SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-9360
ASSET INVESTORS CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 84-1038736
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 South Yosemite Street, Suite 900 80237
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
(303) 793-2703
(Registrant's telephone number, including area code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __.
As of November 1, 1995, 24,325,580 shares of Asset Investors Corporation
Common Stock were outstanding.
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of September 30, 1995
(unaudited) and December 31, 1994 .................... 1
Statements of Operations for the three and
nine months ended September 30, 1995 and 1994
(unaudited)........................................... 2
Statements of Cash Flows for the nine months
ended September 30, 1995 and 1994 (unaudited)......... 3
Notes to Financial Statements (unaudited)............. 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 11
Summary of Definitions................................ 20
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K...................... 23
(i)
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
September 30, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 2,759 $ 14,961
Restricted cash for secured notes payable -- 15,862
Non-agency MBS Bonds 50,546 32,544
Investment in Commercial Assets 20,439 21,068
CMO Ownership Interests ($244,440 and $1,064,462, respectively, of CMO assets
less $241,477 and $1,041,972, respectively, of CMO liabilities and
minority interest at September 30, 1995 and December 31, 1994) 2,963 22,490
Other assets, net 2,064 2,614
----- -----
Total Assets $ 78,771 $ 109,539
= ====== = =======
Liabilities
Accounts payable and accrued liabilities $ 2,636 $ 2,698
Management fees payable 452 526
Short-term borrowings -- 2,758
Secured notes payable -- 30,592
-- ------
Total Liabilities 3,088 36,574
----- ------
Stockholders' Equity
Common Stock, par value $.01 per share, 50,000,000 shares authorized
24,293,912 and 24,212,002 shares issued and outstanding 243 242
Additional paid-in capital 227,372 227,182
Cumulative dividends (227,049) (220,984)
Cumulative net income 75,117 66,525
------ ------
Dividends in excess of net income (151,932) (154,459)
-------- --------
Total Stockholders' Equity 75,683 72,965
------ ------
Total Liabilities and Stockholders' Equity $ 78,771 $ 109,539
= ====== = =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Ongoing Operations:
Revenues
Non-agency MBS bonds $ 2,644 $ 504 $ 5,866 $ 734
Equity in earnings of Commercial Assets 476 416 1,331 919
Interest income 44 125 298 371
-- --- --- ---
Total Revenues 3,164 1,045 7,495 2,024
----- ----- ----- -----
Expenses
Management fees 303 33 667 55
General and administrative 329 398 1,481 1,220
Interest expense 6 46 62 100
- -- -- ---
Total Expenses 638 477 2,210 1,375
--- --- ----- -----
Earnings from ongoing operations 2,526 568 5,285 649
----- --- ----- ---
Liquidating Operations:
Revenues
CMO Ownership Interests 83 561 1,702 2,768
Interest income -- 192 225 510
Net gain on sale of assets 145 859 2,167 8,496
--- --- ----- -----
Total Revenues 228 1,612 4,094 11,774
--- ----- ----- ------
Expenses
Management fees 33 121 195 380
General and administrative 6 59 28 247
Interest expense -- 656 564 2,107
-- --- --- -----
Total Expenses 39 836 787 2,734
-- --- --- -----
Earnings from liquidating operations 189 776 3,307 9,040
--- --- ----- -----
Net income $ 2,715 $ 1,344 $ 8,592 $ 9,689
= ===== = ===== = ===== = =====
Net income per share $ .11 $ .10 $ .35 $ .69
= === = === = === = ===
Weighted-average shares outstanding 24,294 14,111 24,260 14,097
Dividends per share $ .09 $ .07 $ .25 $ .19
= === = === = === = ===
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
1995 1994
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 8,592 $ 9,689
Adjustments to reconcile net income to net cash flows from operating
activities
Amortization of discounts on non-agency MBS bonds 948 418
Write-down of CMO Ownership Interests -- 1,510
Net gain on sale of assets (2,167) (8,496)
Equity in earnings of Commercial Assets (1,331) (919)
Amortization of discount, net of premium, on Mortgage Collateral, discount
on CMO bonds and CMO issuance costs 907 6,882
Increase in other assets (172) (1,423)
(Decrease) increase in accounts payable and accrued liabilities (1,300) 1,050
------ -----
Net Cash Provided By Operating Activities 5,477 8,711
----- -----
Cash Flows From Investing Activities
Acquisition of non-agency MBS bonds (20,646) (17,076)
Principal collections on CMO Ownership Interests 1,867 7,775
Principal collections on non-agency MBS bonds 1,713 195
Dividends from Commercial Assets 1,960 525
Proceeds from the sale of assets 19,520 11,934
Decrease in restricted cash for secured notes payable 15,862 745
------ ---
Net Cash Provided By Investing Activities 20,276 4,098
------ -----
Cash Flows From Financing Activities
Decrease in short-term borrowings, net (2,758) (1,114)
Decrease in secured notes payable (30,592) (8,871)
Dividends paid (4,605) (1,691)
------ ------
Net Cash Used By Financing Activities (37,955) (11,676)
------- -------
Cash and Cash Equivalents
(Decrease) increase (12,202) 1,133
Beginning of period 14,961 7,540
------ -----
End of period $ 2,759 $ 8,673
= ===== = =====
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Capitalized terms not otherwise defined in the narrative below shall have
the meaning indicated in the "Summary of Definitions" following "Management`s
Discussion and Analysis of Financial Condition and Results of Operations."
A. The Company
Asset Investors Corporation was incorporated under Maryland law on October
14, 1986 by MDC. The Common Stock is listed on the NYSE under the symbol "AIC."
The company's assets primarily are non-agency MBS bonds (which it began
acquiring in the second quarter of 1994) and the ownership of shares of common
stock of Commercial Assets.
B. Presentation of Financial Statements
The Condensed Consolidated Financial Statements of the company presented
herein have been prepared by the company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. These financial
statements reflect all adjustments, consisting of only normal recurring
accruals, which, in the opinion of management, are necessary to present fairly
the financial position, results of operations and cash flows of the company as
of September 30, 1995 and for the period then ended and for all prior periods
presented. These statements are condensed and do not include all the information
required by GAAP in a full set of financial statements. These statements should
be read in conjunction with the company's Consolidated Financial Statements and
notes thereto included in the company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
Certain reclassifications have been made in the 1994 Condensed Consolidated
Financial Statements to conform to the classifications used in the current year.
C. Summary of Significant Accounting Policies
Principles of Consolidation - The Condensed Consolidated Financial
Statements include the accounts of the company and its wholly owned corporate
subsidiaries. The company's investment in Commercial Assets is recorded under
the equity method. All significant intercompany balances and transactions have
been eliminated in consolidation.
Non-agency MBS Bonds - The company's non-agency MBS bonds (also referred to
as high-yield bonds backed by home mortgage loans) are acquired at a significant
discount to par value and are recorded at amortized cost (outstanding principal
amount, net of unamortized discount and allowances for credit losses). The
company records an allowance for credit losses when it acquires a non-agency MBS
bond in an amount equal to the expected future credit losses allocated to the
subordinate bond. Future credit losses are estimated using a methodology which
assumes defaults on mortgage loans reach their highest levels during years three
through five of the mortgage loan. The allowance for credit losses is adjusted
for realized credit losses and changes in estimates of future credit losses.
Earnings from non-agency MBS bonds are recognized based upon the relationship of
cash flows received during the period and estimates of future cash flows to be
received over the life of the bonds. The subordinate non-agency MBS bonds owned
by the company generally are not scheduled to receive principal prepayments for
at least their first five years. The principal repayments from the subordinate
bonds after year five may be reduced by credit losses allocated to the bonds
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<PAGE>
during the first five years. Accordingly, the pricing discount is generally not
amortized into income until after year five when the effect of credit losses are
more determinable. The effect of this income recognition methodology is to defer
income from amortization of the significant discount on the bonds until later
periods when the ultimate cash flows from the subordinate non-agency MBS bonds
are more predictable.
Income Taxes - The company currently operates in a manner intended to
permit it to qualify for the income tax treatment accorded to a REIT. If it so
qualifies, the company's REIT income, with certain limited exceptions, will not
be subject to federal income tax at the corporate level. Accordingly, no
provision for taxes has been made in the Condensed Consolidated Financial
Statements.
In order to maintain its status as a REIT, the company generally is
required, among other things, to distribute annually to its shareowners at least
95% of its REIT income reduced by the NOL carryover. The company also is
required to meet certain asset, income and stock ownership tests.
Statements of Operations - In 1993, the company began a program of
liquidating its CMO Ownership Interests and acquiring credit-sensitive assets
(non-agency MBS bonds and shares of Commercial Assets) that should benefit from
an improving economy. Accordingly, the company has classified as liquidating
operations its revenues from CMO Ownership Interests along with expenses
directly allocable to the CMO Ownership Interests. All other revenues and
expenses of the company, including corporate general and administrative
expenses, are classified as ongoing operations.
Statements of Cash Flows - The company paid interest in cash of $903,000
and $78,000 respectively, for the nine months ended September 30, 1995 and 1994.
Non-cash financing activities of the company during the nine months ended
September 30, 1995 and 1994 were $1,460,000 and $987,000, respectively, from
dividends payable and $191,000 and $72,000, respectively, from distributions of
Common Stock pursuant to DERs.
- 5 -
<PAGE>
D. Non-agency MBS Bonds
Through September 30, 1995, the company acquired 150 non-agency MBS bonds,
with an aggregate outstanding principal balance on the date of acquisition of
$173,676,000 and an aggregate total cost of $54,178,000. The net carrying value
of the company's non-agency MBS bonds was as follows (dollar amounts in
thousands):
<TABLE>
Outstanding Balance
September 30, December 31,
Price1 Coupon2 1995 1994
(Unaudited)
<S> <C> <C> <C> <C>
Non-agency MBS bonds collateralized by:
30-year fixed-rate mortgage loans 33.7% 7.0% $ 102,767 $ 56,955
15-year fixed-rate mortgage loans 38.1 6.6 16,813 12,364
Adjustable-rate mortgage loans 27.2 7.1 4,168 4,219
B and C mortgage loans3 56.6 7.5 16,779 14,473
Other subordinate non-agency MBS bonds4 27.3 6.9 28,768 --
---- --- -------- --------
36.5% 7.0% 169,295 88,011
Less:
Allowance for credit losses (56,187) (22,075)
Unamortized discount (62,562) (33,392)
-------- --------
$ 50,546 $ 32,544
- --------------------------------- = ======== = ========
1 Weighted-average price as a percentage of the principal balance of the non-agency MBS bonds acquired.
2 Weighted-average coupon of non-agency MBS bonds at September 30, 1995.
3 The B and C mortgages are lesser quality, adjustable-rate mortgages and include $8,120,000 and $8,165,000,
respectively, of "B" rated non-agency MBS bonds at September 30, 1995 and December 31, 1994.
4 Referred to as re-REMICs.
</TABLE>
The allowance for credit losses is adjusted as follows: (i) increased or
decreased for changes to the company's expectations of future credit losses;
(ii) increased for allowances established when non-agency MBS bonds are
acquired; and (iii) reduced by actual credit losses allocated to the company's
non-agency MBS bonds. The activity in the allowance for credit losses during the
nine months ended September 30, 1995 was as follows (in thousands):
<TABLE>
<S> <C>
Balance at December 31, 1994 $ 22,075
Allowance related to non-agency MBS bonds acquired during the period 35,976
Credit losses (credit losses of $2,367,000, net of indemnifications of $503,000) (1,864)
------
Balance at September 30, 1995 $ 56,187
= ======
</TABLE>
As of September 30, 1995, there were 225 mortgage loans (out of
approximately 130,000) in foreclosure that collateralize the company's
non-agency MBS bonds, with an outstanding principal balance of $43,619,000 and
an amortized cost of $13,361,000. The company's economic exposure to credit
losses from the mortgage loans in foreclosure is dependent upon: (i) the net
amount recovered from the foreclosure sale of the defaulted mortgage loans, less
related foreclosure costs and servicing advances; and (ii) the purchase price of
the related non-agency MBS bonds. The company's economic loss with respect to
any one non-agency MBS bond is limited to the bond's acquisition price less cash
received through the foreclosure date. The average acquisition price of
the company's non-agency MBS bonds is $361,000.
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<PAGE>
The principal amount of the credit support classes of non-agency MBS bonds
acquired by the company represents a small percentage of the principal amount of
the total non-agency MBS bonds issued to securitize a pool of residential
mortgage loans. At September 30, 1995, the weighted-average percentage of the
principal amount of the credit support non-agency MBS bonds owned by the company
represented 0.54% of the principal amount of the total non-agency MBS bonds
issued in the related securitizations. The outstanding principal balance of the
mortgage loans collateralizing all of the non-agency MBS bonds within the bond
issuances in which the company owns subordinate non-agency MBS bonds and the
outstanding principal balance of the non-agency MBS bonds senior to the
company's subordinate non-agency MBS bonds was $31,584,377,000 and
$31,415,082,000, respectively, at September 30, 1995.
E. Investment in Commercial Assets
On September 30, 1995 and December 31, 1994, the company owned 2,761,126
shares (approximately 27%) of the common stock of Commercial Assets. Presented
below is the summarized financial information of Commercial Assets as reported
by Commercial Assets (in thousands):
<TABLE>
<CAPTION>
Balance Sheets September 30, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
CMBS bonds $ 73,748 $ 74,046
Cash and other assets 1,884 13,558
----- ------
Total Assets 75,632 87,604
------ ------
Short-term borrowings 400 10,295
Other liabilities 407 2,637
--- -----
Total Liabilities 807 12,932
--- ------
Stockholders' Equity $ 74,825 $ 74,672
= ====== = ======
</TABLE>
<TABLE>
<CAPTION>
Statements of Income Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
(Unaudited)
<S> <C> <C> <C> <C>
CMBS bonds $ 2,243 $1,848 $ 6,662 $3,879
Other revenues 12 204 182 923
-- --- --- ---
Total Revenues 2,255 2,052 6,844 4,802
Total Expenses 569 543 1,976 1,463
--- --- ----- -----
Net Income $ 1,686 $1,509 $ 4,868 $3,339
= ===== ====== = ===== ======
</TABLE>
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<PAGE>
F. CMO Ownership Interests
In prior periods, certain of the company's CMO Ownership Interests that
were considered equity ownership interests in a CMO issuance, in accordance with
the EITF Issue 89-4 consensus, were presented on a gross basis on the balance
sheets and statements of operations. Accordingly, the book values of the
Mortgage Collateral and CMO Bonds were presented separately as assets and
liabilities, respectively, on the balance sheets, and interest income on
Mortgage Collateral and interest expense on CMO Bonds were presented separately
as income and expenses, respectively, on the statements of operations.
Due to significant sales of CMO Ownership Interests and a change in the
type of assets the company has been acquiring since 1993, CMO Ownership
Interests represented four percent of the company's total assets at September
30, 1995, and seven percent of total revenues for the three months ended
September 30, 1995. Substantially all of the remaining CMO Ownership Interests
of the company are at, or are nearing, the ends of their economic lives.
Beginning in the second quarter of 1995, the company presented all of
its CMO Ownership Interests under the Prospective Method. The company's balance
sheets reflect all the CMO Ownership Interests at their net carrying amount and
the statements of operations reflect earnings from CMO Ownership Interests on a
net basis. Below is certain information relating to the company's CMO Ownership
Interests (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
CMO Subsidiaries:
Restricted cash $ 7,307 $ 109,830
Accrued interest receivable 2,846 11,250
CMO issuance costs, net 327 586
Mortgage Collateral 230,659 934,975
Unamortized premium, net of discount, on Mortgage Collateral 1,660 (2,013)
----- ------
CMO Subsidiaries - assets 242,799 1,054,628
------- ---------
Accrued interest payable 4,000 17,781
CMO Bonds 234,105 1,027,641
Unamortized discount on CMO Bonds (15,499) (60,390)
Reserve 18,634 53,937
------ ------
CMO Subsidiaries - liabilities 241,240 1,038,969
------- ---------
Minority interest 237 3,003
--- -----
Total CMO Subsidiaries 1,322 12,656
CMO Residuals and Acquired CMO Classes 1,641 9,834
----- -----
Total CMO Ownership Interests, net $ 2,963 $ 22,490
= ===== = ======
</TABLE>
During the nine months ended September 30, 1995, the company exercised
the Call Rights on certain CMO Ownership Interests, recognizing net gains of
$2,153,000. The exercise of Call Rights resulted in the sale of $45,698,000
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<PAGE>
principal amount of Mortgage Collateral from CMO Subsidiaries during the nine
months ended September 30, 1995 and the early redemption of the related CMO
Bonds. During the nine months ended September 30, 1994, the company exercised
Call Rights with respect to certain CMO Ownership Interests, recognizing net
gains of $8,496,000. The exercise of Call Rights resulted in the sale of
$78,015,000 of Mortgage Collateral from CMO Subsidiaries during the nine months
ended September 30, 1994 and the early redemption of the related CMO Bonds.
At December 31, 1994, $79,658,000 in restricted cash was held by a
trustee representing proceeds from the sale of Mortgage Collateral related to
the exercise of Call Rights pending the redemption of the related CMO Bonds. The
restricted cash was used primarily to redeem CMO Bonds with an outstanding
principal balance of $76,019,000 at December 31, 1994 at par on January 1 and
February 1, 1995.
On March 30, 1995, Asset Securitization sold 28 CMO Ownership Interests
classified as available-for-sale for $14,927,000. No gain or loss was recognized
at the time of the sale; however, the company recognized $1,205,000 of net
holding losses related to the assets sold as of December 31, 1994. The proceeds
from the sale and $15,569,000 of restricted cash for secured notes payable were
used to repay the $28,437,000 outstanding principal balance of the secured notes
and $355,000 of accrued interest, and to provide $1,704,000 of cash to the
company.
On November 10, 1995, the company sold 23 CMO Ownership Interests with
a net carrying value of $2,194,000 at September 30, 1995 for $4,800,000. The
sale substantially liquidated the company's holdings of CMO Ownership Interests.
G. Short-Term Borrowings
The company has several Repurchase Agreement facilities collateralized
by certain non-agency MBS bonds. The collateral value and interest rate related
to the Repurchase Agreements are subject to periodic adjustment. At September
30, 1995, the company was able to borrow $11,877,000 under eight Repurchase
Agreements, based on the value of the pledged collateral. At September 30, 1995,
there were no borrowings outstanding under these Repurchase Agreements. At
December 31, 1994, borrowings under these Repurchase Agreements had an original
maturity of 30 days, an effective interest rate of 7.38% and an aggregate
outstanding principal balance of $658,000.
The company has entered into a credit facility with a bank secured by
certain non-agency MBS bonds through December 23, 1996. At September 30, 1995,
the company was able to borrow $10,337,000 under the credit facility, based on
the value of the pledged collateral. The credit facility is also subject to
certain financial covenants, with which the company is in compliance, and bears
interest, payable monthly, based on one-month LIBOR. At September 30, 1995,
there were no borrowings outstanding under the credit facility. At December 31,
1994, $2,100,000 was borrowed under the credit facility at an effective interest
rate of 7.49%.
On July 19, 1995, the company obtained a one-year, $1,000,000 unsecured
line of credit. Advances under this line bear interest at prime rate. At
September 30, 1995, there were no borrowings under this line of credit.
H. Other Matters
The company has entered into a series of Management Agreements with the
Manager through December 31, 1995. Pursuant to the Management Agreements, the
Manager advises the company on its business and oversees its day-to-day
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<PAGE>
operations subject to the supervision of the company's Board of Directors, the
majority of whom are Independent Directors. During the three and nine months
ended September 30, 1995, the company incurred combined Incentive Fees and Base
Fees of $214,000 and $505,000, respectively, compared with $57,000 and $171,000,
respectively, for the same periods of 1994. The company also incurred
Administrative Fees pursuant to the Management Agreements referred to above and
certain administration agreements entered into with the Manager in connection
with certain of the company's CMO Ownership Interests and non-agency MBS bonds.
Administrative Fees incurred for the three and nine months ended September 30,
1995 were $205,000 and $766,000, respectively, compared with $360,000 and
$1,078,000, respectively, for the same periods of 1994.
The company has an NOL carryover of approximately $101,000,000 at
September 30, 1995 which can be used to reduce the company's requirement under
the Code to distribute at least 95% of REIT income but does not reduce the
requirement to distribute 95% of Excess Inclusion income. As of September 30,
1995, the company also has a capital loss carryover of approximately $30,600,000
which expires beginning in 1998.
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Capitalized terms not otherwise defined in the narrative below shall
have the meaning indicated in the "Summary of Definitions" which may be
found at the end of this report.
General - Asset Investors Corporation is a real estate investment trust
(REIT) that was incorporated by MDC under Maryland law in 1986. The Common Stock
of Asset Investors Corporation is listed on the NYSE under the symbol "AIC."
Asset Investors owns and manages ownership interests in residential mortgage
loan securitizations and owns approximately 27% of the common stock of
Commercial Assets, Inc. (AMEX: CAX).
The company currently operates in a manner intended to permit it to
qualify for the income tax treatment accorded to a REIT under the Code. If it so
qualifies, the company's REIT income, with certain limited exceptions, will not
be subject to federal income tax at the corporate level. In order to maintain
its REIT status, the company generally will be required, among other things, to
distribute annually (as determined under the Code) to its shareowners at least
95% of its REIT income reduced by the NOL carryover. The company must also meet
certain asset, income and stock ownership tests.
The company's acquisition and other policies are determined by its
Board of Directors. The company's By-laws require that a majority of the Board
of Directors and each committee thereof be comprised of Independent Directors.
The company's day-to-day operations are performed by the Manager, a
subsidiary of MDC, pursuant to a Management Agreement which is subject to the
approval of a majority of the Independent Directors. The Manager is subject to
the supervision of the Board of Directors. As part of its duties, the Manager
presents the company with asset acquisition opportunities consistent with the
policies and objectives of the company and furnishes the Board of Directors with
information concerning the acquisition, holding and disposition of assets. The
company has no employees.
Continuing its strategy of acquiring credit-sensitive assets that the
company believes should benefit from an improving economy, the company acquired
66 non-agency MBS bonds (also referred to as high-yield bonds backed by home
mortgage loans) with an aggregate outstanding balance on the date of acquisition
of $84,734,000 during the first nine months of 1995. These non-agency MBS bonds
were acquired at a total cost of $20,554,000, a weighted-average acquisition
price of 27.0% and with a weighted-average pass-through coupon interest rate of
7.1%. The 1995 acquisitions were made using the remaining proceeds of the
December 1994 Rights Offering and operating cash flow not needed to pay expenses
or used to make dividend distributions. The company's non-agency MBS bonds
acquired through September 30, 1995 have a weighted average pass-through coupon
interest rate of 7.0% and were acquired at a weighted-average acquisition price
of 36.5%.
On March 30, 1995, Asset Securitization sold 28 CMO Ownership Interests
for $14,927,000. The proceeds from the sale plus $15,569,000 of restricted cash
were used to repay $28,437,000 principal amount of secured notes and $355,000 of
accrued interest and to provide $1,704,000 of cash to the company. The 28 CMO
Ownership Interests were classified as "available for sale" for accounting
purposes as of December 31, 1994 and, accordingly, the company recognized, as of
such date, $1,205,000 of net holding losses for book income purposes related to
the 28 CMO Ownership Interests sold. No gain or loss was recorded at the time of
the sale of the CMO Ownership Interests and repayment of the secured notes in
1995. Asset Securitization was liquidated in May 1995.
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<PAGE>
On November 10, 1995, the company sold 23 CMO Ownership Interests with
a net carrying value of $2,194,000 at September 30, 1995 for $4,800,000. The
sale resulted in a net gain of approximately $2,600,000 which will be included
in fourth quarter 1995 net income. The sale substantially liquidated the
company's holdings of CMO Ownership Interests and provides funds to acquire
additional non-agency MBS bonds.
The company's subordinate non-agency MBS bonds and the CMBS bonds of
Commercial Assets have credit risk. Non-agency MBS bonds are collateralized by
mortgage loans that do not meet GNMA, FNMA or FHLMC guarantee standards,
generally because the mortgage loans exceed agency size limits (e.g., the
current FNMA limit is $203,150) or because the borrower does not meet other
agency credit underwriting criteria (a "non-conforming mortgage loan"). The
company generally acquires the class of the non-agency MBS bond which bears the
first losses from the related Mortgage Collateral. If a borrower defaults on a
mortgage loan which is pledged as collateral for a residential mortgage loan
securitization and the proceeds of the foreclosure sale of the property securing
the mortgage loan are less than the unpaid balance of the mortgage, foreclosure
costs and servicer advances, the company, as the holder of the first-loss class,
would suffer a loss up to the then outstanding principal balance of such class.
The loss would equal the unpaid principal balance plus foreclosure costs and
servicer advances, net of proceeds from the foreclosure sale. Conversely, the
holder of an agency-guaranteed mortgage loan virtually is assured of full
payment of principal and interest due to the agency guarantee.
The net economic loss to the company as a result of allocated credit
losses on the company's non-agency MBS bonds (the product of the allocated
credit losses and the related purchase price percentage, less indemnifications)
was $261,000 for the nine months ended September 30, 1995. The outstanding
principal balance of the company's non-agency MBS bonds was reduced by
$2,367,000 from the allocation of credit losses on the home mortgage loan
collateral for the nine months ended September 30, 1995.
The company anticipates that the amount of credit losses allocated to
the company's non-agency MBS bonds will increase in future periods. It is an
industry expectation that defaults on mortgage loans are generally highest
during years three through five of the life of the mortgage loan. Most of the
mortgage loans that collateralize the company's subordinate non-agency MBS bonds
were originated in 1993 through 1995 and have not yet reached the years during
which defaults are anticipated to be at their highest.
The company has set aside a $56,187,000 allowance for credit losses for
non-agency MBS bonds acquired through September 30, 1995 to offset future credit
losses. The allowance for credit losses is increased by the amount of
anticipated future credit losses when the company acquires a non-agency MBS
bond. The allowance for credit losses is decreased by credit losses allocated to
the subordinate non-agency MBS bonds owned by the company, net of any
indemnifications received. Book income, however, is impacted by any changes in
estimates of future credit losses. The company believes that the current balance
of the allowance for credit losses is adequate to absorb future credit losses
allocated to its non-agency MBS bonds. This assumes, among other things, no
significant changes in general economic conditions, which may impact the values
of the single-family home collateral, or widespread natural disasters which may
impact adversely the credit quality of the mortgage loan collateral.
The company intends to use its available funds to acquire additional
non-agency MBS bonds. Although the company's primary emphasis will be on the
acquisition of subordinate unrated non-agency MBS bonds, future acquisitions may
include, among other things, rated classes of residential mortgage loan
securitizations. The company also may acquire or originate agency-guaranteed and
non-conforming mortgage loans which, among other things, may be used for future
securitizations.
- 12 -
<PAGE>
RESULTS OF OPERATIONS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
The company had book income (computed in accordance with GAAP) of
$2,715,000 ($.11 per share) and $8,592,000 ($.35 per share), respectively, for
the three and nine months ended September 30, 1995, compared with $1,344,000
($.10 per share) and $9,689,000 ($.69 per share), respectively, for the three
and nine months ended September 30, 1994. Book income during the three and nine
months ended September 30, 1995 consisted of $2,526,000 ($.10 per share) and
$5,285,000 ($.22 per share), respectively, of earnings from ongoing operations
and $189,000 ($.01 per share) and $3,307,000 ($.13 per share), respectively, of
earnings from liquidating operations compared with $568,000 ($.04 per share) and
$649,000 ($.05 per share), respectively, of earnings from ongoing operations and
$776,000 ($.06 per share) and $9,040,000 ($.64 per share), respectively, from
liquidating operations for the three and nine months ended September 30, 1994.
Results of liquidating operations consist of the revenues from CMO Ownership
Interests along with expenses directly allocable to the CMO Ownership Interests.
All other revenues and expenses of the company, including corporate general and
administrative expenses, are included in ongoing operations. Earnings from
liquidating operations will be negligible in future years, primarily as a result
of the November 10, 1995 sale of 23 CMO Ownership Interests.
In December 1994, the company completed a Rights Offering that resulted
in net proceeds of $17,208,000 and increased the company's outstanding Common
Stock by 71%, from 14,158,208 shares to 24,212,002 shares. The proceeds of the
Rights Offering principally were used to acquire additional non-agency MBS
bonds.
The table below summarizes the company's results of operations during
the three and nine months ended September 30, 1995 and 1994 (in thousands,
except per share data).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Ongoing Operations:
Revenues
Non-agency MBS bonds $ 2,644 $ 504 $ 5,866 $ 734
Equity in earnings of Commercial Assets 476 416 1,331 919
Interest income 44 125 298 371
-- --- --- ---
3,164 1,045 7,495 2,024
Expenses
Management fees 303 33 667 55
General and administrative 329 398 1,481 1,220
Interest expense 6 46 62 100
- -- -- ---
638 477 2,210 1,375
--- --- ----- -----
Earnings from ongoing operations 2,526 568 5,285 649
----- --- ----- ---
</TABLE>
- 13 -
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Liquidating Operations:
Revenues
CMO Ownership Interests $ 83 $ 561 $ 1,702 $ 2,768
Interest income -- 192 225 510
Net (loss) gain on the sale of assets 145 859 2,167 8,496
--- --- ----- -----
228 1,612 4,094 11,774
Expenses
Management fees 33 121 195 380
General and administrative 6 59 28 247
Interest expense -- 656 564 2,107
-- --- --- -----
39 836 787 2,734
-- --- --- -----
Earnings from liquidating operations 189 776 3,307 9,040
--- --- ----- -----
Book income $ 2,715 $ 1,344 $ 8,592 $ 9,689
= ===== = ===== = ===== = =====
Book income per share $ .11 $ .10 $ .35 $ .69
= === = === = === = ===
Estimated REIT Income (Loss):
Ongoing operations $ 3,900 $ 914 $ 8,800 $ (22)
Liquidating operations (100) (2,614) (5,700) (22,278)
---- ------ ------ -------
Estimated REIT income (loss) $ 3,800 $ (1,700) $ 3,100 $ (22,300)
= ===== = ====== = ===== = =======
Estimated REIT income (loss) per share $ .15 $ (.12) $ .13 $ (1.58)
= === = ==== = === = =====
Excess Inclusion income $ -- $ 1,000 $ 636 $ 2,800
= == = ===== = === = =====
Excess Inclusion income per share $ -- $ .07 $ .03 $ .20
= == = === = === = ===
Dividends $ 2,186 $ 988 $ 6,065 $ 2,679
= ===== = === = ===== = =====
Dividends per share $ .09 $ .07 $ .25 $ .19
= === = === = === = ===
Weighted-average shares outstanding 24,294 14,111 24,260 14,097
</TABLE>
- 14 -
<PAGE>
Book Income
Non-agency MBS Bonds - Book income from the company's non-agency MBS
bonds increased significantly during the three and nine months ended September
30, 1995 compared with the same periods in 1994 primarily due to the acquisition
of 150 non-agency MBS bonds since April 1994 with an outstanding principal
balance of $173,676,000 and a weighted-average coupon of 7.0% at acquisition.
The company's effective book yield on its non-agency MBS bonds at September 30,
1995 and December 31, 1994, taking into consideration an estimate of future
credit losses, was 17.9% and 15.0%, respectively. The company records an
allowance for credit losses at the time a non-agency MBS bond is acquired. At
September 30, 1995, the allowance for credit losses related to the company's
non-agency MBS bonds was $56,187,000. The allowance reduces the amount of book
income the company records from these assets.
As of September 30, 1995, there were 225 mortgage loans (out of
approximately 130,000) in foreclosure that collateralize the company's
non-agency MBS bonds, with an outstanding principal balance of $43,619,000 and
an amortized cost of $13,361,000. The company's economic exposure to credit
losses from the mortgage loans in foreclosure is dependent upon: (i) the net
amount recovered from the foreclosure sale of the defaulted mortgage loans, less
related foreclosure costs and servicing advances; and (ii) the purchase price of
the related non-agency MBS bonds. The company's economic loss with respect to
any one non-agency MBS bond is limited to the bond's acquisition price less cash
received through the foreclosure date. The average acquisition price of
the company's non-agency MBS bonds is $361,000.
Commercial Assets - Commercial Assets commenced operations on October
12, 1993 and had only limited operations in 1993 and the first quarter of 1994.
Commercial Assets has reported that it has acquired, since its inception, 11
CMBS bonds from six securitizations at a cost of $74,433,000. At September 30,
1995 and 1994, these CMBS bonds had outstanding principal balances of
$100,612,000 and $84,960,000, respectively, and weighted-average
yields-to-maturity before credit losses of 13.4% and 12.9%, respectively. Income
from the company's shares of Commercial Assets (which, for book income purposes,
is based on the company's pro rata share of Commercial Assets' book income) for
the three and nine months ended September 30, 1995 increased by $60,000 and
$412,000, respectively, compared with the same periods of 1994, due to the
acquisition of $91,971,000 principal amount of CMBS bonds during 1994.
Commercial Assets completed the investment of its original $75,000,000 of
capital in 1994 and has not acquired any CMBS bonds in 1995. Commercial Assets
reported that its earnings and dividends should remain relatively stable subject
to, among other things, expense levels, credit losses and principal prepayments
on the CMBS bonds.
CMO Ownership Interests - The company's book income from CMO Ownership
Interests decreased during the three and nine months ended September 30, 1995
compared with the same periods of 1994 primarily due to gains from the exercise
of Call Rights and sale of CMO Ownership Interests in 1994 and the first half of
1995. As a result of the November 10, 1995 sale of 23 CMO Ownership Interests,
future book income from CMO Ownership Interests will be negligible.
Net Gain on Sale of Assets - During the nine months ended September 30,
1995 and 1994, the company exercised Call Rights on its CMO Ownership Interests
resulting in gains of $2,153,000 and $8,496,000, respectively. The exercise of
these Call Rights during the nine months ended September 30, 1995 and 1994
reduced the outstanding principal amount of the company's Mortgage Collateral by
$45,698,000 and $78,015,000, respectively.
On March 30, 1995, Asset Securitization sold 28 CMO Ownership Interests
and repaid the secured notes payable, as discussed above. As of December 31,
1994, the company recognized $1,205,000 of net holding losses for book income
purposes related to the 28 CMO Ownership Interests sold. As a result, no gain or
loss was recorded on the sale of the CMO Ownership Interests and repayment of
the secured notes in 1995. During the nine months ended September 30, 1995 and
- 15 -
<PAGE>
1994, the company earned book income from Asset Securitization of $733,000 and
$4,340,000 (including a $4,664,000 gain from the exercise of a Call Right in
1994), respectively. Asset Securitization was liquidated in May 1995.
On November 10, 1995, the company sold 23 CMO Ownership Interests with
a net carrying value of $2,194,000 at September 30, 1995 for $4,800,000. The
sale resulted in a net gain of approximately $2,600,000 which will be included
in earnings from liquidating operations in the fourth quarter of 1995.
Interest Income - Interest income from ongoing operations decreased
during the three and nine months ended September 30, 1995 compared with the same
periods in 1994 because the company has used substantially all of its available
cash to acquire non-agency MBS bonds. Interest income from liquidating
operations has decreased during the three and nine months ended September 30,
1995 compared with the same periods in 1994 because the interest income was
earned primarily from restricted cash for the secured notes payable. The
restricted cash was used to repay the secured notes on March 30, 1995.
General and Administrative Expenses - General and administrative
expenses from ongoing operations decreased during the three months ended
September 30, 1995 compared with the same period in 1994 due primarily to lower
consulting fees for non-agency MBS bonds acquisitions offset by higher DER
expense. General and administrative expenses from ongoing operations increased
during the nine months ended September 30, 1995 compared with the same period in
1994 due to, among other things, the increase in DER expense, legal fees and
printing costs.
Management Fees - Included in management fees attributable to ongoing
operations are Incentive Fees incurred by the company along with Base Fees and
Administrative Fees applicable to the non-agency MBS bonds. The management fees
included in ongoing operations increased during the three and nine months ended
September 30, 1995 compared with the same periods in 1994 due to acquisitions of
non-agency MBS bonds during 1994 and 1995 and higher dividends in 1995 compared
with 1994. Management Fees included in liquidating operations decreased during
the three and nine months ended September 30, 1995 compared with the same
periods in 1994 due to sales and calls of CMO Ownership Interests and collateral
repayments during 1994 and 1995. During the three and nine months ended
September 30, 1995, total management fees incurred by the company pursuant to
the Management Agreement were $419,000 and $1,257,000, respectively, compared
with $417,000 and $1,249,000, respectively, for the same periods in 1994.
Interest Expense - Interest expense on the company's borrowing
facilities, primarily included in liquidating operations, decreased during the
three and nine months ended September 30, 1995, compared with the same periods
in 1994, principally due to the repayment of $11,408,000 and $30,592,000,
respectively, of the secured notes payable in 1994 and in the first quarter of
1995.
REIT Income
The company's estimated REIT income from ongoing operations during the
three and nine months ended September 30, 1995 improved over the same periods in
1994 due to $2,620,000 and $8,151,000, respectively, of higher REIT earnings
from non-agency MBS bonds and $607,000 and $884,000, respectively, of increased
dividends from Commercial Assets. The increase in REIT earnings from non-agency
MBS bonds was due to acquisitions of non-agency MBS bonds in 1994 and 1995.
The company's estimated REIT losses from liquidating operations for the
three and nine months ended September 30, 1995 were significantly less than the
same periods in 1994 primarily due to high levels of prepayments of the Mortgage
- 16 -
<PAGE>
Collateral underlying the company's CMO Ownership Interests during the first
half of 1994. The high levels of prepayments in 1994 resulted in significant
amounts of non-cash interest expense from amortization of the discounts on the
company's CMO Bonds.
The estimated REIT losses from liquidating operations during the nine
months ended September 30, 1995 included $4,500,000 of interest expense related
to the write off of unamortized discount from CMO Bonds redeemed during the
period in conjunction with the exercise of Call Rights, compared with $1,500,000
for the same period in 1994. Exclusive of the interest expense related to the
exercise of Call Rights, the company earned estimated REIT income of $7,600,000
during the nine months ended September 30, 1995, compared with REIT losses of
$20,800,000 for the same period in 1994.
The company recognized approximately $2,741,000 and $19,622,000 of net
capital losses during the three and nine months ended September 30, 1995,
respectively. The net capital losses are not included in REIT income, but
increased the company's capital loss carryover to approximately $30,600,000 at
September 30, 1995. For the three and nine months ended September 30, 1994, the
company recognized $981,000 and $8,603,000, respectively, of net capital gains
from the exercise of Call Rights, which reduced the company's capital loss
carryovers from prior periods, as required by the Code.
Excess Inclusion Income
The company's Excess Inclusion income for the three and nine months
ended September 30, 1995 was significantly less than the same periods in 1994.
Excess Inclusion income was generated from certain of the CMO Ownership
Interests owned by the company. Due to the liquidation of these CMO Ownership
Interests, Excess Inclusion income is expected to be negligible in the future
periods.
NOL Carryover
The company's NOL carryover was approximately $101,000,000 as of
September 30, 1995. The NOL can be used to reduce the company's requirement to
distribute at least 95% of its REIT income.
Reconciliation of REIT Income and Book Income
Substantially all of the difference between REIT income and book income
is due to: (i) gains on the sales of assets recorded for book income purposes
that either capital losses or are capital gains that are reduced to zero for
REIT income purposes by the company's capital loss carryover; (ii) the method of
recording credit losses, which for REIT income purposes are not deducted until
they occur and which for book income purposes are estimated and reflected as a
reduction of revenues in the form of lower discount amortization included in
income from non-agency MBS bonds; and (iii) differences in the calculation of
discount and premium amortization for REIT income compared to book income
attributable to non-agency MBS bonds and CMO Ownership Interests.
Dividend Distributions
On September 29, 1995, Asset Investors announced an increase in its
regular quarterly dividend to nine cents per share, representing the third
dividend increase in two years. The third quarter 1995 dividend totaled
$2,186,000, or nine cents per share, compared with $988,000, or seven cents per
share, for the same period in 1994. The dividend was paid on October 16, 1995 to
shareowners of record on October 9, 1995.
- 17 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The company uses its cash flow from operating activities and other
capital resources to provide working capital to support its operations, for the
payment of dividends to its shareowners, for the acquisition of assets and for
the repayment of borrowings.
The table below summarizes the company's operating cash flows and uses
of those cash flows for the nine months ended September 30, 1995 and 1994 (in
thousands).
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1994
<S> <C> <C>
Cash Flow from Ongoing Operations:
Non-agency MBS bonds $ 8,004 $ 1,019
Dividends from Commercial Assets 1,960 525
Cash Flow from Liquidating Operations:
CMO Ownership Interests 4,476 17,425
Restricted cash for secured notes payable 15,569 --
Sale of assets 19,520 11,934
Total expenses, net of interest income and other (3,130) (1,018)
------ ------
Cash Flow From Operations $ 46,399 $ 29,885
= ====== = ======
Dividends Paid $ 4,476 $ 1,691
= ===== = =====
Acquisition of Non-agency MBS Bonds $ 19,520 $ 17,076
= ====== = ======
Repayment of Debt $ 33,350 $ 9,985
= ====== = =====
</TABLE>
The company's cash flow from ongoing operations continues to increase due
to acquisitions of non-agency MBS bonds. From April 1, 1994 through September
30, 1995, the company acquired 150 non-agency MBS bonds, with an aggregate
outstanding principal balance on the date of acquisition of $173,676,000, a
weighted-average coupon of 7.0% and an aggregate total cost of $54,178,000.
Dividends from Commercial Assets increased in 1995 compared with 1994 due to
acquisitions of CMBS bonds by Commercial Assets in 1994. Commercial Assets has
stated that its dividend should remain stable in the future assuming, among
other things, no defaults in the mortgage loans collateralizing its CMBS bonds
and stable expenses.
Cash flow from liquidating operations, primarily consisting of CMO
Ownership Interests, is declining because of the sales and exercises of Call
Rights of CMO Ownership Interests in 1994 and 1995. On November 10, 1995, the
company sold substantially all of its remaining CMO Ownership Interests for
$4,800,000. As a result, the company expects no significant cash flow from its
CMO Ownership Interests in future years.
The company has available sources of liquidity from several Repurchase
Agreements and a credit facility which expires on December 23, 1996, in each
case collateralized by certain non-agency MBS bonds. The collateral value and
interest rate related to these borrowing agreements are subject to periodic
adjustment. At September 30, 1995, the company was able to borrow $22,214,000
under these agreements, based on the value of the pledged collateral. At
- 18 -
<PAGE>
September 30, 1995, there were no borrowings under the Repurchase Agreements or
credit facility. The company currently does not intend to use significant
amounts of short-term debt to acquire non-agency MBS bonds.
On July 19, 1995, the company obtained a one-year, $1,000,000 unsecured
line of credit. Advances under this line bear interest at prime rate. At
September 30, 1995, there were no borrowings under this line of credit.
To further expand the company's operations and increase shareowners'
returns, the company plans to acquire additional non-agency MBS bonds with its
available cash flow. Assuming current levels of cash flow from ongoing
operations, the company anticipates that it will have approximately $6,000,000
(including the $4,800,000 in proceeds from the November 10, 1995 sale of 23 CMO
Ownership Interests) in available cash flow to acquire additional assets during
the fourth quarter of 1995.
The amount of defaults and resulting credit losses on the company's
non-agency MBS bonds may be impacted adversely by natural disasters not
generally insured against by a standard homeowners insurance policy (e.g.,
floods, earthquakes, etc.) in geographic areas in which residential properties
that collateralize the company's non-agency MBS bonds are located. The company
is unable to predict the impact natural disasters may have on the company's
income. The company has provided $56,187,000 of allowances for credit losses at
September 30, 1995 to absorb future credit losses.
- 19 -
<PAGE>
SUMMARY OF DEFINITIONS
The following terms used in the text are understood to have the meanings
indicated below.
Acquired CMO Class - A CMO Class acquired by the company which does not
constitute a CMO Subsidiary or CMO Residual.
Administrative Fee - A fee, of up to $35,000 per annum per CMO Ownership
Interest, and up to $2,500 per annum per non-agency MBS bond, for bond
administration and other services related to the company's CMO Ownership
Interests and non-agency MBS bonds paid pursuant to the Management Agreement,
consulting agreements and other management agreements.
agencies - GNMA, FNMA or FHLMC.
AMEX - American Stock Exchange, Inc.
Asset Securitization - Asset Investors Securitization Corporation, a wholly
owned subsidiary of the company incorporated under Delaware law, liquidated
effective May 2, 1995.
B and C mortgage loans - Mortgage loans made to borrowers who have credit
histories of a lower overall quality than most borrowers generally resulting
from previous repayment difficulties, brief job histories, previous bankruptcies
or other causes.
Base Fee - An annual management fee equal to 3/8 of one percent of the company's
consolidated Average Invested Assets (as defined in the Management Agreement)
which is payable quarterly to the Manager pursuant to the Management Agreement.
book income - Income computed in accordance with GAAP.
By-laws - The By-laws of the company, as amended from time to time.
Call Rights - The rights provided in the Indenture of a CMO Bond that allow the
issuer of the CMO Bond to sell the Mortgage Collateral and redeem the bonds at
par at a predetermined date or if the bond balance falls below a predetermined
amount (for example, 10% of the original bond balance). Any excess proceeds from
the sale of the Mortgage Collateral over the funds required to redeem the bonds
is passed on to the residual interest holder.
CMBS bond - Commercial mortgage-backed security is a debt instrument which is
secured by mortgage loans on commercial real property.
CMOs - Collateralized mortgage obligations. CMOs are multi-class issuances of
bonds which are secured and funded as to the payment of interest and repayment
of principal by the Collateral.
CMO Ownership Interest - A CMO Residual, Acquired CMO Class and/or CMO
Subsidiary.
CMO Residual - A non-equity ownership interest in a CMO issuance.
CMO Subsidiary - An equity ownership interest in a CMO issuance.
Code - The Internal Revenue Code of 1986, as amended.
Collateral - A specific group of mortgage loans or mortgage-backed certificates
and other collateral pledged to secure an issuance of CMOs.
- 20 -
<PAGE>
Commercial Assets - Commercial Assets, Inc., a publicly traded REIT formed by
the company in August 1993, incorporated under Maryland law. (AMEX: Commercial
Assets, Inc.)
Commission - The Securities and Exchange Commission.
Common Stock - Asset Investors Corporation common stock, par value $.01 per
share, listed on the New York Stock Exchange, Inc. under the symbol "AIC."
company - Asset Investors Corporation, a Maryland corporation.
DERs - Dividend equivalent rights as defined in the 1986 Stock Option Plan, as
amended. Option holders earn shares of Common Stock equal to the value of
dividends received as if the options were outstanding Common Stock.
Distribution - The company's distribution of approximately 70% of the common
stock of Commercial Assets to the company's shareowners on October 12, 1993.
EITF - Emerging Issues Task Force, a task force of the FASB.
Excess Inclusion income - Excess Inclusion income is attributable to residual
interests of a REMIC. Excess Inclusion income is the amount of income from a
residual interest in a REMIC which exceeds a specified return as provided in the
Code. Excess Inclusion income cannot be reduced by any expenses or reductions,
including normal operating expenses, losses from the company's CMO Ownership
Interests and NOLs.
FHLMC - Federal Home Loan Mortgage Corporation.
FNMA - Federal National Mortgage Association.
GAAP - Generally accepted accounting principles.
GNMA - Government National Mortgage Association.
Incentive Fee - An annual management fee equal to 20% of the dollar amount by
which cash distributions to shareowners (as defined in the Management Agreement)
of the company exceeds an amount equal to the Average Net Worth (as defined in
the Management Agreement) of the company multiplied by the Ten-Year U.S.
Treasury Rate (as defined in the Management Agreement) plus one percent payable
quarterly to the Manager pursuant to the Management Agreement.
Independent Director - Pursuant to the company's By-laws, an Independent
Director is a person "who is not affiliated, directly or indirectly, with the
person or entity responsible for directing or performing the day-to-day business
affairs of the corporation (the "advisor"), including a person or entity to
which the advisor subcontracts substantially all of such functions, whether by
ownership of, ownership interest in, employment by, any material business or
professional relationship with, or by serving as an officer of the advisor or an
affiliated business entity of the advisor."
Issue 89-4 - The consensus reached by the EITF on Issue No. 89-4, Accounting for
a Purchased Investment in a Collateralized Mortgage Obligation Instrument or in
a Mortgage-Backed Interest-Only Certificate.
LIBOR - The London Interbank Offered Rate on Eurodollar deposits.
LIBOR Class - A variable-rate CMO Class on which the interest rate is adjusted
quarterly or monthly based on specified margins in relation to LIBOR.
- 21 -
<PAGE>
Management Agreement - The one-year management agreement entered into between
the company and the Manager.
Manager - Financial Asset Management Corporation, a Delaware corporation and
indirect subsidiary of M.D.C. Holdings, Inc..
MDC - M.D.C. Holdings, Inc., a Delaware corporation and the indirect parent of
the Manager.
Mortgage Certificates - FNMA mortgage certificates, FHLMC mortgage certificates,
fully-modified pass-through mortgage-backed certificates guaranteed by GNMA and
private certificates owned by the company representing undivided beneficial
interests in pools of mortgage loans.
Mortgage Collateral - Mortgage Certificates and Mortgage Loans which secure CMO
bonds and non-agency MBS bonds.
Mortgage Loans - Mortgage loans, owned by the company, which are secured by
single-family, residential (one-to four-unit) properties.
NYSE - New York Stock Exchange, Inc.
NOL - Net operating loss.
non-agency MBS bonds - Debt interests in residential mortgage loan
securitizations collateralized by pools of non-conforming (non-agency
guaranteed) single-family (one-to-four unit) mortgage loans.
Prospective Method - The accounting method used by the company for CMO Ownership
Interests.
Qualifying Interests - Mortgages and other liens on and interests in real
estate.
REIT - A real estate investment trust as defined in the Code.
REIT income/loss - Taxable income/loss computed as prescribed for REITs prior to
consideration of any NOL carryovers and prior to the "dividends paid deduction"
(including the dividends paid deduction for dividends related to capital gains).
REMIC - A pass-through tax entity known as a "real estate mortgage investment
conduit" created by the Tax Reform Act of 1986 to facilitate the structuring of
mortgage-asset transactions.
Repurchase Agreements - Financial transactions involving the sale and subsequent
repurchase of an identical security on a specified date at two different,
pre-negotiated prices. Because Repurchase Agreements require the same security
to be returned when the transaction is completed, these agreements are perceived
as and accounted for as collateralized borrowing/lending arrangements.
Rights - Transferable subscription rights issued in the Rights Offering.
Rights Offering - On December 16, 1994, the company completed a one-for-one
Rights Offering of its Common Stock. Subscriptions for 10,053,794 shares of
Common Stock were received at a price of $1.90 per share.
Stock Option Plan - The company's 1986 Stock Option Plan, as restated November
15, 1990, as amended.
- 22 -
<PAGE>
PART II
OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
4 Form of certificate representing Common Stock of the
Registrant (incorporated herein by reference to Exhibit 10.15
to the Annual Report on Form 10-K of the Registrant for the
fiscal year ended December 31, 1988, Commission File No.
1-9360, filed on April 5, 1989).
4.1(a) Indenture, dated as of January 1, 1986, between Asset
Investors Mortgage Funding Corporation ("Asset Mortgage
Funding") and Bankers Trust Company ("BTC"), as trustee
(incorporated herein by reference to Exhibit 2 to the Current
Report on Form 8-K of Asset Mortgage Funding, Commission File
No. 0-13955, filed on February 7, 1986).
4.1(b) First Supplemental Indenture, dated as of January 1, 1988,
between Asset Mortgage Funding and BTC, as trustee
(incorporated herein by reference to Exhibit 4 to the Current
Report on Form 8-K of Asset Mortgage Funding, Commission File
No. 0-13955, filed on February 3, 1988).
4.1(c) Form of Residual Interest Agreement entered into in connection
with issuances of collateralized mortgage obligations ("CMOs")
of Asset Mortgage Funding (incorporated herein by reference to
Exhibit 4.1(t) to the Annual Report on Form 10-K of the
Registrant for the fiscal year ended December 31, 1988,
Commission File No. 1-9360, filed on April 5, 1989).
4.2(a) Indenture, dated as of August 1, 1987, between Asset Investors
Funding Corporation ("Asset Funding") and BTC, as trustee
(incorporated herein by reference to Exhibit 4(a) to the
Quarterly Report on Form 10-Q of Asset Funding for the quarter
ended September 30, 1987, Commission File No. 0-14967, filed
on November 16, 1987).
4.2(b) Form of Residual Interest Agreement entered into in connection
with CMO issuances (w/o funding notes) of Asset Funding
(incorporated herein by reference to Exhibit 4.2(i) to the
Annual Report on Form 10-K of the Registrant for the fiscal
year ended December 31, 1988, Commission File No. 1-9360,
filed on April 5, 1989).
4.2(c) Form of Residual Interest Agreement entered into in connection
with CMO issuances (w/ funding notes) of Asset Funding
(incorporated herein by reference to Exhibit 4.2(j) to the
Annual Report on Form 10-K of the Registrant for the fiscal
year ended December 31, 1988, Commission File No. 1-9360,
filed on April 5, 1989).
4.3(a) Indenture, dated as of August 1, 1986, between Asset Investors
Finance Corporation ("Asset Finance") and The First National
Bank of Chicago ("First Chicago"), as trustee (incorporated
herein by reference to Exhibit 4(a) to the Registration
Statement on Form S-11 of Asset Finance, Registration No.
33-9718).
- 23 -
<PAGE>
4.3(b) Form of Residual Interest Agreement entered into in connection
with CMO issuances of Asset Finance (incorporated herein by
reference to Exhibit 4.3(e) to the Annual Report on Form 10-K
of the Registrant for the fiscal year ended December 31, 1988,
Commission File No. 1-9360, filed on April 5, 1989).
4.4 Indenture, dated as of December 1, 1992, between Asset
Investors Securitization Corporation and State Street Bank and
Trust Company, as Note Trustee. *
10.1 Management Agreement dated as of January 1, 1995, between the
Registrant and Asset Management (incorporated herein by
reference to Exhibit 10.1 (b) to the Quarterly Report on Form
10-Q of the Registrant for the quarter ended March 31, 1995,
Commission File No. 1-9360, filed on May 15, 1995).
10.2 CMO Participation Agreement, dated as of December 15, 1986,
among the Registrant, Holdings and Yosemite Financial, Inc.
(incorporated herein by reference to Exhibit 10.10 to the
Quarterly Report on Form 10-Q of the Registrant for the
quarter ended September 30, 1988, Commission File No. 1-9360,
filed on August 15, 1988).
10.3 Form of Repurchase Agreement (incorporated herein by reference
to Exhibit 10.9 to the Quarterly Report on Form 10-Q of the
Registrant for the quarter ended September 30, 1988,
Commission File No. 1-9360, filed on August 15, 1988).
10.4 Form of Indemnification Agreement between the Registrant and
each Director of the Registrant (incorporated herein by
reference to Appendix A to the Proxy Statement of the
Registrant, Commission File No. 1-9360, dated May 18, 1987).
10.5(a) 1986 Stock Option Plan of the Registrant as restated November
15, 1990 (incorporated herein by reference to Exhibit A to the
Proxy Statement of the Registrant, Commission File No. 1-9360,
dated April 22, 1991).
10.5(b) First Amendment to the Registrant's 1986 Stock Option Plan as
restated November 15, 1990 (incorporated herein by reference
to Exhibit 10.9(b) to the Annual Report on Form 10-K of the
Registrant for the fiscal year ended December 31, 1992,
Commission File No. 1-9360, filed on April 5, 1993).
10.5(c) Second Amendment to the Registrant's 1986 Stock Option Plan as
restated November 15, 1990, as amended (incorporated herein by
reference to Exhibit 10.9(c) to the Annual Report on Form 10-K
of the Registrant for the fiscal year ended December 31, 1992,
Commission File No. 1-9360, filed on April 5, 1993).
10.5(d) Form of Non-Qualified Stock Option Agreement pursuant to the
1986 Stock Option Plan of the Registrant as amended and
restated through November 15, 1990 (incorporated here-in by
reference to Exhibit 10.9(b) to the Annual Report on Form 10-K
of the Registrant for the fiscal year ended December 31, 1991,
Commission File No. 1-9360, filed on March 30, 1992).
- 24 -
<PAGE>
10.5(e) Third Amendment to the Registrant's 1986 Stock Option Plan as
restated November 15, 1990, as amended (incorporated herein by
reference to Exhibit 10.9(e) to the Quarterly Report on Form
10-Q of the Registrant for the quarter ended September 30,
1993, Commission File No. 1-9360, filed on November 15, 1993).
10.6 Forms of Investment Agreement entered into in connection with
CMO issuances (incorporated herein by reference to Exhibit
10.26 to the Quarterly Report on Form 10-Q of the Registrant
for the quarter ended September 30, 1988, Commission File No.
1-9360, filed on August 15, 1988).
10.7 Forms of Consulting Agreement entered into in connection with
CMO issuances of Asset Investors Trusts (incorporated herein
by reference to Exhibit 10.31 to the Quarterly Report on Form
10-Q of the Registrant for the quarter ended September 30,
1988, Commission File No. 1-9360, filed on August 15, 1988).
10.8 Form of Management Agreement entered into in connection with
CMO issuances of Asset Mortgage Funding (incorporated herein
by reference to Exhibit 10.28 to the Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31,
1988, Commission File No. 1-9360, filed on April 5, 1989).
10.9 Form of Management Agreement entered into in connection with
CMO issuances (w/o funding notes) of Asset Funding
(incorporated herein by reference to Exhibit 10.29 to the
Annual Report on Form 10-K of the Registrant for the fiscal
year ended December 31, 1988, Commission File No.
1-9360, filed on April 5, 1989).
10.10 Form of Management Agreement entered into in connection with
CMO issuances (w/ funding notes) of Asset Funding
(incorporated herein by reference to Exhibit 10.30 to the
Annual Report on Form 10-K of the Registrant for the fiscal
year ended December 31, 1988, Commission File No.
1-9360, filed on April 5, 1989).
10.11 Form of Management Agreement entered into in connection with
CMO issuances of Asset Finance (incorporated herein by
reference to Exhibit 10.31 to the Annual Report on Form 10-K
of the Registrant for the fiscal year ended December 31, 1988,
Commission File No. 1-9360, filed on April 5, 1989).
10.12 Management Agreement, dated as of July 10, 1987, between Sears
Mortgage Securities Corporation ("SMSC") and Wilmington Trust
Company ("WTC"), as owner trustee, and relating to Trust
1987-1 (incorporated herein by reference to Exhibit C to the
Current Report on Form 8-K of Trust 1987-1, Commission File
No. 33-5466, filed on August 7, 1987).
10.13 Administrative Services Agreement, dated as of January 29,
1990, between WTC, as owner trustee, and Asset Management and
relating to Mortgage Capital Trust III (incorporated herein by
reference to Exhibit 10.17 to the Annual Report on Form 10-K
of the Registrant for the fiscal year ended December 31, 1991,
Commission File No. 1-9360, filed on March 30, 1992).
10.14 Management Agreement, dated as of June 17, 1991, between WTC,
as owner trustee, and Asset Management and relating to Dean
Witter CMO Trust 1 (incorporated herein by reference to
Exhibit 10.18 to the Annual Report on Form 10-K of the
Registrant for the fiscal year ended December 31, 1991,
Commission File No. 1-9360, filed on March 30, 1992).
- 25 -
<PAGE>
10.15 Contribution Agreement, dated as of August 20, 1993, by and
between the Registrant and Commercial Assets, Inc.
(incorporated herein by reference to Exhibit 10.19 to the
Quarterly Report on Form 10-Q of the Registrant for the
quarter ended September 30, 1993, Commission File No. 1-9360,
filed on November 15, 1993).
27 Financial Data Schedule.
99 Automatic Dividend Reinvestment Plan relating to the Common
Stock of the Registrant, as amended (incorporated herein by
reference to Exhibit 28 to the Annual Report on Form 10-K of
the Registrant for the fiscal year ended December 31, 1991,
Commission File No. 1-9360, filed on March 30, 1992).
* The securities issued pursuant to the indenture do not exceed 10% of
the total assets of the Registrant and its subsidiaries on a
consolidated basis and will be filed upon request of the Commission.
(b) Reports on Form 8-K:
No current reports on Form 8-K were filed by the Registrant
during the period covered by this Quarterly Report on Form
10-Q.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ASSET INVESTORS CORPORATION
(Registrant)
Date: November 10, 1995 By /s/ Paris G. Reece III
-----------------------
Paris G. Reece III
Chief Financial Officer
- 26 -
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