Current Report on Form 8-K dated May 7, 1999,
Commission File No. 1-2262, filed on May 18, 1999).
10.13(a) Assignment of Agreement dated May 6, 1999, between Community
Acquisition & Development Corp. and CAX Rancho Mirage, L.L.C.
(incorporated herein by reference to Exhibit 10.13 (a) to the
Registrant's Current Report on Form 8-K dated May 7, 1999,
Commission File No. 1-2262, filed on May 18, 1999).
10.14 Agreement of Sale dated May 6, 1999, between Five Whites,
L.L.C. and Community Acquisition and Development Corporation
(incorporated herein by reference to Exhibit 10.14 to the
Registrant's Current Report on Form 8-K dated June 30, 1999,
Commission File No. 1-2262, filed on July 14, 1999).
10.14(a) Agreement of Sale dated May 6, 1999, between White Gregg,
L.L.C. and Community Acquisition and Development Corporation
(incorporated herein by reference to Exhibit 10.14 to the
Registrant's Current Report on Form 8-K dated June 30, 1999,
Commission File No. 1-2262, filed on July 14, 1999).
10.14(b) Assignment of Agreement of Sale dated June 28, 1999, between
Community Acquisition and Development Corporation and CAX La
Casa Blanca, L.L.C. (incorporated herein by reference to
Exhibit 10.14 to the Registrant's Current Report on Form 8-K
dated June 30, 1999, Commission File No. 1-2262, filed on July
14, 1999).
10.14(c) Assignment of Agreement of Sale dated June 28, 1999, between
Community Acquisition and Development Corporation and CAX La
Casa Blanca East, L.L.C. (incorporated herein by reference to
Exhibit 10.14 to the Registrant's Current Report on Form 8-K
dated June 30, 1999, Commission File No. 1-2262, filed on July
14, 1999).
10.14(d) Promissory Note dated June 30, 1999 between CAX La Casa Blanca
East, L.L.C. and White Gregg, L.L.C. (incorporated herein by
reference to Exhibit 10.14 to the Registrant's Current Report
on Form 8-K dated June 30, 1999, Commission File No. 1-2262,
filed on July 14, 1999).
10.15 Form of Amended and Restated Promissory Note entered into in
connection with investments in mortgages on three manufactured
home communities and adjoining land. (incorporated herein by
reference to Exhibit 10.11 to the Registrant's Annual Report
on Form 10-K dated December 31, 1998, Commission File No.
1-2262, filed on March 24, 1999).
- 32 -
<PAGE>
10.15(a) Form of Amended and Restated Combination Deed of Trust,
Assignment of Rents, Security Agreement and Fixture Financing
Statement entered into in connection with investments in
mortgages on three manufactured home communities and adjoining
land. (incorporated herein by reference to Exhibit 10.11(a) to
the Registrant's Annual Report on Form 10-K dated December 31,
1998, Commission File No. 1-2262, filed on March 24, 1999).
10.15(b) Receipt, Release and Settlement Agreement, dated as of August
13, 1999, between the Registrant, Casa Encanta Commercial,
L.L.C., Fiesta/Encanta MHP, L.L.C., Fiesta MHP Investors,
L.L.C., Fiesta SPE, L.L.C., Southern Palms MHP, L.L.C., Norman
Andrus, and The Norman Andrus Irrevocable Trust (incorporated
herein by reference to Exhibit 10.11(b) to the Registrant's
Current Report on Form 8-K dated August 13, 1999, Commission
File No. 1-2262, filed on August 30, 1999).
10.15(c) Form of Assignment and Assumption of Membership Interest
(incorporated herein by reference to Exhibit 10.11(c) to the
Registrant's Current Report on Form 8-K dated August 13, 1999,
Commission File No.
1-2262, filed on August 30, 1999).
10.16 Form of Promissory Note to General Electric Capital Assurance
Company entered into in connection with the financing of two
manufactured home communities.
21.1 List of Subsidiaries
23.1 Consent of Independent Auditors - Ernst & Young LLP.
27.1 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
- 33 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COMMERCIAL ASSETS, INC.
(Registrant)
Date: March 28, 2000 By /s/Terry Considine
----------------------------------------
Terry Considine
Chairman and Chief Executive Officer
Date: March 28, 2000 By /s/Thomas L. Rhodes
----------------------------------------
Thomas L. Rhodes
Vice Chairman
Date: March 28, 2000 By /s/Bruce E. Moore
----------------------------------------
Bruce E. Moore
President and Chief Operating Officer
Date: March 28, 2000 By /s/David M. Becker
----------------------------------------
David M. Becker
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Capacity Date
/s/Terry Considine Director March 28, 2000
- -------------------------------
Terry Considine
/s/Thomas L. Rhodes Director March 28, 2000
- -------------------------------
Thomas L. Rhodes
/s/Raymond T. Baker Director March 27, 2000
- -------------------------------
Raymond T. Baker
/s/Bruce D. Benson Director March 25, 2000
- -------------------------------
Bruce D. Benson
/s/Thomas C. Fries Director March 24, 2000
- -------------------------------
Thomas C. Fries
Director
- -------------------------------
Donald L. Kortz
/s/Robert J. Malone Director March 28, 2000
- -------------------------------
Robert J. Malone
/s/Bruce E. Moore Director March 28, 2000
- -------------------------------
Bruce E. Moore
- 34 -
SCHEDULE OF OMITTED
AMENDED AND RESTATED PROMISSORY NOTE
The Company has also entered into one additional Promissory Note which is
substantially identical to the following Promissory Note in all material
respects except as to the maker, principal balance and monthly payment. Listed
below are the material details in which such documents differ from the document
filed as part of this exhibit.
Principal Monthly
Maker Balance Payment
------------------------------- --------------------- ------------------
Royal Palm Village, L.L.C. $2,300,000.00 $18,911.00
<PAGE>
PROMISSORY NOTE
$5,100,000.00 April 29, 1999
Tampa, Florida
GELAAC Loan No. 3464
1. Promise to Pay.
FOR VALUE RECEIVED, the undersigned, CAX LAKESHORE, L.L.C., a Delaware
limited liability company, and LAKESHORE UTILITIES, L.L.C., a Delaware limited
liability company (collectively, the "Borrower"), jointly and severally promise
to pay in lawful money of the United States of America to the order of GE LIFE
AND ANNUITY ASSURANCE COMPANY, a Virginia corporation ("Lender"), at P. O. Box
490, Seattle, Washington 98111-0490, ATTN: Real Estate Department, or such other
place either within or without the State of Washington as Lender may designate
in writing from time to time, the principal sum of Five Million One Hundred
Thousand and No/100 Dollars ($5,100,000.00) with interest from the date hereof
on the unpaid principal balance at the rate set forth below.
2. Interest.
Interest shall accrue on the unpaid principal balance from the date
hereof to the Maturity Date at a rate of seven and one-tenth percent (7.10%) per
annum.
3. Payments and Term.
Principal and interest shall be due and payable as follows:
(a) A payment of all interest to accrue hereon from the
Disbursement Date to and including the last day of the month
during which the Disbursement Date occurs shall be due and
payable on the Disbursement Date. For purposes hereof, the
"Disbursement Date" shall be the date on which disbursement of
loan proceeds occurs.
(b) Monthly payments of principal and interest in the sum of
Thirty-Nine Thousand Eight Hundred Forty-Seven and No/100
Dollars ($39,847.00) each shall be due and payable on the
first day of each calendar month, commencing on the first day
of the second calendar month following the Disbursement Date
and continuing on the first day of each calendar month
thereafter to and including the Maturity Date (as defined in
(c) below). These monthly payments are based upon the twenty
(20) year amortization period beginning on June 1, 1999.
(c) The entire indebtedness evidenced by this Note, if not sooner
paid, shall be due and payable on May 31, 2019, the Maturity
Date.
All payments on account of the indebtedness evidenced by this Note
shall be first applied to interest, costs and prepayment fees (if any) and then
to principal. Interest shall be computed on the basis of a 360-day year
consisting of twelve 30-day months, except that interest for a portion of a
month (such as may be required under paragraph 3 (a) above) shall be computed on
the basis of a 365-day year (or a 366-day year during a leap year).
4. Prepayment.
This Note may be prepaid in full or in part, upon giving Lender thirty
(30) days' prior written notice, by paying, in addition to the principal amount
prepaid (and if prepaid in full, accrued interest and all other sums due under
the terms hereof), a prepayment premium ("Premium") equal to the present value
of the series of Payment Differentials (as defined below) from the prepayment
DOCUMENTARY STAMP TAXES IN THE AMOUNT OF $17,850.00 HAVE BEEN PAID UPON AND
AFFIXED TO THE MORTGAGE SECURING THIS NOTE.
<PAGE>
date to the Maturity Date, discounted using the Discount Factor (as defined
below) and the Number of Payments or Periods (as defined below) (monthly
compounding) calculated as follows:
(a) If 7.10% is less than the "Ask Yield" of the non-callable
United States Government Treasury Note with a maturity closest
to the mid-point between the fifth business day preceding the
prepayment date and the Maturity Date as published in The Wall
Street Journal on the fifth (5th) business day preceding the
prepayment date (the "Treasury Yield") (and if more than one
such issue, then the issue with the coupon rate closest to the
interest rate then in effect on this Note) plus fifty basis
points (0.50%) (the "Reinvestment Yield"), the Premium will be
one percent (1%) of the amount of principal prepaid.
(b) If 7.10% equals or exceeds the Reinvestment Yield, the Premium
will be the greater of:
(i) One percent (1%) of the amount of principal prepaid,
or
(ii) The present value of the series of Payment
Differentials from the prepayment date to the
Maturity Date. The present value will be calculated
by Lender using a financial calculator or present
value tables selected by Lender and the (i) Discount
Factor, (ii) Number of Payments or Periods, and (iii)
Payment Differential, as said terms are hereinafter
defined:
i. The "Discount Factor" is equal to
one-twelfth (1/12) of the
Reinvestment Yield.
ii. The "Number of Payments or Periods"
is equal to the number of months
left to the Maturity Date (rounded
up to the nearest whole number).
iii. The "Payment Differential" is the
difference between the monthly
payment which amortizes the
principal prepaid to zero over the
Number of Payments or Periods,
calculated, first, at 7.10% (if this
Note is prepaid in full, then this
is the monthly payment stated in
this Note) and, second, at the
Reinvestment Yield.
If the publication The Wall Street Journal is discontinued or
publication of the yield of United States Treasury notes in The Wall Street
Journal is discontinued, Lender shall, in its sole discretion, designate some
other daily financial or governmental publication of national circulation.
In the event the Lender accelerates the amount due prior to the
Maturity Date, the Borrower shall immediately pay to the Lender all amounts
described in this Note, including but not limited to, the prepayment Premium.
Provided, however, that there shall be no prepayment fee payable on
principal prepaid during the sixty (60) days prior to the Maturity Date. Any
partial prepayment shall be applied upon payments due hereon in the inverse
order of their respective due dates.
In addition to the prepayment provisions above, Borrower may, during
each Loan Year, prepay up to five percent (5%) of the principal balance
outstanding on the first day of that Loan Year upon three (3) days prior written
notice to Lender without the payment of any prepayment fee, such prepayment
privilege being non-cumulative on a Loan Year to Loan Year basis. For purposes
hereof, "Loan Year" means each successive period of twelve (12) months, with the
first such period beginning on June 1, 1999.
- 2 -
<PAGE>
5. Restrictions on Transfer and Encumbrance.
Borrower and Lender acknowledge and agree that the Mortgage referred to
in paragraph 9 below contains the following paragraphs 4.1 and 4.2:
"4.1 Restrictions on Transfer or Encumbrance of the
Property.
(a) A "Transfer" is: any sale (by contract or otherwise),
encumbrance, conveyance or other transfer of all or
any interest in the Property; or any change in the
ownership of any stock interest in a corporate
Mortgagor, in the ownership of any membership
interest or in the manager of a limited liability
company Mortgagor, in the ownership of any general
partnership interest in any general or limited
partnership Mortgagor, or in the ownership of any
beneficial interest in any other Mortgagor which is
not a natural person or persons (including without
limitation a trust); or any change in the ownership
of any stock, membership, general partnership or
other beneficial interest in any corporation, limited
liability company, partnership, trust or other
entity, organization or association directly or
indirectly owning an interest in Mortgagor, or a
change in the manager of a limited liability company.
Changes in the ownership of a limited partnership
interest in a limited partnership (including sale of
publicly traded partnership units) shall not be
deemed a "Transfer."
(b) In the event of a Transfer without Mortgagee's prior
written consent, Mortgagee may at its sole option
declare the Transfer an Event of Default under this
Mortgage and invoke any remedy or remedies provided
for in paragraph 8.1 hereof, or may at its sole
option consent to such Transfer. Mortgagee may
condition its consent to a Transfer upon the payment
of a fee to Mortgagee, or an increase in the rate of
interest due under the Note, or the items in
paragraph 4.1(d) below, or any combination of the
foregoing. Neither of the foregoing options shall
apply, however, in the case of a Transfer under any
will, trust or applicable law of descent arising
because of the death of an individual so long as
Mortgagee is given prompt notice of the Transfer and
the transferee. Mortgagee's consent to a Transfer or
its waiver of an Event of Default by reason of a
Transfer shall not constitute a consent or waiver of
any right, remedy or power accruing to Mortgagee by
reason of any subsequent Transfer.
(c) Mortgagee will give its written consent to Transfers
of interests in Mortgagor or of interests in an
entity with an ownership interest in Mortgagor to the
transferor's spouse or lineal descendant or to an
estate planning trust whose trustees and
beneficiaries are the transferor or the transferor's
spouse or lineal descendant if Mortgagor gives
Mortgagee prior written notice accompanied by copies
of the proposed Transfer documents and a $1,000.00
transfer review fee.
(d) For any Transfer permitted under this Mortgage or
requested by Mortgagor, Mortgagee may condition its
consent upon: the Property having been and assurances
that it shall continue to be well maintained and
managed in a manner reasonably satisfactory to
Mortgagee; Mortgagee's reasonable approval of the
Transfer terms, documents and background materials;
there being no uncured Event of Default under this
Mortgage; Mortgagor furnishing an endorsement to
Mortgagee's title insurance policy insuring the
continued validity and priority of the lien of this
Mortgage following the Transfer and such
subordination agreements and other documents as may
be required by Mortgagee or its title company to
issue the endorsement. Unless Mortgagee in its sole
discretion otherwise agrees in writing at that time,
no Transfer shall release the
- 3 -
<PAGE>
transferor from any liability under the Loan
Documents or the environmental Indemnity. By
accepting a Transfer, the transferee assumes any and
all liability of the transferor under the Loan
Documents and the environmental Indemnity to the
extent the transferor has any personal liability. At
Mortgagee's request, the parties shall execute
agreements, guaranties and indemnities in form and
substance acceptable to Mortgagee. Regardless whether
Mortgagee consents to a Transfer request, Mortgagor
agrees to pay all of Mortgagee's reasonable
out-of-pocket expenses incurred in connection with
any Transfer request, including without limitation
title fees and attorneys' fees and costs, and
Mortgagee may condition its willingness to consider a
Transfer request upon a deposit to pay for
Mortgagee's expenses.
4.2 Loan Assumption Provision. Notwithstanding any
provision of this Mortgage to the contrary, Mortgagee will consent to
two sales of the Property and assumption by the purchaser of the
indebtedness secured hereby, provided that:
(a) Mortgagor is not then in default under this Mortgage;
(b) The purchaser of the Property, the financial
statements, financial strength, tax returns and
credit history of the purchaser, the sale agreement
and related documents, and all aspects of the sale
are satisfactory to Mortgagee;
(c) The purchaser evidences a history of property
management satisfactory to Mortgagee or contracts for
management of the Property with a property management
firm satisfactory to Mortgagee;
(d) If the amount then due on the Note exceeds
seventy-five percent (75%) of the sale price of the
Property, the balance due on the Note, at the
Mortgagee's election, must be reduced, by payment
thereon, to an amount which does not exceed
seventy-five percent (75%) of the sale price;
(e) Mortgagee receives in cash an assumption fee of the
greater of Five Thousand and No/100 Dollars
($5,000.00) or One Percent (1.00%) of the outstanding
loan balance at the time of the assumption, plus its
reasonable legal and administrative expenses,
incurred in connection with such sale and assumption;
(f) Mortgagor furnishes to Mortgagee, at Mortgagor's
expense, an endorsement to Mortgagee's title
insurance policy insuring the continued validity,
enforceability and priority of the Mortgage following
the assumption. The form and content of the
endorsement shall be reasonably satisfactory to
Mortgagee. If required by the Mortgagee or the title
Insurer, the Mortgagor shall furnish subordination
agreements from tenants of the Property and other
necessary parties in form and substance acceptable to
the Mortgagee and the title insurer;
(g) Unless Mortgagee in its sole discretion otherwise
agrees in writing at that time, no such sale or
assumption shall release Mortgagor or any guarantor
or other person from liability, or otherwise affect
the liability of Mortgagor or any such guarantor or
other person, for payment of the indebtedness secured
hereby;
(h) In the event the Loan was made with a requirement
imposed upon the Mortgagor to complete any specified
repairs of the Property, the Mortgagor shall not be
entitled to a consent by Mortgagee pursuant to the
terms of this provision until such repairs have been
completed to Mortgagee's satisfaction; and
- 4 -
<PAGE>
(i) The Mortgagee may, at its option, require tax
reserves as referred to in paragraph 3.1 of this
Mortgage, whether or not previously waived
conditionally or otherwise, as a condition to its
consent."
6. Default.
(a) The occurrence of any one or more of the following shall
constitute an event of default ("Event of Default") under this
Note:
(i) Failure to make any payment of principal or interest
when due hereon, followed by the failure to make such
payment within ten (10) days after written notice
thereof given to Borrower by Lender; provided,
however, that Lender shall not be obligated to give
Borrower written notice prior to exercising its
remedies with respect to such default if Lender had
previously given Borrower during that calendar year a
notice of default for failure to make a payment of
principal or interest hereon. Once Lender has given
such notice to Borrower during any calendar year,
failure by Borrower to make any payment of principal
or interest within ten (10) days of the date when due
shall constitute an Event of Default.
(ii) The occurrence of any other Event of Default under
the Mortgage referred to in paragraph 9 below.
(b) Time is of the essence. If an Event of Default occurs under
this Note:
(i) the entire principal balance hereof and all accrued
interest shall, at the option of Lender, without
notice, bear interest at a rate from time to time
equal to five (5) percentage points over what would
otherwise be the Note rate (or the maximum rate
permitted by applicable law if that is less) from the
date of the Event of Default until such Event of
Default is cured, and such rate shall also apply to
post judgment interest, and
(ii) the entire principal balance hereof and all accrued
interest shall immediately become due and payable at
the option of Lender, without notice.
Lender's failure to exercise any option hereunder shall not constitute
a waiver of the right to exercise the same for any subsequent Event of Default.
(c) Lender may accept partial payments or payments marked "payment
in full" or "in satisfaction" or words to similar effect at
any time. Acceptance of such payment shall not affect or vary
the duty of Borrower to pay all obligations when due hereunder
and shall not affect or impair the right of Lender to pursue
all remedies available to it hereunder, or under any of the
other loan documents securing or guarantying payment hereof or
executed in connection herewith.
7. Late Charges.
Borrower acknowledges that, if any payment under this Note is not made
when due, Lender will as a result thereof incur costs not contemplated by this
Note, the exact amount of which would be extremely difficult or impracticable to
ascertain. Such costs include without limitation processing and accounting
charges. Accordingly, Borrower hereby agrees to pay to Lender with respect to
each payment which is not received by Lender within ten (10) days after such
payment is due under this Note a late charge equal to Five Percent (5%) of the
amount of the payment. Borrower and Lender agree that such late charge
represents a fair and reasonable estimate of the costs Lender will incur by
reason of such late payment. Acceptance of such late charge by Lender shall in
no event constitute a waiver of the default with respect to the overdue amount,
and shall not prevent Lender from exercising any of the other rights and
remedies available to Lender.
- 5 -
<PAGE>
8. Costs and Attorneys' Fees.
If an Event of Default occurs under this Note and Lender consults an
attorney regarding the enforcement of any of its rights under this Note or the
Mortgage, or if this Note is placed in the hands of an attorney for collection,
or if suit be brought to enforce this Note or the Mortgage, Borrower promises to
pay all costs thereof, including attorneys' fees. Said costs and attorneys' fees
shall include, without limitation, costs and attorneys' fees in any appeal or in
a proceeding under any present or future federal bankruptcy act or state
receivership.
9. Security.
This Note is secured by a Mortgage, Assignment of Rents and Leases and
Security Agreement ("Mortgage") and a separate Assignment of Rents and Leases
("Assignment") covering property located in Hillsborough County, Florida
("Property"). It is also secured by an Unconditional Guaranty executed by
Commercial Assets, Inc., a Maryland corporation ("Guarantor").
10. Waiver of Presentment, Etc./Joint and Several Liability.
Borrower hereby waives presentment and demand for payment, notice of
dishonor, protest and notice of protest. The liability of each of the
undersigned Borrower is joint and several with respect to all obligations
hereunder.
11. Limited Recourse Debt.
Except as otherwise provided herein and the Indemnity of the Borrower
of even date, the Borrower is hereby released from all personal liability
hereunder to the extent such release does not operate to invalidate the lien of
the Mortgage securing this Note. In the event of foreclosure of the Mortgage or
other enforcement of the collection of the indebtedness evidenced by this Note,
Lender agrees, and any holder hereof shall be deemed by acceptance hereof to
have agreed, not to take a deficiency judgment against Borrower with respect to
said indebtedness except as may be provided as follows in this paragraph.
Notwithstanding the foregoing, however, Borrower shall be fully and personally
liable to the holder of this Note for:
(i) All damages suffered by the holder on account of waste to the
Property, fraud or willful misrepresentation committed by
Borrower;
(ii) Any retention of rental income or other income of the Property
after an Event of Default has occurred which remains uncured
after any applicable notice and opportunity to cure, to the
extent that any such retention is not applied to the operation
of the Property (i.e., capital and operating expenses), and
the retention of security deposits or other deposits made by
tenants of the Property which are not paid to tenants when due
or transferred to Lender or any other party acquiring the
Property at a foreclosure sale or any transfer in lieu of
foreclosure;
(iii) Any property taxes or assessments accrued prior to the
Lender's acquisition of title to the Property;
(iv) The replacement cost of any personal property or fixtures
encumbered by the Mortgage which are removed or disposed of by
Borrower and not replaced as required by the Mortgage and then
to the extent of the replacement cost of such personal
property or fixtures;
(v) The misapplication of any proceeds to the full extent of
misapplied proceeds under any insurance policies or awards
resulting from condemnation or the exercise of the power of
eminent domain or by reason of damage or destruction to any
portion of the Property or any building or buildings located
thereon;
- 6 -
<PAGE>
(vi) Any loss resulting from Borrower's failure to maintain hazard
or liability insurance as required under the terms of the
Mortgage;
(vii) All damages, liabilities, costs and expenses, including
attorneys' fees, incurred by the Lender due to the presence of
any Hazardous Substances (as defined in the Mortgage) on the
Property and due to any breach of covenant, breach of warranty
or misrepresentation by Borrower under the Mortgage, the
Indemnity, or any of the other loan documents delivered in
connection with the loan evidenced by this Note with respect
to Hazardous Substances and Borrower's failure to perform any
obligations under the Indemnity. There will be no liability of
the Borrower for Hazardous Substances which are introduced to
the Property subsequent to a permitted transfer of the
Property by the Borrower or to the Lender's acquisition of
title as a result of foreclosure or a deed in lieu of
foreclosure; provided, however, the Borrower shall bear the
burden of proof that the introduction and initial release of
such Hazardous Substances (i) occurred subsequent to the
transfer date, (ii) did not occur as a result of any action of
the Borrower, and (iii) did not occur as a result of
continuing migration or release of any Hazardous Substances
introduced prior to the transfer date, in, on, under or near
the Property;
(viii) Any fees and costs including attorney fees incurred in
enforcing and collecting any amounts due under this provision
11;
(ix) The full amount due under this Note including accrued interest
and other amounts due with respect to the Mortgage, the
Assignment and any other loan documents executed by the
Borrower in connection with this Note if there is a transfer
of title to the Property without the Lender's consent; and
(x) The full amount due under this Note including accrued interest
and other amounts due with respect to the Mortgage, the
Assignment and any other loan documents executed by the
Borrower in connection with this Note if subordinate financing
is placed against the Property without the Lender's consent.
The foregoing limitation on personal liability is not intended and
shall not be deemed to constitute a forgiveness of the indebtedness evidenced by
this Note or a release of the obligation to repay said indebtedness according to
the terms and provisions hereof, but shall operate solely to limit the remedies
otherwise available to the holder hereof for the enforcement and collection of
such indebtedness. As used in this paragraph, the term "Borrower" includes:
(a) Borrower (and each of them, if more than one),
(b) all general partners of any Borrower which is a partnership,
and
(c) all joint venturers of any Borrower which is a joint venture.
The personal liability hereunder of all persons included within the
term "Borrower" shall be joint and several. The provisions of this paragraph
shall control over any conflicting provisions of this Note, the Mortgage or the
Assignment. However, nothing contained in this paragraph 11 shall affect
Lender's ability to maintain any action against Borrower, or to obtain any
judgment necessary to realize upon the Mortgage or any other security for this
Note.
12. Loan Charges.
Interest, fees and charges collected or to be collected in connection
with the indebtedness evidenced hereby shall not exceed the maximum, if any,
permitted by any applicable law. If any such law is interpreted so that said
interest, fees and/or charges would exceed any such maximum and Borrower is
entitled to the benefit of such law, then:
- 7 -
<PAGE>
(i) such interest, fees and/or charges shall be reduced by the
amount necessary to reduce the same to the permitted maximum;
and
(ii) any sums already collected from Borrower which exceeded the
permitted maximum will be refunded. Lender may choose to make
the refund either by treating the payments, to the extent of
the excess, as prepayments of principal or by making a direct
payment to Borrower. No prepayment premium shall be assessed
on prepayments under this paragraph. The provisions of this
paragraph shall control over any inconsistent provision of
this Note or the Mortgage or any other document executed in
connection with the indebtedness evidenced hereby.
13. Governing Law.
This Note shall be construed, enforced and otherwise governed by the
laws of the State of Florida.
14. Lender.
As used herein, the term "Lender" shall mean holder and owner of this
Note.
LENDER AND BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE
RIGHT EITHER MAY HAVE TO TRIAL BY JURY IN RESPECT TO ANY LITIGATION BASED
HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE AND ANY
AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONNECTION THEREWITH, OR ANY COURSE OF
CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF
EITHER PARTY. BORROWER ACKNOWLEDGES THAT THIS WAIVER OF JURY TRIAL IS A MATERIAL
INDUCEMENT TO THE LENDER IN EXTENDING CREDIT TO THE BORROWER, THAT THE LENDER
WOULD NOT HAVE EXTENDED CREDIT WITHOUT THIS JURY TRIAL WAIVER, AND THAT BORROWER
HAS BEEN REPRESENTED BY AN ATTORNEY OR HAS HAD AN OPPORTUNITY TO CONSULT WITH AN
ATTORNEY IN CONNECTION WITH THIS JURY TRIAL WAIVER TO UNDERSTAND THE LEGAL
EFFECT OF THIS WAIVER.
Witnesses: CAX LAKESHORE, L.L.C., a Delaware limited
liability company
By: Commercial Assets, Inc., a Maryland
/s/ Laura K. Quigley corporation, Sole Manager and Sole
- ------------------------------- Member
Print Name: Laura K. Quigley
/s/ Merrilyn Lovelady
- -------------------------------
Print Name: Merrilyn Lovelady By:/s/Bruce E. Moore
------------------------------
Bruce E. Moore
President
Witnesses: LAKESHORE UTILITIES, L.L.C., a Delaware
limited liability company
By: Lakeshore Utilities, Inc., a Delaware
/s/ Thomas McLaughlin corporation, its managing member
- -------------------------------
Print Name: Thomas McLaughlin
/s/ Laura K. Quigley By: /s/Bruce E. Moore
- ------------------------------- ------------------------------
Print Name: Laura K. Quigley Bruce E. Moore
President
STATE OF FLORIDA
COUNTY OF PINELLAS
The foregoing instrument was acknowledged before me this 29th day of
April, 1999, by Bruce E. Moore, as President of COMMERCIAL ASSETS, INC., a
Maryland corporation, Sole Manager and Sole Member of CAX LAKESHORE, L.L.C., a
Delaware limited liability company, on behalf of the limited liability company
and corporation. He is personally known to me or has produced
______________________ as identification.
/s/ Merrilyn K. Lovelady
-------------------------------
NOTARY PUBLIC
Name:
Serial #:
My Commission Expires:
STATE OF FLORIDA
COUNTY OF PINELLAS
The foregoing instrument was acknowledged before me this 29th day of
April, 1999, by Bruce E. Moore, as President of Lakeshore Utilities, Inc., a
Delaware corporation, as Managing Member of Lakeshore Utilities, L.L.C., a
Delaware limited liability company, on behalf of the corporation and L.L.C. He
is personally know to me or produced ______________________ as identification.
/s/ Merrilyn K. Lovelady
--------------------------------
NOTARY PUBLIC
Name:
Serial #:
My Commission Expires:
3564-138-646075v1
- 8 -
Commercial Assets, Inc.
Subsidiaries as of March 17, 2000
Casa Encanta Commercial, L.L.C.
CAX Acquisition Corp.
CAX Cannery, L.L.C.
CAX Cypress Greens II, L.L.C.
CAX Cypress Greens, L.L.C.
CAX DTR Securitization Corp.
CAX La Casa Blanca East, L.L.C.
CAX La Casa Blanca Mini-Storage, L.L.C.
CAX La Casa Blanca, L.L.C.
CAX Lakeshore, L.L.C.
CAX New Era Homes, L.L.C.
CAX Rancho Mirage, L.L.C.
CAX Riverside II, L.L.C.
CAX Riverside III, L.L.C.
CAX Riverside Maintenance, L.L.C.
CAX Riverside, L.L.C.
CAX Saddlebrook, L.L.C.
CAX Savanna, L.L.C.
CAX White Sands, L.L.C.
Commercial Assets Finance, Inc.
Fiesta MHP Investors, L.L.C.
Fiesta SPE, L.L.C.
Fiesta/Encanta MHP, L.L.C.
Lakeshore Utilities, Inc.
Lakeshore Utilities, L.L.C.
Riverside Golf Course and Marina, L.L.C.
Riverside Utilities, L.L.C.
Royal Palm Village, L.L.C.
Southern Palms MHP, L.L.C.
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-74689) of Commercial Assets, Inc. of our report dated January 21,
2000, except for Note O, as to which the date is March 7, 2000, with respect to
the financial statements and schedules of Commercial Assets, Inc. included in
this Annual Report (Form 10-K) for the year ended December 31, 1999.
Denver, Colorado
March 24, 2000 /s/Ernst & Young LLP
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<NAME> COMMERCIAL ASSETS, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
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<RECEIVABLES> 0
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<CURRENT-ASSETS> 19213
<PP&E> 65602
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<BONDS> 20442
0
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<COMMON> 104
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<TOTAL-LIABILITY-AND-EQUITY> 97083
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