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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K/A
(Amendment No. 1)
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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)
Maryland 84-1240911
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3410 Galena Street, Suite 210 80231
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (303) 614-9410
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, American Stock Exchange, Inc.
par value $.01 per share
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 5, 1999, 10,364,029 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 $43,070,000.
Documents Incorporated by Reference
Portions of the proxy statement for the Registrant's 1999 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, 1998
Item Page
PART I
1. Business............................................................... 1
Company Background................................................ 1
Industry Background............................................... 2
Financial Information about Industry Segments..................... 2
Growth and Operating Strategies................................... 3
Manager........................................................... 5
Competition....................................................... 6
Taxation of the Company........................................... 6
Regulations....................................................... 7
Insurance......................................................... 7
Capital Resources................................................. 8
Dividend Reinvestment Plan........................................ 8
Restrictions on and Redemptions of Common Stock................... 8
Employees......................................................... 9
2. Properties............................................................. 9
3. Legal Proceedings...................................................... 11
4. Submission of Matters to a Vote of Security Holders.................... 11
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters.. 11
6. Selected Financial Data................................................ 12
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 12
Results of Operations............................................. 12
Liquidity and Capital Resources................................... 15
Funds From Operations............................................. 15
Year 2000 Compliance.............................................. 16
7a. Quantitative and Qualitative Disclosures About Market Risk............. 17
8. Financial Statements and Supplementary Data............................ 18
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 18
PART III
10. Directors and Executive Officers of the Registrant..................... 18
11. Executive Compensation................................................. 19
12. Security Ownership of Certain Beneficial Owners and Management......... 19
13. Certain Relationships and Related Transactions......................... 19
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....... 20
(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 Maryland corporation and, where appropriate, our
subsidiaries.
Item 1. Business.
Company Background
We are a Maryland corporation formed in August 1993, and 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 restructured our CMBS bonds in November 1997 by selling, redeeming and
resecuritizing our various CMBS bonds from which we received $77.7 million in
cash and 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.
In the third quarter of 1998, we decided to acquire interests in manufactured
housing communities. As of December 31, 1998, we held interests as owner, ground
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<PAGE>
lessor or mortgage lender (including participating mortgages) in six
manufactured home communities with a total of 640 developed homesites (sites
with homes in place), 50 sites ready for homes and 1,180 sites available for
future development. We expect to continue acquiring interests in manufactured
home communities during 1999.
Our principal executive offices are located at 3410 S. Galena Street, Suite 210,
Denver, Colorado 80231 and our telephone number is (303) 614-9410.
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 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 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.
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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 fees incurred in connection with property acquisitions; and
o nonrecurring costs related to discontinued classes of 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.
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-park homesite development;
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<PAGE>
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-amortized debt instead of higher cost,
short-term debt;
o ensuring the continued maintenance of our communities by providing a
minimum $50 per developed homesite per year for capital replacements;
o seeking to reduce 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. We plan on continuing this business plan during
1999, and hope to have largely invested our capital in manufactured home
communities during this year.
Our acquisition of interests in manufactured home communities takes many forms.
In many cases we acquire fee title to the community. When a community has a
significant number of unleased homesites, we seek a stable return from the
community during the development and lease-up phase while also seeking to
participate in future increased earnings after development is completed and the
sites are leased. We seek to accomplish this goal by making loans to development
companies in return for participating mortgages that are non-recourse to the
borrowers and secured by the property. In general, our participating mortgages
earn interest at fixed rates and, in addition, participate in the profits or
revenues from the community. This profit participation right generally entitles
us to 50% of the net income and cash flow generated by the community. As an
alternative, we sometimes enter into ground leases with development companies
having similar terms to our participating mortgages.
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.
In 1998, we invested $23 million to acquire interests in six manufactured home
communities that are located in Arizona, Florida and California. These
communities have a total of 640 developed homesites (sites with homes in place),
50 sites ready for homes and 1,180 sites available for future development.
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<PAGE>
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, 1998, we held interests in
six communities with 50 sites ready for homes and 1,180 sites available for
future development.
Manager
Our daily operations are performed by a manager pursuant to a management
agreement currently in effect through December 31, 1999. 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
Asset Investors are involved in the same industry. The two companies have 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.
The management agreement was approved by our independent directors and may be
terminated by either party with our 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 REIT income
exceeds (a) our average net worth, multiplied by (b) 1% over the ten year
United States Treasury rate.
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<PAGE>
During 1998, we paid $87,000 in Base Fees and $124,000 in Acquisition Fees to
Asset Investors. We did not pay any Incentive Fees in 1998. For 1999, the
management agreement relating to the Incentive Fee has been amended to provide
that such fee is calculated the same way as in 1998 except that our FFO, less an
annual capital replacement reserve of at least $50 per developed homesite,
replaces REIT income in the calculation 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.
In order to allocate investments between us and Asset Investors, the companies
have agreed that we will invest at least $50 million of our cash resources in
the acquisition of communities before Asset Investors will invest further cash
in the acquisition of communities. Thereafter, the companies will make a
determination with respect to acquisitions on a case-by-case basis. In the
ordinary course of our business, we are engaged in discussions and negotiations
with a number of manufactured home community owners regarding the purchase of
communities or interests in communities.
Asset Investors may acquire communities if a material portion of the purchase
price is paid for in units of limited partnership in Asset Investors Operating
Partnership ("OP Units") or Asset Investors' common stock.
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.
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.
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<PAGE>
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 these
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
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.
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<PAGE>
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 5, 1999, 10,364,029 shares of
common stock were issued and 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 5, 1999, we
have not authorized or issued additional classes of stock.
Dividend Reinvestment Plan
In 1998, we terminated our Automatic Dividend Reinvestment Plan due to the
administrative costs related to the plan.
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 Certification 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
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.
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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 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, 1998 are located:
<TABLE>
<CAPTION>
Number of Sites
----------------------------------------------------------
Available for
Number of Ready for Future
Communities Developed Homes Development
---------------- ----------------- --------------- ------------------
<S> <C> <C> <C> <C>
Arizona 3 337 -- 206
Florida 2 305 46 942
California 1 -- -- 30
--- ----- ----- ------
Total 6 642 46 1,178
=== ===== ===== ======
</TABLE>
The following table sets forth information regarding each manufactured home
community in which we own an interest:
<TABLE>
<CAPTION>
Average
Monthly Sites Sites
Developed Rent Ready Available for Year(s)
Community Location Homesites Occupancy per Site for Homes Development Developed
- -------------------------------------------------------------------------------------------------------------------
Owned Communities
<S> <C> <C> <C> <C> <C> <C> <C>
Cypress Greens (1)Lakeland, FL 85 100% $184 22 -- 1984
Riverside (1) Ruskin, FL 220 100 418 24 942 1981
-----------------------------------------------------------
Subtotal 305 100 353 46 942
-----------------------------------------------------------
Participating Mortgage and
Joint Venture Communities
Fiesta Village Mesa, AZ 175 98 273 -- 206 (2) 1962
Casa Encanta Mesa, AZ 111 87 350 -- -- (2) 1970
Southern Palms Mesa, AZ 51 100 203 -- -- (2) 1961
Cannery Village Newport Beach, CA -- -- -- -- 30 -- (3)
-----------------------------------------------------------
Subtotal 337 95 288 -- 236
-----------------------------------------------------------
Total Communities 642 97% $319 46 1,178
===========================================================
<FN>
(1) We have leased this community to a third party under a long-term lease in
which we receive a base rent plus 50% of any profits from the community.
(2) We intend to redevelop the Fiesta Village, Casa Encanta, and Southern
Palms communities along with adjoining vacant land. The combined
redevelopment will result in the additional 206 spaces.
(3) Property is expected to be redeveloped in 1999.
</FN>
</TABLE>
Owned Properties. At December 31, 1998, we owned one manufactured home community
which exceeded 10% of our total assets. This property, known as Riverside Club,
is located in the Tampa, Florida region and was purchased in November 1998. The
property has 220 developed homesites which are 100% occupied, 24 sites ready for
- 9 -
<PAGE>
homes and approximately 940 sites available for future development. 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, 1998, the average monthly rent for a homesite
was approximately $420. We can increase rent based on either (a) rents charged
by comparable 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 $7,744,000 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, 1998, our net book value in this property was
$11,268,000 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 for 50 years to a third party,
Riverside Golf Course Community, L.L.C. 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 receive
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.
We intend to further develop this property over the next five to ten years. The
development is expected to include development of the sites ready for homes and
the sites available for future development 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.
Properties Involving Participating Mortgages. At December 31, 1998, we had
$8,033,000 of participating mortgages involving three manufactured home
communities and adjoining land. The mortgages were secured by the three
properties and land plus two additional manufactured home communities, a
recreational vehicle park and commercial real estate. The mortgages accrue
interest at 15% and pay interest at 9% during the first year. The pay rate
increases by 1% each year to a maximum of 12% per year and the mortgages mature
in 2007. We receive additional interest equal to 50% of the profits and net cash
flows from the three properties and adjoining land in excess of the interest
rate. Also, we receive 50% of any net sales proceeds in excess of the amount of
our participating mortgages. The mortgages may be prepaid at any time; however,
we continue to receive 50% of any profits and net cash flows from these
properties until they are sold.
- 10 -
<PAGE>
Item 3. Legal Proceedings.
At March 5, 1999, there were no material legal proceedings, pending or
threatened, to which we were a party or to which any of our respective
properties were subject.
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 1998.
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:
<TABLE>
<CAPTION>
Regular Special Capital Gain
Dividends Dividends Dividends
High Low Declared Declared Declared
---- --- -------- -------- --------
1998
- ----
<S> <C> <C> <C> <C> <C>
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 -- --
1997
- ----
First Quarter $ 7 $ 6-3/8 $ .17 $ -- $ --
Second Quarter 6-11/16 6-3/16 .17 -- --
Third Quarter 7-3/16 6-5/8 .17 -- --
Fourth Quarter 7-11/16 6-9/16 .17 .26 .17
</TABLE>
As of March 5, 1999, 10,364,029 shares of common stock were issued and
outstanding and were held by 1,375 stockholders of record. We estimate there
were an additional 8,000 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
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 21, 1998, 22,020 shares of common stock were issued to non-executive
directors in lieu of annual director fees as a private placement of our
securities. The $6.81 per share value was equal to the closing stock price on
the date of issuance.
- 11 -
<PAGE>
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, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998, 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,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Real estate, before accumulated depreciation $ 12,678 $ -- $ -- $ -- $ --
Investments in participating mortgages and joint
Cash equivalents and short-term investments 48,358 74,153 8,277 598 12,367
CMBS bonds 1,739 1,981 61,460 69,503 74,046
Total assets 78,234 78,148 72,406 71,590 87,604
Total stockholders' equity 77,254 77,705 71,919 70,465 74,672
Year Ended December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
RENTAL PROPERTY OPERATIONS:
Income from participating mortgages and leases $ 587 $ -- $ -- $ -- $ --
Depreciation (50) -- -- -- --
-------- -------- -------- -------- --------
537 -- -- -- --
-------- -------- -------- -------- --------
CMBS bonds revenues 9,172 9,838 8,980 5,938
Interest and other income 3,874 945 319 189 1,126
General and administrative expenses (420) (519) (805) (1,393) (1,220)
Management fees paid to manager (211) (1,678) (1,425) (1,151) (598)
Gain on sale of bonds -- 5,786 -- -- --
Net income 3,441 13,706 6,959 6,376 4,927
Per share amounts:
Basic and diluted earnings $ .33 $ 1.32 $ .68 $ .63 $ .49
Regular dividends $ .39 $ .68 $ .68 $ .68 $ .50
Special dividends $ -- $ .26 $ .04 $ -- $ .03
Capital gain dividends $ -- $ .17 $ -- $ -- $ --
Weighted-average common shares outstanding 10,357 10,332 10,247 10,104 10,047
Weighted-average common shares and common share
equivalents outstanding 10,372 10,371 10,254 10,108 10,048
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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 1998, we decided to
change our business from the ownership of high-risk CMBS bonds to the ownership,
acquisition, development and management of manufactured home communities. This
decision helped us to avoid the volatility incurred by other owners of these
securities following the capital market crisis in the third quarter of 1998.
- 12 -
<PAGE>
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. During the last few months we have been focused on
the investment of our capital in the acquisition of manufactured home
communities. We believe that the investment of our capital will be substantially
completed during 1999, and we are hopeful that this will result in improved
performance.
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997
In 1997, we decided to cease to invest in commercial mortgage backed securities
bonds. In November 1997, we resecuritized, sold or redeemed our existing
portfolio of commercial mortgage backed securities bonds and had substantially
ceased to be involved in the investment in commercial mortgage backed securities
bonds. In August 1998, we decided to invest in manufactured home communities. In
the interim period, we temporarily invested our cash resources in money market
and other short-term investments while we were determining which real estate
asset class we would re-deploy our capital into. Results of 1998 are not
comparable to 1997 results because during 1997, we were in the business of
investing in commercial mortgage backed securities bonds. During 1998, our
operations were primarily the result of investments in money market accounts and
other short-term investments. During the latter half of 1998, we began to invest
in manufactured home communities. Accordingly, 1998 activities are unrelated to
1997 activities.
Rental Property
During 1998, income from rental properties totaled $537,000, arising from our
initial investments in manufactured home communities.
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.
Interest and Other Income
Interest and other income during 1998 was $3,874,000 compared to $945,000 for
1997. The increase is due to our temporary investment of the $77.7 million of
cash proceeds received in November 1997 from the restructuring of the CMBS
bonds. The average interest rates earned on these short-term investments were
5.40% and 5.44% during 1998 and 1997, respectively.
CMBS Bonds
Income from CMBS bonds was $161,000 during 1998 compared to $9,172,000 for 1997.
The earnings figures for 1998 represent the income from the retained residual
interest of the resecuritization of 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 in 1998 compared
to 1997 primarily due to lower accounting and other expenses related to the
ownership of CMBS bonds.
- 13 -
<PAGE>
Management Fees
During 1998, we incurred Base Fees of $87,000 on investments in manufactured
home communities, the retained equity 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 incur such
fees on cash equivalents and short-term investments of our cash resources.
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.
Acquisition Fees were expensed in 1998 because the manager is Asset Investors,
owner of 27% of our common stock. If these fees had been paid to an unrelated
third party, then they would have been capitalized under generally accepted
accounting principles. For this reason, such fees are capitalized in our
calculation of FFO.
Costs Related to 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.
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
Interest Income
Interest income in 1997 and 1996 was $945,000 and $319,000, respectively. The
increase in interest income in 1997 as compared to 1996 is due to our investment
of the proceeds from the restructuring of the CMBS bonds in short-term
investments. The average interest rate earned on these funds was 5.44% and 5.14%
in 1997 and 1996, respectively.
CMBS Bonds
Income from CMBS bonds was $9,172,000 during 1997 compared to $9,838,000 in
1996. Earnings from CMBS bonds decreased by $1,138,000 because there were no
earnings in November or December 1997 after the sale of the CBMS bond portfolio.
This decrease was partially offset by higher income prior to the sale. The
income from the CMBS bonds prior to the sale was higher due to the prepayments
made in August 1997 on one bond and the earnings on bonds acquired in March 1997
offset by income from the early redemption of two bonds in May 1996 and
prepayments made on another bond in 1996.
General and Administrative Expenses
Our general and administrative expenses were $519,000 and $805,000,
respectively, for 1997 and 1996. General and administrative expenses decreased
in 1997 compared to 1996 primarily due to lower stockholder relations expenses,
lower consulting and accounting expenses and the elimination of expenses from
dividend equivalent rights pursuant to the amendment to our stock option plan.
- 14 -
<PAGE>
Management Fees
Management fee expenses were $1,678,000 and $1,425,000, respectively, for 1997
and 1996. The increase in management fees during 1997 compared with 1996 was due
to an increase of $311,000 in Incentive Fees, offset by a decrease of $58,000 in
Base Fees and Administrative Fees. Prior to the restructuring of the CMBS bond
portfolio, our manager received an Administrative Fee of up to $10,000 per year
for each CMBS bond. The increase in Incentive Fees was due to higher REIT income
before Incentive Fees partially offset by an increase in the average Ten-Year
U.S. Treasury Rate between 1996 and 1997. The increase in REIT income was
primarily a result of gains associated with the restructuring of the CMBS bonds
and nonrecurring expenses incurred in 1996 while the increase in the average
Ten-Year U.S. Treasury Rate had the effect of raising the threshold above which
Incentive Fees are paid. The decrease in Base Fees was due to the decrease in
average invested assets as a result of the restructuring of our CMBS bonds.
Dividend Distributions
During 1998, we declared regular dividends of $.39 per share. During each of
1997 and 1996, we declared regular dividends of $.68 per share. In addition, we
declared special dividends of $.26 per share and $.04 per share in 1997 and
1996, respectively, and a capital gains dividend of $.17 per share in 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, we had cash and cash equivalents of $3,292,000 and
short-term investments of $45,066,000. 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 1998, the net cash provided by operating activities was $3,705,000 compared
to $4,428,000 during 1997. The decrease was primarily a result of lower income
from both short-term investments and investments in manufactured home
communities in 1998 than income from CMBS bonds in 1997.
Net cash used in investing activities was $70,524,000 during 1998 compared to
net cash provided by investing activities of $72,892,000 in 1997. The net cash
in 1998 was primarily used to acquire short-term investments and investments in
manufactured home communities. Investing activities in 1997 included $77,693,000
of net cash provided from the restructuring of the bonds.
Net cash used in financing activities decreased to $4,042,000 in 1998 compared
to $11,444,000 in 1997, primarily due to lower dividends.
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),
- 15 -
<PAGE>
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 fees incurred in connection with property acquisitions; and
o nonrecurring costs related to discontinued classes of 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. Commercial Assets uses FFO
in measuring its operating performance because it believes 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 1998, our FFO was as follows (in thousands):
1998
----
Net income $ 3,441
Real estate depreciation 50
Acquisition fees 124
Costs related to potential marina investments 500
----------
Funds From Operations (FFO) $ 4,115
==========
Weighted average common shares outstanding 10,357
==========
For 1998, our net cash flows were as follows (in thousands):
1998
----
Cash provided by operating activities $ 3,705
Cash used in investing activities (70,524)
Cash used in financing activities (4,042)
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
without any material interruption or material effect on our business, results of
operations or financial condition. In addition, we anticipate that any hardware
- 16 -
<PAGE>
or software that we acquire (including upgrades to existing systems) between now
and December 31, 1999 will be Year 2000 compliant.
Disruptions in the economy generally resulting from Year 2000 issues could also
materially adversely affect us. Moreover, because a large number of our tenants
may be dependent on social security payments to pay their rents, a failure of
the Social Security Administration to cause their systems to be Year 2000
compliant may result in a material adverse effect on our operations. The Social
Security Administration has announced that they will have their systems Year
2000 compliant before January 1, 2000. We have received oral representations
from our third party vendors indicating that they are substantially Year 2000
compliant.
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.
Our worst case scenario would be in the event that the U.S. Social Security
Administration were unable to process their payments to our tenants, in which
case large numbers of our tenants may be unable to pay their rent when due. If
this were to occur, we may be unable to continue to service our debt as it
becomes due and foreclosure proceedings on our affected properties could be
commenced by our lenders. We have no contingency plan with respect to potential
Year 2000 related problems. We note, however, that on December 28, 1998,
President Clinton publicly announced that the U.S. Social Security
Administration would be fully Year 2000 compliant before the end of 1999.
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 ("LIBOR"). Accordingly, changes in interest rates could
affect the returns from such investments. If LIBOR decreased immediately by 1%,
our annual net income would decrease by $451,000, based on the amount of
short-term investments at December 31, 1998. Because we intend to re-deploy our
short-term investments by acquiring manufactured home communities during 1999,
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 future investments in manufactured home communities
will depend on a number of factors. See "Business - Growth and Operating
Strategies - Future Acquisitions."
We do not currently have any notes payable but expect to borrow amounts in
connection with acquisitions of communities. We intend to borrow non-recourse,
secured, fixed rate, fully amortizing debt in connection with such acquisitions.
Accordingly, such debt would not cause us significant exposure to changing
interest rates.
- 17 -
<PAGE>
Item 8. Financial Statements and Supplementary Data.
The independent auditor's reports, consolidated financial statements and
schedules listed in the accompanying index are filed as part of this report 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.
The information set forth under the caption "Board of Directors and Officers" in
the proxy statement in connection with our 1999 Annual Meeting of Stockholders
which is to be filed after the date this report on Form 10-K is filed is hereby
incorporated by reference.
Executive Officers of the Registrant
The Executive Officers of the Company as of December 31, 1998 are:
Name Age Position with the Company
- --------------------------------------------------------------------------------
Terry Considine 51 Chairman of the Board of Directors and
Chief Executive Officer
Thomas L. Rhodes 59 Vice Chairman of the Board of Directors
Bruce E. Moore 56 President and Chief Operating Officer
David M. Becker 39 Chief Financial Officer, Secretary and Treasurer
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 our Co-Chairman of the Board of Directors and Co-Chief
Executive Officer. Mr. Considine also serves as Chairman of the Board of
Directors and Chief Executive Officer of Asset Investors. He is the sole owner
of Considine Investment Co, and since July 1994, he has been the Chairman of the
Board of Directors and Chief Executive Officer of Apartment Investment and
Management Company.
Thomas L. Rhodes has been our Vice Chairman of the Board of Directors since
April 1998. From September 1996 to April 1998, Mr. Rhodes served as Co-Chairman
of the Board of Directors and Co-Chief Executive Officer. From September 1996 to
April 1998, Mr. Rhodes also served as Asset Investors' Co-Chairman of the Board
of Directors and Co-Chief Executive Officer. Since April 1998, Mr. Rhodes has
also served as Vice Chairman of the Board of Directors of 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 has been our President and Chief Operating Officer since October
1998. He also serves as President and Chief Operating Officer of Asset
Investors. Mr. Moore is the founder and was the Chief Executive Officer of
Brandywine Financial Services Corporation and its affiliates, a private real
estate firm specializing in various aspects of the real estate industry
including asset management, consulting, development, property management,
- 18 -
<PAGE>
brokerage and capital formation. He is a certified public accountant and 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, Mr. 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, Secretary and
Treasurer since December 1997 and was appointed to such positions in April 1998.
Since December 1997, Mr. Becker has also served as Chief Financial Officer,
Secretary and Treasurer of Asset Investors and was appointed to such positions
in February 1998. From September 1995 until joining us, 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.
There are no family relationships between any of the executive officers,
directors or persons nominated or chosen by us to become a director or executive
officer and there are no arrangements or understandings pursuant to which any of
them were selected as directors or officers. Except as described above, none of
the persons nominated to become directors or executive officers have been
involved in any legal proceedings during the past five years that are material
to an evaluation of the ability or integrity of such persons.
The information set forth under the caption "Compliance with Section 16(a) of
the Exchange Act" in the proxy statement is hereby incorporated by reference.
Item 11. Executive Compensation.
The information set forth under the captions "Summary Compensation Table",
"Options/SAR Grants in Last Fiscal Year" and "Aggregate Option/SAR Exercises in
Last Fiscal Year and Fiscal Year-end Options/SAR Values" in the proxy statement
is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the proxy statement is hereby incorporated
by reference.
Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "Certain Relationships and Related
Transactions" in the proxy statement is hereby incorporated by reference.
- 19 -
<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 18 of this report.
(b) Reports on Form 8-K for the quarter ended December 31, 1998:
Current report on Form 8-K, dated November 20, 1998, reporting the acquisition
of manufactured housing community assets which included the Statement of Excess
Revenues Over Specific Operating Expenses of the Moorings of Manatee
Manufactured Home Community for the Year Ended December 31, 1997 (audited) and
the Period from January 1, 1998 to September 30, 1998 (unaudited).
- 20 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
COMMERCIAL ASSETS, INC. Page
Financial Statements:
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997............ F-3
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996...................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Financial Statement Schedules:
Schedule III--Real Estate and Accumulated Depreciation.................. F-18
Schedule IV - Mortgage Loans on Real Estate............................. F-20
F - 1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Commercial Assets, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Commercial
Assets, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Commercial Assets, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. 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 29, 1999
F - 2
<PAGE>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
--------------- --------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 3,292 $ 74,153
Short-term investments 45,066 --
Real estate, net of accumulated depreciation of $50 12,628 --
Investments in participating mortgages 9,328 --
Investment in real estate joint venture 1,280 --
Investment in and note receivable from Westrec 4,011 1,710
CMBS bonds 1,739 1,981
Other assets, net 890 304
---------- ----------
Total Assets $ 78,234 $ 78,148
========== ==========
LIABILITIES
Accounts payable and accrued liabilities $ 872 $ 368
Management fees payable to related parties 108 75
---------- ----------
980 443
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share, 25,000
shares authorized; no shares outstanding -- --
Common stock, par value $.01 per share, 75,000 shares
authorized; 10,364 and 10,342 shares isued and
outstanding, respectively 104 104
Additional paid-in capital 76,874 76,724
Retained earnings 276 877
---------- ----------
77,254 77,705
---------- ----------
Total Liabilities and Stockholders' Equity $ 78,234 $ 78,148
========== ==========
</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,
--------------------------------------
1998 1997 1996
--------- --------- --------
RENTAL PROPERTY OPERATIONS
<S> <C> <C> <C>
Income from participating mortgages and leases $ 587 $ -- $ --
Depreciation (50) -- --
--------- -------- --------
Income from property operations 537 -- --
--------- -------- --------
Interest and other income 3,874 945 319
CMBS bonds revenue 161 9,172 9,838
General and administrative expenses (420) (519) (805)
Management fees paid to manager (87) (1,678) (1,425)
Interest expense -- -- (2)
Elimination of dividend equivalent rights -- -- (966)
Acquisition fees paid to manager (124) -- --
Costs related to potential marina investments (500) -- --
Gain on sale of bonds -- 5,786 --
--------- -------- --------
NET INCOME $ 3,441 $ 13,706 $ 6,959
========= ======== =========
BASIC AND DILUTED EARNINGS PER SHARE $ .33 $ 1.32 $ .68
========= ======== =========
DIVIDENDS DECLARED PER SHARE:
Regular dividends $ .39 $ .68 $ .68
Special dividends -- .26 .04
Capital gain dividends -- .17 --
--------- -------- ---------
$ .39 $ 1.11 $ .72
========= ======== =========
Weighted-Average Common Shares Outstanding 10,357 10,332 10,247
Weighted-Average Common Shares and Common Share
Equivalents Outstanding 10,372 10,371 10,254
</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, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Retained
Earnings
(Dividends In Accumulated
Common Stock Additional Excess of Other Total
------------ Paid-In Accumulated Comprehensive Stockholders'
Shares Amount Capital Earnings) Income Equity
------ ------ ------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCES - DECEMBER 31, 1995 10,142 $ 102 $ 75,523 $ (915) $(4,245) $ 70,465
Comprehensive Income
Net income -- -- -- 6,959 -- 6,959
Unrealized appreciation of CMBS bonds -- -- -- -- 856 856
------- ------ --------- -------- ------- ---------
Comprehensive Income -- -- -- 6,959 856 7,815
------- ------ --------- -------- ------- ---------
Issuance of common stock 174 1 1,036 -- -- 1,037
Dividends -- -- -- (7,398) -- (7,398)
------- ------ --------- -------- ------- ---------
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
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
======= ====== ========= ======== ======= =========
</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,
------------------------------------------
1998 1997 1996
----------- ----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 3,441 $ 13,706 $ 6,959
Adjustments to reconcile net income to net cash flows from
operating activities:
Amortization of premium/discount on CMBS bonds and short-term
investments 274 (2,381) (2,155)
Accrued income on participating mortgages and leases (443) -- --
Depreciation 50 -- --
Gain on sale of bonds -- (5,786) --
Issuance of common stock for dividend equivalent rights -- -- 941
Increase in accounts payable and accrued liabilities 537 216 157
Decrease (increase) in other assets (154) (1,327) 18
-------- -------- --------
Net cash provided by operating activities 3,705 4,428 5,920
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of short-term investments (91,946) -- --
Collections on short-term investments 30,313 -- --
Proceeds from sale of short-term investments 16,085 -- --
Investments in participating mortgages, net (8,959) -- --
Purchases of real estate (12,671) -- --
Capital replacements (7) -- --
Investments in Westrec (2,301) -- --
Investment in real estate joint venture (1,280) -- --
Proceeds from restructuring of bonds -- 77,693 --
Collections on CMBS bonds 242 -- 9,857
Acquisitions of CMBS bonds -- (4,801) --
-------- -------- --------
Net cash provided by (used in) investing activities (70,524) 72,892 9,857
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (4,042) (11,475) (7,398)
Proceeds from the issuance of Common Stock -- 31 --
Paydowns on short-term financing -- -- (700)
-------- -------- --------
Net cash used in financing activities (4,042) (11,444) (8,098)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (70,861) 65,876 7,679
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 74,153 8,277 598
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,292 $ 74,153 $ 8,277
======== ======== ========
</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 Maryland corporation that has interests in manufactured home
communities and has elected to be taxed as a real estate investment trust
("REIT"). 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"). The CMBS bonds were issued in commercial
mortgage loan securitizations involving multi-class issuances of debt securities
which were secured and funded as to the payment of principal and interest by a
specific group of mortgage loans on multi-family or other commercial real
estate. In 1997, the Company decided to resecuritize its asset base and cease to
invest in subordinate CMBS bonds. In November 1997, the Company resecuritized
its subordinate CMBS bond portfolio by selling or redeeming its various CMBS
bonds. The sale resulted in the Company receiving $77,693,000 cash and retaining
a residual interest in an owner trust arising from the resecuritization
transaction (see Note H). The Company temporarily invested the proceeds from
such sale in government securities and short-term investments until the Company
decided what class of assets to reinvest such funds in.
In the third quarter of 1998, the Company decided to invest in manufactured home
communities and as of December 31, 1998 has invested $23 million in interests in
manufactured home communities and adjoining land with 640 developed homesites,
50 sites ready for homes and 1,180 sites available for future development.
The Company's daily operations are performed by a manager pursuant to an
agreement currently in effect through December 1999 ("the Management
Agreement"). Prior to October 1996, the Company was managed by subsidiaries of
MDC Holdings, Inc. ("MDC"). In September 1996, MDC sold Financial Asset
Management LLC ("FAM"), the manager at such time, to an investor group led by
Terry Considine, Thomas L. Rhodes and Bruce D. Benson. In November 1997, the
assets of FAM, including the Management Agreement, were acquired by Asset
Investors Corporation ("AIC" and together with its subsidiaries, "Asset
Investors"), the current manager. Mr. Considine is Chairman of the Board of
Directors and Chief Executive Officer of both the Company and Asset Investors.
Mr. Rhodes is Vice Chairman and Mr. Benson is a director of both companies.
Asset Investors owns 27% of the Company's Common Stock. No change was made to
the Management Agreement during 1998 other than an extension. During 1999, the
Incentive Fee has been amended to provide that such fee is based on Adjusted
Funds From Operations ("AFFO") instead of REIT income. Generally, AFFO is book
net income plus depreciation, amortization and acquisition fees less an annual
capital replacement reserve equal to $50 per developed homesite.
The Management Agreement is subject to the approval of a majority of the
Company's independent directors and can be terminated by either party, without
cause, with 60 days' notice. Since the Company has no employees, certain
officers of Asset Investors are also officers of the Company.
F - 7
<PAGE>
B. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Real Estate and Depreciation
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,
1998, management believes that no impairment losses exist based on periodic
reviews. No impairment losses were recognized in 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.
Investment in Real Estate Joint Venture
An investment in a real estate joint venture in which the Company does not
control the joint venture's activities is 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, 1998.
Revenue Recognition
Interest on participating mortgages is recorded based upon outstanding balances
and interest rates per the terms of the mortgages. In addition, the Company
evaluates the collectibility of any unpaid interest and provides reserves as
F - 8
<PAGE>
necessary. As of December 31, 1998, there is no reserve for uncollected interest
on the participating mortgages. Rent on ground leases is recognized when earned
and due from lessee.
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
CAX intends to operate in a manner that will permit it to qualify for the income
tax treatment accorded to a REIT. If it so qualifies, CAX's REIT income, with
certain limited exceptions, will not be subject to federal 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, CAX is required, among other things,
to distribute annually to its stockholders at least 95% of its REIT income and
to meet certain asset, income and stock ownership tests. Regular and special
dividends declared in 1998, 1997 and 1996 represented ordinary taxable income to
the stockholders. In addition, the Company declared a capital gains dividend of
$.17 per share in 1997.
Earnings Per Share
Basic earnings per share for 1998, 1997 and 1996 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 15,000, 39,000 and 7,000 in 1998, 1997 and 1996, respectively.
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 interest expense in cash of $8,000 in 1996. The
Company paid no interest expense in 1998 or 1997.
F - 9
<PAGE>
Non-cash investing and financing activities for 1998, 1997 and 1996 were as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ------
Principal collections on CMBS bonds transferred to restricted
<S> <C> <C> <C>
cash $ -- $ 6,227 $ 1,214
Unrealized holding gains and losses on CMBS bonds -- 3,389 856
Issuance of Common Stock for services 150 135 --
Distributions of Common Stock pursuant to dividend equivalent
rights -- -- 96
Issuance of Common Stock as consideration for the elimination
of dividend equivalent rights -- -- 941
</TABLE>
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made in the 1997 and 1996 consolidated
financial statements to conform to the classifications currently used. The
effect of such reclassifications on amounts previously reported is immaterial.
C. Short-term Investments
During 1998, the Company acquired short-term investments consisting of
mortgage-backed bonds guaranteed by Federal Home Loan Mortgage Corporation and
Federal National Mortgage Association. These investments are classified as
available-for-sale, and the fair market value at December 31, 1998 approximates
the carrying value of $45,066,000. During 1998, the Company had no unrealized
gains (losses) on these investments. The Company had $16,085,000 in proceeds
from the sale of short-term investments during 1998 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, 1998,
these investments had the following maturities:
Amount Maturity
------------------ ---------------
$10,548,000 2000
$14,971,000 2003
$19,547,000 2022
D. Investments in Manufactured Home Communities
During 1998, the Company paid $12,671,000 to acquire two manufactured home
communities with approximately 300 developed homesites, 50 sites ready for homes
and 940 sites available for future development. These investments are recorded
as real estate.
The Company also made $8,959,000 of participating mortgages involving three
manufactured home communities and adjacent land involving approximately 340
developed homesites and 210 sites available for future development. These
non-recourse mortgages are 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.
F - 10
<PAGE>
Finally, the Company invested $1,280,000 in a real estate joint venture
involving a manufactured home community with 30 sites available for future
development. The Company accounts for this as an investment in real estate joint
venture since the other party to the venture controls the activities of the
venture.
The following unaudited pro-forma information has been prepared assuming the
acquisition of the interests in manufactured home communities and the
restructuring of the Company's CMBS bonds 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
1998 and 1997 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
Revenues (income from participating mortgages and leases, interest
<S> <C> <C>
income and CMBS bonds revenues) $ 5,375 $ 6,693
========== ==========
Income before gain on restructuring of bonds $ 3,724 $ 5,529
Gain on restructuring of CMBS bonds -- 6,069
---------- ----------
Net income $ 3,724 $ 11,598
========== ==========
Basic and diluted earnings per share $ .36 $ 1.12
========== ==========
</TABLE>
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
completion, which may include outstanding contracts to acquire certain
manufactured home communities, subject to satisfactory completion of the
Company's due diligence review.
E. Investments in Participating Mortgages
As of December 31, 1998, the Company has investments in participating mortgages
secured by three manufactured home communities and adjoining land. The
non-recourse notes accrue interest at 15% per annum and pay interest at 9% per
annum through August 1999, with the pay rate increasing 1% each year thereafter
to a maximum of 12% per annum. The loans mature in September 2007. The Company
also receives additional interest of 50% of the net profits and cash flows from
the properties. In addition, as of December 31, 1998, the Company has
investments in participating mortgages secured by individual homes and home
sites within two manufactured home communities. These mortgages accrue interest
at 10% and pay interest from the cash flows from the homesites. The Company also
receives additional interest of 50% of the net profits and cash flows from the
homesites. As of December 31, 1998, the Company had investments in participating
mortgages of $9,328,000 and income of $451,000 from these mortgages during 1998.
F - 11
<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 (in
thousands):
(unaudited)
Rental and other property revenues $ 458
Property operation expenses (234)
Depreciation expense (31)
----------
Income from rental property operations 193
----------
Net loss (108)
F. Real Estate
Real estate at December 31, 1998, is as follows (in thousands):
Land $ 3,798
Land improvements and buildings 8,880
----------
12,678
Less accumulated depreciation (50)
----------
Investment in real estate, net $ 12,628
==========
Land improvements and buildings consist primarily of infrastructure, roads,
landscaping, clubhouses, maintenance buildings and common amenities. The two
manufactured home communities involving the above real estate 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 other community acquired by the Company involves two phases and has been
leased to the same third party for 50 years. Phase One has 220 developed
homesites and 24 sites ready for homes. Phase Two involves 940 sites available
for future development. Initial annual lease payments on Phase One is $890,000,
increasing by 4% per annum. There are no lease payments on Phase Two until the
sites are ready for homes, at which time, the annual lease payments on Phase Two
will be equal to 10% times the costs incurred in developing Phase Two. In
addition, the lessee pays to the Company additional rent equal to 50% of the
lessee's net cash flow from the property. In the event of a sale, the Company
receives 50% of any sales proceeds in excess of the Company's cost.
G. Investment in Real Estate Joint Venture
In November 1997, the Company invested $1,280,000 in a joint venture involving
the development of 30 homesites near Newport Beach, California. 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.
F - 12
<PAGE>
Any excess sales proceeds are then shared equally. The Company did not record
any income from this real estate joint venture in 1998.
H. 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 1998, the Company received $403,000 of which $242,000 was
recorded as a reduction in the net book value of the retained residual interest,
resulting in a net book value of $1,739,000 which the Company believes
approximates fair market value at December 31, 1998. The Company had no
unrealized gains (losses) on its CMBS bonds at December 31, 1998 and 1997. The
maturity dates of the CMBS bonds range from 2001 to 2004 and the Company had no
sales of CMBS bonds during 1998 or 1996.
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.
I. 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 in March 1998. In the third quarter of 1998, the Company decided to
invest in manufactured housing communities and not to invest in marinas. The
Company has valued its investment in Westrec common stock at the price at which
the Company can re-sell such stock to Westrec. The Company has expensed $500,000
for the portion of its investment in Westrec in excess of the sales price plus
additional due diligence, legal, and other costs incurred in connection with
investigating investments in marinas. The Company also has a note receivable
from an affiliate of Westrec. The outstanding balance of the note receivable
(including interest receivable) is $1,883,000 and $1,710,000 at December 31,
1998 and 1997, respectively. In May 1998, the Company issued to an affiliate of
Westrec warrants to purchase 322,000 shares of Common Stock at $6.60 per share.
These warrants were cancelled in 1998.
F - 13
<PAGE>
J. 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, 1998, permitted the issuance of up to an aggregate of 3,000,000
shares of Common Stock, of which 454,000 and 717,000 related to outstanding
stock options as of December 31, 1998 and 1997, 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.
Prior to May 30, 1996, stock options granted under the Stock Option Plan
automatically accrued dividend equivalent rights ("DERs") based on: (i) the
number of shares underlying the unexercised portion of the option; (ii)
dividends declared on the outstanding shares of the Company between the option
grant date and the option exercise date; and (iii) the market price of the
shares on the dividend record date. DERs were paid in shares of Common Stock (or
in other property that constituted the dividend) at the time of each dividend
distribution. During 1996, the Company incurred $96,000 of expenses from DERs
covering 16,000 shares of Common Stock which were subject to issuance pursuant
to options granted under the plan. On May 30, 1996, the Company's stockholders
approved the issuance of Common Stock in exchange for the elimination of DERs
for such options and, as a result, the Company recorded a $966,000 charge during
1996.
Presented below is a summary of the changes in stock options for the three years
ended December 31, 1998. As of December 31, 1998, the outstanding options have
exercise prices ranging from $5.625 to $6.875 and have a remaining
weighted-average life of 2.3 years.
Weighted
Average
Exercise Price Shares
-------------- ------
Outstanding - December 31, 1995 $ 6.94 574,000
Granted 5.86 83,000
Forfeited 6.68 (9,000)
------ ----------
Outstanding - December 31, 1996 6.80 648,000
Granted 6.30 87,000
Forfeited 7.30 (13,000)
Exercised 6.12 (5,000)
------ ----------
Outstanding - December 31, 1997 6.74 717,000
Granted 6.62 38,000
Forfeited 7.50 (290,000)
Expired 7.25 (11,000)
------ -----------
Outstanding - December 31, 1998 $ 6.23 454,000
====== ==========
Options granted to date vest over various periods up to two years. As of
December 31, 1998, 1997 and 1996, 445,000, 660,000 and 454,000, respectively, of
the outstanding options were exercisable. As of December 31, 1998, 1997 and
1996, the weighted average exercise price of exercisable options was $6.22,
$6.78 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.
F - 14
<PAGE>
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using an
option-pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Range of risk free interest rate 6.0% 6.2% 6.1% to 7.2%
Expected dividend yield 8.0% 8.0% 9.8%
Volatility factor of the expected market price of the
Company's common stock 0.280 0.156 0.150
Weighted average expected life of options 10.0 years 4.2 years 4.2 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 1998, 1997 and 1996, the estimated weighted-average, grant-date fair
value of options granted was $.76, $.42 and $.45, 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, 1998, 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>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Pro forma net income $3,402 $ 13,670 $ 6,932
Pro forma basic and diluted earnings per share $ 0.33 $ 1.32 $ 0.68
</TABLE>
K. 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. Prior to November 1997, FAM was the manager.
The Management Agreement provides that the manager receives a "Base Fee," an
"Acquisition Fee" and an "Incentive Fee." The Base Fee is payable quarterly in
an amount equal to 1% per annum of the Company's average net book value of real
estate-related assets. The Acquisition Fee equals 0.5% of the cost of each real
estate asset acquired. The Incentive Fee equals 20% of the amount by which the
Company's REIT taxable income exceeds the amount calculated by multiplying the
Company's "average net worth" by the "Ten-Year United States Treasury rate" plus
1%. In 1997 and 1996, 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.
F - 15
<PAGE>
Fees paid to the manager during 1998, 1997 and 1996 were (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------------- --------------- --------------
<S> <C> <C> <C>
Base Fees $ 87 $ 598 $ 654
Acquisition Fees 124 23 --
Incentive Fees -- 1,024 713
Administrative Fees -- 56 58
------ -------- --------
$ 211 $ 1,701 $ 1,425
====== ======== ========
</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 1998 were expensed because such fees were paid to
Asset Investors, owner of 27% of the Company's Common Stock.
The Management Agreement has been extended through December 31, 1999. During
1999, the Incentive Fee has been amended to provide that such fee is based on
CAX'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 book net income plus depreciation, amortization and
acquisition fees.
L. Commitments
In connection with the acquisition of a manufactured home community, the Company
entered into an earn-out agreement with respect to 154 unoccupied homesites. The
Company will pay $17,000 to the former owner for each newly occupied homesite.
The Company has agreed to acquire from time to time ground leases related to
individual homesites. The purchase price for each lease will be equal to the
base annual rent provided for in each such ground lease divided by 9%. The
Company is not required to acquire such leases in groups of less than 10 leases.
The maximum number of leases the Company might purchase is approximately 500 for
total consideration of approximately $20 million.
M. Operating Segments
The Company has recently begun investing in manufactured home communities and
management assesses the performance of the Company as one operating segment.
N. 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.
F - 16
<PAGE>
O. Selected Quarterly Financial Data (unaudited)
Presented below is selected quarterly financial data for the years ended
December 31, 1998 and 1997 (in thousands, except per share data).
<TABLE>
<CAPTION>
Three Months Ended,
-----------------------------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------------- ---------------
1998
- --------------------------------------------------- -------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Income from rental property operations $ 390 $ 147 $ -- $ --
CMBS bonds 37 40 44 40
Interest and other income 767 1,012 1,042 1,053
Net income 967 486 986 1,002
Per share amounts:
Basic and diluted earnings .09 .05 .09 .10
Regular dividends .13 .13 .13 --
Stock prices 1
High 6-1/4 6-7/8 7 7
Low 5-1/8 5-9/16 6-1/4 6-7/16
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
1997
- --------------------------------------------------- -------------- ----------------- --------------- ----------------
CMBS bonds revenue $ 1,512 $ 3,423 $ 2,193 $ 2,044
Interest and other income 734 51 49 111
Gain on restructuring of bonds 5,786 -- -- --
Net income 7,677 2,484 1,810 1,735
Per share amounts:
Basic and diluted earnings .74 .24 .17 .17
Regular dividends .17 .17 .17 .17
Special dividends .26 -- -- --
Capital gains dividends .17 -- -- --
Stock prices 1
High 7-11/16 7-3/16 6-11/16 7
Low 6-9/16 6-5/8 6-3/16 6-3/8
Weighted-average common shares outstanding 10,342 10,342 10,326 10,316
Weighted-average common shares and common share
equivalents outstanding 10,408 10,381 10,348 10,351
- ---------------------------------------------------
<FN>
1 Daily closing prices as reported on the AMEX Composite Tape.
</FN>
</TABLE>
F - 17
<PAGE>
Commercial Assets, Inc.
SCHEDULE III
Real Estate and Accumulated Depreciation
December 31, 1998
(In Thousands Except Site Data)
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------
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>
Cypress Greens 1998 Lakeland, FL 1986 107 $ 240 $1,129 $7 $ 240 $1,136 $1,376 $16 $ 1,360 $ --
Riverside 1998 Ruskin, FL 1984 1,186 3,558 7,744 -- 3,558 7,744 11,302 34 11,268 --
------ ------ -------- ------- ------- ------ ------- ---- -------- -------
Total 1,293 $3,798 $8,873 $7 $3,798 $8,880 $12,678 $50 $12,628 $ --
====== ====== ======== ======= ======= ====== ======== ==== ======== =======
</TABLE>
F - 18
<PAGE>
COMMERCIAL ASSETS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
For the Years Ended December 31, 1998, 1997, 1996
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
-------- ------- ------
Real Estate
<S> <C> <C> <C>
Balance at beginning of year $ -- $ -- $ --
Additions during the year:
Real estate acquisitions 12,671 -- --
Additions 7 -- --
Dispositions -- -- --
---------- --------- -------
Balance at end of year $ 12,678 $ -- $ --
========== ========= =======
Accumulated Depreciation
Balance at beginning of year $ -- $ -- $ --
Additions during the year:
Depreciation (50) -- --
Dispositions -- -- --
---------- --------- -------
Balance at end of year $ (50) $ -- $ --
========== ========= =======
</TABLE>
See Report of Independent Auditors and accompanying notes to consolidated
financial statements.
F - 19
<PAGE>
COMMERCIAL ASSETS, INC.
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
(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>
Fiesta Village (1) 9/2007 (1) $ -- $ 8,033 $ 8,462 $ --
Savanna Club 10% 9/2018 (2) -- 822 828 --
Sun Lake 10% 9/2018 (2) -- 38 38 --
--------- -------------- --------------- ---------------
$ -- $ 8,893 $ 9,328 $ --
========= ============== =============== ===============
<FN>
(1) The Fiesta Village loan is comprised of five mortgage loans secured by
three manufactured home communities and adjoining land. The notes accrue
interest at 15% per annum and pay interest at 9% per annum through August
1999, with the pay rate increasing 1% each year thereafter to a maximum
of 12% per annum.
(2) Interest is paid from any cash flows from the property.
</FN>
</TABLE>
F - 20
<PAGE>
COMMERCIAL ASSETS, INC.
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Balance at beginning of period $ -- $ -- $ --
Additions during period:
Investments in participating mortgages 8,913 -- --
Accrued interest 371 -- --
Loan costs 70 -- --
Deductions during period:
Collections of principal (20) -- --
Collections of interest (2) -- --
Amortization of loan costs (4) -- --
---------- --------- --------
Balance at close of period $ 9,328 $ -- $ --
========== ========= =======
</TABLE>
F - 21
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
3.1 Amended and Restated Charter of Commercial Assets,
Inc. (the "Registrant"), (incorporated herein by
reference to Exhibit 3.1 to Amendment No. 1 to the
Registrant's Registration Statement on Form 10 (as
amended, the "Form 10") of the Registrant,
Commission File No. 1-22262, filed on August 31,
1993).
3.2 By-laws of the Registrant, (incorporated herein by
reference to Exhibit 3.2 to Amendment No. 1 to the
Form 10 of the Registrant, Commission File No.
1-22262, filed on August 31, 1993).
3.3 Amendment to the By-laws of the Registrant dated as
of January 14, 1997 (incorporated herein by
reference to Exhibit 3.3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1996, Commission File No. 1-22262, filed on March
24, 1997).
4.1 Form of certificate representing common stock of the
Registrant (incorporated herein by reference to
Exhibit 4.2 to the Form 10-Q for the period ended
March 31, 1994, of the Registrant, Commission File
No. 1-22262, filed on May 16, 1994).
4.2 Automatic Dividend Reinvestment Plan relating to the
common stock of the Registrant (incorporated herein
by reference to Exhibit 4.2 to Amendment No. 1 to
the Form 10 of the Registrant, Commission File No.
1-22262, filed on August 31, 1993).
10.1 Contribution Agreement, dated as of August 20, 1993,
between the Registrant and Asset Investors
(incorporated herein by reference to Exhibit 10.1 to
Amendment No. 1 to the Form 10 of the Registrant,
Commission File No. 1-22262, filed on August 31,
1993).
10.2 Registration Rights Agreement, dated as of August
20, 1993, between the Registrant and Asset Investors
(incorporated herein by reference to Exhibit 10.2 to
Amendment No. 2 to the Form 10 of the Registrant,
Commission File No. 1-22262, filed on September 15,
1993).
10.3* Management Agreement, dated as of January 1, 1995,
between the Registrant and Financial Asset
Management Corporation (incorporated herein by
reference to Exhibit 10.3(b) to the Registrant's
Quarterly Report on Form 10Q, Commission filed on
May 12, 1995).
10.3(a)* Amendment to the Management Agreement dated as of
January 1, 1996 between the Registrant and Financial
Asset Management Corporation (incorporated herein by
reference to Exhibit 10.3(a) to the Registrant's
Quarterly Report on Form 10-Q for the period ended
March 31, 1996, Commission File No. 1-22262, filed
on May 15, 1996).
- 21 -
<PAGE>
10.3(b)* Assignment of the Management Agreement dated as of
April 1, 1996 between Financial Asset Management
Corporation and Financial Asset Management LLC
(incorporated herein by reference to Exhibit 10.3(b)
to the Registrant's Quarterly Report on Form 10-Q,
Commission File No. 1-22262, filed on May 15, 1996).
10.3(c)* Amendment to the Management Agreement dated as of
January 1, 1997, between the Registrant and
Financial Asset Management LLC (incorporated herein
by reference to Exhibit 10.3(c) to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1996, Commission File No. 1-22262,
filed on March 24, 1997).
10.4* 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. 1-22262, 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. 1-22262, 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.
1-22262, 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. 1-22262, 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. 1-22262, 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. 1-22262, 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. 1-22262, filed
on November 14, 1997).
- 22 -
<PAGE>
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. 1-22262, 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. 1-22262,
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. 1-22262, filed on December 4,
1998).
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.
1-22262, 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. 1-22262, 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.
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. 1-22262, 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 for the year
ended December 31, 1998, Commission File No.
1-22262, filed on March 24, 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
- 23 -
<PAGE>
10.10(b) to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1998,
Commission File No. 1-22262, filed on March 24,
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
10.11 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998, Commission
File No. 1-22262, filed on March 24, 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 10.11(a) to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1998, Commission File No. 1-22262,
filed on March 24, 1999).
21.1 List of Subsidiaries (incorporated herein by
reference to Exhibit 10.11(a) to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1998, Commission File No. 1-22262,
filed on March 24, 1999).
23.1 Independent Auditors' Consent - Ernst & Young LLP.
27.1 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
SIGNATURE
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.
OMMERCIAL ASSETS, INC.
Registrant)
Date: March 8, 2000 By /s/David M. Becker
---------------------
David M. Becker
Chief Financial Officer
- 24 -
RIVERSIDE MASTER
LEASE
THIS LEASE ("Lease") is entered into by and between CAX RIVERSIDE,
L.L.C., a Delaware limited liability company ("Lessor"), and RIVERSIDE GOLF
COURSE COMMUNITY, L.L.C., a Delaware limited liability company ("Lessee"), and
is effective on the date last executed by Lessor and Lessee (the "Effective
Date").
WITNESSETH:
Article 1 Definitions.
1.1 Capital Expenditures. Those arms-length expenditures customarily
characterized as capital expenditures in accordance with generally accepted
accounting principles consistently applied including but not limited to the
costs of developing additional residential phases, nine additional golf holes,
community centers, golf pro-shop, marina, water and sewer treatment plant,
expansion, roads and related infrastructure together with construction interest
thereon.
1.2 Expenses. The aggregate amount of monies actually paid by the
Lessee in connection with the operation of the Premises pursuant to arms-length
transactions during each respective Lease Quarter and Lease Year, as the case
may be, except as hereinafter provided to the contrary, for (i) Labor Costs (as
defined hereinbelow), (ii) general maintenance, repairs and replacements, (iii)
premiums actually paid by the Lessee for insurance customarily carried for
property comparable to the Premises, (iv) charges (including applicable taxes)
for or in connection with real estate taxes, assessments, water charges and
sewer rents, (v) customary and reasonable accounting and auditing expenses and
customary and reasonable attorneys' fees, (vi) management fees paid to a
managing agent reasonably approved by Lessor, (vii) fees paid to unaffiliated
third parties for consulting, engineering or other professional services
provided that such fees are customary and commercially reasonable in amount,
(viii) other expenses which are not discretionary and are required by law, (ix)
sales tax paid hereon, if any, and (x) reserves for Capital Expenditures (as
defined below), and (xi) other commercially reasonable expenses in connection
with, and related solely to, the operation and maintenance of the Premises which
are usual and customary for comparable properties located in the vicinity of the
Premises. All of the foregoing items shall be substantiated by evidence
satisfactory to Lessor in its reasonable discretion. Without limiting the
generality of those items which shall not be included in, or which shall be
excluded from, Expenses, the following shall be specifically excluded from
Expenses:
(a) general overhead expenses of the Lessee, whether in connection
with the operation of the Premises or otherwise;
<PAGE>
(b) depreciation, amortization and other non-cash items;
(c) prepaid expenses which are not customarily prepaid in the
ordinary course of business; and
Capital Expenditures other than Capital Expenditures which relate to
minor capital improvements, which shall be deemed to be an Expense but only (x)
if Lessor shall have approved same in writing, which approval shall not be
unreasonably withheld and (y) in an amount not to exceed for the applicable
period, the amortization for such improvements determined on a straight line
basis over the useful life of the improvement in accordance with generally
accepted accounting principles, consistently applied) and other than those
Capital Expenditures contemplated through reserves.
1.3 Gross Revenue. The aggregate of all revenue from all sources in
respect of the operation of each Phase of the Premises (as defined hereinbelow)
(including, without limitation, pursuant to or in connection with any leases of
mobile home spaces, golf course and marina excluding any income from the
operation of the water and sewer treatment plant) received by the Lessee for
each respective Lease Quarter and Lease Year, as the case may be, other than
condemnation awards and insurance proceeds (except for the proceeds of rental
loss insurance, which shall be deemed to be Gross Revenue) to the extent
actually used by Lessee to restore the affected portion of the Premises, and
security deposits, except to the extent such sums are applied to the payment of
any rent, additional rent or other sums due under any of the leases; provided,
however, that not withstanding anything to the contrary contained in this Lease,
Gross Revenue shall not include any item of revenue unless such item would be
treated as "rents from real property" within the meaning of Section 856(d) of
the Code, determined as if such item had been received or accrued by CAX.
1.4 Labor Costs. All customary and reasonable expenses actually paid by
Lessee pursuant to arms-length transactions during any Lease Quarter which are
directly related to the employment of personnel whose responsibilities relate
solely to the Premises, including amounts paid for wages, salaries and other
compensation for services, payroll, social security, unemployment and other
similar taxes, workers compensation, insurance, disability benefits, pensions,
hospitalization, retirement plans and group insurance, uniforms and working
clothes and the cleaning thereof, and expenses imposed pursuant to any
collective bargaining agreement.
1.5 Lease Quarter. The period beginning on November 20, 1998 and ending
March 31, 1999, and each subsequent three (3) month period thereafter until the
expiration of the Term (as defined hereinbelow).
1.6 Lease Year. The period beginning on January 1, 1999 and ending on
December 31, 1999, and each subsequent twelve (12) calendar month period
thereafter
2
<PAGE>
until the expiration of the Term (as defined hereinbelow).
1.7 Net Cash Flow. For each respective Lease Quarter and Lease Year, as
the case may be, the amount, if any, by which Gross Revenue exceeds Expenses for
such Lease Quarter or Lease Year.
1.8 Phases. There are currently planned five phases of development for
a total of 1,186 units broken down as follows:
Phase No. Proposed Units
Phase I (completed) 244
Phase II 100
Phase III 100
Phase IV 100
Phase V 100
Phase VI 100
Unallocated 442
Total 1,186
============================ ==========================
Phase I is full developed having 244 fully developed spaces with approximately
220 spaces occupied by residents paying rent.
1.9 CAX. Commercial Assets, Inc., a Maryland corporation which is the
sole member of Lessor.
1.10 Code. The Internal Revenue Code of 1986, as amended.
Article 2 Grant and Term.
2.1 Premises. In consideration of the rents, covenants and agreements
herein set forth, Lessor hereby leases to Lessee and Lessee hereby rents from
Lessor those certain premises, fixtures and improvements located on each Phase
thereon, located in Hillsborough County, Florida, including the mobile home
park, golf course and marina, the street address of which is Universal Drive,
Ruskin, FL 33570, and which is more particularly described on Exhibit "A"
attached hereto (collectively, the "Premises"). Lessee hereby accepts the
Premises "as is," without any representation or warranty of any kind, either
express or implied, on behalf of Lessor. Accordingly, Lessee acknowledges and
agrees that is has inspected the Premises, including, but not limited to:
structural elements, sewage, utility systems, and other facilities; the soils
and geology of the
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premises; the zoning and other legal status of the Premises; the habitability,
merchantability and fitness of the Premises; the adequacy of the Premises for
any particular purpose; and the Premises' compliance with applicable codes,
laws, regulations, statutes, ordinances, covenants, conditions, and restrictions
of any kind.
2.2 Quiet Enjoyment. Upon payment by Lessee of the Rent (as defined
hereinbelow) herein provided, and upon the observance and performance of all
terms and provisions hereunder on Lessee's part to be observed and performed,
Lessee shall have the right to quiet enjoyment of the Premises subject to the
terms, conditions and covenants of this Lease.
2.3 Term. The original term of this Lease shall commence November 20,
1998, and shall be for a period of fifty (50) years, expiring on December 1,
2049. The phrase "Term" as used in this Lease shall mean collectively, the
Initial Term and any Renewal Term (as hereinafter defined) for which an option
has been exercised by Lessee. Each Phase of the Premises will have its own
commencement date but shall expire on December 1, 2049. The Renewal Terms and
expiration dates shall be coterminous for all phases.
2.4 Renewal Terms. If Lessee shall have kept and performed each and
every covenant, agreement and provision herein, then Lessee may, at Lessee's
option, renew this Lease for four (4) additional "Renewal Terms" (herein so
called) of five (5) years each. Each Renewal Term shall commence on the date
immediately following the last day of the Initial Term or the preceding Renewal
Term, as the case may be. Such option is to be exercised by Lessee by written
notice thereof given to Lessor not later than six (6) months nor earlier than
fifteen (15) months prior to the expiration of the Initial Term or the preceding
Renewal Term, as the case may be. If Lessee fails or omits to give Lessor the
written notice herein required within the prescribed time, it shall be deemed
without further notice and without further agreement, that Lessee elected not to
exercise the option to extend the term of this Lease.
Article 3 Rent.
3.1 Lessee agrees to pay to Lessor as "Base Rent" (herein so called)
for Phase I of the development on the Premises, the sums indicated on Exhibit
"B" attached hereto and made a part hereof, which amounts are calculated using
Lessor's land acquisition costs of $________ (the "Acquisition Amount") plus the
cost of developing the nine additional golf holes, golf pro-shop and marina
times the rent factor percentage shown on Exhibit B (the "Base Rent Factor").
Base Rent shall be payable monthly in equal monthly installments, plus all
applicable sales tax. Rent shall commence on the first day of the Initial Term
and shall be due and payable in advance on the first day of each calendar month
thereafter without demand, set-off, or deduction whatsoever, at the office of
the Lessor designated for notices. Lessee also shall pay all taxes, assessments
and/or
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governmental charges of any kind and nature whatsoever now or subsequently
levied or assessed upon the privilege of renting the Premises or upon the amount
of rent collected therefor.
3.2 Percentage Rent
(a) In addition to the payment of Base Rent, Phase Base Rent
and Additional Rent (as defined in Sections 3.3 and 3.4 below), Lessee shall
also pay to Lessor, within thirty (30) days after the end of each Lease Quarter,
percentage rent ("Percentage Rent") equal to 50% of Net Cash Flow. The balance
of Net Cash Flow shall be retained by Lessee. Notwithstanding anything in this
paragraph 3 to the contrary, the Net Cash Flow paid as Percentage Rent within
thirty (30) days after the end of each Lease Quarter shall be based upon amounts
calculated on an accrual basis. Such calculations shall be prepared in
accordance with generally accepted accounting principles. In accordance with the
provisions of 3.2(c) hereinbelow, Lessee shall at the end of each Lease Year
re-calculate the proper amount of the Percentage Rent that should have been paid
during such Lease Year and shall make such adjustments as are necessary in
accordance with the provisions of paragraph 3.2(c). Notwithstanding anything
expressed or implied to the contrary in this Lease, amounts payable to Lessor as
Percentage Rent shall be determined using only that revenue of Lessee which
would qualify as "rents from real property" within the meaning of Section 856(d)
of the Code, determined as if received or accrued directly by CAX. In the event
that there is a final non-appealable decision by a court of competent
jurisdiction or by the Internal Revenue Service, or if Lessor determines, that
any item of revenue of Lessee was improperly or erroneously included in Gross
Revenue in determining Net Cash Flow and the amount of Rent payable to Lessor,
then, without prejudice to any other remedies that Lessor may have hereunder,
Lessor shall, as promptly as practicable, refund to Lessee the resultant amount
of Rent received in error. Lessor and Lessee shall, to the extent permitted by
law, treat any such refund for all tax and other purposes as a retroactive
adjustment to Rent for the period in which the item originally arose.
(b) Each payment of Percentage Rent shall be accompanied by a
revenue and expense statement (prepared in accordance with generally accepted
accounting principles consistently applied in such detail and with such back-up
information as shall be reasonably required by Lessor) certified by Lessee as
true, correct and complete, setting forth, among other things, Gross Revenue and
Expenses for such Lease Quarter and the calculation and application of Net Cash
Flow and Percentage Rent (if any) for such Lease Quarter.
(c) If the installments of Percentage Rent paid during and
with respect to such Lease Year exceed the amount of Percentage Rent as
recomputed on an annual basis, the amount of such excess shall be credited
against the installments of Percentage Rent next coming due or shall be refunded
to Lessee in the event no further installments
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of Percentage Rent are payable hereunder. If the Percentage Rent paid to Lessor
during such Lease Year is less than the amount of Percentage Rent as recomputed
on an annual basis which should had been paid to Lessor, the amount of such
deficiency shall be due and payable upon delivery of such annual financial
statement. If such difference between Percentage Rent actually due and
Percentage Rent paid is equal to or greater than five percent (5%) of the amount
of Percentage Rent actually due or regardless of the amount of the deficiency,
if the deficiency is a result of fraud or willful misconduct on the part of
Lessee, Lessee shall also pay to the Lessor upon delivery of such annual
financial statements an additional amount equal to six percent (6%) of such
underpayment as and for liquidated damages to compensate Lessor for the loss of
use of such sums during the applicable Lease Year.
3.3 Phase Base Rent and Unit Rent.
Lessee agrees to pay to Lessor as "Base Rent" for Phases II, III, IV, V
and VI of the Premises (the Phase Base Rent) , an amount calculated by using
Lessor's allocated land acquisition costs of $3,000.00 per Unit for each Phase
plus all per Unit allocated Capital Expenditures and Marketing Costs, as
hereinafter defined, times the rent factor of 10% per annum (the "Phase Base
Rent Factor"). Lessor and Lessee agree to amend this Lease to state the actual
total Capital Expenditures and Marketing Costs for each Phase upon each Phase
obtaining a certificate of occupancy for the first Unit within that Phase (the
"Occupancy Date") including all closing costs, expenses, professional fees and
other allocations. Which amount will be divided by the number of Units in that
Phase to establish a per unit cost (the "Unit Cost") at the time a Unit is
occupied by a resident and that resident is paying rent the Lessee agrees to pay
Lessor additional base rent per occupied Unit equal to five percent (5%) of (the
"Unit Rent"). Phase Base Rent shall be payable monthly in equal monthly
installments, plus all applicable sales tax, if any, commencing on the first day
of the seventh (7th) month following the Occupancy Date (the "Rent Commencement
Date"). Prior to the Rent Commencement Date, funds advanced by Lessor to Lessee
with respect to Capital Expenditures, Marketing Costs, and the Unit Costs shall
bear interest at the rate of ten percent (10%) per annum which interest shall be
capitalized as of the Rent Commencement Date. Rent shall commence on the Rent
Commencement Date for that Phase and shall be due and payable in advance on the
first day of each calendar month thereafter without demand, set-off, or
deduction whatsoever, at the office of the Lessor designated for notices. If
available cash flow is inadequate to satisfy any Phase Base Rent or Unit Rent,
Lessee shall have the right to accrue the balance due Lessor until the cash flow
is adequate to service Phase Base Rent or Unit Rent for each Phase. Any unpaid
Phase Base Rent or Unit Rent shall be paid to Lessor prior to any payment of
percentage rent on any Phase of the Development. Lessor shall advance at the
request of Lessee the Capital Expenditures to the Lessee for each Phase in
accordance with a Phase Development Budget previously approved in writing by
Lessor. Lessor shall also advance, at the request of Lessee, the Lessee's share
of Marketing Costs allocated to each Phase pursuant to a Phase Marketing Budget
previously approved
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in writing by Lessor (the "Marketing Costs").
3.4 Additional Rent.
Lessee shall pay as "Additional Rent" (herein so called) all other sums
and charges required to be paid by Lessee pursuant to the terms of this Lease.
The terms Base Rent, Phase Base Rent, Unit Rent, Percentage Rent and Additional
Rent are sometimes referred to herein collectively as "Rent." Lessee also shall
pay all taxes, assessments and/or governmental charges of any kind and nature
whatsoever now or subsequently levied or assessed upon the privilege of renting
the Premises or upon the amount of Rent collected therefor.
3.5 Past Due Rent.
If the Lessee shall fail to pay when due and payable any Base Rent, or
any other amounts or charges provided for in this Lease, and which failure is
not cured within fifteen (15) days after written notice of such failure from
Lessor, there shall become due and payable, in addition, an amount equal to ten
percent (10%) of the amount past due to cover the Lessor's additional costs in
handling delinquent charges. Further, if Lessee shall fail to pay within fifteen
(15) days after the same is due and payable any Base Rent, Additional Rent or
any other amounts or charges provided for in this Lease, and which failure is
not cured within fifteen (15) days after written notice of such failure from
Lessor, such past due amount shall bear interest at the lesser of the maximum
rate permitted by law or eighteen percent (18%) per annum (herein the "Default
Rate") from the date due until paid.
Article 4 Real Estate Taxes.
Lessee agrees to pay prior to delinquency all taxes, public and/or
private assessments and governmental charges of any kind and nature whatsoever
now or subsequently levied or assessed against the Premises. Lessee may contest
any such taxes provided Lessee tenders full payment of same to Lessor prior to
initiating such contest.
Article 5 Utilities.
To the extent not paid for by mobile home residents and sub-lessee of
the marina and golf course, Lessee covenants and agrees to pay all charges for
water, sewer, gas, electric, telephone, and other utilities and services used or
consumed in or upon the Premises as and when the charges for the same shall
become due and payable, and shall not allow the same to become delinquent or a
lien upon the Premises.
Article 6 Conduct of Business by Lessee.
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6.1 Use of Premises. The Premises shall be used by Lessee solely for
the purpose of operating thereon a mobile home community and related amenities,
and for subleasing a golf course and marina and related businesses. Lessee shall
not suffer or permit all or any part of the Premises to be used for any other
business or purpose or by any other person without the prior written consent of
Lessor, which consent shall not be unreasonably withheld.
6.2 Governmental Regulation. Lessee, at its expense, shall comply with
all federal, state and local laws, ordinances, orders, rules, regulations
(including, without limitation, the Americans with Disabilities Act), all
agreements and covenants of public record pertaining to all or any portion of
the Premises now or hereafter in force, and all recommendations of the Fire
Underwriters Rating Bureau, with respect to the Premises. Without limiting the
foregoing, Lessee shall be required to effect any structural repair,
improvement, alteration or other change to the Premises and improvements thereon
by reason of any such laws, ordinances, rules, regulations, covenants or
agreements.
6.3 Waste or Nuisance. Lessee shall not commit or suffer to be
committed any waste upon all or any portion of the Premises or any nuisance or
other act or thing which may disturb the quiet enjoyment of any surrounding
property owners.
Article 7 Covenants of Lessee.
Lessee covenants and agrees that, at all times during the Term of this
Lease:
7.1 Use of Premises. Lessee will use commercially reasonable efforts to
sublease substantially all of its interest in the Premises.
7.2 Source of Income. Substantially all of the gross income derived by
Lessee pursuant to such subleases will constitute income that would qualify as
"rents from real property" within the meaning of Section 856(d) of the Code,
determined as if such income had been received or accrued by CAX. Substantially
all of the gross income derived by Lessee from all sources will constitute
either "rents from real property" as described in the preceding sentence, or
other income of a character which is described in Section 856(c)(3) of the Code.
7.3 Tax Classification. Lessee will not be treated as a corporation for
federal income tax purposes; provided, however, that it may be wholly owned and
treated as an entity that is disregarded for federal income tax purposes
pursuant to the rules of Section 301.7701-3(b)(1)(ii) of the Treasury
Regulations, with its assets and income treated as those of its owner.
7.4 Assets. Lessee will not hold securities of any one issuer, within
the meaning of Section 856(c)(4)(B) of the Code, in an amount that exceeds 5
percent of the value of
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Lessee's gross assets. Lessee will not hold any direct or indirect equity
interest in any entity that is treated as a corporation for federal income tax
purposes.
7.5 Ownership of REIT Stock. Lessee, together with those persons who
directly and indirectly own any interest in Lessee, shall not own, individually
or in the aggregate, directly, indirectly or by attribution (as determined for
purposes of Section 856(d) of the Code),10 percent or more in value of the stock
of CAX.
7.6 Cooperation. Lessee will cooperate with Lessor in ascertaining
compliance with each of the covenants set forth in this Article 7. Such
cooperation shall include, without limitation, to the extent requested by
Lessor, providing financial statements, copies of subleases and other
information, completing questionnaires and certificates, and causing
knowledgeable officers, employees or agents to be available to answer questions
for Lessor and its agents. The covenant to cooperate as set forth in this
paragraph 7.6 shall continue beyond the term of this Lease to the extent
reasonably requested by Lessor.
Article 8 Maintenance of Premises.
8.1 Maintenance by Lessee. Lessee shall at all times keep the Premises
and all improvements located thereon (including, without limitation, all slabs,
footers, walls, roofs and other structural elements, all glass, windows, floors,
partitions, doors, fixtures, equipment and appurtenances thereof, lighting,
heating, plumbing fixtures and air conditioning equipment, but excluding all
items including mobile home units owned by residential tenants), in good order
and repair, and in a clean and sanitary condition, and shall make all necessary
repairs, ordinary and extraordinary, foreseen and unforeseen, including all
necessary replacements, alterations, additions and betterments, using material
and equipment of like kind and quality to the original improvements.
If Lessee fails to maintain and repair Premises and improvements
thereon as required hereunder to the satisfaction of Lessor, then within thirty
(30) days after written request, Lessor shall then have the right to enter the
Premises to make such repairs at Lessee's expense, without liability to Lessee
for any loss or damage that may accrue to Lessee's merchandise, fixtures, or
other property or to Lessee's business by reason thereof, and upon completion
thereof, Lessee shall pay as Additional Rent Lessor's cost of making such
repairs, plus ten percent (10%) of the cost thereof for overhead, within thirty
(30) days of presentation of the bill therefor, which shall be conclusive
evidence of the amount of such cost. Any sums not so paid shall bear interest at
the Default Rate from the date due until paid.
8.2 Delivery at Expiration.
Upon the expiration of the tenancy hereby created, Lessee shall
surrender the Premises in the same condition as existing upon delivery of
possession thereof under this
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Lease, reasonable wear and tear excepted, and shall surrender all keys for the
Premises to Lessor at its place then fixed for the payment of Rent. Lessee shall
remove all of its trade fixtures and any alterations or improvements which have
not become the property of the Lessor pursuant to Section 9.1 hereof, before
surrendering the Premises as aforesaid and shall repair any damage to the
Premises or improvements thereon caused thereby. Lessee's obligation to observe
or perform this covenant shall survive the expiration or termination of this
Lease.
Article 9 Fixtures, Improvements.
9.1 Ownership of Improvements. All alterations, replacements and
improvements permanently affixed to the Premises by Lessee shall become the
property of Lessor upon termination of this Lease or any extension or renewal
and shall remain on the Premises in absence of a written agreement of Lessor to
the contrary. Upon expiration of this Lease, or any renewal term thereof, any
property belonging to Lessee which Lessee has failed to remove from the Premises
shall forthwith become the property of Lessor and Lessee shall be liable for the
cost of removal thereof. Notwithstanding the foregoing, however, mobile home
units may be removed at any time by the owners thereof.
9.2 Lessee Shall Discharge All Liens. Except as provided in Section
21.11 below, Lessee shall not have any authority to create any liens for labor,
services, materials or other items required by any improvements upon the
Premises, and the interest of Lessor shall not be subject to liens for
improvements made by or on behalf of Lessee. Lessee shall promptly pay all
contractors and materialmen working on the Premises on its account, so as to
minimize the possibility of a lien attaching to any of the Premises. Should any
such lien be made or filed, Lessee shall notify Lessor immediately and bond
against or discharge the same within thirty (30) days after such lien is made or
filed.
Article 10 Insurance and Indemnity.
10.1 Liability Insurance. Lessee shall procure and maintain throughout
the Term, at its sole expense, (a) Workers' Compensation and Comprehensive
General Liability Insurance (with contractual liability endorsement) insuring
Lessor and Lessee against all claims arising out of Lessee's use or occupancy of
the Premises or the condition of the Premises, in an amount not less than
$1,000,000 with respect to injuries to, or death of, any one person, and an
amount not less than $2,000,000 with respect to any one occurrence or disaster,
and an amount not less than $500,000.00 with respect to property, and (b)
business interruption insurance, insuring loss of profits in the event of an
insured peril damaging the Premises.
10.2 Casualty Insurance. Lessee shall keep in force at its own expense
throughout the term of this Lease all risk property insurance covering fire and
extended coverage, vandalism and malicious mischief, sprinkler leakage, and
other perils of direct
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physical loss or damage insuring the common area improvements located on the
Premises for the full replacement value thereof. Lessee will have such casualty
insurance policy endorsed to show Lessor as a loss payee.
10.3 General. Lessee's liability and casualty insurance policies will
provide for at least thirty (30) days notice to Lessor before reduction of
policy limits, cancellation, or any other policy changes adverse to the Lessor's
interest. Lessee will furnish Lessor with a copy of policy or policies of such
insurance and/or certificates thereof prior to the commencement of the Initial
Term and thereafter within fifteen (15) days after Lessor's request. If Lessee
shall not comply with the provisions of this Article 10, Lessor may, at its
option, cause insurance as aforesaid to be issued, and in such event, Lessee
agrees to pay the premium for such insurance plus ten percent (10%) of the cost
thereof for overhead, within five (5) days of Lessor's demand. Any sums not so
paid shall bear interest at the Default Rate from the date due until paid.
Lessee agrees to periodically increase the limits of the insurance required
hereunder to commercially reasonable limits.
10.4 Indemnity by Lessee. Lessor shall not be liable to Lessee or
Lessee's employees, agents, visitors or any other person for injury to person or
damage to or loss of property on or about the Premises, or arising out of the
use of the Premises by Lessee, or the conduct of its business thereon, or
arising out of any breach or default by Lessee in the performance of its
obligations hereunder, or resulting from any other cause except Lessor's sole
negligence. Lessee shall indemnify, save harmless and defend Lessor from and
against any and all suits, claims, actions, damages, liability and expense,
including attorneys' fees, in connection with loss of life, personal injury
and/or damage to property arising with respect to the Premises or any part
thereof, or occasioned wholly or in part by any act or omission of Lessee, its
officers, agents, servants, contractors, employees or invitees.
10.5 Employer's Liability Insurance. Lessee shall, throughout the term
of this lease or any renewal thereof, maintain such workmen's compensation or
employer's liability insurance as may be required by law and shall indemnify and
hold harmless the Lessor against any loss, claim or demand of employees, agents,
contractors and subcontractors of the Lessee.
10.6 Waiver of Subrogation. Lessor and Lessee hereby release each other
from any and all liability or responsibility to the other or anyone claiming
through or under them by way of subrogation or otherwise from any loss or damage
to property caused by fire or any other perils insured in policies of insurance
covering such property, even if such loss or damage shall have been caused by
default or negligence of the other party or anyone for whom such party may be
responsible.
Article 11 Assignment and Subletting.
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Except for subleases for the operation and maintenance of the Golf
Course, Marina and related facilities to Riverside Golf Course and Marina,
L.L.C., a Delaware limited liability company and the water and sewer treatment
facilities to Riverside Utilities, L.L.C., a Delaware limited liability company
and residential lot leases or tenancies, and other than as permitted in
Paragraph 21.11 herein, Lessee shall not (a) assign, or in any other manner
transfer this Lease or any estate or interest therein; (b) sublet the Premises
or any part thereof; (c) permit the transfer of ownership interests in Lessee so
as to result in a change in the control of Lessee; or (d) permit any other
person to become Lessee by merger, consolidation, or otherwise (all of the above
being a "Transfer"), without the prior written consent of Lessor, such consent
to be withheld in the sole and absolute discretion of Lessor. Consent by Lessor
to one or more Transfers shall not operate as a waiver of Lessor's rights as to
any subsequent Transfer.
Lessee shall give Lessor at least sixty (60) days advance written
notice of any proposed Transfer, accompanied by a copy of the proposed Transfer
documents, including such additional information, including financial
information, as Lessor reasonably requests regarding such transferee.
Article 12 Events of Default/Remedies.
12.1 Default. Lessee shall be deemed in default of its obligations
under this Lease upon the occurrence of any of the following:
(a) Lessee's failure to pay Rent when due, which default is
not cured within fifteen (15) days after written notice thereof by Lessor to
Lessee;
(b) Lessee's failure to perform any other covenant, promise,
or obligation of this Lease, other than the payment of Rent, for a period of
more than thirty (30) days after written notice thereof by Lessor to Lessee,
except that this thirty (30) day period shall be extended for a reasonable
period of time if the alleged default is not reasonably capable of cure within
said thirty (30) day period and Lessee proceeds to diligently cure the default;
(c) Lessee shall be late twice during any twelve (12) month
period in the payment of Rent or other sums or charges due Lessor under this
Lease, or shall repeatedly default in the keeping, observing or performing of
any other covenants or agreements herein contained to be kept, observed or
performed by Lessee (provided notice of such non-payment or other defaults shall
have been given to Lessee, but irrespective of whether or not Lessee shall have
timely cured any such payment or other default of which notice was given);
(d) The appointment of a receiver or trustee for Lessee;
(e) Lessee voluntarily petitions for relief under, or
otherwise seeks the
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benefit of, any bankruptcy, reorganization, or insolvency law;
(f) The sale of Lessee's interest under this Lease by
execution or other legal process;
(g) Lessee's abandonment of the Premises during the term of
this Lease;
(h) Lessee's making an assignment of this Lease for the
benefit of creditors;
(i) Any sale, transfer, assignment, subleasing, concession,
license, or other disposition prohibited under Article 11 hereof; or
(j) Lessee shall do or permit to be done anything that creates
a lien upon the Premises and shall fail to obtain the release of any such lien
or to transfer the lien to bond as required herein.
12.2 Remedies. In the event of any default hereunder, Lessor shall be
entitled to declare this Lease to be terminated and re-enter upon and take
possession of the Premises with prior written notice to Lessee, whereupon the
term hereby granted and all right, title and interest of Lessee in the Premises
shall terminate. Such termination shall be without prejudice to Lessor's right
to collect from Lessee any Rent that may have accrued prior to such termination,
or to recover damages suffered as a consequence of the breach of a covenant
contained in Article 7, or the falseness of a representation contained in
paragraph 21.10 hereof.
12.3 Legal Expenses. In case suit be brought for recovery of possession
of the Premises, for the recovery of Rent or any other amount due under the
provisions of this Lease, or because of the breach of any other covenant herein
contained on the part of the Lessee to be kept or performed, Lessee shall pay to
Lessor all expenses incurred therefor, including attorneys' fees.
Article 13 Access by Lessor.
Lessor or Lessor's agents shall have the right, after reasonable prior
notice to Lessee, to enter the Premises to show them to prospective purchasers.
Article 14 Lessee's Property.
14.1 Taxes on Lessee's Leasehold. Lessee shall be responsible for and
shall pay before delinquency, all municipal, county, state and federal taxes
assessed during the term of this Lease against personal property and trade
fixtures of any kind, owned by or placed in, upon or about the Premises by
Lessee.
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14.2 Loss and Damage. Lessor shall not be liable for any damage to
property of Lessee or of others located on the Premises, nor for the loss of or
damage to any property of Lessee or of others by theft or otherwise. Lessor
shall not be liable to Lessee for and Lessee shall hold Lessor harmless from and
indemnify Lessor against any claims arising from injury to or death of persons
or damage to property resulting from fire, explosion, gas, electricity, water,
flood, air pollution, rain or leaks from any part of the Premises or from the
pipes, appliances or plumbing works or by dampness or by any other cause of
whatever nature. Lessor shall not be liable to Lessee for any such damage caused
by other Lessees or person in the Premises, occupants of any of the Premises or
of adjacent property, or the public or caused by operations in construction of
any private, public or quasi-public work.
14.3 Notice by Lessee. Lessee shall give immediate notice to Lessor in
case of fire or other casualty or accidents in the Premises or in the building,
or of defects therein or in any fixtures or equipment.
Article 15 Holding Over, Successors.
15.1 Holding Over. This Lease and the tenancy hereby created shall
cease and terminate at the end of the Initial Term, or any Renewal Term, as the
case may be, without the necessity of any notice from either Lessor or Lessee to
terminate the same, and Lessee hereby waives notice to vacate the Premises and
agrees that Lessor shall be entitled to the benefit of all provisions of law
respecting the summary recovery of possession of premises from a Lessee holding
over to the same extent as if statutory notice had been given.
Any holding over after the expiration of the term hereof, with the
consent of the Lessor, shall be construed to be a tenancy from month to month
for the Rent provided herein (prorated on a monthly basis) and shall otherwise
be on the terms and conditions herein specified, so far as applicable.
15.2 Successors. All rights and liabilities herein given to or imposed
upon, the parties hereto shall insure to the benefit of and be binding upon
their respective heirs, executors, administrators, successors and assigns, and
if there shall be more than one Lessee, they shall all be bound jointly and
severally by the terms, covenants and agreements herein. No rights, however,
shall inure to the benefit of any assignee of Lessee unless the assignment to
such assignee has been approved by Lessor in writing as provided elsewhere in
this Lease.
Article 16 Condemnation.
If the whole of the Premises or such a portion thereof as will make the
Premises unusable for the purpose leased, as reasonably determined by Lessor, be
condemned or taken in any manner for public use, then in either event the Term
shall cease and come
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to an end as of the date of the vesting of title in such public authority and
all Rent payable by Lessee to Lessor hereunder shall be paid by Lessee up to the
date of the taking. All compensation and damages awarded in connection with any
such taking of the Premises shall be allocated as follows: (i) to Lessor for its
fee interest in the Premises (including its interest as Lessor under this Lease,
and its reversionary interest in the improvements located on the Premises); and
then, (ii) to Lessee for its leasehold estate and its fee interest in the
improvements (subject to Lessor's reversionary interest therein) immediately
prior to such taking. If a portion of the Premises is condemned or taken and
this Lease is not terminated as aforesaid, this Lease shall not be terminated
and shall continue without any abatement of Rent, and Lessee shall, after such
partial taking, at its sole cost and expense, repair and restore any damage
caused by any such partial taking to the common area improvements so that after
the completion of such restoration the common area improvements shall be, as
nearly as possible, in a condition as good as the condition thereof or
immediately prior to such partial taking. In the event of any such partial
taking the net award therefor shall be deposited with Lessor. Lessor shall then
make available to Lessee all of said award to affect the restoration, unless
Lessee is in default hereunder. Upon completion of such restoration, any portion
of the award then remaining will belong to Lessor to the extent of the value of
Lessor's interest in the award and thereafter to Lessee (as described in (ii)
above), any such award retained by Lessor (or retained pursuant to the paragraph
immediately below) shall result in an equitable reduction in Base Rent. If the
cost of the restoration required to be made by Lessee under this Lease shall
exceed the amount of the award therefore, the deficiency shall be paid by
Lessee. In no event shall Lessor be liable to Lessee for any business
interruption, diminution in use or for any value of any unexpired term of this
Lease.
If all or any portion of the Premises shall be taken by any competent
authority for temporary use or occupancy, this Lease shall continue in full
force and effect without reduction or abatement of Rent, notwithstanding any
other provision of this Lease, statute or rule of law to the contrary, and
Lessee shall, in such event, be entitled to any award specifically made for the
repair and restoration of any damage to the Premises, or any improvements
thereon, as a result of such temporary use or occupancy and to the entire award
for such taking to the extent that the same shall be applicable to the period of
such temporary use or occupancy included in the Term and Lessor shall be
entitled to the remainder of the award. Lessee, however, shall, upon the
termination of the temporary taking (or earlier, at Lessee's sole discretion),
at its sole cost and expense, repair and restore any damage to the common area
improvements located on the Premises caused by such temporary use or occupancy,
whether or not the award received by Lessee is sufficient for such purpose.
Article 17 Destruction of Premises.
If the Premises shall be totally or partially damaged by fire or other
casualty, Lessee shall immediately undertake to repair the common area
improvements located on the
15
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Premises to substantially the same condition as existed prior to such casualty,
Lessee shall be entitled to all insurance proceeds payable as a result of such
casualty, and Rent shall not be abated. However, if the Premises are
substantially or totally destroyed by fire or other casualty, Lessor shall have
the option of terminating this Lease upon thirty (30) days prior written notice
to Lessee, whereupon Lessor shall be entitled to all insurance proceeds payable
as a result of such casualty. Lessor shall not liable for any inconvenience or
interruption of business of Lessee occasioned by fire or other casualty.
Article 18 Hazardous Substances.
Lessee shall not cause or permit any Hazardous Substance to be used,
stored, generated, or disposed of on, in or about the Premises except in
compliance with all applicable laws and regulations. If any Hazardous Substance
is used, stored, generated, or disposed of on, in, or about the Premises, or if
the Premises become contaminated in any manner, Lessee shall indemnify, defend
and hold harmless Lessor from any and all claims, demands, actions, damages,
fines, judgments, penalties, costs (including attorneys', consultants', and
experts' fees), liabilities, losses and expenses arising during or after the
term of this Lease, arising as a result of such contamination. This
indemnification includes, without limitation, any and all costs incurred due to
any investigation of the site or any cleanup, removal, or restoration mandated
by a federal, state, or local agency or political subdivision. Without limiting
the foregoing, if Hazardous Substances are present on, in, or about the
Premises, Lessee, at its sole expense, shall promptly take any and all necessary
actions to return the Premises to the same condition that existed prior to the
presence of any such Hazardous Substance on, in or about the Premises. Lessee
shall first obtain Lessor's approval for any such remedial action.
As used herein, the term "Hazardous Substance" means any substance
which is toxic, ignitable, reactive, or corrosive and which is regulated by any
local government, the State in which the Premises are located, or the United
States government. "Hazardous Substance" includes any and all materials or
substances which are defined as "hazardous waste", "extremely hazardous waste"
or a "hazardous substance" pursuant to state, federal or local governmental law.
"Hazardous Substance" includes, but is not limited to, solvents, asbestos,
polychlorobiphenyls, waste oil and petroleum.
Article 19 Subordination.
This Lease is and shall be subject and subordinate to any mortgage
which may now or hereafter affect the Premises, provided that neither Lessee nor
any residential tenant shall be disturbed in possession of the Premises. Lessee,
upon demand at any time or times by Lessor, shall execute, acknowledge and
deliver to Lessor, without expense to Lessor, any and all instruments and
certificates that may be necessary or proper to subordinate this Lease and the
rights of the Lessee hereunder to the lien of any such mortgage or mortgages as
aforesaid, provided such instrument contains non-disturbance
16
<PAGE>
language in favor of Lessee and the mobile home unit tenants. Furthermore, at
any time and from time to time, Lessee, upon the request of Lessor, will
execute, acknowledge and deliver an instrument, stating, if the same be true,
that this Lease is in full force and effect, that there are no offsets, defenses
or counterclaims with respect to the payment of Rent reserved hereunder and
certifying such other information as may be requested by Lessor or Lessor's
lender. Such instrument will be executed by Lessee and delivered to Lessor
within fifteen (15) days of receipt of request therefor.
Article 20 Sale.
In the event of a sale of the Premises during the term of this Lease,
Lessor and Lessee agree that the sales proceeds less reasonable closing costs
(the "Net Sales Proceeds") shall be paid first to Lessor in an amount equal to
the Acquisition Amount and Capital Expenditures funded by Lessor, as the case
may be, plus a fifteen percent (15%) internal rate of return on such Acquisition
Amount and Capital Expenditures (with such 15% internal rate of return
calculated by taking into account Rent paid to Lessor (prepaid and otherwise)
and all casualty insurance and condemnation proceeds received by Lessor); with
the remaining Net Sale Proceeds distributed based on the percentage of net cash
flow being paid Lessor and Lessee as of the date of the sale.
Article 21 Miscellaneous.
21.1 Waiver. The waiver by Lessor of any breach of any term, covenant
or condition herein contained shall not be deemed to be a waiver of such term,
covenant or condition or any subsequent breach of the same or any other term,
covenant or condition herein contained. The subsequent acceptance of Rent
hereunder by Lessor shall not be deemed to be a waiver of any previous breach by
Lessee of any term, covenant, or condition of this Lease, other than the failure
of the Lessee to pay the particular rental so accepted, whether or not Lessor
had knowledge of such previous breach at the time of acceptance of such Rent. No
covenant, term or condition of this Lease shall be deemed to have been waived by
Lessor, unless Lessor waives the same in writing.
21.2 Accord and Satisfaction. No payment by Lessee or receipt by Lessor
of an amount less than the Rent herein stipulated shall be deemed to be other
than on account of the earliest stipulated Rent, nor shall any endorsement or
statement on any check or in any letter accompanying any check or payment as
Rent be deemed an accord and satisfaction, and Lessor may accept such check or
payment without prejudice to Lessor's right to recover the balance of such Rent
or pursue any other remedy provided in this Lease.
21.3 Entire Agreement. This Lease and the Exhibits attached hereto and
forming a part hereof set forth all the covenants, promises, agreements,
conditions and understandings between Lessor and Lessee concerning the Premises
and there are no
17
<PAGE>
covenants, promises, agreements, conditions or understandings, either oral or
written, between them other than are herein set forth. Except as herein
otherwise provided, no subsequent alteration, amendment, change or addition to
this Lease shall be binding upon Lessor or Lessee unless reduced to writing and
signed by them.
21.4 Notices. Any notice, demand, request or other instrument which may
be or is required to be given under this Lease shall be delivered in person or
sent by United States certified mail postage prepaid, return receipt requested,
and shall be addressed, (a) if to Lessee, at the Premises or at such other
address as the Lessee shall designate by written notice and, (b) if to Lessor,
3410 South Galena Street, Suite 210, Denver, Colorado 80231, or at such other
address as Lessor may designate by written notice.
21.5 Captions and Section Numbers. The captions, section numbers and
article numbers and an index appearing in this Lease are inserted only as a
matter of convenience and in no way define, limit, construe or describe the
scope of intent of such sections or articles of this Lease nor in any way affect
this Lease.
21.6 Use of Pronoun. The use of the neuter singular pronoun to refer to
Lessor or Lessee shall be deemed a proper reference even though Lessor or Lessee
may be an individual, a partnership, a corporation, or a group of two or more
individuals or corporations. The necessary grammatical changes required to make
the provisions of this Lease apply in the plural sense where there is more than
one Lessor or Lessee and to either corporations, associations, partnerships or
individuals, males or females, shall in all instances be assumed as though in
each case fully expressed.
21.7 Partial Invalidity. If any term, covenant or condition of this
Lease, the application thereof to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Lease or the
application of such term, covenant or condition to persons or circumstances
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby and each term, covenant or condition of this Lease shall be
valid and be enforced to the fullest extent permitted by law.
21.8 Florida Laws to Govern. This Lease shall be construed according to
the laws of the State of Florida.
21.9 Net Lease. It is intended by the parties that this Lease be a "net
lease", imposing upon Lessee the obligation to pay all charges of every kind and
nature in connection with the use and occupancy of the Premises, whether or not
recited herein and whether foreseeable or unforeseeable, including, but not
limited to, utilities, fees, costs, real estate taxes, sales and use taxes, and
all maintenance and repair costs associated with the Premises and the
improvements located thereon.
21.10 Representations and Warranties. Lessee represents and warrants to
Lessor
18
<PAGE>
that (i) Lessee is a duly authorized and valid existing Delaware limited
liability company; (ii) Lessee is adequately capitalized and expects, throughout
the term of the Lease, to be able to satisfy its obligations on a continuing
basis as they become due and to derive a commercially reasonable profit in
respect of its position in the Lease; (iii) Lessee has the full right and
authority to enter into this Lease; (iv) each of the persons executing this
Lease on behalf of Lessee is authorized to do so; and (v) this Lease constitutes
a valid and legally binding obligation of Lessee, enforceable in accordance with
the terms.
Lessor represents and warrants to Lessee that (i) Lessor is a duly
authorized and validly existing Delaware limited liability company, (ii) Lessor
has the full right and authority to enter into this Lease, (iii) each of the
persons executing this Lease on behalf of Lessor is authorized to do so, and
(iv) this Lease constitutes a valid and legally binding obligation of Lessor,
enforceable in accordance with the terms.
21.11 Right to Encumber Leasehold Estate. Lessee shall have the
unrestricted right, from time to time, to encumber, hypothecate or mortgage
Lessee's leasehold estate to a leasehold mortgagee (the "Leasehold Mortgagee")
without the prior consent of Lessor (the "Leasehold Mortgage"). In no event
shall Lessor be obligated to encumber its fee interest in the Premises under any
such Leasehold Mortgage. Such Leasehold Mortgage shall simultaneously encumber
Lessee's title to and interest in the improvements located on the Premises.
Lessor consents to the inclusion of a provision in the Leasehold Mortgage for
the assignment of rents from leases to mobile home tenants to the Leasehold
Mortgagee, effective upon any default under the Leasehold Mortgage. Lessor and
Lessee hereby agree to cooperate in including in this Lease by suitable
amendment from time to time any provision which may reasonably be requested by
any proposed Leasehold Mortgagee for the purpose of implementing the Leasehold
Mortgagee protection provisions contained in this Lease and allowing such
Leasehold Mortgagee reasonable means to protect or preserve the lien of the
Leasehold Mortgage on the occurrence of a default hereunder. Lessor and Lessee
each agree to execute and deliver (and to acknowledge, if necessary, for
recording purposes) any agreement necessary to effectuate any such amendment;
provided, however, that any such amendment shall not in any way affect the Term
or Rent under this Lease, nor otherwise in any material respect adversely affect
any rights of Lessor under this Lease Notwithstanding anything to the contrary
contained herein, Lessee's rights as set forth in this paragraph 21.11 are
subject in each case to Lessee's obligations contained in Articles 7 and 11
hereof.
21.12 Radon. Radon is a naturally occurring radioactive gas that, when
it has accumulated in a building in sufficient quantities, may present health
risks to persons who are exposed to it over time. Levels of radon that exceed
federal and state guidelines have been found in buildings in Florida. Additional
information regarding radon and radon testing may be obtained from the
Hillsborough county public health unit. Lessor makes no representations,
warranties or covenants express or implied regarding Radon.
19
<PAGE>
21.13 Facsimile/Counterpart. This Lease may be executed in several
counterparts, each of which shall be fully effective as an original and all of
which together shall constitute one and the same instrument. An executed
facsimile copy of this Lease shall be binding for all purposes.
IN WITNESS WHEREOF, Lessor and Lessee have signed and sealed this Lease
as of the day and year first above written.
Witnesses:
LESSOR:
CAX RIVERSIDE L.L.C., a Delaware
limited liability company
/s/ Janet Johnson
Name: Janet Johnson By: Commercial Assets, Inc., a
Maryland corporation, sole
member
/s/ Marie Ferguson
Name: Marie Ferguson By: /s/ Bruce E. Moore
Bruce E. Moore
Its President
Dated as of November 20, 1998
LESSEE:
Riverside Golf Course Community
L.L.C., a Delaware limited
liability company
/s/ Janet Johnson
Name: Janet Johnson By: Community Acquisition and
Development Corporation, a
Delaware corporation
/s/ Marie Ferguson
Name: Marie Ferguson By: /s/ Joseph W. Gaynor
Joseph W. Gaynor
Its President
Dated as of November 20, 1998
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 29,
1999, with respect to the financial statements and schedules of Commercial
Assets, Inc. included in this Annual Report (Form 10-K/A Amendment No. 1) for
the year ended December 31, 1998.
/s/ Ernst & Young LLP
Denver, Colorado
March 1, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3292
<SECURITIES> 45066
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 48771
<PP&E> 12678
<DEPRECIATION> (50)
<TOTAL-ASSETS> 78234
<CURRENT-LIABILITIES> 980
<BONDS> 0
0
0
<COMMON> 104
<OTHER-SE> 77150
<TOTAL-LIABILITY-AND-EQUITY> 78234
<SALES> 0
<TOTAL-REVENUES> 4622
<CGS> 0
<TOTAL-COSTS> 50
<OTHER-EXPENSES> 631
<LOSS-PROVISION> 500
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3441
<INCOME-TAX> 0
<INCOME-CONTINUING> 3441
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3441
<EPS-BASIC> .33
<EPS-DILUTED> .33
</TABLE>
