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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK,
PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE, INC.
(Title of each class) (Name of each exchange on which registered)
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. [X]
As of March 16, 1995, 24,227,005 shares of Asset Investors Corporation 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 New York
Stock Exchange, Inc.) held by non-affiliates was approximately $55,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K is incorporated by reference to the registrant's 1995
definitive proxy statement to be filed with the Securities and Exchange
Commission no later than 120 days after the end of the registrant's fiscal year.
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ASSET INVESTORS CORPORATION AND SUBSIDIARIES
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1994
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS
(a) General Development of Business . . . . . . . . . . . . . . 1
(b) Narrative Description of Business . . . . . . . . . . . . . 4
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREOWNER MATTERS . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . 24
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . 40
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.. . . . . . . . . 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . 41
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SUMMARY OF DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 47
<PAGE>
PART I
CAPITALIZED TERMS NOT OTHERWISE DEFINED IN THE NARRATIVE BELOW SHALL
HAVE THE MEANINGS INDICATED IN THE "SUMMARY OF DEFINITIONS" WHICH MAY
BE FOUND AT THE END OF THIS REPORT.
ITEM 1. BUSINESS.
(A) GENERAL DEVELOPMENT OF BUSINESS.
Asset Investors Corporation (the "company") is a real estate investment
trust (REIT) that was incorporated by MDC under Maryland law in 1986. Its
shares of Common Stock are listed on the NYSE under the symbol "AIC." Asset
Investors manages ownership interests in residential mortgage loan
securitizations (non-agency MBS bonds and CMO Ownership Interests) and owns
approximately 27% of the common stock of Commercial Assets, Inc. (AMEX: CAX).
For all taxable years commencing on or after January 1, 1987, the company
has operated, and in the future intends to operate, in a manner that will 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 and its Excess Inclusion 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 will be
required, among other things, to distribute annually (as determined under the
Code) to its shareowners at least 95% of the greater of its REIT income or its
Excess Inclusion income and to 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 persons constituting
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.
OVERVIEW - During 1994, the company continued to rebuild and diversify its
residential mortgage loan-related assets focusing on permissible REIT activities
which do not generate Excess Inclusion income. Since October 1993, the company
has acquired a substantial amount of assets that are less sensitive to mortgage
interest rates and prepayments compared with the company's CMO Ownership
Interests. However, these assets are more sensitive to credit risks. Since
April 1994, the company has acquired and in the future intends to acquire
subordinate non-agency MBS bonds. Through December 31, 1994, the company
acquired 84 non-agency MBS bonds at a cost of $33,624,000.
On December 16, 1994, the company completed a one-for-one Rights Offering
of its Common Stock. Subscriptions for 10,053,794 shares of its Common Stock
were received in the Rights Offering at a price of $1.90 per share resulting in
net proceeds to the company of $17,208,000. Over 70 percent of the
subscriptions for shares of Common Stock offered in the Rights Offering were
exercised. The capital raised has been used to acquire subordinate non-agency
MBS bonds and, to a lesser extent, to repay short-term borrowings. Between
January 1, 1995 and February 28, 1995, the company has acquired eight additional
non-agency MBS bonds at a cost of $1,980,000. At February 28, 1995, the company
had
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$14,993,000 of cash and cash equivalents available for, among other things,
future acquisitions of non-agency MBS bonds.
The company's CMO Ownership Interests have decreased significantly in value
since 1991 due to, among other things: (i) high levels of prepayments in 1992,
1993 and the first five months of 1994 which were caused by record low mortgage
interest rates; (ii) the sale in June 1993 of 21 CMO Ownership Interests that
previously generated a significant amount of Excess Inclusion income; and (iii)
the early redemption of many CMO Ownership Interests resulting from the
company's exercise of Call Rights. In addition, the company agreed to sell on
March 30, 1995, 28 CMO Ownership Interests that are a portion of the collateral
for the company's secured notes payable.
REDUCTION OF CMO OWNERSHIP INTERESTS - From 1990 to 1993, mortgage interest
rates fell to their lowest levels in over 25 years which resulted in an
unprecedented high level of prepayments in 1992, 1993 and the first half of 1994
on the mortgage loans underlying the company's GNMA, FNMA and FHLMC-guaranteed
mortgage certificates, as homeowners nationwide refinanced their mortgages to
lower their payments. Prepayments adversely affect the company's CMO Ownership
Interests by reducing the amount of its interest earning assets (and the
company's future income therefrom) and by permanently reducing the positive
spread between the company's fixed-rate agency-guaranteed mortgage certificates
and the weighted-average interest cost of its remaining CMO bonds.
The historically high levels of Mortgage Collateral prepayments shortened
significantly the economic lives of many of the company's CMO Ownership
Interests from what was anticipated by the company at the time of their
acquisition. Accordingly, most of the company's CMO Ownership Interests are at
or are nearing the end of their economic lives and are not expected to generate
significant amounts of Excess Cash Flows in the future.
The company's CMO Ownership Interests that are pledged as collateral for
the secured notes payable are being sold, among other reasons, because they are
not anticipated to generate Excess Cash Flows after debt service requirements
until after the year 2001. In March 1995, the company agreed to sell the CMO
Ownership Interests that are collateral for the secured notes payable. The
proceeds from the sale, which is scheduled to close on March 30, 1995, plus the
restricted cash for the secured notes payable will be used to repay the secured
notes payable. The sale of these CMO Ownership Interests and repayment of the
secured notes payable significantly will reduce the total assets and liabilities
of the company and its future revenues and expenses from CMO Ownership
Interests. The company believes this sale will occur although there can be no
assurance.
Certain of the company's CMO Ownership Interests allow the company to
exercise the Call Rights as specified in the related CMO Bond Indenture. During
1994, 1993 and 1992 the company exercised Call Rights on ten, five and one CMO
Ownership Interests, respectively, recognizing gains on the sale of assets of
$8,169,000, $1,062,000 and $1,435,000, respectively. The calls in 1994, 1993
and 1992 reduced the outstanding principal amount of the company's Mortgage
Collateral by $184,491,000, $22,320,000 and $48,716,000, respectively.
FORMATION OF COMMERCIAL ASSETS - To maintain its status as a REIT, in
general, the company is required to distribute dividends to its shareowners
equal to at least 95% of the greater of the company's REIT income or Excess
Inclusion income. Prior to July 1993, the company's CMO Ownership Interests
generated significant amounts of Excess Inclusion income. Excess Inclusion
income cannot be reduced by expenses or deductions, including normal operating
expenses, losses from the company's CMO Ownership Interests and NOLs. As a
result, the company's Excess Inclusion income and distribution requirements
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were significantly higher than its REIT income during 1992 and 1993.
Satisfaction of these distribution requirements (as discussed below) utilized a
significant portion of the company's capital which otherwise could have been
used for new acquisitions. In order to reduce the adverse effects of Excess
Inclusion income on the company's capital requirements, in June 1993, the
company sold most of its assets that generated Excess Inclusion income.
In August 1993, the company formed a new REIT, Commercial Assets. The
company contributed $75,000,000 ($74,800,000 pursuant to the Contribution
Agreement plus $200,000 of cash) to the capital of Commercial Assets during 1993
and distributed, on October 12, 1993, approximately 70% of the shares of
Commercial Assets to the company's shareowners as a taxable dividend. The
Distribution satisfied a significant portion of the company's REIT distribution
requirement for 1993 and 1992. As of December 31, 1994, the company owned
approximately 27% of the shares of Commercial Assets.
Commercial Assets acquires and manages debt instruments issued in
commercial mortgage loan securitizations. Commercial mortgage loan
securitizations generally are multi-class issuances of debt instruments which
are 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 and
other collateral. To date, Commercial Assets has acquired subordinate credit
support classes of commercial securitizations backed by mortgages on multi-
family real estate. Commercial Assets has advised the company that future
acquisitions may include, among other things, rated and unrated classes of CMBS
bonds secured by mortgage loans on senior living centers, retail space,
cooperative apartments, nursing homes and office buildings, and participation in
commercial real estate. In addition, Commercial Assets has advised the company
that Commercial Assets, in the future, also may acquire fee interests in, or
acquire or originate mortgage loans on, commercial real property which, among
other things, may be used as collateral for future securitizations.
ACQUISITION OF NON-AGENCY MBS BONDS - In late April 1994, the company
commenced its previously announced acquisition of unrated credit support debt
interests in non-conforming residential mortgage loan securitizations known as
"non-agency MBS bonds."
Unlike the agency-guaranteed mortgage certificates which are pledged to
secure the CMO bonds related to the company's CMO Ownership Interests, the
company's subordinate non-agency MBS bonds have substantial credit risk. Non-
agency MBS bonds are collateralized by non-conforming mortgage loans (i.e.,
loans that do not meet GNMA, FNMA or FHLMC, each an "agency," guarantee
standards). Non-conforming mortgage loans do not meet GNMA, FNMA or FHLMC
guarantee standards typically because the mortgage loans exceed agency size
limits (e.g., the current FNMA limit is $203,150) or the borrower does not meet
other agency credit underwriting criteria. The company generally acquires the
class of the non-agency MBS bond issuance which bears the first losses from
foreclosure losses on the related Mortgage Collateral. If a borrower defaults
on a non-conforming mortgage loan which is the collateral for a residential
mortgage loan securitization and the proceeds from the foreclosure sale of the
property are less than the unpaid balance of the mortgage, foreclosure costs and
interest advances, the company, as the holder of the first loss unrated credit
support class, would suffer a credit loss up to the then outstanding principal
balance of such class. 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 company intends to use its available funds and may use a conservative
amount of leverage to acquire additional non-agency MBS bonds. While the
company's primary emphasis will be on the acquisition of subordinate non-agency
MBS bonds, future acquisitions may include, among other things, rated classes of
residential mortgage loan securitizations and participations in residential real
estate. The
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company also may acquire or originate agency-guaranteed and non-conforming
mortgage loans which, among other things, may be used for future
securitizations.
(B) NARRATIVE DESCRIPTION OF BUSINESS.
The company seeks to: (i) generate cash flow in order to make distributions
to its shareowners; (ii) enable its shareowners to participate in the market for
credit support non-agency MBS bonds (substantially all of which may be unrated)
and the market for unrated and lower-rated debt interests in commercial mortgage
loan securitizations through its ownership of shares in Commercial Assets; and
(iii) preserve stockholders' equity. There can be no assurance that the company
will achieve any or all of these objectives.
During the past two years, the company has changed its assets from
primarily CMO Ownership Interests to a combination of: (i) subordinate non-
agency MBS bonds; (ii) shares of Commercial Assets; and (iii) CMO Ownership
Interests. At December 31, 1994, the company's net assets were allocated as
follows: 29.7% to non-agency MBS bonds, 19.3% to shares in Commercial Assets,
20.5% to CMO Ownership Interests and 30.5% to other assets, including cash from
the Rights Offering. As the company acquires additional non-agency MBS bonds
with the remaining proceeds of the Rights Offering and as its CMO Ownership
Interests continue to pay down, the company's non-agency MBS bonds will make up
a greater share of the company's assets.
The discussion below describes the principal categories of assets which the
company owns and intends to acquire.
NON-AGENCY MBS BONDS - Residential mortgage loan securitization is the
process of accumulating a specific group of mortgage loans on residential (one
to four-unit) properties and structuring the monthly principal and interest
payments received from the owners of the properties securing these mortgage
loans into new multi-class debt instruments. The debt instruments issued in the
securitization of non-conforming mortgage loans are known as "non-agency MBS
bonds". The holder of a non-conforming mortgage loan will suffer a loss if the
borrower defaults and the proceeds from the foreclosure sale of the mortgaged
property are less than the unpaid balance of the mortgage loan plus foreclosure
costs and interests advances. In contrast, agency-guaranteed mortgage loans or
CMO bonds secured by agency-guaranteed or insured mortgage certificates do not
have substantial credit risk due to the agency guarantee.
Because of credit risk, a securitization of non-conforming mortgage loans
requires some form of credit enhancement. One type of credit enhancement
commonly provided is through a "senior-subordinate" structure, where the
subordinate classes (or tranches) of the non-conforming residential mortgage
loan securitization provide credit protection to the senior classes by absorbing
the first losses from loan defaults or foreclosures. The company has acquired,
and intends to acquire in the future, the subordinate non-agency MBS bond
classes which, while offering the potential of a higher yield than the more
senior classes, carry greatest credit risk. Such MBS bond classes are considered
to be speculative and are subject to special risks, including a substantially
greater risk of loss of principal and non-payment of interest than rated
classes.
Based on the structure of the non-conforming mortgage loan securitization,
the cash flow (principal and interest) from the non-conforming mortgage loans is
allocated to pay senior and subordinated non-agency MBS bond classes. The senior
class consists of the higher "rated" securities and may be rated from low
investment grade "BBB" to higher investment grades "A" through "AAA." The
subordinated class typically would be the lower rated, non-investment grade "BB"
and "B" and the unrated, higher-yielding,
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credit support non-agency MBS bond class (which generally incurs the first
losses). The company generally intends to acquire the unrated credit support
non-agency MBS bond class.
The principal of, and interest on, the non-conforming mortgage loans which
comprise the Mortgage Collateral for the non-agency MBS bonds may be allocated
among the classes of MBS bonds in many ways. The right of the company to
distributions of principal and interest is subordinated to all the more senior
classes of the non-agency MBS bond issuance.
Despite credit underwriting of the non-conforming mortgage loans and the
borrowers by the mortgage banking firms, the nationally recognized credit rating
agencies generally are unwilling to give ratings to classes of non-conforming
mortgage loan securitizations unless these classes have the benefit of credit
enhancement. The inclusion of the unrated credit support class in a non-
conforming mortgage loan securitization (which generally does not receive any
prepayments of principal from the non-conforming mortgage loans which comprise
the Mortgage Collateral for a period of at least five years) enables the rating
agencies to rate the more senior non-agency MBS bond classes.
The majority of the non-conforming mortgage loans that are the collateral
for the company's non-agency MBS bonds had an original principal balance that
generally (but not in all cases) did not exceed 80% of the lesser of the
appraised value of the mortgaged residential property or the purchase price of
such property. The ratio of the loan amount to the appraised value or purchase
price is referred to as the loan-to-value ratio. The loan-to-value ratio of a
mortgage loan may be higher or lower on any subsequent date as a result of
decreases or increases in the value of property securing the mortgage loan and
as a result of principal payments on the mortgage loan. If the loan-to-value
ratio on the date a mortgage loan is originated is above 80%, the borrower
generally (but not always) is required to purchase private mortgage insurance at
the time the mortgage loan is originated. The general effect of the mortgage
insurance is to reduce the loan-to-value ratio at the origination date to 75%.
In addition, the borrower must meet certain credit underwriting criteria.
An example of a non-conforming mortgage loan securitization follows. The
example assumes the existence of a home with an appraised value of $375,000
secured by a non-conforming mortgage loan with a principal balance of $300,000.
If an issuer purchased 1,000 similar mortgage loans of $300,000 secured by 1,000
homes with an aggregate appraised value of $375,000,000, it could issue a total
of $300,000,000 principal amount of non-agency MBS bonds.
Based on, among other things, recent non-conforming mortgage loan
securitizations, 94% of the aggregate principal amount of non-agency MBS bonds
issued (approximately $282,000,000) would be "senior" investment grade, non-
agency MBS bonds, 5.5% of the aggregate principal amount of non-agency MBS bonds
issued (approximately $16,500,000) would be "subordinate" non-agency MBS bonds
and the remaining 0.5% of the aggregate principal amount of non-agency MBS bonds
issued (approximately $1,500,000) would be unrated credit support non-agency MBS
bonds. In the event of a default by any of the homeowners in making their
mortgage loan payments and upon foreclosure of that mortgage loan and sale of
the mortgaged property, to the extent that the foreclosure sale did not result
in net proceeds at least equal to the principal balance of the mortgage loans
then outstanding, including foreclosure costs and interest advances, the
shortfall generally first would reduce the principal amount of the unrated
credit support non-agency MBS bond. The above example is illustrated in the
following diagram. THE DIAGRAM BELOW ILLUSTRATES THE MECHANICS OF A NON-
CONFORMING MORTGAGE LOAN SECURITIZATION AND DOES NOT REFLECT AN ACTUAL ISSUANCE
OF NON-AGENCY MBS BONDS, WHICH MAY BE MATERIALLY DIFFERENT FROM THE EXAMPLE.
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<TABLE>
<CAPTION>
<S> <C> <C>
1,000 HOMES $300,000,000 AGGREGATE NON-CONFORMING MORTGAGE
PRINCIPAL AMOUNT OF NON- LOAN SECURITIZATION
CONFORMING MORTGAGE STRUCTURE $300,000,000
LOANS(1) TOTAL PRINCIPAL AMOUNT OF
NON-AGENCY MBS BONDS(2,3)
$282,000,000 TOTAL
PRINCIPAL AMOUNT OF
AAA, AA, A AND
BBB-RATED SENIOR
NON-AGENCY MBS
BONDS
[Photograph] DEEDS OF TRUST
FIRST MORTGAGE LIENS
$300,000,000
$16,500,000 TOTAL
PRINCIPAL AMOUNT OF BB
AND B-RATED, SUBORDINATE
NON-AGENCY MBS BONDS
$1,500,000 (*)
AGGREGATE
APPRAISED VALUE $75,000,000 AGGREGATE $75,000,000 AGGREGATE
$375,000,000 HOMEOWNERS' EQUITY BASED HOMEOWNERS' EQUITY
ON APPRAISED BASED ON APPRAISED
VALUE VALUE
<FN>
* Total Principal Amount of Unrated Credit Support Non-Agency MBS Bonds
_______________
(1) 1,000 mortgage loans each with a principal balance of $300,000. In this
example, the amount of each mortgage is no greater than 80 percent of the
appraised value of the home, as a result no homeowner is required to obtain
private mortgage insurance.
(2) The principal amount (often referred to as "splits") of each non-agency MBS
bond class is determined by the rating agency based on, among other things,
its determination as to the quality of the non-conforming mortgage loans
and the likelihood of timely payment of interest and principal on each of
the non-agency MBS bond classes.
(3) In the event a mortgage loan is foreclosed and the property securing the
mortgage loan is sold for an amount less than the unpaid principal balance
of the mortgage loan, including foreclosure costs and interest advances,
the unrated credit support non-agency MBS bonds will suffer a loss
notwithstanding the fact that, in the aggregate, there is significant
homeowners' equity supporting the remaining non-conforming mortgage loans
comprising the Mortgage Collateral for the non-conforming mortgage loan
securitization.
</TABLE>
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After originating and funding or purchasing the non-conforming mortgage
loans that will comprise the collateral for the non-conforming mortgage loan
securitization, the issuer transfers the non-conforming mortgage loans to a
trustee for safekeeping. As homeowners make their monthly mortgage loan payments
to their respective mortgage loan servicers, the payments are remitted by the
servicers to the trustee. The trustee collects these payments and holds them
until the next scheduled non-agency MBS bond payment date, generally monthly.
On the payment date, the trustee first makes payments of interest to the
holders of the various non-agency MBS bond classes in the non-conforming
mortgage loan securitization, including the holders of the unrated credit
support class. The priority of the payments is determined by the terms of an
indenture. The trustee then remits the regularly scheduled principal received to
the holders of the non-agency MBS bonds pursuant to the indenture, generally to
each class (including the unrated credit support class) based on the percentage
that the principal amount outstanding of that MBS bond class bears to the
aggregate principal amount outstanding of all the MBS bond classes in that
issuance. To the extent that more senior tranches of non-agency MBS bonds are
outstanding, all prepayments of principal on the non-conforming mortgage loans
comprising the Mortgage Collateral will be paid to the holders of the more
senior classes sequentially in the order of their anticipated maturity.
Generally, the company, as the holder of the unrated credit support non-agency
MBS bond class, would not receive any prepayments of principal from the non-
conforming mortgage loans comprising the Mortgage Collateral for at least five
years following the date the company's non-agency MBS bond class initially is
issued.
YIELD CONSIDERATIONS ON NON-AGENCY MBS BONDS - The yields on the unrated
credit support non-agency MBS bonds acquired by the company will be extremely
sensitive to losses on the non-conforming mortgage loans comprising the Mortgage
Collateral for such non-agency MBS bonds as well as the timing of such losses.
The company's right as a holder of non-agency MBS bonds to distributions of
principal and interest is subordinate to all of the more senior classes of non-
agency MBS bonds. Actual losses on the Mortgage Collateral (after default, where
the proceeds from the foreclosure sale of the home are less than the unpaid
balance of the mortgage loan plus disposition costs and interest advances) will
be allocated first to the credit support non-agency MBS bonds prior to being
allocated to the more senior non-agency MBS bond classes. The non-agency MBS
bonds the company owns and intends to acquire are speculative and may be subject
to special risks, including a substantially greater risk of loss of principal
and non-payment of interest than the more senior rated bonds.
THE EFFECT OF PREPAYMENTS ON NON-AGENCY MBS BONDS - The aggregate amount of
distributions on the company's non-agency MBS bonds and their yield also will be
affected by the amount and timing of principal prepayments on the non-conforming
mortgage loans comprising the Mortgage Collateral. To the extent the more senior
tranches of non-agency MBS bonds are outstanding, all prepayments of principal
on the non-conforming mortgage loans comprising the Mortgage Collateral will be
paid to the holders of more senior classes, and none will be paid to the company
during the first five years, and in some cases a longer period, after the
original issue date of the company's non-agency MBS bonds. This subordination of
the credit support non-agency MBS bonds to more senior classes may affect
adversely the yield on the non-agency MBS bonds owned or acquired by the
company. Even if there are no actual losses on the Mortgage Collateral, interest
and principal payments are made on the more senior classes before interest and
principal are paid with respect to the credit support class. Because the
company is acquiring the non-agency MBS bonds at a significant discount from
their outstanding principal balance, if the company estimates the yield on a
non-agency MBS bond based on a faster rate of payment of principal than actually
occurs, the company's yield on that non-agency MBS bond will be lower than the
company anticipated.
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Because the rate and timing of principal payments on the Mortgage
Collateral will depend on future events and on a variety of other factors over
which the company has no control, no assurances can be given as to such rate or
the timing of principal payments on the non-agency MBS bonds the company owns or
acquires.
Unlike debt interests which have a definite maturity date, absent a
complete reduction of principal as a result of allocated realized losses, the
maturity date of a non-agency MBS bond may occur sooner or later than its
anticipated maturity date due to the rate and timing of prepayments on the non-
conforming mortgage loans comprising the Mortgage Collateral. In order to
compare more easily the rate at which a pool of single-family residential
mortgage loans prepays (i.e., their "prepayment speed"), the Public Securities
Association, a national statistical analysis organization, created a prepayment
assumption model as a reference standard for measuring future single-family
residential mortgage loan prepayment rates known as "PSA." One hundred percent
PSA (i.e., 100% of the Prepayment Assumption Model) assumes prepayment rates of
0.2% per annum of the then unpaid principal balance of such mortgage loans in
the first month of the life of such mortgage loans and an additional 0.2% per
annum in each month thereafter (for example, 0.4% per annum in the second month)
until the 30th month. A 100% PSA rate means that 6% of the remaining aggregate
principal amount of the non-conforming mortgage loans comprising the Mortgage
Collateral pays off each year (after the mortgage loan is 30 months old) until
all the mortgage loans are paid in full; a 200% PSA rate means that 12% of the
remaining aggregate principal amount of the Mortgage Collateral pays off each
year; and a 300% PSA rate means that 18% of the remaining principal amount of
the Mortgage Collateral pays off each year. The PSA curve is not a historical
description of the prepayment experience of any specific pool of single-family
residential mortgage loans or a prediction of the anticipated rate of
prepayments of any pool of such mortgage loans.
THE PUBLIC SECURITIES ASSOCIATION
PREPAYMENT ASSUMPTION MODEL
[GRAPH]
CONSTANT PREPAYMENT RATE
<TABLE>
<CAPTION>
YEARS 0 1 2 3 4 30
----- ----- ----- ----- ----- -----
(Percentages)
<S> <C> <C> <C> <C> <C> <C>
100 PSA 0.0 2.4 4.8 6.0 6.0 6.0
200 PSA 0.0 4.8 9.6 12.0 12.0 12.0
300 PSA 0.0 7.2 14.4 18.0 18.0 18.0
</TABLE>
The graph is a representaion of prepayments (100 PSA, 200 PSA and 300 PSA) as
expressed as an annual percentage of the outstanding mortgage balance over time.
-8-
<PAGE>
The actual rate of principal prepayments on the non-conforming mortgage
loans comprising the Mortgage Collateral may be influenced by a variety of
economic, geographic, social and other factors. In general, if prevailing
mortgage loan interest rates fall below the interest rates on the non-conforming
mortgage loans comprising the Mortgage Collateral, such non-conforming mortgage
loans and the Mortgage Collateral likely would be subject to higher prepayment
rates than if prevailing mortgage loan interest rates remain at or above the
interest rates on such non-conforming mortgage loans. Conversely, if mortgage
loan interest rates rise above the interest rates on the non-conforming mortgage
loans comprising the Mortgage Collateral, the rate of prepayment would be
expected to decrease. Other factors affecting the rate of prepayments (including
defaults and foreclosures) of single-family residential mortgage loans include
changes in mortgagors' housing needs, job transfers, unemployment, mortgagors'
net equity in the mortgaged properties, changes in the value of the mortgaged
properties and mortgage loan interest rates.
The rate of principal prepayments on the non-conforming mortgage loans
comprising the Mortgage Collateral may affect the company's actual yield on the
non-agency MBS bonds it acquires, even if the average rate of principal
prepayments is consistent with the company's expectations. The actual rate of
principal prepayments on the Mortgage Collateral cannot be predicted, and there
is no assurance that the Mortgage Collateral will prepay at any given percentage
of PSA.
THE EFFECT OF ACTUAL LOSSES ON NON-AGENCY BONDS - To facilitate the
standardization of the measurement of the rates of default on non-conforming
mortgage loans relative to a model, the Public Securities Association has
defined a standardized benchmark default curve. The standard default assumption
("SDA") represents an assumed rate of default each month relative to the then
outstanding performing principal balance of the non-conforming mortgage loans
comprising the Mortgage Collateral. The SDA curve assists the company and others
in analyzing the non-agency MBS bonds they are considering for acquisition.
The SDA curve gives the annualized default rate on a hypothetical pool of
non-conforming mortgage loans as a function of the age of the mortgage loans.
100% SDA assumes that the monthly default rate starts at an annualized rate of
0.02% in month one. The rate increases by 0.02% every month after month one
until it reaches an annualized rate of 0.60% a month. Defaults remain at 0.60% a
month from month 30 through month 60. From month 61 through month 120, the
default rate declines monthly by 0.0095%, from 0.60% a month to 0.03% a month
where it remains constant. Zero percent SDA assumes there are no defaults.
Correspondingly, 200% SDA assumes twice the default rates of 100% of SDA and so
on. The SDA curve reflects the historical fact that defaults on non-conforming
mortgage loans generally occur with greater frequency in the earlier years of a
non-conforming mortgage loan. The SDA does not purport to be a historical
description of default experience or a prediction of the anticipated rate of
default of any specific pool of non-conforming mortgage loans, but merely a
standard to compare and analyze default risk in non-agency MBS bonds.
-9-
<PAGE>
THE PUBLIC SECURITIES ASSOCIATION
STANDARD DEFAULT ASSUMPTION MODEL
[GRAPH]
THE PUBLIC SECURITIES ASSOCIATION
STANDARD DEFAULT ASSUMPTION MODEL
ANNUALIZED DEFAULT RATE
<TABLE>
<CAPTION>
MONTHS 1 31 61 91 121 151 181 221 241 271 301
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
100% SDA 0.02000 0.60000 0.59050 0.30550 0.03000 0.03000 0.03000 0.03000 0.03000 0.03000 0.03000
50% SDA 0.01000 0.30000 0.29525 0.15275 0.01500 0.01500 0.01500 0.01500 0.01500 0.01500 0.01500
200% SDA 0.04000 1.20000 1.18100 0.61100 0.06000 0.06000 0.06000 0.06000 0.06000 0.06000 0.06000
</TABLE>
The graph is a representaion of 100% SDA, 50% SDA and 200% SDA as expressed as
an annual percentage of the outstanding mortgage balance over time.
While the rate of default or SDA and the rate and timing of prepayments on
the non-conforming mortgage loans comprising the Mortgage Collateral are
important in determining the anticipated yield on an unrated credit support non-
agency MBS bond, the anticipated severity of the loss (i.e., the total loss on
each foreclosure sale as a percentage of the remaining outstanding principal
balance of a non-conforming mortgage loan) is significantly more important in
determining the anticipated yield on a non-agency MBS bond. The single-family
residential properties are the primary security (and in some cases, the only
security) for the non-conforming mortgage loans comprising the Mortgage
Collateral. The severity of the losses on defaulted mortgage loans through a
foreclosure sale of the single-family residential properties is extremely
important because the entire amount of such losses generally will be allocated
to, and will reduce the remaining principal balance of, the company's credit
support non-agency MBS bonds. The severity of loss takes into account the
anticipated decline in market value of the home, interest advances through the
foreclosure sale and maintenance and disposition expenses, which include, among
other things, necessary repair and maintenance costs during the foreclosure,
brokerage fees, legal fees and taxes. In addition, the higher the coupon rate of
the mortgage loan, the higher the interest advances through the foreclosure
sale.
For example, assume that a mortgagor purchased a home for $375,000 and
obtained a mortgage loan of $300,000 (a loan-to-value ratio of 80%) and
defaulted on the mortgage loan. Upon the foreclosure sale of the home securing
the mortgage loan, a loss severity percentage of 20% would result in an actual
loss of $60,000 ($300,000 x 20%). As the holder of the first-loss credit
support non-agency MBS bond, the actual loss would be allocated to, and reduce
the principal balance of, the company's non-agency MBS bond by $60,000.
-10-
<PAGE>
In addition, the company believes that the rate of default and severity of
loss may be higher on non-conforming mortgage loans which are cash out
refinances, limited documentation mortgage loans, Second Tier mortgage loans or
ARMs, than for other types of non-conforming mortgage loans. The rate of
default, timing of prepayments and the severity of loss on defaulted mortgage
loans through foreclosure sale will be affected by general economic conditions
of the region of the country in which the related homes are located. The risk of
defaults and actual loss is greater in regions experiencing weak or
deteriorating economies which generally are accompanied by, among other things,
increasing unemployment, natural disasters, falling property values or all
three.
The example shown in Tables 1 and 2 below illustrates the extreme
sensitivity of the yield on the non-agency MBS bonds owned or to be acquired by
the company to the rate of default on the non-conforming mortgage loans
comprising the Mortgage Collateral and the severity of loss resulting from such
defaults as well as the timing of such defaults and actual losses.
Among other things, the example assumes that the company acquired an
unrated credit support non-agency MBS bond with an outstanding principal balance
of $1,500,000 (representing the last tranche, 0.5% of a $300,000,000 principal
amount non-agency MBS bond issuance) for an acquisition price of $600,000. The
example further assumes: (i) the non-conforming mortgage loans comprising the
Mortgage Collateral have an unpaid principal balance at the date of acquisition
by the company of $300,000,000, original and remaining terms to maturity of 360
months and bear interest at a rate of 7.25%; (ii) the unrated credit support
non-agency MBS bond acquired by the company has a pass-through rate of 6.75%
payable monthly; (iii) scheduled payments on all of the non-conforming mortgage
loans comprising the Mortgage Collateral are made on a level payment basis and
are received on the first day of each month, (iv) any pay off on the non-
conforming mortgage loans comprising the Mortgage Collateral are received on the
last day of each month and include 30 days of interest; (v) the non-conforming
mortgage loans comprising the Mortgage Collateral prepay at each of the
indicated percentages of PSA; (vi) defaults occur monthly at rates equal to the
SDAs indicated; (vii) liquidation of a defaulted non-conforming mortgage loan
through foreclosure sale occurs 12 months after the default; and (viii) a loss
severity percentage of 10%, 20% and 30% in the month in which the non-conforming
mortgage loans first defaulted.
-11-
<PAGE>
TABLE 1
PRE-TAX YIELD-TO-MATURITY OF A $1,500,000 OUTSTANDING PRINCIPAL
BALANCE FIRST LOSS CREDIT SUPPORT NON-AGENCY MBS BOND
AT AN ACQUISITION PRICE OF $600,000 (40% OF ITS OUTSTANDING PRINCIPAL BALANCE)
<TABLE>
<CAPTION>
Pre-tax Yield-to-Maturity (in percentages)
Loss -------------------------------------------------------------------
Prepayment Severity No
Rate(1) Percentage(2) Defaults 10%SDA 20%SDA 30%SDA 50%SDA 100%SDA 200%SDA
---------- ------------- -------- ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
125% 10% 20.6% 20.1% 19.5% 18.9% 17.6% 13.3% -5.4%
125 20 20.6 19.5 18.2 16.8 13.3 -5.6 -24.3
125 30 20.6 18.9 16.8 14.3 5.6 -16.5 -35.1
225 10 22.2 21.6 21.1 20.6 19.4 15.9 -0.7
225 20 22.2 21.1 20.0 18.7 15.8 -1.8 -23.0
225 30 22.2 20.6 18.7 16.6 10.3 -14.7 -34.4
325 10 22.8 22.3 21.9 21.4 20.4 17.4 7.8
325 20 22.8 21.9 20.9 19.8 17.4 7.5 -21.4
325 30 22.8 21.4 19.8 18.0 13.5 -12.3 -33.5
<FN>
_______________
(1) Expressed as a PSA percentage.
(2) Expressed as a percentage of loss of principal amount of mortgage loans.
</TABLE>
The pre-tax yields set forth in Table 1 were calculated by determining the
monthly discount rate which, when applied to the assumed stream of cash flows to
be paid on the non-agency MBS bond to be acquired by the company in the example,
would cause the discounted present value of such assumed stream of cash flows to
equal the assumed acquisition price. These yields do not take into account the
different interest rates at which the company would reinvest funds received by
it as payments of interest and principal on such non-agency MBS bond.
The amount of aggregate actual losses set forth in Table 2 that would be
incurred on the Mortgage Collateral under each of the scenarios in Table 1 is
expressed as a dollar amount of actual losses on the foreclosure sale after
disposition expenses of homes securing the non-conforming mortgage loans
comprising the Mortgage Collateral. Because the company owns and intends to
acquire first loss credit support non-agency MBS bonds, all of such losses are
assumed to reduce the initial $1,500,000 outstanding principal balance of the
company's non-agency MBS bond until there is no principal amount outstanding.
-12-
<PAGE>
TABLE 2
AGGREGATE ACTUAL LOSSES ON FORECLOSURE SALE OF HOMES
SECURING THE NON-CONFORMING MORTGAGE LOANS COMPRISING
THE MORTGAGE COLLATERAL FOR A $1,500,000 OUTSTANDING PRINCIPAL BALANCE
FIRST LOSS CREDIT SUPPORT NON-AGENCY MBS BOND ACQUIRED AT A
PRICE OF $600,000 (40% OF ITS OUTSTANDING PRINCIPAL BALANCE)
<TABLE>
<CAPTION>
Aggregate Actual Losses (amounts in thousands)
Loss --------------------------------------------------------------------------------------
Prepayment Severity No
Rate(1) Percentage(2) Defaults 10%SDA 20%SDA 30%SDA 50%SDA 100%SDA 200%SDA
--------- ------------- ------- ------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
125% 10% $0 $88 $177 $265 $ 439 $ 872 $1,423
125 20 0 177 353 529 878 1,423 1,449
125 30 0 265 529 793 1,318 1,441 1,457
225 10 0 72 144 217 359 713 1,407
225 20 0 144 288 433 718 1,413 1,448
225 30 0 217 433 648 1,077 1,439 1,456
325 10 0 60 120 180 298 593 1,172
325 20 0 120 240 360 597 1,186 1,446
325 30 0 180 360 538 895 1,436 1,456
<FN>
______________
(1) Expressed as a PSA percentage.
(2) Expressed as a percentage of loss of principal amount of mortgage loans.
</TABLE>
The assumed percentages of purchase price, SDA, loss severity and PSA
reflected in the preceding tables are for the purposes of illustration only. It
is highly unlikely that the non-conforming mortgage loans comprising the
Mortgage Collateral will be prepaid, or that the actual losses will be incurred,
according to one particular pattern. For this reason, and because the timing of
cash flows is critical to determining yields, the pre-tax yields in this example
will differ from the yields on the non-agency MBS bonds owned and to be acquired
by the company, and such differences may be material. There can be no assurance
that the Mortgage Collateral will prepay at any particular rate or that the
actual losses will be incurred at any particular level or that the actual yields
earned by the company will conform to the yields in this illustration. The
unrated credit support non-agency MBS bonds the company owns and intends to
acquire are speculative and may be subject to special risks, including a
substantially greater risk of loss of principal and non-payment of interest than
more senior, rated MBS bonds. In the event of substantial losses, the company
may not recover the full amount, if any, of its acquisition cost.
COMMERCIAL ASSETS, INC. - During 1993, the company contributed $75,000,000
($74,800,000 pursuant to the Contribution Agreement plus $200,000 cash) to the
capital of Commercial Assets. Commercial Assets is an American Stock Exchange-
listed REIT, which owns and manages debt instruments issued in commercial
mortgage loan securitizations. To date, Commercial Assets' primary emphasis has
been on the acquisition of credit support classes primarily secured by mortgage
loans on multi-family real estate. The company has been advised by Commercial
Assets that it also intends to operate in a manner that will permit it to
qualify as a REIT for federal income tax purposes.
-13-
<PAGE>
The process of commercial mortgage loan securitization is similar to the
process of non-conforming single-family mortgage loan securitization.
Commercial Assets owns and manages interests that are heavily weighted towards
the unrated and lower-rated credit support classes of CMBS bonds issued in
commercial mortgage loan securitizations. As in non-agency MBS bonds, the
subordinate classes of CMBS bonds shield the more senior classes from losses due
to defaults on the underlying commercial mortgage loans comprising the Mortgage
Collateral and have substantially greater credit risk.
The company has been advised by Commercial Assets that it believes
attractive acquisition opportunities are available in unrated and low-rated
credit support classes of CMBS bonds representing interests in, or secured by,
multi-family and other commercial properties. An improving economy and rising
rent levels over time should improve the credit quality of the unrated classes
because of, among other things, the resulting lower loan-to-value ratios. An
economic recovery also may generate increased values for commercial real estate
from greater demand and inflation.
Based on, among other things, the yield spreads on rated CMBS bonds over
similar corporate securities Commercial Assets has informed the company that it
believes (although there can be no assurance) that the acquisition of these
unrated and low-rated classes presents the opportunity to obtain a higher yield
compared to corporate securities having similar maturities and risks and also
may present opportunities for capital appreciation. Commercial Assets has
advised the company that it anticipates that many financial institutions will
continue to seek to reduce their holdings of commercial mortgage loans, thereby
increasing the supply of commercial mortgage loans available for
securitizations. No assurance can be given that any of the foregoing
developments actually will occur.
The establishment by nationally recognized rating agencies of criteria to
assess the relative risk of classes of commercial mortgage loan securitizations
and the resulting assignment of ratings to such classes by these agencies has
contributed to the increase of the overall number of investors in commercial
real estate securities. This is particularly true for the more senior classes
of CMBS bonds.
Commercial Assets has advised the company that it has acquired and
currently intends to acquire CMBS bonds where the mortgage collateral for the
CMBS bonds is mortgage loans on multi-family real estate and depending on the
economic climate, Commercial Assets may expand its acquisitions to include CMBS
bonds from securitizations where the mortgage collateral for the CMBS bonds are
mortgage loans on other types of commercial properties.
Because of its tax status as a REIT, Commercial Assets' REIT income
generally is not subject to income tax at the corporate level. Asset Investors
will not be subject to corporate income tax on the dividends it receives from
its shares of Commercial Assets stock as long as it maintains its status as a
REIT.
CMO OWNERSHIP INTERESTS - The company's CMO Ownership Interests consist of
CMO Subsidiaries, CMO Residuals and, to a lesser extent, Acquired CMO Classes.
CMO Subsidiaries and CMO Residuals entitle the company to receive its
proportionate share of the positive difference between: (i) the cash flow from
the Mortgage Collateral pledged to secure the related CMO bonds together with
reinvestment income thereon, if any; and (ii) the amount required for debt
service payments on such CMO bonds together with administrative expenses (such
difference is referred to as "Excess Cash Flow," residual cash flow or the
residual). These CMO Ownership Interests may be considered derivatives because
they derive their value from an interest rate arbitrage (i.e., the positive
spread between the coupon on the Mortgage Collateral and the weighted-average
coupon on the related CMO bonds).
-14-
<PAGE>
Excess Cash Flow from the company's CMO Ownership Interests is highest in
the earlier years and lowest in the later years of the related CMO issuances
because the CMO Classes with earlier stated maturities generally have lower
interest rates and because the positive spread in the earlier years is earned on
a larger Mortgage Collateral balance. The Excess Cash Flow will decline and
eventually will terminate over the life of such CMO issuances (and may become
negative) for several reasons. Among these reasons are: (i) the positive
spread between the weighted-average pass-through rate on the Mortgage Collateral
securing such CMO issuances and the weighted-average interest rate on the
related CMO Classes is reduced by progressively higher interest rates on the
later maturing CMO Classes; (ii) the Mortgage Collateral balance (on which the
positive interest spread described in (i) above is earned) continually decreases
over time; and (iii) the administrative expenses of such CMO issuances (most of
which are fixed) will increase, as a percentage of such spread, as the
outstanding principal amount of the Mortgage Collateral declines.
Each of the CMO issuances is structured so that the cash flow from the
Collateral pledged to secure such CMO issuance, together with reinvestment
income thereon, if any, will be sufficient, irrespective of the rate of
prepayments on the Mortgage Collateral and, for Variable-Rate CMO Ownership
Interests, irrespective of changes in LIBOR, to make timely payments of interest
on the related CMO Classes, to begin the payment of principal on each CMO Class
not later than its "first mandatory principal payment date" and to retire each
CMO Class not later than its "stated maturity."
REIT income (losses) from CMO Ownership Interests primarily is attributable
to the difference between: (i) the effective yield on the Mortgage Collateral
(i.e., the coupon income on the Mortgage Collateral plus the amortization of
Mortgage Collateral discount, if any); and (ii) the effective cost of the
related CMO bonds (i.e., the coupon expense on the CMO bonds plus the
amortization of CMO bond discount, if any). Changes in long-term mortgage
interest rates and short-term interest rates significantly affect the company's
REIT income (losses) from its CMO Ownership Interests. As a result, the amount
of REIT income (losses) and Excess Cash Flow that may be generated from the
company's CMO Ownership Interests is uncertain and may be subject to wide
variation depending primarily upon the rate and timing of prepayments on the
Mortgage Collateral and, for Variable-Rate CMO Ownership Interests, changes in
LIBOR.
EFFECTS OF PREPAYMENTS ON CMO OWNERSHIP INTERESTS - Principal payments on
mortgage loans may be in the form of scheduled amortization or prepayments. For
this purpose, "prepayments" include principal prepayments due to the sale or
refinancing of the related property, guaranteed payments due to default,
foreclosure, or both, of the related property and unscheduled partial principal
payments.
In general, if prevailing mortgage loan interest rates fall significantly
below the interest rates on the mortgage loans comprising or underlying the
Mortgage Collateral, such Mortgage Collateral is likely to be subject to higher
prepayments (generally due to refinancing opportunities) than if prevailing
mortgage loan interest rates remained at or above the interest rates on such
mortgage loans. Conversely, if prevailing mortgage loan interest rates rise
above the interest rates on the mortgage loans comprising or underlying the
Mortgage Collateral, prepayments would be expected to decrease.
Prepayments reduce the company's REIT income (or increase its REIT losses)
from CMO Ownership Interests because a substantial portion of the prepayments
must be used to repay the principal amount of CMO bonds. The CMO bonds repaid
first generally are those with shorter maturities and lower interest rates. The
remaining CMO bonds have longer maturities with higher interest rates.
Accordingly, as the CMO bonds with the lower interest rates are repaid, the
weighted-average coupon rate of the remaining CMO bonds increases, which
decreases the company's positive interest spread. Mortgage
-15-
<PAGE>
repayments also reduce the Mortgage Collateral balance on which the company
earns its spread from CMO Ownership Interests.
In addition, prepayments increase the effective cost of the remaining CMO
bonds outstanding because they shorten the time during which the company is
required to amortize the discount associated with its CMO bonds. This reduces
REIT income or increases REIT losses. Because the lower REIT income or
increased REIT losses generally result from non-cash expenses such as the
amortization of CMO bond discount, the company's CMO Ownership Interests may
generate Excess Cash Flow even though the related CMO Ownership Interests
generate lower REIT income or increased REIT losses. Due to the distribution
requirements relating to Excess Inclusion income, the company is required to
make distributions of its Excess Inclusion income notwithstanding its REIT
losses and NOL carryovers. Such distributions would be treated by shareowners
as ordinary income.
INTEREST RATE RISK ON CMO OWNERSHIP INTERESTS - The company owns Variable-
Rate CMO Ownership Interests. The Excess Cash Flow received by the company from
Variable-Rate CMO Ownership Interests will increase or decrease due to, among
other things, changes in short-term interest rates, specifically LIBOR, the
"benchmark" for determining the interest expense on the LIBOR Classes (included
in a Variable-Rate CMO Ownership Interest). A reduction in LIBOR generally
reduces the interest paid by the company on its LIBOR Classes which increases
the positive spread between the interest earned on the fixed-rate Mortgage
Collateral and the interest paid on the LIBOR Classes and, as a result,
increases the company's REIT income, Excess Inclusion income and book income.
Conversely, an increase in LIBOR generally increases the interest the company
must pay on the LIBOR Classes which decreases the company's REIT income, Excess
Inclusion income and book income. The aggregate proportionate principal balance
of the LIBOR Classes underlying the company's Variable-Rate CMO Ownership
Interests and aggregate proportionate notional principal amount of the
Variable-Rate Acquired CMO Classes was $148,474,000 ($26,480,000 after the March
30, 1995 sale of CMO Ownership Interests that are pledged as collateral on the
secured notes payable), $273,331,000 and $836,181,000 as of December 31, 1994,
1993 and 1992, respectively.
SUBSIDIARIES OF THE COMPANY
At December 31, 1994, the company had seven wholly-owned corporate
subsidiaries: Asset Mortgage Funding, Asset Funding, Asset Acceptance, Asset
Southwest, Asset Acquisition, Asset Finance and Asset Securitization. Each of
these entities is a limited-purpose finance subsidiary which was created for the
purpose of issuing CMOs, except for Asset Acquisition which was organized in
connection with the acquisition of Guild and Asset Securitization which was
organized in connection with the sale of $48,000,000 of secured notes payable.
COMPETITION
In acquiring mortgage-related assets, including non-agency MBS bonds and
CMO Ownership Interests, the company (and Commercial Assets in connection with
CMBS bonds) competes with other REITs, savings and loan associations, banks,
mortgage bankers, mutual funds, pension funds, professional money managers,
insurance companies, and others, many of which have greater financial resources
than the company. Furthermore, many of these entities may be conducting
business activities through corporations, master limited partnerships or other
business forms, which, among other things, because of the company's status as a
REIT, may have more flexibility than the company in conducting their business
operations. As a result of such competition, the market prices the company pays
for its acquired assets may increase.
-16-
<PAGE>
CAPITAL RESOURCES
Substantially all of the proceeds received by the company from the issuance
of Common Stock are used to acquire assets. The company uses its cash flow from
operating activities and short-term credit facilities to provide working capital
to support its operations, for the payment of dividends to its shareowners and
for the acquisition of assets.
Without further shareowner approval, the company is authorized to issue up
to 50,000,000 shares of Common Stock, of which 24,227,005 shares were issued and
outstanding as of March 16, 1995.
The Board of Directors is authorized to issue additional classes of stock
without shareowner approval. Depending upon the terms set by the Board of
Directors, the authorization and issuance of preferred stock or other new
classes of stock could affect adversely existing shareowners. The effects on
shareowners could include, among other things, dilution of ownership interests
of existing shareowners, restrictions on dividends on Common Stock, restrictions
on dividends for other corporate purposes and preferences to holders of a new
class of stock in the distribution of assets upon liquidation. As of March 16,
1995, the company has not authorized or issued additional classes of stock.
DIVIDEND REINVESTMENT PLAN
The company has an Automatic Dividend Reinvestment Plan (the "Reinvestment
Plan") which is administered by KeyCorp Shareholder Services, Inc. The
Reinvestment Plan provides the company's shareowners a method of investing cash
dividends paid by the company in additional shares of Common Stock purchased in
the open market. The Reinvestment Plan also permits participants to purchase
additional Common Stock with voluntary cash payments through the Reinvestment
Plan in the open market.
INVESTMENT RESTRICTIONS
The company intends to continue its business and to conduct its operations
so as not to become regulated as an investment company under the 1940 Act. The
1940 Act exempts entities that, directly or through majority-owned subsidiaries,
are "primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate" ("Qualifying
Interests"). Under current interpretations by the staff of the Commission, in
order to qualify for this exemption, the company, among other things, must
maintain at least 55% of its assets in Qualifying Interests and may also be
required to maintain an additional 25% in Qualifying Interests or other real
estate-related securities. The assets which the company may acquire could be
limited by the provisions of the 1940 Act. In connection with its acquisition of
non-agency MBS bonds, the company has adopted a policy of obtaining substantial
foreclosure rights with respect to the underlying mortgage loans. As a result of
obtaining such rights, the company believes that such MBS bonds constitute
Qualifying Interests for the purpose of the 1940 Act.
Greater than 55% of the company's consolidated assets are Qualifying
Interests. The company believes that it is not required to register as an
investment company under the 1940 Act. If the Commission or its staff were to
take a different position with respect to whether such MBS bonds constitute
Qualifying Interests, the company could be required either: (i) to change the
manner in which it conducts its operations to avoid being required to register
as an investment company; or (ii) to register as an investment company, either
of which could have an adverse effect on the company and the market prices for
the Common Stock.
-17-
<PAGE>
Pursuant to restrictions set forth in its By-laws, the company may not
"invest in unimproved real property (i.e., acquire an equity interest in
property for purposes other than producing income, which has no development or
construction in progress thereon nor is any development or construction planned
to commence thereon within the year); invest in mortgage loans (but not
including mortgage related securities) without an appraisal of the underlying
property; invest in real estate contracts of sale unless the same are in
recordable form; invest in or make a mortgage loan on property in excess of 100%
of its appraised value (unless other mortgage loan underwriting criteria would
justify such investment); or invest in or make a mortgage loan subordinate to a
mortgage or equity interest in the property held by the advisor, the sponsor, a
director or an affiliate of any of the foregoing." The foregoing restrictions
may not be changed without the approval of the Board of Directors, which has the
power to modify or alter such policies without the consent of shareowners.
Although the company has no present intention of modifying such policies, the
Board of Directors may conclude, in the future, that it would be advantageous
for the company to modify such policies if such modifications are in the best
interests of the shareowners.
MANAGEMENT AGREEMENT
The company has entered into annual Management Agreements with the Manager
through December 31, 1995. The Manager advises the company on its business and
oversees its day-to-day operations, subject to the supervision of the Board of
Directors of the company. The Manager also is obligated to present to the
company asset acquisition opportunities consistent with the policies and
objectives of the company and to furnish the Board of Directors of the company
with information concerning the acquisition, holding and disposition of assets.
The terms appearing in quotes below which are not defined herein are defined in
the Management Agreement and have the meanings ascribed to them therein.
The Management Agreement is approved by the Independent Directors. It may
be terminated by either party with or without cause at any time upon 60 days'
written notice. In addition, the company has the right to terminate the
Management Agreement upon the happening of certain specified events including,
among other things, a breach by the Manager of any material provision which
breach remains uncured for 30 days or the bankruptcy of the Manager. The
Management Agreement also may be terminated at any time by a majority vote of
the: (i) Independent Directors; or (ii) holders of the shares of Common Stock.
The Manager is entitled to certain termination payments in the event of, among
other things, an acquisition of the company which results in the termination of
the Management Agreement.
The Manager receives various fees for the advisory and other services
performed in connection with the Management Agreement. The Manager provides all
personnel and certain overhead items (at its expense) necessary to conduct the
regular business of the company.
Pursuant to the Management Agreement, the Manager receives a Base Fee, an
Incentive Fee and an Administrative Fee. The Base Fee is payable quarterly in
an amount equal to 3/8 of 1% of the "average invested assets" of the company and
its subsidiaries for such year. The Incentive Fee is based on the company's
cash distributions to shareowners. The Manager is entitled to the Incentive Fee
only after the company's shareowners have first received a return on the
company's stockholders' equity equal to the "ten-year United States treasury
rate" plus one percent. The company's distributions in excess of this minimum
return to shareowners is multiplied by 20% and paid to the Manager as the
Incentive Fee. The Manager also performs certain bond administration and other
related services for the company pursuant to the Management Agreement and
receives an Administrative Fee for such services in relation to the complexity
of the transaction and the services required.
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<PAGE>
The company has agreed to indemnify the Manager and its affiliates with
respect to all expenses, losses, damages, liabilities, demands, charges or
claims of any nature in respect of acts or omissions of the Manager made in good
faith and in accordance with the Management Agreement.
In December 1986, the company entered into a participation agreement (the
"CMO Participation Agreement") which provides that during the time the Manager
serves as advisor to the company, if either MDC, the company or their respective
affiliates propose to issue a CMO or are presented with an opportunity to
acquire a CMO instrument, MDC or the company is required to offer the other the
opportunity to participate in such transaction on an equal basis. In the event
of such participation, the company and MDC each will be responsible for their
proportionate share of the issuance or acquisition cost and the administration
costs of the related CMO issuance and will be entitled to receive their
proportionate share, if any, of cash flow and income therefrom.
FEDERAL INCOME TAXATION OF THE COMPANY
GENERAL - For all taxable years commencing on or after January 1, 1987, the
company has operated and, in the future intends to operate, in a manner that
will permit it to qualify for the income tax treatment accorded a REIT. To so
qualify, in general, the company is required, among other things, to distribute
annually (as determined under the Code), to its shareowners, at least 95% of the
greater of its REIT income or Excess Inclusion income. So long as the company
meets the REIT qualification requirements, including its distribution
requirements, the company expects that, with limited exceptions, its REIT income
and Excess Inclusion income will not be subject to federal income tax at the
corporate level. If the company fails to qualify as a REIT, it would be subject
to federal income tax on its REIT income and Excess Inclusion income at regular
corporate rates without any deduction for distributions to shareowners.
In order to qualify as a REIT, the company must satisfy various
requirements with respect to: (i) the nature of its assets ("Asset
Requirements") and income ("Income Requirements"); (ii) the amount of
distributions to shareowners ("Distribution Requirements"); and (iii) certain
organizational matters ("Organizational Requirements").
ASSET REQUIREMENTS - At least 75% of the assets of the company must consist
of specified real estate assets, cash or government securities. Also, the
company cannot own equity securities of any one issuer (other than a qualified
REIT) which represent: (i) more than 5% of the total value of the company's
assets; or (ii) more than 10% of the outstanding voting securities of any one
issuer. Under certain circumstances, if the company fails to satisfy the Asset
Requirements at the end of any quarter of its taxable year, such failure can be
cured by a disposition of sufficient nonqualifying assets within 30 days after
the close of that quarter.
INCOME REQUIREMENTS - The Income Requirements provide that at least 75% of
the company's gross income must be derived from specified real estate sources,
including rents from real property and interest on mortgage obligations.
Additionally, at least 95% of the company's gross income must consist of income
derived from items that qualify for the 75% test plus other specified types of
passive income, such as interest, dividends and gains from the sale or other
disposition of stock and securities.
If the company fails to satisfy the foregoing Income Requirements but: (i)
the company otherwise satisfies the requirements for qualification as a REIT;
(ii) such failure is held to be due to reasonable cause and not willful neglect;
and (iii) certain other requirements are met, then the company will continue to
qualify as a REIT but will be subject to a 100% tax on certain of its
nonqualifying income.
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<PAGE>
The Income Requirements also require that less than 30% of the company's
gross income be derived from the sale or other disposition of: (i) stock or
securities held for less than one year; (ii) property in a transaction which is
a "Prohibited Transaction"; and (iii) most real property held for less than four
years. In addition, the Code generally imposes a 100% tax on net gain derived
from Prohibited Transactions. Failure to satisfy the 30% test generally causes
a loss of REIT status.
DISTRIBUTION REQUIREMENTS - In general, the company is required to
distribute annually, to its shareowners, at least 95% of the greater of its REIT
income or Excess Inclusion income. Distributions may be made in cash,
securities or property. For this purpose (but not for purposes of determining
how distributions are to be taxed to shareowners), certain dividends paid by the
company after the close of a taxable year may be considered as having been made
during such taxable year. However, shareowners will be subject to tax in the
year of declaration on dividends declared by the company during October,
November and December of a taxable year and paid before January 31 of the
subsequent taxable year. Due to the nature of the company's income from its
assets and its deductions in respect of its obligations, under certain
circumstances, the company may generate REIT income, Excess Inclusion income, or
both, in excess of its cash flow. This result may occur, for example, because
REIT income from non-agency MBS bonds (coupon plus discount amortization) is
greater than the cash flow from those non-agency MBS bonds (coupon plus
principal repayments). At December 31, 1994, the company had a NOL carryover of
approximately $100,000,000. The NOL may be used to offset all or a portion of
the company's distribution requirement with respect to REIT income; however, the
NOL may not be used to reduce or eliminate the company's distribution
requirement with respect to Excess Inclusion income. To the extent the company
has either current or accumulated earnings and profits, distributions generally
will be treated as ordinary income by the shareowners receiving such
distributions. The company's NOL will not change how distributions to
shareowners are treated for tax purposes by shareowners under the Code.
PURSUANT TO THE DISTRIBUTION REQUIREMENTS, THE COMPANY MAY BE REQUIRED,
AMONG OTHER THINGS, TO: (I) DISTRIBUTE TO ITS SHAREOWNERS A PORTION OF ITS
WORKING CAPITAL OR SECURITIES; OR (II) BORROW FUNDS OR SELL ASSETS TO MAKE
REQUIRED DISTRIBUTIONS IN YEARS IN WHICH ITS EXCESS INCLUSION INCOME EXCEEDS
REIT INCOME. BECAUSE OF THE DISTRIBUTION REQUIREMENTS RELATING TO EXCESS
INCLUSION INCOME, WHICH IN 1994, 1993 AND 1992 EXCEEDED THE COMPANY'S REIT
INCOME, THESE DISTRIBUTIONS WILL REDUCE THE AMOUNTS AVAILABLE FOR FUTURE
ACQUISITIONS OF ASSETS AND HAVE SUBSTANTIALLY REDUCED THE SIZE OF THE COMPANY
AND ITS INCOME IN THE FUTURE. IN THE EVENT THE COMPANY IS UNABLE TO DISTRIBUTE
ON AN ANNUAL BASIS TO ITS SHAREOWNERS THE GREATER OF 95% OF ITS REIT INCOME OR
ITS EXCESS INCLUSION INCOME, THE COMPANY WILL NOT MAINTAIN ITS STATUS AS A REIT.
ORGANIZATIONAL REQUIREMENTS - Shares of Common Stock must be held by a
minimum of 100 persons for at least 335 days in each taxable year and no more
than 50% in value of the Common Stock can be owned, actually or constructively,
by five or fewer individuals at any time during the second half of each taxable
year. For this purpose an "individual" includes certain tax-exempt entities.
To evidence compliance with these requirements, the company is required to
maintain records that disclose the actual ownership of its outstanding shares of
Common Stock. In fulfilling its obligations to maintain records, the company
must demand written statements each year from the record holders of designated
percentages of its shares of Common Stock which would, among other things,
disclose the actual owners of such shares.
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<PAGE>
FAILURE TO QUALIFY AS A REIT - The company will be subject to tax
(including any applicable alternative minimum tax) on its REIT income or Excess
Inclusion income at regular corporate rates without any deduction for
distributions to shareowners if it fails to qualify as a REIT in any taxable
year. Even if the company is not disqualified as a REIT as a result of a
failure to satisfy any of the tests described above, it may be subject to
certain excise taxes. Unless entitled to relief under specific statutory
provisions, the company also will be disqualified from treatment as a REIT for
the following four taxable years. The failure to qualify as a REIT for even one
year could result in the company incurring substantial indebtedness in order to
pay any resulting taxes, thus reducing the amount of cash available for
distribution to shareowners or for acquisition of additional assets.
EXCESS INCLUSION INCOME - Since 1987, a significant portion of the cash
dividends distributed to the company's shareowners consisted of Excess Inclusion
income. Excess Inclusion income is attributable to certain CMO issuances for
which an election has been made to be treated as a REMIC for federal income tax
purposes. 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.
The company's Excess Inclusion income may not be reduced by any expenses or
deductions including normal operating expenses, losses from the company's CMO
Ownership Interests and NOLs. During 1994, 1993 and 1992, 100%, 100% and 75%,
respectively, of the cash dividends paid to the company's shareowners was Excess
Inclusion income.
During 1993 and 1994, and as arranged in 1995, the company sold many of its
CMO Ownership Interests that generated Excess Inclusion income. As a result,
the amount of Excess Inclusion income to be generated in future years is
expected to be significantly less than in 1994 and earlier years. The company's
ownership interest in Commercial Assets and non-agency MBS bonds do not generate
Excess Inclusion income.
THE PROVISIONS OF THE CODE ARE HIGHLY TECHNICAL AND COMPLEX. THIS SUMMARY
IS NOT INTENDED TO BE A DETAILED DISCUSSION OF ALL APPLICABLE PROVISIONS OF THE
CODE, THE RULES AND REGULATIONS PROMULGATED THEREUNDER, OR THE ADMINISTRATIVE
AND JUDICIAL INTERPRETATIONS THEREOF. THE COMPANY HAS NOT OBTAINED A RULING
FROM THE INTERNAL REVENUE SERVICE WITH RESPECT TO ANY TAX CONSIDERATIONS
RELEVANT TO ITS ORGANIZATION OR OPERATION, OR TO AN ACQUISITION OR OWNERSHIP OF
ITS COMMON STOCK. THIS SUMMARY IS NOT INTENDED TO BE A SUBSTITUTE FOR PRUDENT
TAX PLANNING, AND EACH SHAREOWNER OF THE COMPANY, INCLUDING FOREIGN AND TAX-
EXEMPT ENTITIES, IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THESE
AND OTHER FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE ACQUISITION,
OWNERSHIP AND DISPOSITION OF THE COMMON STOCK OF THE COMPANY.
RESTRICTIONS ON AND REDEMPTIONS OF COMMON STOCK
As described above, to qualify as a REIT the company must meet certain
ownership tests with respect to its shares of Common Stock. In addition, the
company's Certificate of Incorporation provides that shares of Common Stock may
not be owned by a person if the ownership of shares by such person would result
in the imposition of a tax on the company or on any other holder (nominee or
otherwise) of shares of Common Stock. Provisions of the Code would impose such
a tax if shares of Common Stock were owned, directly or indirectly, by the
United States, any state or political subdivision thereof, any foreign
government, any international organization, a rural electric or telephone
cooperative described in
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<PAGE>
Section 1381(a)(2)(C) of the Code, any agency or instrumentality of any of the
foregoing, or any organization exempt from tax under the Code that is not
subject to tax on its unrelated business taxable income.
The company's Certificate of Incorporation empowers the Board of Directors,
at its option, to redeem shares of Common Stock or to restrict transfers of
shares to bring or maintain ownership of the Common Stock in conformity with the
requirements described above. The redemption price to be paid is the fair
market value as reflected in the latest quotations on any exchange on which the
shares of Common Stock are listed or, if the Common Stock is not listed on any
exchange, on the over-the-counter market or, if no quotations are available, the
net asset value of the shares of Common Stock as determined by the Board of
Directors. The company's Certificate of Incorporation also provides that any
acquisition of shares of Common Stock that would result in the disqualification
of the company as a REIT under the Code shall be void to the fullest extent
permitted under applicable law and the intended transferee of such shares shall
be deemed never to have had an interest therein. Furthermore, if such provision
is determined to be void or invalid, then the transferee of such shares shall be
deemed, at the option of the company, to have acted as agent on behalf of the
company in acquiring such shares and to hold such shares on behalf of the
company.
Each shareowner is required, upon demand, to disclose to the Board of
Directors in writing such information with respect to direct and indirect
ownership of shares of Common Stock as the Board of Directors deems prudent in
protecting the tax status of the company.
EMPLOYEES
The company has no employees. Pursuant to the Management Agreement, the
Manager provides all personnel necessary to conduct the regular business of the
company. Certain employees of the Manager have been designated as officers of
the company.
ITEM 2. PROPERTIES.
The company does not own or lease any real estate or physical property.
ITEM 3. LEGAL PROCEEDINGS.
At March 16, 1995, there were no material legal proceedings, pending or
threatened, to which the company or any of its subsidiaries was a party or which
any of their respective property was subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the company's shareowners during the
fourth quarter of 1994.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREOWNER MATTERS.
Asset Investors Corporation Common Stock is listed on the NYSE under the
symbol "AIC." The high and low closing sales prices of the shares of Common
Stock as reported on the NYSE Composite Tape and certain dividend information
for the periods indicated were as follows:
<TABLE>
<CAPTION>
High Low Dividends
---- --- ---------
1994
----
<S> <C> <C> <C>
First Quarter $ 2-1/2 $ 1-7/8 $ .05
Second Quarter 3-3/8 2 .07
Third Quarter 2-7/8 2-1/2 .07
Fourth Quarter 2-3/4 1-3/4 .14(2)
1993
----
First Quarter $ 7-7/8 $ 5-1/2 $ .10
Second Quarter 6-1/2 4-1/8 .10
Third Quarter 5-3/8 3-3/4 3.74(1)
Fourth Quarter 5-5/8 1-3/4 .05
<FN>
________________
(1) Distribution of Commercial Assets common stock.
(2) Consisted of a regular dividend of eight cents per share and two special
dividends of three cents per share each.
</TABLE>
Historically, the company has paid dividends on its Common Stock which in
the aggregate equal, on an annual basis (as determined under the Code), at least
95% of the greater of its REIT income or Excess Inclusion income.
As of March 16, 1995, 24,227,005 shares of Common Stock were outstanding
and were held by 3,194 shareowners of record. The company estimates there were
an additional 12,000 beneficial owners on that date whose shares were held by
banks, brokers or other nominees.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data of the company, set forth below, has been
derived from and should be read in conjunction with the company's audited
Consolidated Financial Statements and the notes thereto. The data as of
December 31, 1994 and 1993, and for each of the three years in the period ended
December 31, 1994, is included elsewhere in this Annual Report on Form 10-K (in
thousands, except per share data).
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $136,715 $232,593 $396,405 $527,867 $586,086
Expenses 122,850 263,731 437,198 488,720 549,581
Net income (loss) 13,358 (51,018) (32,122) 29,173 29,284
Net income (loss) per share 0.92 (3.64) (2.30) 2.09 2.11
Dividends per share 0.33 3.99(1) 1.18 2.70 1.85
Weighted-average shares
outstanding 14,548 14,024 13,986 13,953 13,893
<CAPTION>
BALANCE SHEET DATA:
DECEMBER 31,
----------------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
CMO Subsidiaries-Mortgage
Collateral, net $ 932,962 $1,676,841 $3,159,851 $5,017,753 $5,739,711
Total assets 1,151,511 1,903,837 3,593,160 5,355,337 6,025,050
Secured notes payable 30,592 42,000 48,000 -- --
CMO Subsidiaries-CMO
bonds (long-term debt), net 1,021,188 1,772,890 3,275,096 4,961,234 5,624,035
Total stockholders' equity 72,965(2) 47,187(3) 153,316 201,941 210,080
Book value per share 3.01(2) 3.35(3) 10.96 14.44 15.12
<FN>
__________________________
(1) Includes $.25 per share in cash and $3.74 per share in shares of Commercial
Assets, Inc. common stock.
(2) Includes $17,208,000 of net proceeds and 10,053,794 shares of Common Stock
from the Rights Offering which reduced the book value per share from
approximately $3.94 to $3.01.
(3) The decrease in book value per share between 1992 and 1993 reflects, among
other things, the payment of a dividend of $3.99 per share, including a
dividend of $3.74 per share in the form of shares of Commercial Assets
common stock.
</TABLE>
ITEM 7. 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. Its shares of
Common Stock are listed on the NYSE under the symbol "AIC." Asset Investors
manages ownership interests in residential mortgage loan
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<PAGE>
securitizations (non-agency MBS bonds and CMO Ownership Interests) and owns
approximately 27% of the common stock of Commercial Assets, Inc. (AMEX: CAX).
For all taxable years commencing on or after January 1, 1987, the company
has operated, and in the future intends to operate, in a manner that will 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 and its Excess Inclusion income,
with certain limited exceptions, will not be subject to federal income tax at
the corporate level. In order to maintain its REIT status, in general the
company will be required, among other things, to distribute annually (as
determined under the Code) to its shareowners at least 95% of the greater of its
REIT income or its Excess Inclusion income and to 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 persons constituting
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.
OVERVIEW - 1994 was a transition year for Asset Investors. The company
continued its asset diversification strategy which began in mid-1993. Through
its acquisition of non-agency MBS bonds and ownership of shares of Commercial
Assets, the company is replacing its assets that are extremely sensitive to
changes in mortgage interest rates and prepayments with credit sensitive assets
that should benefit from an improving economy. Income and cash flow from the
company's non-agency MBS bonds and shares of Commercial Assets are anticipated
to increase in 1995: (i) if the company, as anticipated, acquires additional
non-agency MBS bonds with its available liquidity; and (ii) because the
company's return on its shares of Commercial Assets common stock will reflect
the investment of Commercial Assets initial capital for a full year. However,
there can be no assurance in this regard.
A significant portion of 1994 book income and operating cash flows came
from the exercise of Call Rights available to the company on certain of its CMO
Ownership Interests. The gain on the sale of assets resulting from the future
exercise of Call Rights will depend on future prices of the Mortgage Collateral
which are affected by interest rate changes and the prepayment speeds on the
Mortgage Collateral which affect the timing of these Calls Rights.
Because most of the company's CMO Ownership Interests are at or are nearing
the end of their economic lives due to, among other things, high principal
prepayments on the Mortgage Collateral and the sale of Mortgage Collateral in
connection with the exercise of Call Rights, it is anticipated that book income
and cash flows from CMO Ownership Interests will continue to decline.
On December 16, 1994, the company completed a one-for-one Rights Offering
of its Common Stock. Subscriptions for 10,053,794 shares of its Common Stock
were received in the Rights Offering at a price of $1.90 per share resulting in
net proceeds to the company of $17,208,000. Over 70% of the subscriptions for
shares of Common Stock offered in the Rights Offering were exercised. The
capital raised has been used to acquire non-agency MBS bonds and, to a lesser
extent, to repay short-term borrowings.
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<PAGE>
REDUCTION OF CMO OWNERSHIP INTERESTS - From 1990 to 1993, mortgage interest
rates fell to their lowest levels in over 25 years which resulted in an
unprecedented high level of prepayments in 1992, 1993 and the first half of 1994
on the mortgage loans underlying the company's GNMA, FNMA and FHLMC-guaranteed
mortgage certificates, as homeowners nationwide refinanced their mortgages to
lower their payments. Prepayments adversely affect the company's CMO Ownership
Interests by reducing the amount of its interest earning assets (and the
company's future income therefrom) and by permanently reducing the positive
spread between the company's fixed-rate agency-guaranteed mortgage certificates
and the weighted-average interest cost of its remaining CMO bonds.
The historically high levels of Mortgage Collateral prepayments shortened
significantly the economic lives of many of the company's CMO Ownership
Interests from what was anticipated by the company at the time of their
acquisition. Accordingly, most of the company's CMO Ownership Interests are at
or are nearing the end of their economic lives and are not expected to generate
significant amounts of Excess Cash Flows in the future.
The company's CMO Ownership Interests that are pledged as collateral for
the secured notes payable are being sold, among other reasons, because they are
not anticipated to generate Excess Cash Flows after debt service requirements
until after the year 2001. In March 1995, the company agreed to sell the CMO
Ownership Interests that are collateral for the secured notes payable. The
proceeds from the sale, which is scheduled to close on March 30, 1995, plus the
restricted cash for the secured notes payable will be used to repay the secured
notes payable. The sale of these CMO Ownership Interests and repayment of the
secured notes payable significantly will reduce the total assets and liabilities
of the company and its future revenues and expenses from CMO Ownership
Interests. The company believes this sale will occur although there can be no
assurance.
Certain of the company's CMO Ownership Interests allow the company to
exercise the Call Rights as specified in the related CMO Bond Indenture. During
1994, 1993 and 1992 the company exercised Call Rights on ten, five and one CMO
Ownership Interests, respectively, recognizing gains on the sale of assets of
$8,169,000, $1,062,000 and $1,435,000, respectively. The calls in 1994, 1993
and 1992 reduced the outstanding principal amount of the company's Mortgage
Collateral by $184,491,000, $22,320,000 and $48,716,000, respectively.
FORMATION OF COMMERCIAL ASSETS - To maintain its status as a REIT, in
general, the company is required to distribute dividends to its shareowners
equal to at least 95% of the greater of the company's REIT income or Excess
Inclusion income. Prior to July 1993, the company's CMO Ownership Interests
generated significant amounts of Excess Inclusion income. Excess Inclusion
income cannot be reduced by expenses or deductions, including normal operating
expenses, losses from the company's CMO Ownership Interests and NOLs. As a
result, the company's Excess Inclusion income and distribution requirements were
significantly higher than its REIT income during 1992 and 1993. Satisfaction of
these distribution requirements (as discussed below) utilized a significant
portion of the company's capital which otherwise could have been used for new
acquisitions. In order to reduce the adverse effects of Excess Inclusion income
on the company's capital requirements, in June 1993, the company sold most of
its assets that generated Excess Inclusion income.
In August 1993, the company formed a new REIT, Commercial Assets. The
company contributed $75,000,000 ($74,800,000 pursuant to the Contribution
Agreement plus $200,000 of cash) to the capital of Commercial Assets during 1993
and distributed, on October 12, 1993, approximately 70% of the shares of
Commercial Assets to the company's shareowners as a taxable dividend. The
Distribution satisfied a
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<PAGE>
significant portion of the company's REIT distribution requirement for 1993 and
1992. As of December 31, 1994, the company owned approximately 27% of the
shares of Commercial Assets.
Commercial Assets acquires and manages debt instruments issued in
commercial mortgage loan securitizations. Commercial mortgage loan
securitizations generally are multi-class issuances of debt instruments which
are 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 and
other collateral. To date, Commercial Assets has acquired subordinate credit
support classes of commercial securitizations backed by mortgages on multi-
family real estate. Commercial Assets has advised the company that future
acquisitions may include, among other things, rated and unrated classes of CMBS
bonds secured by mortgage loans on senior living centers, retail space,
cooperative apartments, nursing homes and office buildings, and participation in
commercial real estate. In addition, Commercial Assets has advised the company
that Commercial Assets, in the future, also may acquire fee interests in, or
acquire or originate mortgage loans on, commercial real property which, among
other things, may be used as collateral for future securitizations.
ACQUISITION OF NON-AGENCY MBS BONDS - In late April 1994, the company began
acquiring unrated, credit support debt interests in non-conforming residential
mortgage loan securitizations, known as non-agency MBS bonds.
Unlike the agency-guaranteed mortgage certificates which are pledged to
secure the CMO bonds related to the company's CMO Ownership Interests, the
company's unrated subordinate non-agency MBS bonds have substantial credit risk.
Non-agency MBS bonds are collateralized by non-conforming mortgage loans that do
not meet GNMA, FNMA or FHLMC guarantee standards. The non-conforming mortgage
loans do not meet GNMA, FNMA or FHLMC guarantee standards typically because the
mortgage loans exceed agency size limits (e.g., the current FNMA limit is
$203,150) or the borrower does not meet other agency credit underwriting
criteria. 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 non-conforming mortgage loan which is pledged as
collateral for a residential mortgage loan securitization and the proceeds of
the foreclosure sale of the property are less than the unpaid balance of the
mortgage, foreclosure costs and interest advances, the company, as the holder of
the unrated, credit support class, would suffer a credit loss up to the then
outstanding principal balance of such class. 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 company intends to use its available funds and may use a conservative
amount of leverage to acquire additional non-agency MBS bonds. While the
company's primary emphasis will be on the acquisition of subordinate non-agency
MBS bonds, future acquisitions may include, among other things, rated classes of
residential mortgage loan securitizations and participations in residential real
estate. The company also may acquire or originate agency-guaranteed and non-
conforming mortgage loans which, among other things, may be used for future
securitizations.
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<PAGE>
The schedule below presents certain information with respect to the
company's acquisition and disposition of CMO Subsidiaries, CMO Residuals,
Acquired CMO Classes and non-agency MBS bonds since inception.
<TABLE>
<CAPTION>
Acquired CMO Non-agency
CMO Subsidiaries CMO Residuals Classes MBS Bonds
---------------------- ------------------- ------------------- -------------------
Period/Quarter Number Initial Cost(1) Number Initial Cost Number Initial Cost Number Initial Cost
-------------- ------ --------------- ------ ------------ ------ ------------ ------ ------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Acquisitions
------------
1986-1991 42 $ 220,486 47 $113,570 4 $21,305 -- $ --
1992 -- -- 18 41,259 11 42,953 -- --
1993 First -- -- -- -- 1 4,250 -- --
1994
Second -- -- -- -- -- -- 28 13,185
Third -- -- -- -- -- -- 15 3,891
Fourth(2) -- -- -- -- -- -- 41 16,548
-- --------- -- -------- -- ------- -- ------
Subtotal 42 220,486 65 154,829 16 68,508 84 33,624
-- --------- -- -------- -- ------- -- ------
Sales/Redemptions
-----------------
1986-1991 -- -- 1 3,459 2 13,889 -- --
1992 1 4,000 -- -- 1 6,425 -- --
1993
Second 1 4,649 10 23,196 10 35,586 -- --
Third 1 2,700 -- -- -- -- -- --
Fourth 4 2,490 -- -- -- -- -- --
1994
First 2 2,946 1 7,878 1 7,367 -- --
Second 2 3,175 -- -- -- -- -- --
Third 1 876 -- -- -- -- -- --
Fourth 5 13,315 7 9,665 1 4,250 -- --
-- ------- -- ------- -- ------- -- -------
Subtotal 17 34,151 19 44,198 15 67,517 -- --
-- ------- -- ------- -- ------- -- -------
Initial cost of
assets held at
December 31, 1994 25 $186,335 46 $110,631 1 $ 991 84 $33,624
-- -------- -- -------- -- -------- -- -------
-- -------- -- -------- -- -------- -- -------
<FN>
________________
(1) Does not include the company's minority interest in four series of multi-
participant CMO issuances with an aggregate cost of $3,786,000.
(2) The company acquired an additional eight non-agency MBS bonds from January
1, 1995 to February 28, 1995 at an aggregate cost of $1,980,000.
</TABLE>
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<PAGE>
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
BOOK INCOME
The company had book income (computed in accordance with GAAP) of
$13,358,000 ($0.92 per share) for the year ended December 31, 1994, compared to
a book loss for the years ended December 31, 1993 and 1992 of $51,018,000 ($3.64
per share) and $32,122,000 ($2.30 per share), respectively.
The improvement in 1994 results compared with 1993 primarily was due to:
(i) gains in 1994 on the sale of assets, primarily from the exercise of Call
Rights compared with losses on the sale of assets in 1993; and (ii) reductions
in the amounts of write-downs and reserves for the carrying value of the
company's CMO Ownership Interests (including the cumulative effect of an
accounting change recorded on December 31, 1993) from 1993 to 1994.
Other factors that positively impacted 1994 book income include: (i)
revenues from non-agency-MBS bonds which the company acquired in the second,
third and fourth quarters of 1994; (ii) earnings generated from the company's
shares of common stock in Commercial Assets, which commenced operations in
October 1993; (iii) a decrease in prepayments on the mortgage loans
collateralizing the company's CMO Ownership Interests which resulted during the
third and fourth quarters of 1994 in lower interest expense from the
amortization of CMO bond discount compared with 1993; and (iv) lower management
fees, general and administrative costs and interest expense.
The company, during 1993, accumulated substantially all of its cash flow
not required to pay its expenses and debt service in short-term, low-yielding
cash instruments pending the capitalization of Commercial Assets in October 1993
rather than using such cash flow to acquire new, higher-yielding assets.
Furthermore, the balance of the company's cash flow not used to capitalize
Commercial Assets and the cash flow received by the company from its assets
during the fourth quarter of 1993 continued to be held in short-term, low-
yielding cash instruments until the company commenced its program to acquire
non-agency MBS bonds during the second quarter of 1994.
CHANGE IN ACCOUNTING - The book loss in 1993 includes the cumulative effect
of an accounting change of $24,399,000 ($1.74 per share). On December 31, 1993,
the company adopted FAS 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES. In accordance with FAS 115, the non-agency MBS bonds and CMO
Ownership Interests that the company has the ability and positive intent to
"hold-to-maturity" are reported at their amortized cost. The CMO Ownership
Interests that the company does not intend to hold-to-maturity are classified as
available-for-sale and are reported at their fair value. If the fair value of a
CMO Ownership Interest or non-agency MBS bond declines below its amortized cost
basis and the decline is considered to be "other than temporary," the cost basis
of the individual asset must be written down to its fair value as a new cost
basis. The amount of the write-down is reflected in the company's current book
income (i.e., accounted for as a realized loss). The decline in fair value is
considered to be other than temporary if the cost basis of the asset exceeds the
related projected cash flow from the CMO Ownership Interest and non-agency MBS
bond discounted at a risk-free rate of return. Unrealized holding gains and
losses, considered to be temporary, on the company's CMO Ownership Interests
that are classified as available-for-sale are excluded from current book income,
and are reported as a separate component of Stockholders' Equity until realized.
The change in accounting principle has reduced significantly the amortized
cost of many of the company's CMO Ownership Interests at December 31, 1993. As
a result, it is anticipated that the earnings from these assets will improve in
future periods. Prior years' Consolidated Financial Statements were not
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<PAGE>
required to be restated. However, faster prepayment speeds and lower estimates
of cash flow from Call Rights may cause the fair value of CMO Ownership
Interests to decline further which may require additional write-downs in the
future.
When the company adopted FAS 115 on December 31, 1993, the company
classified all of its CMO Ownership Interests as held-to-maturity because the
company had the ability and positive intent to hold these assets to maturity.
Certain of the company's CMO Ownership Interests continued to generate Excess
Inclusion income in 1994. Excess Inclusion income has an adverse effect of the
company's distribution requirements. In order to minimize the adverse effect
caused by Excess Inclusion income, the company intends to dispose of assets that
generate Excess Inclusion income, eliminating the Excess Inclusion income these
assets may generate in the future. Accordingly, the company reclassified those
assets which generate Excess Inclusion income as available-for-sale at September
30, 1994. Subsequently, the company sold seven CMO Ownership Interests
classified as available-for-sale in December 1994 and in March 1995 agreed to
sell on March 30, 1995, 28 CMO Ownership Interests classified as available-for-
sale in March 1995. The company continues to have the positive intent and
ability to hold to maturity its remaining CMO Ownership Interests and non-agency
MBS bonds and, accordingly, they continue to be classified as held-to-maturity.
NET GAIN (LOSS) ON SALE OF ASSETS - During 1994 and 1993, the company
exercised the Call Rights on certain CMO Subsidiaries and CMO Residuals
resulting in gains of $12,833,000 ($.88 per share) and $1,062,000 ($.08 per
share), respectively. In 1992, the company redeemed the CMO bonds of one CMO
Subsidiary and sold a CMO Residual, resulting in a gain of $1,733,000 ($.12 per
share).
During June 1993, the company sold ten CMO Residuals, ten Acquired CMO
Classes and one CMO Subsidiary for an aggregate of $29,200,000, resulting in a
net loss of $6,225,000 ($.44 per share). These 21 REMIC assets generated book
income of $8,387,000 ($.60 per share) during the first six months of 1993.
During 1992 and 1991, those assets generated book income of $2,450,000 ($.18 per
share) and $334,000 ($.02 per share) for 1992 and 1991, respectively.
CMO RESIDUALS AND ACQUIRED CMO CLASSES - Book income from the company's CMO
Residuals, before write-downs, decreased $5,531,000 ($.38 per share) to
$2,799,000 ($.19 per share) in 1994 compared to 1993 and decreased $9,253,000
($.66 per share) to $8,330,000 ($.59 per share) in 1993 compared to 1992. In
June 1993, the company sold ten CMO Residuals with a book value of $11,034,000.
The sale of CMO Residuals in June 1993 and principal paydowns in 1993 and 1994
caused the decrease in book income from CMO Residuals in 1994. Continued low
mortgage interest rates in 1993 resulted in higher actual prepayments during the
year as well as higher projected prepayment rates at December 31, 1993 compared
to projected prepayment rates at December 31, 1992. Because the higher
prepayment rates in 1993 reduced the projected Excess Cash Flow from certain CMO
Residuals at December 31, 1993 compared to the Excess Cash Flow which was
projected at December 31, 1992: (i) many of the company's CMO Residuals had no
book income for 1993; and (ii) the company recognized a noncash write-down with
respect to its CMO Residuals of $9,750,000 ($.69 per share) and $11,922,000
($.85 per share) for 1993 and 1992, respectively.
The company's book income from Acquired CMO Classes decreased by $9,572,000
($.66 per share) to $110,000 ($.01 per share) for 1994 compared with 1993 and
increased by $4,572,000 ($.33 per share) to $9,682,000 ($.69 per share) for 1993
compared with 1992. Income from Acquired CMO Classes decreased in 1994 because
of the sale, in June 1993, of ten Acquired CMO Classes with a book value of
$21,240,000 and paydowns of the Acquired CMO Classes during 1993. Income from
Acquired CMO Classes during 1993 increased due to the acquisition of $4,250,000
and $42,953,000 of Acquired CMO
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<PAGE>
Classes during 1993 and 1992, respectively. The increase was offset by the sale
of ten Acquired CMO Classes in June 1993.
CMO SUBSIDIARIES - The company had income from CMO Subsidiaries before the
provision for reserve of $3,726,000 ($.26 per share) during 1994 compared with a
loss of $13,582,000 ($0.97 per share) and $9,824,000 ($.70 per share) in 1993
and 1992, respectively. Earnings from CMO Subsidiaries improved in 1994
compared with 1993 because of lower prepayments in the second half of 1994
compared with 1993, and the $20,393,000 ($23,180,000 minus minority interest of
$2,787,000) reduction in the carrying amount of 24 of the company's CMO
Subsidiaries at December 31, 1993, pursuant to a change in accounting principle.
As a result, less CMO bond discount was required to be recognized as interest
expense during 1994. The losses during 1993 and 1992 primarily were due to a
decrease in the coupon interest spread between the Mortgage Collateral and the
CMO bonds of $14,260,000 ($1.02 per share) and $10,844,000 ($.78 per share),
respectively. However, the adverse effect on book income from the lower coupon
interest spread partially was offset by a net decrease in the amortization of
CMO bond and Mortgage Collateral discount of $10,502,000 ($.75 per share) in
1993 compared to 1992.
The projected prepayment rates on a significant portion of the Mortgage
Collateral underlying the company's CMO Subsidiaries were lower at December 31,
1994 than at December 31, 1993, but higher at December 31, 1993 than at December
31, 1992 due to changes in mortgage interest rates. This, along with the high
actual prepayments in 1993, among other things, resulted in significantly lower
projections of Excess Cash Flow from the related CMO Subsidiaries at December
31, 1993 compared to December 31, 1992. As a result, the company recorded a
provision for reserve in the amount of $4,272,000 ($5,584,000 minus minority
interest of $1,312,000) for eight of its CMO Subsidiaries during 1993.
Generally, CMO bond discount is amortized as interest expense as the
principal on the related CMO Subsidiaries-CMO bonds is repaid. The extremely
fast prepayments in 1992 and 1993 caused the company's CMO Subsidiaries-CMO
bonds to be repaid much faster than the original estimates made when the related
CMO Subsidiaries were acquired between December 1986 to July 1988. The
provision for reserve, in effect, allows the company to accelerate the
amortization of its CMO bond discount to a level which approximates the
remaining Excess Cash Flow from the related CMO Subsidiary based on current
estimates of, among other things, LIBOR and projected prepayment rates. The
provision for reserve results in a permanent reduction in the carrying amount of
a CMO Subsidiary which cannot be reversed in the event prepayment speeds slow
down. Faster prepayment rates and lower estimates of cash flow from the
exercise of Call Rights may require the company to increase the reserve in the
future.
The average of one-month LIBOR and three-month LIBOR increased to 4.60% at
December 31, 1994 from 3.31% at December 31, 1993 and 3.38% at December 31,
1992. The increase in LIBOR increased the company's interest expense from LIBOR
Classes related to Variable-Rate CMO Ownership Interests. The aggregate
proportionate principal balance of the LIBOR Classes underlying the company's
Variable-Rate CMO Ownership Interests and the aggregate proportionate notional
principal amount of the Variable-Rate Acquired CMO Classes was $148,474,000
($26,480,000 after the March 30, 1995 sale of the CMO Ownership Interests that
are pledged as collateral on the secured notes payable), $273,331,000 and
$836,181,000 at December 31, 1994, 1993 and 1992, respectively.
COMMERCIAL ASSETS - Commercial Assets commenced operations on October 12,
1993, and had only limited operations in 1993 and the first quarter of 1994.
Since its inception, Commercial Assets has acquired 11 CMBS bonds from six
securitizations at a cost of $74,433,000. The CMBS bonds of Commercial Assets
at December 31, 1994 and 1993, had an outstanding balance of $101,319,000 and
$10,000,000, respectively, and a weighted-average coupon of 8.25% and 8.88%,
respectively. Income
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<PAGE>
from the company's ownership interest in Commercial Assets (which for book
income purposes is determined based on the company's percentage of ownership
interest in Commercial Assets and Commercial Assets book income) was $1,354,000
($.09 per share) for the year ended December 31, 1994.
NON-AGENCY MBS BONDS - Since April 1994, the company acquired 84 non-agency
MBS bonds which generated book income of $1,531,000 ($.11 per share). The
company's non-agency MBS bonds had an outstanding principal balance of
$88,011,000 and weighted-average coupon of 6.55% at December 31, 1994. The
company recorded an allowance for credit losses of $22,269,000 on the non-agency
MBS bonds it owns upon their acquisition. The allowance reduces substantially
the amount of book income the company records from these assets..
GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative expenses
decreased $2,656,000 ($.18 per share) to $1,925,000 ($.13 per share) in 1994
compared with 1993 and increased $1,718,000 ($.12 per share) to $4,581,000 ($.33
per share) in 1993 compared with 1992. The decrease in 1994 resulted from,
among other things, $1,098,000 ($.08 per share) of costs incurred in 1993 in
connection with the Distribution of shares of Commercial Assets and a decrease
in DERs expense of $1,691,000 ($.12 per share), a significant portion of which
was related to the Distribution. The increase in 1993 relative to 1992 resulted
from, among other things, the increase in the accrual of DERs of $1,492,000
($.11 per share) and the costs incurred in connection with the distribution of
shares of Commercial Assets, offset by a decrease in excise tax from 1992 to
1993 of $1,374,000 ($.10 per share).
MANAGEMENT FEES - Incentive Fees paid to the Manager under the Management
Agreement for the years ended December 31, 1994, 1993 and 1992 were $137,000, $0
and $166,000, respectively. During the year ended December 31, 1994, the Base
Fee decreased $357,000 to $235,000 compared with 1993 and decreased $311,000 to
$592,000 in 1993 compared with 1992. The decreases in the Base Fee resulted
from the normal amortization of the company's assets due to Mortgage Collateral
prepayments in 1994 and 1993 and the sale of CMO Residuals and Acquired CMO
Classes in June 1993, offset by the acquisition of non-agency MBS bonds in 1994.
In addition, the company pays Administrative Fees primarily to the Manager and,
to a much lesser extent, unaffiliated CMO administrators for each of its CMO
Ownership Interests and non-agency MBS bonds. During the years ended December
31, 1994, 1993 and 1992, Administrative Fees totaled $1,495,000, $1,665,000 and
$1,690,000, respectively (of which $1,440,000, $1,582,000 and $1,565,000,
respectively, were paid to the Manager). Additional Administrative Fees of
$44,000, $70,000 and $70,000 in 1994, 1993 and 1992, respectively, were incurred
under other administration agreements with the Manager.
INTEREST EXPENSE - Interest expense on the company's borrowing facilities
decreased by $1,981,000 ($.14 per share) to $2,872,000 ($.20 per share) during
1994 compared to 1993 and increased by $1,913,000 ($.14 per share) to $4,853,000
($.35 per share) during 1993 compared with 1992. The decrease in interest
expense in 1994 compared with 1993 was attributable to the repayment of
$11,408,000 of the secured notes payable in 1994 and a decrease in the weighted-
average balance of the company's short-term borrowings from 1993 to 1994. The
weighted-average outstanding balance of the company's short-term borrowing
facilities was $2,900,000, $18,751,000 and $58,667,000 during 1994, 1993 and
1992, respectively. The effective interest rate under the company's short-term
borrowing facilities during 1994, 1993 and 1992 was 5.02%, 3.93% and 4.97% per
annum, respectively.
The company's ratio of borrowings (excluding CMO Subsidiaries and CMO
bonds) to stockholders' equity with and without the effect of the non-recourse
secured notes payable (and related equity) at December 31, 1994, was .46 to 1
and .04 to 1, respectively, and at December 31, 1993 was .98 to 1 and .10 to 1,
respectively. The debt-to-equity ratio at December 31, 1992 was .55 to 1.
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<PAGE>
REIT INCOME
The company incurred a REIT loss estimated to be $21,600,000 ($1.49 per
share) for 1994 compared with a REIT loss of $15,800,000 ($1.13 per share) for
1993 and REIT income of $12,699,000 ($.91 per share) for 1992. In 1994, the
REIT loss included $5,244,000 ($.36 per share) of net capital gains from the
exercise of Call Rights and sales of assets which were reduced to zero by the
company's capital loss carryovers from prior years.
The lower 1994 and 1993 results predominantly were due to three factors.
The most significant factor was the continued low mortgage interest rates which
resulted in high levels of prepayments of the Mortgage Collateral underlying the
company's CMO Ownership Interests through May 1994. The high levels of
prepayments resulted in significant amounts of non-cash interest expense from
amortization of the discounts on the company's CMO bonds. The lower earnings
from CMO Ownership Interests was particularly evident with respect to those
assets acquired prior to 1991, which were anticipated at the time of their
acquisition to generate losses toward the end of their economic lives. In
addition, the company commenced its acquisition of non-agency MBS bonds in April
1994 and acquired only one asset during 1993 because substantially all of the
company's cash flow not required for expenditures or debt service was
accumulated in low-yielding cash equivalents pending the capitalization of
Commercial Assets. Finally, the company sold 21 REMIC assets in June 1993 which
generated $14,084,000 ($1.00 per share) of REIT income during the first half of
1993. All of these assets were owned during 1992 and generated REIT income of
$9,905,000 ($.71 per share).
The sale of assets, the capital contribution of $75,000,000 to Commercial
Assets and the distribution of shares of Commercial Assets to the company's
shareowners significantly reduced the size of the company. Furthermore, many of
the company's CMO Ownership Interests are nearing the end of their economic
lives and the company does not anticipate these assets will generate substantial
cash flow or REIT income in the future.
The company believes REIT income from continuing operations in 1995 and
future years should improve from 1994 and 1993 levels as the company's REIT
income from non-agency MBS bonds increase and REIT losses from the company's CMO
Ownership Interests decline as a result of sales, exercise of Call Rights and
principal paydowns.
EXCESS INCLUSION INCOME
The company's Excess Inclusion income for the year ended December 31, 1994
was $3,769,000 ($.26 per share) compared with $30,665,000 ($2.19 per share) and
$39,183,000 ($2.80 per share) in 1993 and 1992, respectively. Excess Inclusion
income of $17,178,000 ($1.22 per share) and $13,581,000 ($.97 per share)
incurred during 1993 and 1992, respectively, was generated from the 21 REMIC
assets which were sold in June 1993.
Excess Inclusion income is attributable to the company's residual interests
in REMICs. During 1994, 1993 and 1992, Excess Inclusion income exceeded REIT
income. Excess Inclusion income may not be reduced by any expenses or
deductions, including normal operating expenses, losses from the company's CMO
Ownership Interests and NOLs. Dividends paid to shareowners of the company will
be characterized as Excess Inclusion income to the extent that such dividends
are attributable to Excess Inclusion income realized by the company.
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<PAGE>
NOL CARRYOVER
The company had a NOL carryover of approximately $100,000,000 as of
December 31, 1994; the NOL can be used to reduce the company's requirement to
distribute at least 95% of its REIT income but not its Excess Inclusion income.
RECONCILIATION OF REIT INCOME, EXCESS INCLUSION INCOME AND BOOK INCOME
The company computes its income in accordance with the Code (REIT income
and Excess Inclusion income) and in accordance with GAAP (book income). As a
REIT, the company's REIT income and Excess Inclusion income are extremely
important because they are the basis upon which the Code requires the company to
make its distributions. However, the Commission requires all public companies
to report their income in accordance with GAAP. The differences between REIT
income, Excess Inclusion income and book income are discussed below.
The difference between Excess Inclusion income and REIT income was
$25,369,000 ($1.75 per share) in 1994, $46,465,000 ($3.32 per share) in 1993 and
$26,484,000 ($1.89 per share) in 1992. These differences result from expenses
and deductions, including normal operating expenses, losses from the company's
CMO Ownership Interests and NOLs, which reduce REIT income but cannot reduce
Excess Inclusion income.
During 1994, book income exceeded REIT income by $34,958,000 ($2.41 per
share) and during 1993 and 1992, REIT income exceeded book income by $35,218,000
($2.51 per share) and by $44,821,000 ($3.20 per share), respectively.
Substantially all of the difference between REIT income and book income is due
to: (i) charges to book income for the provision for reserve related to CMO
Subsidiaries and the write-down of CMO Residuals ($38,421,000 and $35,922,000 in
1993 and 1992, respectively) which do not affect the determination of REIT
income or Excess Inclusion income; (ii) gains on the sales of assets recorded
for GAAP purposes that are reduced to zero for REIT income purposes due to the
company's capital loss carryover; and (iii) other differences in the calculation
of REIT income compared to book income of non-agency MBS bonds and CMO Ownership
Interests.
DIVIDEND DISTRIBUTIONS
During 1994, the company declared regular dividends of $3,809,000 ($.27 per
share) and special dividends of $1,150,000 ($.06 per share). Since its
inception, the company has distributed dividends to its shareowners totaling
$220,984,000 ($16.95 per share). The distributions included cash dividends of
$168,386,000 ($13.21 per share) and 7,040,043 shares of common stock of
Commercial Assets (one-half share of common stock of Commercial Assets for every
share of Common Stock owned). During 1993, the company paid $.25 per share in
cash dividends and distributed to its shareowners approximately 70% of the
outstanding shares of common stock of Commercial Assets. The value of the
Commercial Assets Distribution on a fully-distributed basis was estimated to be
$52,598,000 ($3.74 per share). During 1992, the company paid cash dividends of
$1.18 per share. The amount of previously distributed dividends is not
necessarily indicative of the amount of future dividends which may be declared
by the company, if any.
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. During the past year, the company has
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<PAGE>
restructured and diversified its operations through its ownership of shares of
Commercial Assets and by acquiring non-agency MBS bonds. For the years ended
December 31, 1994, 1993 and 1992, cash flow provided by operating activities was
$6,479,000, $28,108,000, and $60,132,000, respectively.
During 1994, the company generated cash flow of $26,416,000 (including
$17,125,000 from the sale of assets and the exercise of Call Rights), $911,000
and $2,225,000 from its CMO Ownership Interests, shares of Commercial Assets and
non-agency MBS bonds, respectively. During 1993 and 1992, the company generated
cash flow of $82,454,000 and $20,706,000, respectively, from its CMO Ownership
Interests. Cash flow from the company's non-agency MBS bonds is anticipated to
increase in 1995 because of the company's $88,942,000 aggregate principal amount
of non-agency MBS bonds acquired during the second, third and fourth quarters of
1994 will be outstanding for a full year, and due to the acquisition of an
additional $7,186,000 aggregate principal amount of eight non-agency MBS bonds
from January 1, 1995 to February 28, 1995.
During 1994, the company used its cash flow not required for expenses and
principal payments on CMO Subsidiaries-CMO bonds to make $12,890,000 in
principal payments on its borrowing facilities, to acquire 84 non-agency MBS
bonds for $33,624,000 and to make dividend payments of $4,232,000. The company
acquired an additional eight non-agency MBS bonds from January 1, 1995 to
February 28, 1995 at an aggregate cost of $1,980,000. At February 28, 1995, the
company had $14,993,000 in cash and cash equivalents which are available for,
among other things, future acquisitions.
In 1993, the company contributed $75,000,000 ($74,800,000 pursuant to the
Contribution Agreement plus $200,000 cash ) to the capital of Commercial Assets
and paid $791,000 in interest expense to Commercial Assets. In addition to
enabling the company to diversify its operations by participating in the growing
market for commercial securitizations, the formation of Commercial Assets and
the distribution of approximately 70% of the common stock of Commercial Assets
to the company's shareowners allowed the company to satisfy a significant
portion of its REIT distribution requirements through December 31, 1993 with
respect to Excess Inclusion income. The company believes that its future
distribution requirements with respect to Excess Inclusion income should decline
substantially as a result of, among other things, the sale of CMO Ownership
Interests that generate Excess Inclusion income in June 1993 and December 1994,
and the agreement to sell on March 30, 1995, 28 CMO Ownership Interests that
collateralize the secured notes payable.
In June 1993, the company sold a total of 21 REMIC assets for $29,200,000.
These assets generated $25,009,000 of cash flow during 1993. Those assets which
were owned during 1992 generated cash flow of $11,993,000. The sale of these
assets, among other things, allowed the company to restructure its business and
focus on other permissible REIT activities which do not generate Excess
Inclusion income.
During 1993, the company used its cash flow not required for expenses and
principal payments on CMO Subsidiaries-CMO bonds primarily to: (i) contribute
$75,000,000 to the capital of Commercial Assets; (ii) reduce its short-term
borrowings and secured notes payable by $38,172,000; (iii) acquire one Acquired
CMO Class for $4,250,000; and (iv) pay $3,509,000 in dividends.
During 1992, the company used substantially all of its cash flow not
required for expenses and principal payments on CMO bonds to acquire 18 CMO
Residuals and 11 Acquired CMO Classes with an aggregate acquisition cost of
$41,259,000 and $42,953,000, respectively, and pay $16,503,000 in dividends.
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<PAGE>
From time to time, the company uses its available cash flow for short
periods of time to exercise "class calls" on CMO bonds nearing maturity.
Because the company is able to use low-cost funds to redeem higher-cost CMO
bonds, the company earns the interest rate spread during the period in which the
CMO bonds otherwise would have been outstanding. At December 31, 1992, the
company advanced $17,199,000 with respect to two class calls. The advances were
repaid to the company in 1993. No class call advances were outstanding at
December 31, 1994 or 1993.
With the consent of the lender, the company terminated its $5,000,000 bank
line of credit in February 1994. All of the collateral pledged to the facility
has been returned to the company.
As of December 31, 1994, $658,000 was borrowed under month-to-month
Repurchase Agreements with original maturity terms of 30 days and a weighted-
average effective interest rate of 7.38% per annum. During 1994, 1993 and 1992,
the weighted-average outstanding principal balance of all Repurchase Agreements
was $1,858,000, $18,751,000 and $58,667,000, respectively, and the related
weighted-average effective interest rate was 4.32%, 3.93% and 4.97%,
respectively.
On June 30, 1994, the company entered into a $10,000,000 six-month credit
facility. On September 8, 1994, the company entered into an additional
$10,000,000 one-year credit facility with another lender. Both credit
facilities are secured by certain non-agency MBS bonds. At December 31, 1994,
the company was able to borrow $3,089,000 under these credit facilities, based
on the value of the pledged collateral. The credit facilities are also subject
to certain financial covenants, which the company is in compliance, and bear
interest, payable monthly, based on one-month LIBOR. The collateral value and
interest rate are subject to periodic adjustment. At December 31, 1994,
$2,100,000 was borrowed under the credit facilities at an effective interest
rate of 7.49%. During 1994, the weighted-average outstanding principal balance
of the credit facilities was $1,042,000 and the related weighted-average
effective interest rate was 6.27%.
The company intends in 1995 to retire its $30,592,000 of secured notes
payable outstanding at December 31, 1994, using the proceeds to be received from
the sale of the CMO Ownership Interests that are pledged as collateral for the
company's secured notes payable, which is scheduled to close on March 30, 1995,
plus restricted cash for the secured notes payable. Because substantially all
of the cash flow from the pledged collateral is required to make payments of
principal and interest on the notes, the company did not anticipate that it
would receive any cash flow from these assets for at least five years (see Note
C to the Consolidated Financial Statements).
At December 31, 1994, the company's undistributed Excess Inclusion income,
after considering the dividend declared on December 19, 1994 and paid on January
6, 1995, was estimated to be $222,000 ($.02 per share).
The dividend of shares of common stock of Commercial Assets to the
company's shareowners in 1993, and sales of assets in 1994 and arranged in 1995,
have substantially reduced the size of the company and will reduce its future
income and ability to raise funds for the acquisition of additional assets. The
company's ability to acquire additional assets also may depend on, among other
things: (i) the amount of cash flow required for dividend distributions with
respect to the company's REIT income and Excess Inclusion income; and (ii) the
ability to borrow additional funds, to the extent permitted by its operating
policies and By-laws, through additional borrowings including, without
limitation, intermediate and long-term borrowings, commercial paper borrowings
and Repurchase Agreements with selected banks and securities dealers. The
company's ability to obtain funds from such sources will be affected adversely
by high interest rates. In addition, depending on conditions in the equity
market for REIT stocks and other
-36-
<PAGE>
factors over which the company has no control, the company may increase the
amount available for asset acquisitions through the issuance of additional
equity securities.
The amount of defaults and resulting credit losses on the company's non-
agency MBS bonds may be adversely impacted by the occurrence of natural
disasters not generally insured against by a standard home owners 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 with any certainty the impact natural
disasters may have on the company's income. The company has provided for
$22,075,000 of allowances for credit losses at December 31, 1994 to absorb the
impact of possible future credit losses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimates of fair value of the company's financial instruments have
been determined by the company using available market information and valuation
methodologies. The fair values of the company's short-term financial
instruments, including cash and cash equivalents, accounts payable and accrued
liabilities, management fees payable and short-term borrowings are estimated to
equal their carrying amounts or cost basis because of the short maturity of
these instruments. The estimate of fair value of the company's investment in
Commercial Assets is based upon the per share trading price of the common stock
of Commercial Assets.
Due to the complex nature of mortgage securitization structures, every non-
agency MBS bond, CMO Subsidiary, CMO Residual and Acquired CMO Class structure
varies significantly from issuance to issuance. The Collateral for each
issuance is separate and distinct from that underlying the Collateral of another
issuance. As a result, there is no exchange or other active market from which
to obtain a quoted market price for these financial instruments. Accordingly,
the estimates of fair value have been determined by the company using available
market information and valuation methodologies. Considerable judgment was
required to interpret the market information and develop the estimates of fair
value. THE ESTIMATES OF FAIR VALUE PRESENTED HEREIN ARE NOT NECESSARILY
INDICATIVE OF THE AMOUNTS THE COMPANY COULD REALIZE IN A CURRENT MARKET
EXCHANGE. THE USE OF DIFFERENT MARKET ASSUMPTIONS, VALUATION METHODOLOGIES OR
BOTH MAY HAVE A MATERIAL EFFECT ON THE ESTIMATES OF FAIR VALUE. THE FAIR VALUE
ESTIMATES PRESENTED HEREIN ARE BASED ON PERTINENT INFORMATION AVAILABLE TO
MANAGEMENT AS OF DECEMBER 31, 1994. FUTURE ESTIMATES OF FAIR VALUE MAY DIFFER
SIGNIFICANTLY FROM THE AMOUNTS PRESENTED HEREIN. The estimated fair value of
the company's assets of non-agency MBS bonds, ownership interests in Commercial
Assets, CMO Subsidiaries, CMO Residuals and Acquired CMO Classes will fluctuate
over time due to, among other things, changes in prevailing long-term interest
rates, changes in collateral prepayments and performance, liquidity in the
mortgage-backed securities market and changes in the values of the related real
estate.
At December 31, 1994, the estimated fair value of the company's ownership
interest in Commercial Assets was $15,876,000, compared to $17,257,000 at
December 31, 1993. The decrease in fair value was due to the decrease in the
trading price per share from $6.25 per share at December 31, 1993, to $5.75 per
share at the end of 1994. At March 16, 1995, the closing price of Commercial
Assets was $6.38 per share.
-37-
<PAGE>
The December 31, 1994 estimated fair value of the company's non-agency MBS
bonds approximated their carrying value of $32,544,000. There has been no
significant change in the estimated fair value of the non-agency MBS bonds since
their acquisition.
The net estimated fair value of the company's CMO Subsidiaries classified
as held-to-maturity was $7,000,000 ($7,600,000 minus minority interest of
$600,000) at December 31, 1994 as compared with an estimated fair value of
$23,000,000 ($28,000,000 minus minority interest of $5,000,000) at the end of
1993. The decrease is due to: (i) the exercise of Call Rights on ten CMO
Subsidiaries during 1994 for net proceeds of $10,149,000; (ii) the
reclassification of 14 CMO Subsidiaries with a fair value of $7,951,000 at
December 31, 1994, to available-for-sale; (iii) the receipt of $9,198,000 of
cash flows from CMO Subsidiaries during 1994; and (iv) the increase in interest
rates offset by the decrease in projected prepayment speeds during the year.
The net estimated fair value of the company's CMO Residuals and Acquired
CMO Classes classified held-to-maturity at December 31, 1994, was $2,000,000
compared with an estimated fair value of $26,400,000 at December 31, 1993. The
decrease in estimated fair value during 1994 of $24,400,000 is due to: (i) the
exercise of Call Rights on one CMO Residual during 1994 for net proceeds of
$6,072,000; (ii) the sale of seven CMO Residuals and two Acquired CMO Classes
for net proceeds of $904,000; (iii) the reclassification of 14 CMO Residuals
with a fair value of $7,368,000 at December 31, 1994 to available-for-sale; (iv)
the receipt of $10,242,000 of cash flows from CMO Residuals and Acquired CMO
Classes during 1994; and (v) the increase in interest rates offset by the
decrease in projected prepayment speeds during the year.
INVESTMENT COMPANY ACT OF 1940
The company intends to conduct its business operations so as not to become
regulated as an investment company under the 1940 Act. The 1940 Act exempts
entities that, directly or indirectly through majority-owned subsidiaries, are
"primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate" ("Qualifying
Interests"). Under current interpretations by the staff of the Commission, in
order to qualify for this exemption, the company, among other things, must
maintain at least 55% of its assets in Qualifying Interests and may also be
required to maintain an additional 25% in Qualifying Interests or other real
estate-related securities. The assets which the company may acquire, therefore,
may be limited by the provisions of the 1940 Act. In connection with its
acquisition of non-agency MBS bonds, the company has adopted a policy of
obtaining substantial foreclosure rights with respect to the underlying mortgage
loans. As a result of obtaining such rights, the company believes that such MBS
bonds constitute Qualifying Interests for the purpose of the 1940 Act and that
the company should not be required to register as an investment company. If the
Commission or its staff were to take a different position with respect to
whether such MBS bonds constitute Qualifying Interests, the company could be
required either: (i) to change the manner in which it conducts its operations
to avoid being required to register as an investment company; or (ii) to
register as an investment company, either of which could have an adverse effect
on the company and the market prices for the shares of Common Stock.
INTEREST RATES AND MORTGAGE PREPAYMENTS
Inflation primarily affects the company because of the impact inflation may
have on interest rates, which in turn affects the rate of principal payments on
the mortgage loans underlying or comprising the Mortgage Collateral. Principal
payments on mortgage loans are influenced by a variety of economic, geographic,
social and other factors. In general, if prevailing mortgage loan interest
rates fall significantly
-38-
<PAGE>
below the interest rates on the mortgage loans underlying or comprising the
Mortgage Collateral, such Mortgage Collateral is likely to be subject to higher
prepayments. A high level of prepayments would have an adverse effect on the
company's income from CMO Ownership Interests because they reduce the weighted-
average life of the CMO Issuance.
Conversely, high mortgage loan interest rates generally will result in
decreased prepayments which would be expected to have a positive effect on the
company's income. In the case of Variable-Rate CMO Ownership Interests, a
higher prevailing LIBOR will increase interest payments on the related LIBOR
Class and, thus, decrease the company's income from such CMO issuances, while a
lower prevailing LIBOR will decrease interest payments on the related LIBOR
Class and, thus, increase the company's income from such CMO issuances.
Generally, an increasing LIBOR environment would be expected to be accompanied
by higher mortgage loan interest rates, and a decreasing LIBOR environment would
be expected to be accompanied by lower mortgage loan interest rates. In such
case, the effect that increasing LIBOR would have on the company's income from
its CMO Ownership Interests may be offset, to a certain extent, by a decrease in
prepayments on the related Mortgage Collateral and vice versa; however, extreme
increases or decreases in LIBOR generally will affect adversely the company's
income.
The subordinate non-agency MBS bonds owned by the company and the
subordinate CMBS bonds owned by Commercial Assets are generally "locked-out" of
mortgage prepayments in their early years. Also, because these instruments are
purchased at a discount, greater than expected prepayments on the Mortgage
Collateral that are passed on to the company and Commercial Assets (i.e.,
prepayments in the later years of the bond) would generally improve the expected
yields from the non-agency MBS bonds and CMBS bonds.
In addition to the effects interest rates have on the Mortgage Collateral
and LIBOR Classes, large increases in short-term interest rates will result in
higher interest expense on amounts borrowed under the company's bank line of
credit and Repurchase Agreements. Moreover, as LIBOR increases, the value of
the CMO Ownership Interests pledged by the company as collateral for its credit
facilities decreases. Extreme increases in LIBOR can result in "margin calls."
The company may satisfy any such margin call by repaying part or all of the
advances under the bank line of credit and Repurchase Agreements with cash, if
available, or by pledging additional collateral if permitted by the respective
Repurchase Agreement. Alternatively, the company could sell certain of its
assets and use the cash receipts from such sales to satisfy the margin call.
Current interest rates affect the fair value of Mortgage Collateral
securing the company's CMO Ownership Interests, and the potential value of the
Call Rights the company has with certain of its CMO Ownership Interests. When
long-term interest rates are low, the value of the Mortgage Collateral securing
the company's CMO Ownership Interests on which Call Rights are available is
enhanced and the company may have a larger gain from the exercise of the call.
When long-term interest rates are high, the value of the Mortgage Collateral
securing the company's CMO Ownership Interests may decrease to a point that
exercising a Call Right would not be economically feasible.
-39-
<PAGE>
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Consolidated Financial Statements
Independent Auditors' Report----------------------------------------- F-2
Consolidated Balance Sheets as of December 31, 1994 and 1993--------- F-3
Consolidated Statements of Operations for the years ended December 31,
1994, 1993 and 1992------------------------------------------------ F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1993 and 1992------------------------------------------------ F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, 1993 and 1992----------------------------------- F-7
Notes to Consolidated Financial Statements--------------------------- F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareowners
Asset Investors Corporation
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Asset
Investors Corporation and subsidiaries as of December 31, 1994 and 1993, and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements 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 financial position of Asset
Investors Corporation and subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994 in conformity with generally accepted
accounting principles.
As discussed in Note B to the consolidated financial statements, the
company changed its method of accounting for CMO Ownership Interests effective
as of December 31, 1993.
KENNETH LEVENTHAL & COMPANY
Phoenix, Arizona
March 17, 1995
F-2
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1994 1993
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 14,961 $ 7,540
Restricted cash for secured notes payable 15,862 17,062
Non-agency MBS Bonds 32,544 --
Investment in Commercial Assets 21,068 20,625
CMO Residuals and Acquired CMO Classes 9,834 24,660
Other assets, net 2,614 2,121
CMO Subsidiaries
Restricted cash 109,830 135,309
Accrued interest receivable 11,250 18,620
CMO issuance costs, net 586 1,059
Mortgage Collateral, net 932,962 1,676,841
---------- ----------
Total Assets $1,151,511 $1,903,837
---------- ----------
---------- ----------
LIABILITIES
Accounts payable and accrued liabilities $ 2,698 $ 680
Management fees payable 526 143
Short-term borrowings 2,758 4,240
Secured notes payable, recourse to related subsidiary assets only 30,592 42,000
CMO Subsidiaries
Accrued interest payable 17,781 30,575
CMO bonds, net 1,021,188 1,772,890
---------- ----------
Total Liabilities 1,075,543 1,850,528
---------- ----------
CMO Subsidiaries-minority interest 3,003 6,122
---------- ----------
STOCKHOLDERS' EQUITY
Common Stock, par value $.01 per share, 50,000,000 shares
authorized 24,212,002 and 14,080,087 shares issued and
outstanding 242 141
Additional paid-in capital 227,182 209,904
Cumulative dividends (220,984) (216,025)
Cumulative net income 66,525 53,167
---------- ----------
Dividends in excess of net income (154,459) (162,858)
---------- ----------
Total Stockholders' Equity 72,965 47,187
---------- ----------
Total Liabilities and Stockholders' Equity $1,151,511 $1,903,837
---------- ----------
---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Interest
CMO Subsidiaries-Mortgage Collateral, net $119,699 $227,751 $383,719
Acquired CMO Classes, net 110 9,682 5,110
Non-agency MBS bonds 1,531 -- --
CMO Residuals
Income 2,799 8,330 17,583
Write-down (1,510) (9,750) (11,922)
Equity in earnings of Commercial Assets 1,354 -- --
Net gain (loss) on sale of assets 12,646 (5,150) 1,733
Realized holding loss on assets available-for-sale (1,205) -- --
Other income 1,291 1,730 182
-------- -------- --------
Total Revenues 136,715 232,593 396,405
-------- -------- --------
EXPENSES
CMO Subsidiaries
Interest 115,466 244,539 396,745
Provision for reserve -- 5,584 29,464
Administrative Fees 1,429 1,665 1,690
Other 720 1,917 2,427
-------- -------- --------
117,615 253,705 430,326
Management fees 438 592 1,069
General and administrative 1,925 4,581 2,863
Interest 2,872 4,853 2,940
-------- -------- --------
Total Expenses 122,850 263,731 437,198
-------- -------- --------
Income (loss) before minority interest 13,865 (31,138) (40,793)
Minority interest (507) 4,519 8,671
-------- -------- --------
Net income (loss) before cumulative effect of
accounting change 13,358 (26,619) (32,122)
Cumulative effect of accounting change -- (24,399) --
-------- -------- --------
NET INCOME (LOSS) $ 13,358 $(51,018) $(32,122)
-------- -------- --------
-------- -------- --------
Net income (loss) before cumulative effect of
accounting change per share $0.92 $(1.90) $(2.30)
Cumulative effect of accounting change per share -- (1.74) --
-------- -------- --------
NET INCOME (LOSS) PER SHARE $0.92 $(3.64) $(2.30)
-------- -------- --------
-------- -------- --------
Weighted-average shares outstanding 14,548 14,024 13,986
Cash dividends per share $ 0.33 $ 0.25 $ 1.18
Commercial Assets stock dividend per share $ -- $ 3.74 $ --
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 13,358 $ (51,018) $ (32,122)
Cumulative effect of accounting change -- 24,399 --
----------- ----------- -----------
Net income (loss) before cumulative effect of accounting
change 13,358 (26,619) (32,122)
Adjustments to reconcile net income (loss) to net cash
flows from operating activities
Amortization of (discount) premium 247 (522) (308)
Write-down of CMO Residuals 1,510 9,750 11,922
Net (gain) loss on sale of assets (4,477) 6,212 (298)
Realized holding loss on assets available-for-sale 1,205 -- --
Equity in earnings of Commercial Assets (1,354) (187) --
Increase (decrease) in accounts payable and accrued
liabilities 1,845 206 (730)
CMO Subsidiaries
Amortization of discount, net of premium, on
Mortgage Collateral, discount on CMO bonds and
CMO issuance costs 7,738 42,393 58,631
Provision for reserve -- 5,584 29,464
Gain on sale of CMO Subsidiaries (8,169) (1,062) (1,435)
Decrease in accrued interest receivable 7,370 14,639 21,559
Decrease in accrued interest payable (12,794) (22,286) (26,551)
----------- ----------- -----------
Net Cash Provided By Operating Activities 6,479 28,108 60,132
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of non-agency MBS bonds, CMO Residuals,
Acquired CMO Classes and investment in
Commercial Assets (33,624) (4,450) (84,212)
Principal collections on CMO Residuals, Acquired
CMO Classes, non-agency MBS bonds and
other assets 9,843 49,546 39,848
Proceeds from the sale of assets 7,045 24,100 6,023
Decrease (increase) in restricted cash for secured notes
payable and other 1,917 (8,507) (8,362)
CMO Subsidiaries
Principal collections on Mortgage Collateral and
Funding Notes 741,898 1,337,410 1,814,219
Proceeds from sale of Mortgage Collateral 10,149 6,293 52,165
Net decrease (increase) in restricted cash 25,479 98,680 (85,796)
Decrease in minority interest (3,119) (12,764) (23,743)
----------- ----------- -----------
Net Cash Provided By Investing Activities 759,588 1,490,308 1,710,142
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on CMO Subsidiaries-CMO bonds $ (758,738) $(1,397,597) $(1,773,178)
Decrease in short-term borrowings, net (1,482) (32,172) (24,390)
(Decrease) increase in secured notes payable (11,408) (6,000) 48,000
Payments on the Contribution Agreement -- (74,800) --
Dividends paid (4,232) (3,509) (16,503)
Issuance of Common Stock 17,208 -- --
Decrease (increase) in other assets 6 (251) (1,833)
----------- ----------- -----------
Net Cash Used By Financing Activities (758,646) (1,514,329) (1,767,904)
----------- ----------- -----------
CASH AND CASH EQUIVALENTS
Increase 7,421 4,087 2,370
Beginning of year 7,540 3,453 1,083
----------- ----------- -----------
End of year $ 14,961 $ 7,540 $ 3,453
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest expense $ 97,857 $ 183,747 $ 312,975
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Capital contribution to Commercial Assets $ -- $ 74,800 $ --
----------- ----------- -----------
----------- ----------- -----------
Distribution of Commercial Assets common
stock $ -- $ 52,598 $ --
----------- ----------- -----------
----------- ----------- -----------
Increase in CMO bond principal on Compound
Interest Classes $ 25,429 $ 46,944 $ 56,913
----------- ----------- -----------
----------- ----------- -----------
Distribution of Commercial Assets common stock
as DERs $ -- $ 1,771 $ --
----------- ----------- -----------
----------- ----------- -----------
Issuance of Common Stock $ -- $ 996 $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS)
<TABLE>
<CAPTION>
Dividends
Common Stock Additional In Excess Total
--------------- Paid-In of Net Stockholders'
Shares Amount Capital Income Equity
------ ------ --------- --------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES - DECEMBER 31, 1991 13,986 $140 $208,909 $(7,108) $201,941
Net (loss) -- -- -- (32,122) (32,122)
Dividends -- -- -- (16,503) (16,503)
------ ----- --------- --------- ----------
BALANCES - DECEMBER 31, 1992 13,986 140 208,909 (55,733) 153,316
Issuance of Common Stock 94 1 995 -- 996
Net (loss) -- -- -- (51,018) (51,018)
Dividends -- -- -- (56,107) (56,107)
------ ----- --------- --------- ----------
BALANCES - DECEMBER 31, 1993 14,080 141 209,904 (162,858) 47,187
Issuance of Common Stock 10,132 101 17,278 -- 17,379
Net income -- -- -- 13,358 13,358
Dividends -- -- -- (4,959) (4,959)
------ ----- --------- --------- ----------
BALANCES - DECEMBER 31, 1994 24,212 $242 $227,182 $(154,459) $72,965
------ ----- --------- --------- ----------
------ ----- --------- --------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
A. THE COMPANY
Asset Investors Corporation was incorporated under Maryland law on October
14, 1986 by MDC. The company completed its initial public offering of Common
Stock and commenced operations on December 31, 1986. Subsequently, the company
completed its second and third public offerings of Common Stock and the
acquisition of Guild. Asset Investors Corporation Common Stock is listed on the
NYSE under the symbol "AIC."
In the second quarter of 1994, the company began acquiring non-agency MBS
bonds. The company's assets also include shares of common stock of Commercial
Assets, CMO Ownership Interests and, to a lesser extent, other mortgage-related
assets.
Non-agency MBS bonds are issued in residential mortgage loan
securitizations which are collateralized by a specific group of non-conforming
mortgage loans on single-family (one to four-unit) properties from which bond
payments are funded. A non-conforming mortgage loan does not meet agency
guarantee standards. The non-agency MBS bonds acquired by the company to date
generally have been the first loss credit support classes of non-agency, non-
conforming residential mortgage loan securitizations which provide credit
enhancement to the more senior bond classes by incurring all credit losses from
loan defaults resulting in foreclosure sales to the extent of the outstanding
balance of the class. Prepayments of principal on the underlying mortgage loans
generally are allocated to the more senior non-agency MBS bond classes during
the first five years, and sometimes a longer period of time, of a residential
mortgage loan securitization.
The company bears the economic risk of default and foreclosure of the non-
conforming mortgage loans that are the collateral for a non-agency MBS bond,
unlike the pools of agency-guaranteed mortgage loans which are pledged to secure
the CMO bonds related to the company's CMO Ownership Interests. If a borrower
defaults on a non-conforming mortgage loan which is pledged as collateral for a
residential mortgage loan securitization and the proceeds of the foreclosure
sale of the property are less than the unpaid balance of the mortgage and
foreclosure costs, the company, as the holder of the unrated, credit support
class will suffer a loss up to the then outstanding principal balance of such
class. Losses are allocated to, and reduce the principal amount of, the
company's credit support non-agency MBS bonds.
Commercial Assets is a REIT which acquires and manages debt instruments in
commercial real estate securitizations. Commercial securitizations generally
are multi-class issuances of debt which are secured and funded as to the payment
of principal and interest by a specific group of commercial mortgage loans on
multi-family, or other commercial real estate, accounts and other collateral.
CMOs are multi-class issuances of bonds which are secured and funded as to
the payment of interest and repayment of principal by a specific group of
mortgage loans or mortgage-backed certificates and other collateral. The
company's CMO Ownership Interests consist of CMO Subsidiaries and CMO Residuals,
each of which entitles the company to receive its proportionate share of the
difference between: (i) the cash flow from the Collateral pledged to secure the
related CMO bonds together with reinvestment
F-8
<PAGE>
income thereon, if any; and (ii) the amount required for debt service payments
on such CMO bonds together with administrative expenses (such difference is
referred to as "Excess Cash Flow," residual cash flow or the residual).
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NON-AGENCY MBS BONDS - The company's non-agency MBS bonds are acquired at a
significant discount to par value and recorded at cost (outstanding principal
amount, net of unamortized discount and allowance for credit losses). Earnings
from non-agency MBS bonds are recognized based upon estimates of future cash
flows from the bonds which are adjusted periodically for actual payments
received and credit losses allocated and changes of future estimates of
prepayment speeds and credit losses. The company records an allowance for
credit losses when it acquires a non-agency MBS bond using a methodology which
assumes defaults on mortgage loans reach their highest levels during years three
through five. The allowance for credit losses is adjusted for realized credit
losses and changes in estimates of future credit losses.
PRINCIPLES OF CONSOLIDATION - The Consolidated Financial Statements include
the accounts of the company and its wholly-owned corporate subsidiaries, Asset
Mortgage Funding, Asset Funding, Asset Acceptance, Asset Southwest, Asset
Acquisition, Asset Finance, Asset Securitization and each of the company's CMO
Subsidiaries. The portion of the ownership interest of each such CMO Subsidiary
not owned by the company is accounted for as minority interest. The company
owns approximately 27% of the shares of Commercial Assets which is recorded
under the equity method. All significant intercompany balances and transactions
have been eliminated in consolidation.
CMO RESIDUALS AND ACQUIRED CMO CLASSES - CMO Residuals refer to non-equity
CMO Ownership Interests and are recorded at cost, which is amortized over the
expected life of the related CMO issuance using an effective yield as prescribed
under the Prospective Method. Acquired CMO Classes are non-equity CMO bonds
that are accounted for under the Level-Yield Method. Acquired CMO Classes are
recorded at cost (outstanding principal amount, net of unamortized premium or
discount). Effective December 31, 1993, the company adopted FAS 115 (see
Accounting Change below) to evaluate the carrying amount of its CMO Residuals
and Acquired CMO Classes. Previously, the carrying amount of each CMO Residual
was evaluated based on undiscounted projected Excess Cash Flow.
CMO SUBSIDIARIES - CMO Subsidiaries refer to equity CMO Ownership Interests
and are accounted for under the Consolidation Method, which records the gross
amount of the Mortgage Collateral and related assets, CMO bonds and related
liabilities, interest income and interest expense in the Consolidated Financial
Statements. Since July 1988, all of the CMO Ownership Interests acquired by the
company were classified as CMO Residuals and not as CMO Subsidiaries based on
the criteria established by GAAP. Accordingly, the assets, liabilities,
revenues and expenses from CMO Subsidiaries have declined during each subsequent
period. The decline results from mortgage loan repayments during these periods
which decreased the principal balance of the related Mortgage Collateral and CMO
bonds and, as a result, reduced interest income and interest expense. Because
the company does not intend to acquire additional CMO Subsidiaries in the
future, its revenues and expenses from CMO Subsidiaries will continue to
decline.
CMO Subsidiaries-Mortgage Collateral and CMO bonds are carried at cost
(outstanding principal amount, net of unamortized premium or discount).
Premiums and discounts on CMO Subsidiaries-Mortgage Collateral and CMO bonds,
and CMO issuance costs are amortized over the estimated life of the related
Mortgage Collateral, CMO bonds and CMO issuances, respectively, based upon a
method which
F-9
<PAGE>
provides a constant effective yield and assumes an estimated principal
prepayment rate which is adjusted for actual experience.
Effective December 31, 1993, the company adopted FAS 115 (see Accounting
Change below) to evaluate the carrying amount of its CMO Subsidiaries. For this
purpose, the fair value of each CMO Subsidiary will be based on the discounted
present value of the sum of the related projected: (i) Excess Cash Flow; and
(ii) net cash proceeds, if any, resulting from the company's Call Rights.
Previously, the carrying amount of each CMO Subsidiary was evaluated based on
undiscounted projected cash flows.
INCOME TAXES - The company intends to operate in a manner that will permit
it to qualify for the income tax treatment accorded to a REIT. If it so
qualifies, the company's 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 Consolidated Financial Statements.
In order to maintain its status as a REIT, the company is required, among
other things, to distribute annually to its shareowners at least 95% of the
greater of its REIT income or Excess Inclusion income and meet certain asset,
income and stock ownership tests. The company currently intends to distribute
100% of the greater of its REIT income or Excess Inclusion income to its
shareowners within the time limits prescribed by the Code.
NET INCOME (LOSS) PER SHARE - Net income (loss) per share for the years
ended December 31, 1994, 1993 and 1992 was based upon the weighted-average
number of shares of Common Stock outstanding during each such year. The effect
of unexercised stock options was not material with respect to net income per
share in 1994 and was antidilutive with respect to the net loss per share in
1993 and 1992.
STATEMENTS OF CASH FLOWS - For purposes of reporting cash flows, cash
maintained in bank accounts, money market funds and overnight cash investments
are considered to be cash and cash equivalents.
RECLASSIFICATIONS - Certain reclassifications have been made in the 1993
and 1992 Consolidated Financial Statements to conform to the classifications
used in the current year.
ACCOUNTING CHANGE - On December 31, 1993, the company adopted FAS 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. In accordance
with FAS 115, the non-agency MBS bonds and CMO Ownership Interests that the
company has the ability and positive intent to "hold-to-maturity" are reported
at their amortized cost. The CMO Ownership Interests that the company does not
have a positive intent to hold to maturity are classified as available-for-sale
and are reported at their fair value. If the fair value of a CMO Ownership
Interest or non-agency MBS bond which is classified as held-to-maturity or
available-for-sale declined below its amortized cost basis and the decline is
considered to be "other than temporary," the cost basis of the individual asset
must be written down to its fair value as a new cost basis. The amount of the
write-down is reflected in the company's current income (i.e., accounted for as
a realized loss). The decline in fair value is considered to be other than
temporary if the cost basis of the asset exceeds the related projected cash flow
from the CMO Ownership Interest and non-agency MBS bonds discounted at a risk-
free rate of return. Unrealized holding gains and losses, considered to be
temporary, on the company's CMO Ownership Interests that are classified as
available-for-sale are excluded from current income, and are reported as a
separate component of stockholders' equity until realized.
F-10
<PAGE>
When the company adopted FAS 115 on December 31, 1993, the company
classified all of its CMO Ownership Interests as held-to-maturity because the
company had the ability and positive intent to hold these assets to maturity.
Certain of the company's CMO Ownership Interests continued to generate Excess
Inclusion income during 1994. Excess Inclusion income has an adverse effect on
the company's distribution requirements. In order to minimize the adverse
effect caused by Excess Inclusion income, the company intends to dispose of its
assets that generate Excess Inclusion income, thereby, eliminating the Excess
Inclusion income they would generate in the future. Accordingly, the company
reclassified certain assets which generate Excess Inclusion income as available-
for-sale at September 30, 1994. The company reclassified 14 CMO Subsidiaries
and 19 CMO Residuals from held-to-maturity to available-for-sale. The net
carrying value and fair value of the CMO Subsidiaries and CMO Residuals
reclassified to available-for-sale at September 30, 1994, was $22,539,000 and
$21,097,000, respectively, resulting in a $1,442,000 unrealized holding loss
included in stockholders' equity. Subsequently, the company sold in December
1994, five CMO Ownership Interests classified as available-for-sale and has
arranged to sell on March 30, 1995, 28 CMO Ownership Interests classified as
available-for-sale (See Note C). The company continues to have the positive
intent and ability to hold to maturity its remaining CMO Ownership Interests and
non-agency MBS bonds and, accordingly, they continue to be classified as held-
to-maturity.
The write-downs recorded in accordance with FAS 115 significantly reduced
the amortized cost of many of the company's CMO Ownership Interests at December
31, 1993. Faster prepayment speeds and lower estimates of cash flow from Call
Rights may cause the fair value of CMO Ownership Interests to decline further
and may require additional write-downs in the future.
The company recognized a $24,399,000 ($27,186,000 minus minority interest
of $2,787,000) charge to income in 1993 from the cumulative effect on December
31, 1993 of adopting the new standard. Twenty-four of the company's CMO
Subsidiaries were written down $20,393,000 ($23,180,000 minus minority interest
of $2,787,000) and 17 of the company's CMO Residuals were written down
$4,006,000. Prior years' Consolidated Financial Statements were not required to
be restated (see "CMO Residuals and Acquired CMO Classes" and "CMO Subsidiaries"
below).
C. RESTRUCTURING OF ASSETS
During 1994 and 1993, the company restructured its business to focus on
permissible REIT activities in the residential mortgage loan business that do
not generate Excess Inclusion income and that will allow the company to replace
its assets that are extremely sensitive to changes in mortgage interest rates
and prepayments with credit-sensitive assets that should benefit from an
improving economy.
On June 30, 1993, the company sold ten CMO Residuals and ten Acquired CMO
Classes (with a book value of $11,034,000 and $21,240,000, respectively) for a
total of $24,100,000, resulting in a book loss of $8,174,000. These assets were
expected, in the future, to generate Excess Inclusion income in excess of cash
flow and REIT income. The company also sold Oxford Acceptance Corporation III,
Series E ("Oxford") on June 24, 1993 for $5,100,000, resulting in a book gain of
$1,949,000.
In December 1994, Asset Investors completed a Rights Offering of its Common
Stock. Subscriptions for 10,053,794 shares of its Common Stock were received in
the Rights Offering, at a price of $1.90 per share resulting in net proceeds to
the company of $17,208,000. Proceeds from the Rights Offering, along with cash
flow from operations during the year, were used to acquire unrated non-agency
MBS bonds (see Note D).
F-11
<PAGE>
On September 30, 1994, certain CMO Ownership Interests were reclassified
from held-to-maturity to available-for-sale (see Note B - Accounting Change).
At that time, the carrying value of the CMO Ownership Interests was adjusted to
fair value and the net write-down of $1,442,000 was recorded in stockholders'
equity as an unrealized holding loss. In December 1994, the company sold five
CMO Residuals and one Acquired CMO Class classified as available-for-sale,
realizing a $472,000 loss. In March 1995, the company agreed to sell its
remaining CMO Ownership Interests classified as available-for-sale. The sale is
scheduled to close on March 30, 1995. The proceeds from the sale and the
restricted cash for secured notes payable will be used to retire the outstanding
principal balance of the secured notes payable ($30,592,000 at December 31,
1994). Consequently, the company recognized, as of December 31, 1994,
$1,205,000 of net holding losses related to the assets to be sold. Because
substantially all of the cash flow from the pledged collateral is required to
make payments of principal and interest on the notes, the company did not
anticipate that it would receive any cash flow from these assets for at least
five years. The following table presents the unaudited summary consolidated
financial position of the company at December 31, 1994, as if the March 30, 1995
sale of the pledged collateral and retirement of the secured notes payable had
occurred at that date (in thousands):
<TABLE>
<CAPTION>
December 31, 1994
--------------------------
As Reported Pro Forma
----------- ----------
(Unaudited)
<S> <C> <C>
Restricted cash for secured notes payable $ 15,862 $ --
Non-agency MBS bonds 32,544 32,544
Investment in Commercial Assets 21,068 21,068
CMO Residuals and Acquired CMO Classes 9,834 2,466
CMO Subsidiaries-assets 1,054,628 463,801
Other assets 17,575 17,775
----------- ---------
Total Assets $1,151,511 $ 537,654
----------- ---------
----------- ---------
Secured notes payable $ 30,592 $ --
CMO Subsidiaries - liabilities 1,038,969 458,724
Other liabilities 5,982 5,593
----------- ---------
Total Liabilities 1,075,543 464,317
CMO Subsidiaries - minority interest 3,003 372
Stockholders' equity 72,965 72,965
----------- ---------
Total Liabilities and Stockholders' Equity $1,151,511 $ 537,654
----------- ---------
----------- ---------
</TABLE>
F-12
<PAGE>
The following table presents the unaudited summary consolidated results of
operations of the company for the years ended December 31, 1994, 1993 and 1992,
as if the March 30, 1995, sale of the pledged collateral and retirement of the
secured notes payable had occurred at the beginning of these periods (in
thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1994 1993 1992
-------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Revenues $ 65,853 $105,745 $180,192
Net income (loss) before cumulative effect of
accounting change $ 10,176 (17,031) $(20,039)
Cumulative effect of accounting change -- (14,105) --
-------- -------- --------
Net income (loss) $ 10,176 $(31,136) $(20,039)
-------- -------- --------
-------- -------- --------
Net income (loss) per share before cumulative effect of
accounting change $ 0.70 $ (1.21) $ (1.43)
Cumulative effect of accounting change per share -- (1.01) --
-------- -------- --------
Net income (loss) per share $ 0.70 $ (2.22) $ (1.43)
-------- -------- --------
-------- -------- --------
</TABLE>
D. NON-AGENCY MBS BONDS
During 1994, the company acquired 84 non-agency MBS bonds, with an
aggregate outstanding principal balance on the date of acquisition of
$88,942,000 at an aggregate total cost of $33,624,000. The net carrying value
of the company's non-agency MBS bonds was as follows (in thousands):
<TABLE>
<CAPTION>
Outstanding
Balance at
Price(1) Coupon(2) Yield(3) December 31, 1994
------- -------- ------- -----------------
<S> <C> <C> <C> <C>
Non-agency MBS bonds collateralized by:
30-year fixed-rate mortgages 38.1% 6.8% 15.5% $ 56,955
15-year fixed-rate mortgages 39.4 6.4 15.0 12,364
Adjustable-rate mortgages 27.2 5.9 21.8 4,219
Second tier mortgages(4) 49.3 6.1 8.0 14,473
---- --- ---- ---------
40.3% 6.6% 15.0% 88,011
---- --- ----
---- --- ----
Less:
Allowance for credit losses (22,075)
Unamortized discount (33,392)
---------
$ 32,544
---------
---------
<FN>
_________________________
(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 December 31, 1994.
(3) Weighted-average projected yield-to-maturity of non-agency MBS bonds at
December 31, 1994, based on the timing and amount of estimated future
credit losses.
(4) The second tier mortgages are all adjustable-rate mortgages.
</TABLE>
F-13
<PAGE>
The yield on the non-agency MBS bonds acquired by the company will be
extremely sensitive to losses on the mortgage loans that are collateral for the
non-agency MBS bonds. Additionally, the full extent of losses may not be
apparent until later in the life of the non-agency MBS bonds. The company's
subordinate non-agency MBS bonds provide credit support to the more senior bond
classes of the related securitization and are collateralized by mortgage loans
on single-family homes located throughout the country. The mortgage loans that
collateralize the company's non-agency MBS bonds are residential mortgage loans
that for different reasons fail to qualify for or conform to agency mortgage
guarantee or purchase programs. Typically, the mortgage loans exceed agency
size limits (e.g., the current FNMA limit is $203,150) or the borrower does not
meet agency credit underwriting criteria.
Generally, any loss on an individual mortgage loan, which comprises a
portion of the Collateral for all bond classes in a non-agency MBS issuance, is
allocated first to the company up to the amount of outstanding principal balance
of the company's class. The dollar amount of the company's exposure to losses
from any of its non-agency MBS bonds is limited to their carrying amount.
The outstanding principal balance of the mortgage loans that are the
collateral for the company's 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 $16,709,275,000 and $16,621,264,000, respectively, at
December 31, 1994. During 1994, the company: (i) provided an allowance for
credit losses of $22,269,000 at the acquisition of the non-agency MBS bonds;
(ii) recorded no credit losses; and (iii) charged $194,000 of foreclosure losses
against the allowance for credit losses, resulting in a $22,075,000 allowance
for credit losses at December 31, 1994. As of December 31, 1994, there were 29
mortgage loans that collateralize the company's non-agency MBS bonds with an
outstanding principal balance of $9,518,000 that were considered seriously
delinquent (three or more payments late plus loans in foreclosure).
Each non-agency MBS bond issuance is generally secured by 800 to 1,000
mortgage loans on homes located throughout the country. Generally, the mortgage
loan collateral of the company's non-agency MBS bonds is concentrated in areas
of the country with more expensive homes (e.g., California and New York). At
December 31, 1994, approximately 40% of the mortgage loan collateral of the
company's non-agency MBS bonds were located in California. No more than 10% of
the remaining mortgage loan collateral was located in any other individual
state.
The credit support non-agency MBS bonds acquired by the company represent a
small percentage of the total non-agency MBS bonds issued to securitize a pool
of residential mortgage loans. At December 31, 1994, the weighted-average
percentage of credit support non-agency MBS bonds owned by the company to the
total non-agency MBS bonds in the related securitization was 0.59%.
F-14
<PAGE>
E. CMO SUBSIDIARIES
CMO SUBSIDIARIES-MORTGAGE COLLATERAL AND OTHER ASSETS - The weighted-
average coupon and the effective yield (including amortization of discount, net
of premium) on the CMO Subsidiaries-Mortgage Collateral was approximately 9.83%
and 9.87% per annum, respectively, for the year ended December 31, 1994 as
compared to 9.77% and 9.83% per annum, respectively, for the year ended December
31, 1993. Presented below is a schedule of CMO Subsidiaries-Mortgage Collateral
and other assets which secure CMO Subsidiaries-CMO bonds at December 31, 1994
and 1993 (dollar amounts in thousands):
<TABLE>
<CAPTION>
Range of Pass- December 31,
Through Rates (%) -------------------------
at December 31, 1994 1994 1993
-------------------- ---------- ----------
<S> <C> <C> <C>
Mortgage Certificates
GNMA Certificates 9.0-10.5 $ 340,021 $ 671,986
FNMA Certificates 7.8-10.3 180,685 343,337
FHLMC Certificates 8.0-10.3 401,860 639,266
Private Certificates 7.8-10.3 7,287 12,856
Mortgage Loans 8.1-10.5 5,122 10,383
---------- ----------
934,975 1,677,828
Unamortized discount, net of premium (2,013) (987)
---------- ----------
CMO Subsidiaries-Mortgage Collateral, net 932,962 1,676,841
CMO Subsidiaries-Other Assets
Restricted cash 109,830 135,309
Accrued interest receivable 11,250 18,620
CMO issuance costs, net 586 1,059
---------- ----------
$ 1,054,628 $ 1,831,829
---------- ----------
---------- ----------
</TABLE>
During 1994, 1993 and 1992, the company exercised the Call Rights with
respect to certain CMO Subsidiaries recognizing a net gain of $8,169,000,
$1,062,000 and $1,435,000, respectively. The exercise of Call Rights resulted
in the sale of $184,491,000, $22,320,000 and $48,716,000 principal amount of
Mortgage Collateral during 1994, 1993 and 1992, respectively, and the early
redemption of the related CMO Bonds.
Included in restricted cash of December 31, 1994, is $79,658,000 of cash
held by a trustee representing proceeds from the sale of Mortgage Collateral
related to the exercise of Call Rights that have not yet been disbursed to
redeem the related CMO bonds. The CMO bonds with an outstanding principal
balance of $76,019,000 at December 31, 1994, were redeemed at par on January 1
and February 1, 1995.
CMO SUBSIDIARIES-CMO BONDS - The weighted-average coupon and the effective
yield (including amortization of net discount) on the CMO Subsidiaries-CMO bonds
was approximately 8.51% and 9.50% per annum, respectively, for the year ended
December 31, 1994, as compared to 8.33% and 10.72% per annum, respectively, for
the year ended December 31, 1993. Presented below is a schedule of outstanding:
(i) CMO bonds issued by Asset Mortgage Funding and Asset Funding; (ii) CMO bonds
relating to other CMO Subsidiaries; and (iii) multi-participant CMO issuances in
which Asset Acceptance and Asset Southwest participated (to the extent of such
participation) and the related accrued interest payable at December 31, 1994 and
1993, and other information regarding the related CMO issuance.
F-15
<PAGE>
<TABLE>
<CAPTION>
Mortgage Collateral CMO Bonds Principal Balance
Approximate --------------------------------- CMO Bond -----------------------------------
Percentage Pass- Remaining Interest December 31,
(%) of Issue Through Term to Rates (%) ----------------------
Issue Ownership Date Type Rate(%)(1) Maturity(2) at 12/31/94 Original 1994 1993
----------- --------- ------- --------- --------- ---------- ----------- ---------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Asset Mortgage
Funding
1985-A(7). 100.0 1/23/86 FNMA $ 124,583 $ -- $ 12,610
B(7) . . . 100.0 2/26/86 GNMA 100,107 -- 16,015
C(7) . . . 100.0 3/31/86 FNMA 150,064 -- 19,073
D(7) . . . 100.0 4/30/86 GNMA 125,000 -- 36,413
F. . . . . 100.0 6/27/86 FNMA 9.00 16.3 yrs 9.10-9.35 200,000 27,271 45,670
G(7) . . . 100.0 6/30/86 FNMA 9.10 100,000 11,480 20,096
H(9) . . . 100.0 7/30/86 GNMA 9.25 17.8 9.05-9.20 199,067 48,063 73,099
I(7) . . . 100.0 7/29/86 GNMA 9.05-9.50 200,388 44,915 68,422
J(7) . . . 100.0 7/30/86 GNMA 9.35-9.50 100,000 19,623 29,333
K(7) . . . 100.0 8/29/86 GNMA 100,000 -- 31,267
L(7) . . . 100.0 9/29/86 FNMA 150,000 -- 26,543
M. . . . . 100.0 9/29/86 FNMA 9.50 19.3 8.05-9.50 200,066 20,958 38,178
N. . . . . 100.0 9/29/86 FNMA 9.00 20.5 9.00 200,000 24,695 41,981
O. . . . . 100.0 10/30/86 FHLMC 9.00 19.6 8.45-9.00 200,000 21,238 36,679
P. . . . . 100.0 10/30/86 FHLMC 9.50 16.7 8.20-9.50 200,104 26,988 42,230
Q. . . . . 100.0 11/26/86 FHLMC 9.00 19.4 8.85-9.00 250,130 30,259 48,247
---------- --------- ---------
2,599,509 275,490 585,856
---------- --------- ---------
Asset Funding
MIR-6(8) 100.0 7/29/88 FNMA 10.01 21.5 6.39-9.25(3) 275,186 43,840 65,801
MIR-7(7) 100.0 7/28/88 GNMA 21,720 -- 6,969
---------- --------- ---------
296,906 43,840 72,770
---------- --------- ---------
(Continued on the next page)
F-16
<PAGE>
<CAPTION>
Mortgage Collateral CMO Bonds Principal Balance
Approximate ------------------------------------ CMO Bond -----------------------------------
Percentage Pass- Remaining Interest December 31,
(%) of Issue Through Term to Rates (%) -----------------------
Issue Ownership Date Type Rate(%)(1) Maturity(2) at 12/31/94 Original 1994 1993
----------- --------- ------- ----------- ---------- ---------- ----------- -------- --------- ---------
(continued from previous page) (In thousands)
Asset Investors
Trust
I(8) . . . 100.0 4/29/87 FHLMC/FNMA 8.82-8.51 19.6 yrs. 8.00-8.60 $ 300,001 $ 55,232 $ 92,614
II . . . . 100.0 4/30/87 FNMA 7.80 20.8 7.75 300,000 33,365 50,737
IV(8). . . 100.0 6/29/87 GNMA 9.72 20.8 9.80-9.90 294,843 65,177 104,685
V(8) . . . 100.0 7/29/87 GNMA 10.00 20.7 9.33-9.83 250,000 50,278 76,235
VII(8) . . 50.0 8/28/87 FHLMC 9.49 20.5 7.01-9.00(3) 345,678 40,861 68,142
VIII(8). . 50.0 9/29/87 GNMA 10.00 20.1 6.90-7.75(3) 299,999 56,605 87,662
IX(8). . . 50.0 9/29/87 FHLMC 9.50 19.5 6.75-9.25 275,000 33,727 56,377
X(8) . . . 50.0 9/29/87 FHLMC 9.50 19.6 6.26-9.45(3) 300,150 41,350 68,003
XI(8). . . 100.0 10/30/87 FHLMC 10.01 20.3 6.84-7.00(3) 275,137 37,541 58,946
XII. . . . 100.0 2/29/88 GNMA 9.00 21.3 8.47-8.94 200,000 64,015 92,307
XIV. . . . 51.0 4/28/88 FHLMC 10.01 20.2 6.26-9.45(3) 299,999 42,918 66,312
XV . . . . 100.0 4/27/88 FHLMC 10.00 21.0 7.50-8.75 220,000 29,503 46,970
--------- --------- ---------
3,360,807 550,572 868,990
--------- --------- ---------
(continued on the next page)
F-17
<PAGE>
<CAPTION>
Approximate Mortgage Collateral CMO Bond
----------------------------------
Percentage Pass- Remaining Interest CMO Bonds Principal Balance
-----------------------------------
(%) of Issue Through Term to Rates (%) December 31,
-----------------------
Issue Ownership Date Type Rate(%)(1) Maturity(2) at 12/31/94 Original 1994 1993
----------- --------- ------- ---------- ---------- ---------- ----------- -------- --------- ---------
(continued from previous page) (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sears Mortgage
Funding Trust
1987-1(8). . . . 100.0 7/15/87 (4) 8.86 18.3 9.00 $ 84,498 $ 7,810 $ 14,929
Bear Stearns
Secured Investors
Trust 1987-2(8). 50.0 9/24/87 FHLMC 10.00 19.3 6.93-9.95(3) 200,000 26,200 41,774
Mortgage Capital
Trust III, Series
A(8) . . . . . . 50.0 9/29/87 FHLMC 10.00 18.6 6.83-9.50(3) 150,050 19,492 32,663
Morgan Stanley
Mortgage Trust
Series P(8). . . 50.0 10/30/87 FHLMC 10.00 20.5 6.74-9.80(3) 300,137 36,936 61,060
Thrift Financing
Corporation
Series D(8). . . 100.0 10/30/87 GNMA 9.99 20.6 5.78-9.75(3) 300,500 62,211 97,485
---------- --------- ----------
1,035,185 152,649 247,911
---------- --------- ----------
Subtotal CMO Subsidiaries 7,292,407 1,022,551 1,775,527
---------- --------- ----------
(continued on the next page)
F-18
<PAGE>
<CAPTION>
Approximate Mortgage Collateral CMO Bond
----------------------------------
Percentage Pass- Remaining Interest CMO Bonds Principal Balance
-----------------------------------
(%) of Issue Through Term to Rates (%) December 31,
-----------------------
Issue Ownership Date Type Rate(%)(1) Maturity(2) at 12/31/94 Original 1994 1993
----------- --------- ------- ---------- ---------- ---------- ----------- -------- --------- ---------
(continued from previous page) (In thousands)
MULTI-PARTICIPANT CMOS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Asset Acceptance
Ryland 34. . . 17.0 2/26/87 (5) (6) (6) 8.63-8.85 $ 22,145 $ 2,273 $ 4,549
Ryland 54. . . 18.0 10/29/87 (5) (6) (6) 10.00 12,192 1,269 2,866
Ryland 56. . . 13.0 12/22/87 (5) (6) (6) 9.50 6,768 569 1,020
Asset Southwest
ASFC-44. . . . 12.0 3/26/87 (5) (6) (6) 8.90 10,748 979 2,418
---------- --------- ---------
Subtotal Multi-Participant CMOs 51,853 5,090 10,853
---------- --------- ---------
Total CMO Subsidiaries 7,344,260 1,027,641 1,786,380
Unamortized discount (210,091) (60,390) (71,499)
Reserve -- 53,937 58,009
---------- --------- ---------
CMO Subsidiaries-CMO bonds, net 1,021,188 1,772,890
Accrued interest payable 17,781 30,575
---------- --------- ---------
$7,134,169 $1,038,969 $1,803,465
---------- --------- ---------
---------- --------- ---------
<FN>
________________________
(1) Weighted-average collateral pass-through rate at December 31, 1994.
(2) Weighted-average years at December 31, 1994.
(3) Includes one or more LIBOR Classes.
(4) Private Certificates.
(5) Mortgage Loans.
(6) Not readily ascertainable.
(7) This CMO bond was called and redeemed in 1994.
(8) This CMO bond was arranged to be sold on March 30, 1995 (see Note C).
(9) This CMO bond was called and redeemed in 1995.
</TABLE>
F-19
<PAGE>
The CMO bonds included in each CMO issuance in which the company has a CMO
Ownership Interest were rated, both at the time of their issuance and as of
December 31, 1994, "AAA" except for CMO bonds issued by FNMA and FHLMC which are
not required to be rated. The CMO bonds included in the CMOs issued by FNMA and
FHLMC are guaranteed by FNMA and FHLMC, respectively, and, accordingly, are
considered to have the same level of safety as those CMO bonds which are rated
"AAA." Each of the CMO issuances in which the company has a CMO Ownership
Interest consists of one or more CMO Classes and was issued pursuant to an
Indenture between the CMO issuer and a specified trustee. Substantially all of
the company's CMO Ownership Interests which generate reinvestment income have
guaranteed investment contracts pursuant to which cash flows from the Collateral
are reinvested at a specified fixed rate or variable rate until the next payment
date of such CMO issuance.
Each such CMO issuance is structured so that the cash flow from the CMO
Subsidiaries-Mortgage Collateral together with reinvestment income thereon, if
any, will be sufficient, irrespective of the rate of prepayments on the related
CMO Subsidiaries-Mortgage Collateral and, for CMO issuances that include LIBOR
Classes, irrespective of changes in LIBOR, to make timely payments of interest
on the related CMO Subsidiaries-CMO bonds, to begin the payment of principal on
each CMO Class not later than its "first mandatory principal payment date" and
to retire each CMO Class not later than its "stated maturity." The cash flow
from the CMO Subsidiaries-Mortgage Collateral relating to each CMO issuance and
the reinvestment income thereon are held by a trustee prior to making the
distributions required by the related Indenture and are recorded in the
Consolidated Balance Sheets as restricted cash. The portion of restricted cash
remaining after making such distributions is remitted to the company as Excess
Cash Flow.
Interest on the CMO Subsidiaries-CMO bonds is payable on specified payment
dates (quarterly or monthly), except with respect to Compound Interest Classes
on which interest accrues and is added to the principal amount thereof on each
payment date until the conditions set forth in the related Indenture have been
satisfied, and with respect to PO Classes which do not bear interest. Each
other CMO Class provides for payment of interest at a fixed or variable rate for
the life of such CMO Class. The interest rate on LIBOR Classes is adjusted
quarterly or monthly based on specified margins in relation to LIBOR.
Principal payments on the CMO Subsidiaries-CMO bonds are made on specified
payment dates (quarterly or monthly), in each case, in accordance with the terms
of the related Indenture. Generally, payments of principal are allocated to the
earlier maturing CMO Classes until such CMO Classes are paid in full. However,
payments of principal on certain CMO Classes are made pursuant to a specified
repayment schedule or formula (to the extent funds are available therefore),
regardless of which other CMO Classes are outstanding. Each CMO issuance is,
and certain CMO Classes are, subject to redemption prior to stated maturity at
the option of the issuer thereof.
The company evaluates the carrying amount of its CMO Subsidiaries quarterly
and records a provision for reserve related to its CMO Subsidiaries in
accordance with its accounting policies. No provision for reserves was required
during 1994. However, due to the significant adverse effect on the projected
Excess Cash Flow from the Company's CMO Subsidiaries, caused primarily by high
levels of prepayments during 1993 and 1992, the company recorded a provision for
reserve for eight of its CMO Subsidiaries in the amount of $4,272,000
($5,584,000 minus minority interest of $1,312,000) in 1993 and for 17 of its CMO
Subsidiaries in the amount of $23,994,000 ($29,464,000 minus minority interest
of $5,470,000) in 1992. During 1994, the company reclassified a substantial
portion of its CMO Subsidiaries from held-to-maturity to available-for-sale (see
Note C).
In connection with the adoption of FAS 115 on December 31, 1993, the
company recorded an additional provision for reserve of $20,393,000 ($23,180,000
minus minority interest of $2,787,000) to the
F-20
<PAGE>
carrying amount of its CMO Subsidiaries. The provision for reserve results in a
permanent reduction in the carrying amount of a CMO Subsidiary which cannot be
reversed in the event prepayment speeds slow down. However, faster prepayment
speeds and lower estimates of cash flow from Call Rights would cause the fair
value of CMO Subsidiaries to decrease further and may require the company to
increase the provision for reserve in the future.
The provision for reserve has no effect on: (i) the calculation of the
company's REIT income, Excess Inclusion income and distributions requirements;
(ii) the principal and interest the company receives on its CMO Subsidiaries-
Mortgage Collateral, substantially all of which is guaranteed by the GNMA, FNMA
or FHLMC; and (iii) the company's ability to make all interest and principal
payments on its CMO Subsidiaries-CMO bonds. The provision for reserve primarily
results from the unamortized discount related to the company's CMO Subsidiaries-
CMO bonds.
Since July 1988, all of the CMO Ownership Interests acquired by the company
were classified either as CMO Residuals of Acquired CMO Classes and not as CMO
Subsidiaries based on the criteria established by GAAP. Accordingly, the
outstanding principal balance of CMO Subsidiaries-Mortgage Collateral and CMO
Subsidiaries-CMO bonds has decreased during the past five years (and will
continue to decrease in the future because the company does not anticipate
acquiring additional CMO Subsidiaries) as the mortgage loans underlying the CMO
Subsidiaries-Mortgage Collateral are paid off.
F. CMO RESIDUALS AND ACQUIRED CMO CLASSES
The company's CMO Residuals had an unamortized cost of $9,561,000 and
$23,233,000 and its Acquired CMO Classes had an unamortized cost of $273,000 and
$1,427,000 at December 31, 1994 and 1993, respectively. Many of these CMO
Residuals and Acquired CMO Classes are at, or are nearing, the end of their
economic lives. Accordingly, the company does not anticipate that these assets
will generate significant amounts of income in the future.
During 1994, actual mortgage loan prepayments on the Mortgage Collateral
underlying certain of the company's CMO Residuals were higher than the dealer-
estimated prepayment rates at December 31, 1993. Accordingly, the projected
future Excess Cash Flow from the company's CMO Residuals decreased. This
required the company to record write-downs totaling $1,510,000 on eight of its
CMO Residuals during the year ended December 31, 1994. The write-downs and
realized holding losses, which are required under GAAP, do not affect the
company's REIT income and Excess Inclusion income. During 1994, the company
reclassified a substantial portion of its CMO Residuals from held-to-maturity to
available-for-sale (see Note C).
The Mortgage Collateral underlying the company's CMO Residuals experienced
extremely high levels of prepayments during 1993. This resulted in, among other
things, significantly lower projections of Excess Cash Flow from the related CMO
Residuals. As a result, under the Prospective Method, the company recorded
write-downs on 28 CMO Residuals totaling $9,750,000 in 1993 as compared to
write-downs on 30 CMO Residuals totaling $11,922,000 in 1992.
In connection with the adoption of FAS 115 on December 31, 1993, the
company recognized an additional $4,006,000 write-down to the carrying amount of
its CMO Residuals.
F-21
<PAGE>
G. INVESTMENT IN COMMERCIAL ASSETS
In August 1993, the company formed a new publicly held REIT, Commercial
Assets, which acquires and manages debt instruments in subordinate credit
support classes of commercial real estate securitizations. Commercial
securitizations generally are multi-class issuances of securities which are
secured and funded as to the payment of principal and interest by a specific
group of commercial mortgage loans on multi-family or other commercial real
estate, accounts and other collateral. The company contributed approximately
$200,000 to the capital of the new company for 100% of the shares of Commercial
Assets. Subsequently, the company entered into a Contribution Agreement with
Commercial Assets, pursuant to which the company, among other things: (i)
distributed on October 12, 1993, 7,040,043 shares of the Commercial Assets
common stock to the Asset Investors shareowners, the balance of the Commercial
Assets shares were retained by the company; and (ii) contributed $74,800,000 to
the capital of Commercial Assets by December 31, 1993. The company paid
$791,000 in interest to Commercial Assets related to the Contribution Agreement.
The Commercial Assets shares were distributed to Asset Investors'
shareowners of record on October 1, 1993 as a taxable dividend. The
distribution, among other things, satisfied substantially all of the company's
REIT distribution requirements and had a value of $52,598,000, on a fully-
distributed basis, as of the Distribution Date. The company incurred $1,098,000
of costs in connection with the distribution which is included in general and
administrative expenses in 1993.
On October 29, 1993, the company distributed to the holders of its stock
options 237,393 shares of Commercial Assets common stock pursuant to previously
accrued DERs. On 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 (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------
1994 1993
--------- ----------
<S> <C> <C>
BALANCE SHEET
CMBS bonds $ 74,046 $ 8,723
Cash and cash equivalents 12,367 66,302
Other assets 1,191 191
--------- ---------
Total assets 87,604 75,216
--------- ---------
Short-term borrowings 10,295 --
Other liabilities 2,637 240
--------- ---------
Total liabilities 12,932 240
--------- ---------
Stockholders' equity $ 74,672 $ 74,976
--------- ---------
--------- ---------
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended October 12, 1993(1) to
December 31, 1994 December 31, 1993
----------------- -----------------
<S> <C> <C>
STATEMENTS OF INCOME
CMBS bonds $5,938 $ 125
Other revenues 1,126 869
------ -----
Total revenues 7,064 994
------ -----
Management fees 598 6
General and administrative expenses 1,220 309
Interest on borrowings 319 --
------ -----
Total expenses 2,137 315
------ -----
Net income $4,927 $ 679
------ -----
------ -----
<FN>
__________________
(1) Date operations commenced.
</TABLE>
Both the company and Commercial Assets have, under the terms of the
Contribution Agreement, among other things, agreed that: (i) neither shall
assume any liability or obligation of the other; (ii) each party shall indemnify
the other against any such liability or obligation; and (iii) Commercial Assets
will not acquire interests in single-family (one- to four-unit) securitizations
and that the company will not acquire interests in commercial securitizations,
including commercial securitizations secured by multi-family residential
properties.
In connection with the Distribution, the company and Commercial Assets
entered into a Registration Rights Agreement which, among other things, provides
that upon the request of the company, Commercial Assets will use its best
efforts to register under the Securities Act of 1933 any of the shares of
Commercial Assets common stock currently held or hereafter acquired by the
company for sale in accordance with Commercial Assets intended method of
disposition thereof, and will take such other actions necessary to permit the
sale thereof in other jurisdictions. The company has the right to request three
such registrations. Each of Commercial Assets and the company has agreed to pay
one-half of all costs and the right, which it may exercise at any time and from
time to time in the future, to include the shares of Commercial Assets common
stock held by it in certain other registrations or securities initiated by
Commercial Assets on its own behalf or on behalf of its shareowners. The rights
of the company under the Registration Rights Agreement are, under certain
circumstances, transferable by the company.
H. SHORT-TERM BORROWINGS
The company borrows funds through Repurchase Agreements collateralized by
certain non-agency MBS bonds. The collateral value and interest rate related to
each Repurchase Agreement are subject to periodic adjustment. As of December
31, 1994, borrowings under the Repurchase Agreement had an original maturity of
30 days, an aggregate outstanding principal balance of $658,000 and an effective
interest rate of 7.38% per annum.
On June 30, 1994, the company entered into a $10,000,000 six-month credit
facility. On September 8, 1994, the company entered into an additional
$10,000,000 one-year credit facility with another lender. Both credit
facilities are secured by certain non-agency MBS bonds. At December 31, 1994,
the company was able to borrow $3,089,000 under these credit facilities, based
on the value of the
F-23
<PAGE>
pledged collateral. The credit facilities are also subject to certain financial
covenants, which the company was in compliance with, and bear interest, payable
monthly, based on one-month LIBOR. The collateral value and interest rate are
subject to periodic adjustment. At December 31, 1994, $2,100,000 was borrowed
under the September 8, 1994 credit facility at an effective interest rate of
7.49%.
With the consent of the lender, the company terminated its $5,000,000 line
of credit with a bank in February 1994. All of the pledged collateral was
returned to the company.
I. SECURED NOTES PAYABLE
On December 30, 1992, a wholly-owned subsidiary of the company, Asset
Securitization, sold $48,000,000 of secured notes, due May 20, 2004, under an
indenture with two institutional investors. Except with respect to the pledged
collateral, the notes are non-recourse to the company. The notes bear interest
at 7.70% per annum which, along with scheduled principal payments, is payable
quarterly.
The notes are collateralized by, among other things, CMO Ownership
Interests which had (i) an aggregate net carrying amount of $15,202,000 and
$31,061,000 at December 31, 1994 and 1993, respectively; and (ii) funds held by
the trustee for the notes (recorded as restricted cash for secured notes payable
in the Consolidated Financial Statements) including a $15,862,000 reserve fund
as of December 31, 1994. The reserve fund will be used to make, among other
things, scheduled principal and interest payments on the notes under certain
circumstances as required by the indenture. The portion of the cash flow
collected by the trustee that is not required to make principal and interest
payments on the notes, pay expenses or fund the reserve fund is remitted to
Asset Securitization.
The company intends to retire the secured notes payable in 1995 (see Note
C).
J. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each type of financial instrument. The estimates of fair value have been
determined by the company using available market information and valuation
methodologies. Considerable judgment was required to interpret the market
information and develop the estimates of fair value. THE ESTIMATES OF FAIR
VALUE PRESENTED HEREIN ARE NOT NECESSARILY INDICATIVE OF THE AMOUNTS THE COMPANY
COULD REALIZE IN A CURRENT MARKET EXCHANGE. THE USE OF DIFFERENT MARKET
ASSUMPTIONS AND/OR VALUATION METHODOLOGIES MAY HAVE A MATERIAL EFFECT ON THE
ESTIMATES OF FAIR VALUE. THE FAIR VALUE ESTIMATES PRESENTED HEREIN ARE BASED ON
PERTINENT INFORMATION AVAILABLE TO MANAGEMENT AS OF DECEMBER 31, 1994. FUTURE
ESTIMATES OF FAIR VALUE MAY DIFFER SIGNIFICANTLY FROM THE AMOUNTS PRESENTED
HEREIN.
- CASH AND CASH EQUIVALENTS, RESTRICTED CASH FOR SECURED NOTES PAYABLE,
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES, MANAGEMENT FEES PAYABLE AND
SHORT-TERM BORROWINGS - the carrying amounts approximate fair value
because of the short maturity of these instruments.
- NON-AGENCY MBS BONDS - there is no exchange or other active market
from which to obtain a quoted market price for these financial
instruments. The estimate of fair value was determined
F-24
<PAGE>
by multiplying the outstanding principal balance at December 31, 1994
by current prices of non-agency MBS bonds with similar
characteristics.
- INVESTMENT IN COMMERCIAL ASSETS - the fair value was determined based
upon the closing price of the Commercial Assets common stock as of the
end of 1994.
- CMO RESIDUALS AND ACQUIRED CMO CLASSES - there is no exchange or other
active market from which to obtain a quoted market price for these
financial instruments. Instead, the estimate of fair value was
determined by calculating the present value of the projected Excess
Cash Flow discounted at interest rates ranging from 10% to 45%. The
discount rate, prepayment rates and LIBOR assumptions were based upon
current market information.
- CMO SUBSIDIARIES - there is no exchange or other active market from
which to obtain a quoted market price for these financial instruments.
The estimate of fair value of the CMO Subsidiaries-assets was
determined by adding: (i) the present value of the projected Excess
Cash Flow (including the projected cash flow from Call Rights
discounted based on the estimated term to the call date) discounted at
bond equivalent rates ranging from 10% to 45% from the company's CMO
Subsidiaries; and (ii) the estimate of fair value of the CMO
Subsidiaries-liabilities. The discount rate, prepayment rate and
LIBOR assumptions were based upon current market information. The
estimate of fair value of the CMO Subsidiaries-liabilities was assumed
to be equal to the outstanding principal balance of the related CMO
bonds plus accrued interest. The quoted market values of the mortgage
instruments similar to those underlying the company's CMO
Subsidiaries-assets and liabilities have not been used (except to
estimate the projected cash flow from Call Rights) for this
presentation of fair value because, under the terms of each respective
Indenture relating to the company's CMO Subsidiaries, the CMO
Subsidiaries-assets are held by a trustee as security for the CMO
Subsidiaries-liabilities, and thus, cannot be sold.
- CMO OWNERSHIP INTERESTS COLLATERALIZING THE SECURED NOTES PAYABLE -
the company arranged to sell the CMO Ownership Interests that are
pledged as collateral to the secured notes payable on March 30, 1995
(see Note C). The fair value of the CMO Residuals and CMO
Subsidiaries pledged as Collateral to the secured notes payable has
been derived based upon the actual net proceeds from the sale.
- SECURED NOTES PAYABLE - the estimate of fair value was estimated based
upon the expected repayment amount in 1995, at its outstanding
principal balance.
F-25
<PAGE>
The carrying amounts and fair values of certain of the company's financial
instruments at December 31, 1994 and 1993, are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
---------------------- -----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Non-agency MBS bonds $ 32,544 $ 32,544 $ -- $ --
--------- --------- --------- ---------
--------- --------- --------- ---------
Investment in Commercial Assets $ 21,068 $ 15,876 $ 20,625 $ 17,257
--------- --------- --------- ---------
--------- --------- --------- ---------
CMO Residuals and Acquired CMO
Classes
Available-for-sale $ 7,368 $ 7,368 $ -- $ --
Held-to-maturity 2,466 2,000 24,660 26,400
--------- --------- --------- ---------
$ 9,834 $ 9,368 $ 24,660 $ 26,400
--------- --------- --------- ---------
--------- --------- --------- ---------
CMO Subsidiaries
Available-for-sale
Assets $ 590,827 $ 590,827 $ -- $ --
Liabilities (580,245) (580,245) -- --
Minority interest (2,631) 7,951 -- --
--------- --------- --------- ---------
7,951 7,951 -- --
--------- --------- --------- ---------
Held-to-maturity
Assets 463,801 466,324 1,831,829 1,845,000
Liabilities (458,724) (458,724) (1,803,465) (1,817,000)
Minority interest (372) (600) (6,122) (5,000)
--------- --------- --------- ---------
4,705 7,000 22,242 23,000
--------- --------- --------- ---------
$ 12,656 $ 14,951 $ 22,242 $ 23,000
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
K. COMMON STOCK
On December 16, 1994, the company sold 10,053,794 shares of Common Stock
pursuant to the Rights Offering, at a price to the public of $1.90 per share,
resulting in net proceeds to the company of $17,208,000. On December 31, 1994
and 1993, the shares of Common Stock owned by MDC represented approximately 1.3%
and 1.1% , respectively, of the outstanding shares of Common Stock.
L. STOCK OPTION PLAN
The company has a Stock Option Plan for the issuance of non-qualified stock
options to its directors, officers and key personnel of the Manager which, as of
January 1, 1995 and 1994, permitted the issuance of up to an aggregate of
1,319,970 and 749,387 shares of Common Stock, 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 grant. Under the Stock Option Plan,
unexercised stock options accrue DERs based on: (i) the number of shares
covered by the option; (ii) the amount of the dividend; and (iii) the stock
price on the dividend record date. Each of the stock options granted to date
expire five years from the date of grant.
F-26
<PAGE>
Presented below is a summary of the changes in stock options for the three
years ended December 31, 1994:
<TABLE>
<CAPTION>
Average
Option
Price Shares
-------- -------
<S> <C> <C>
OUTSTANDING-DECEMBER 31, 1991 $ 11.93 306,500
Granted 12.50 25,000
Exercised -- --
Canceled -- --
-------- -------
OUTSTANDING-DECEMBER 31, 1992 11.98 331,500
Granted 4.75 143,286
Exercised -- --
Canceled 8.95 (81,169)
-------- -------
OUTSTANDING-DECEMBER 31, 1993 9.97 393,617
Granted 2.44 188,750
Exercised -- --
Canceled 7.05 (33,723)
Issued in connection with the Rights Offering -- 388,993
-------- -------
OUTSTANDING-DECEMBER 31, 1994 $ 4.42 937,637
-------- -------
-------- -------
</TABLE>
As of December 31, 1994, options to acquire 937,637 shares of Common Stock
were exercisable. During 1994 and 1993, the company recognized expense of
$180,000 and $100,000, respectively, associated with the accrual of DERs
covering 82,627 and 27,430 shares of Common Stock, respectively. 67,624 shares
of Common Stock were distributed in 1994 with respect to DERs. In connection
with the distribution of Commercial Assets common stock in 1993, the company
recognized $1,771,000 in expense related to the accrual of DERs covering 237,393
shares of common stock of Commercial Assets.
M. OTHER MATTERS
The company has entered into a series of management agreements with the
Manager through December 31, 1995. Pursuant to the Management Agreement, the
Manager advises the company on its business and oversees its day-to-day
operations subject to the supervision of the company's Board of Directors, the
majority of whom are Independent Directors. During the years ended December 31,
1994, 1993 and 1992, the company incurred management fees of $372,000, $592,000
and $1,069,000, respectively. 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 years ended December 31, 1994, 1993 and
1992 were $1,440,000, $1,582,000 and $1,565,000, respectively.
In December 1986, the company entered into a participation agreement (the
"CMO Participation Agreement") which provides that during the time the Manager
serves as advisor to the company, if either MDC, the company or their respective
affiliates propose to issue a CMO or are presented with an opportunity to
acquire a CMO instrument, MDC or the company is required to offer the other the
opportunity to participate in such transaction on an equal basis. In the event
of such participation, the
F-27
<PAGE>
company and MDC each will be responsible for their proportionate share of the
issuance or acquisition cost and the administration costs of the related CMO
issuance and will be entitled to receive their proportionate share, if any, of
cash flow and income therefrom.
The company's Certificate of Incorporation permits the Board of Directors
to issue additional classes of stock without further shareowner approval. As of
December 31, 1994, the company has not issued any classes of stock other than
its Common Stock.
The officers and certain directors of the company also serve as officers,
directors or both of Commercial Assets, MDC and certain of MDC's affiliates,
including the Manager.
During 1994, 1993 and 1992, 100%, 100% and 75%, respectively, of the
dividends distributed to the company's shareowners were Excess Inclusion income.
Excess Inclusion income results from holding residual interests in REMICs.
Excess Inclusion income may not be reduced by any expenses or deductions,
including normal operating expenses, losses from the company's CMO Ownership
Interests and NOLs. Dividends paid to shareowners of the company will be
characterized as Excess Inclusion income to the extent that such dividends are
attributable to Excess Inclusion income realized by the company. Distributions
of Excess Inclusion income are taxable as ordinary income to shareowners.
The company has an NOL carryover of approximately $100,000,000 at December
31, 1994, 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 December 31, 1994, the company
also has a capital loss carryover of approximately $11,000,000, which expire in
1998.
F-28
<PAGE>
N. ADDITIONAL FINANCIAL INFORMATION
Presented below is certain financial information about the company on a
condensed partially unconsolidated basis (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1993
--------- ---------
<S> <C> <C>
BALANCE SHEETS
Non-agency MBS bonds $ 32,544 $ --
Investment in Commercial Assets 21,068 20,625
CMO Subsidiaries 12,656 22,242
CMO Residuals and Acquired CMO Classes 9,834 24,660
Other assets 33,437 26,723
--------- ---------
Total Assets 109,539 94,250
--------- ---------
Secured notes payable 30,592 42,000
Other liabilities 5,982 5,063
--------- ---------
Total Liabilities 36,574 47,063
--------- ---------
--------- ---------
Stockholders' Equity $ 72,965 $ 47,187
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
Non-agency MBS bonds $ 1,531 $ -- $ --
Equity in earnings of Commercial Assets 1,354 -- --
CMO Subsidiaries 1,577 (17,125) (13,942)
CMO Subsidiaries - reserve -- (4,272) (23,994)
CMO Residuals 2,799 8,330 17,583
CMO Residuals - write-downs (1,510) (9,750) (11,922)
Acquired CMO Classes 110 9,682 5,110
Net gain (loss) on sale of assets 12,646 (5,150) 1,733
Other 86 1,692 182
-------- -------- --------
Total Revenues 18,593 (16,593) (25,250)
-------- -------- --------
Management fees 438 592 1,069
General and administrative 1,925 4,581 2,863
Interest on borrowings 2,872 4,853 2,940
-------- -------- --------
Total Expenses 5,235 10,026 6,872
-------- -------- --------
Net income (loss) before cumulative effect of
accounting change 13,358 (26,619) (32,122)
Cumulative effect of accounting change -- (24,399) --
-------- -------- --------
Net income (loss) $ 13,358 $(51,018) $ (32,122)
-------- -------- --------
-------- -------- --------
</TABLE>
F-29
<PAGE>
O. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Presented below is selected quarterly financial data for the years ended
December 31, 1994 and 1993 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------
December 31, September 30, June 30, March 31,
---------------------------------------------------------
<S> <C> <C> <C> <C>
1994
-------------------------------------------------------------------------------------------
Revenues $ 29,616 $ 29,243 $ 33,355 $ 44,501
Provision for reserves and
write-downs -- (644) (866) --
Net income 3,669 1,344 1,830 6,515
Net income per share .23 .10 .13 .46
Dividends per share .14(4) .07 .07 .05
Closing stock prices(2)
High 2-3/4 2-7/8 3-3/8 2-1/2
Low 1-3/4 2-1/2 2 1-7/8
Common Stock outstanding(3) 15,885 14,111 14,100 14,080
1993
-------------------------------------------------------------------------------------------
Revenues $ 46,524 $ 52,133 $ 60,981 $ 72,955
Provision for reserves and
write-downs (295) (2,949) (3,766) (7,012)
Net loss before cumulative
effect of accounting change (5,370) (8,314) (6,449) (6,486)
Cumulative effect of accounting
change (24,399) -- -- --
Net loss (29,769) (8,314) (6,449) (6,486)
Net loss per share before
cumulative effect of
accounting change (.39) (.59) (.46) (.46)
Cumulative effect of accounting
change per share (1.74) -- -- --
Net loss per share (2.13) (.59) (.46) (.46)
Dividends per share 3.79(1) .10 .10 --
Stock prices(2)
High 5-5/8 5-3/8 6-1/2 7-7/8
Low 1-3/4 3-3/4 4-1/8 5-1/2
Common Stock outstanding(3) 14,080 14,080 13,986 13,986
<FN>
________________________
(1) Includes the distribution of stock of Commercial Assets valued at $3.74 per
share and a cash dividend of $.05 per share.
(2) As reported on the NYSE Composite Tape.
(3) For the period indicated.
(4) Consisted of a regular dividend of eight cents per share and two special
dividends of three cents per share each.
</TABLE>
F-30
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required to be set forth hereunder has been omitted and will be
incorporated by reference, when filed, to the company's Proxy Statement for its
1995 Annual Meeting of Shareowners.
ITEM 11. EXECUTIVE COMPENSATION
Information required to be set forth hereunder has been omitted and will be
incorporated by reference, when filed, to the company's Proxy Statement for its
1995 Annual Meeting of Shareowners.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required to be set forth hereunder has been omitted and will be
incorporated by reference, when filed, to the company's Proxy Statement for its
1995 Annual Meeting of Shareowners.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required to be set forth hereunder has been omitted and will be
incorporated by reference, when filed, to the company's Proxy Statement for its
1995 Annual Meeting of Shareowners.
-40-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
1. The following Consolidated Financial Statements of the company are
included in Part II, Item 8 of this Annual Report on Form 10-K:
PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1994 and 1993 F-3
Consolidated Statements of Operations for the years ended December 31,
1994, 1993 and 1992 F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1993 and 1992 F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, 1993 and 1992 F-7
Notes to Consolidated Financial Statements F-8
2. Schedule to Consolidated Financial Statements:
All financial statement schedules have been omitted because they are
inapplicable or the information is provided in the company's Consolidated
Financial Statements and notes thereto, included in Part II, Item 8, of
this Annual Report on Form 10-K.
3. Exhibits:
Exhibit
No. Description
3.1 Certificate of Incorporation of Asset Investors Corporation
(the "Registrant"), as amended (incorporated herein by
reference to Exhibit 3.1(b) to the Quarterly Report on Form
10-Q of the Registrant for the quarter ended June 30, 1989,
Commission File No. 1-9360, filed on August 14, 1989).
3.3(a) By-laws of the Registrant, as amended and restated
(incorporated herein by reference to Exhibit 3.3 to the
Annual Report on Form 10-K of the Registrant for the fiscal
year ended December 31, 1993, commission file number
1-9360 filed March 31, 1994).
3.3(b) June 21, 1994 Amendment to the By-laws of the Registrant.
3.3(c) March 15, 1995 Amendment to the By-laws of the Registrant.
4 Form of certificate representing Common Stock of the
Registrant (incorporated herein by reference to Exhibit
10.15 to the Annual Report
-41-
<PAGE>
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).
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
-42-
<PAGE>
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(e) Management Agreement dated as of January 1, 1994, between
the Registrant and Asset Management.
10.4 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 June 30, 1988, Commission File No. 1-9360,
filed on August 15, 1988).
10.5 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 June 30, 1988,
Commission File No. 1-9360, filed on August 15, 1988).
10.8 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).
10.9(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).
10.9(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).
10.9(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).
10.9(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).
-43-
<PAGE>
10.9(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).
10.10 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 June 30, 1988, Commission
File No. 1-9360, filed on August 15, 1988).
10.11 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 June
30, 1988, Commission File No. 1-9360, filed on August 15,
1988).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
-44-
<PAGE>
10.17 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).
10.18 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).
10.19 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).
23 Independent Auditors' Consent - Kenneth Leventhal & Company.
27 Financial Data Schedule
28 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
fourth quarter of the period covered by this Annual Report on Form 10-K.
-45-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ASSET INVESTORS CORPORATION
(Registrant)
Date: March 24, 1995 By /s/ Spencer I. Browne
--------------------------------------
Spencer I. Browne
President and Chief Executive Officer
Date: March 24, 1995 By /s/ Paris G. Reece III
---------------------------------------
Paris G. Reece III
Executive Vice President and
Chief Financial Officer
Date: March 24, 1995 By /s/ Kevin J. Nystrom
---------------------------------------
Kevin J. Nystrom
Vice President and Chief Accounting
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME CAPACITY DATE
---- -------- ----
/s/ Larry A. Mizel Director March 24, 1995
-------------------------
Larry A. Mizel
/s/ Spencer I. Browne Director March 24, 1995
-------------------------
Spencer I. Browne
/s/ Elliot H. Kline Director March 24, 1995
-------------------------
Elliot H. Kline
/s/ Richard L. Robinson Director March 24, 1995
-------------------------
Richard L. Robinson
/s/ Tim Schultz Director March 24, 1995
-------------------------
Tim Schultz
-46-
<PAGE>
SUMMARY OF DEFINITIONS
WHEN THE FOLLOWING TERMS ARE USED IN THE TEXT, THEY WILL BE 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 and is accounted for under the
Level-Yield Method.
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 ACCEPTANCE - Asset Investors Acceptance, Inc., a wholly-owned subsidiary
of the company incorporated under Colorado law.
ASSET ACQUISITION - Asset Investors Acquisition Corp., a wholly-owned subsidiary
of the company incorporated under Maryland law.
ASSET FINANCE - Asset Investors Finance Corporation, a wholly-owned subsidiary
of the company and separately-qualified REIT incorporated under Maryland law
(formerly Guild Finance Corporation, a wholly-owned subsidiary of Guild).
ASSET FUNDING - Asset Investors Funding Corporation, a wholly-owned subsidiary
of the company incorporated under Delaware law.
ASSET MORTGAGE FUNDING - Asset Investors Mortgage Funding Corporation, a wholly-
owned subsidiary of the company incorporated under Delaware law.
ASSET SECURITIZATION - Asset Investors Securitization Corporation, a wholly-
owned subsidiary of the company incorporated under Delaware law.
ASSET SOUTHWEST - Asset Investors Southwest, Inc., a wholly-owned subsidiary of
the company incorporated under Colorado law.
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 generally accepted accounting
principles.
BY-LAWS - The By-laws of the company, as amended from time to time.
-47-
<PAGE>
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 outstanding 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, which 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 CLASS OR CMO BOND - A debt obligation resulting from the issuance of a CMO.
A CMO Class may represent the right to receive interest only, principal only, a
proportionate amount of interest and principal (each, respectively, an "IO
Class," "PO Class" and "Regular Class") or a disproportionate amount of interest
and principal.
CMO OWNERSHIP INTEREST - A CMO Residual, Acquired CMO Class and/or CMO
Subsidiary.
CMO RESIDUAL - In connection with the EITF Issue 89-4 consensus, the term CMO
Residual has been revised to refer to a non-equity ownership interest in a CMO
issuance that is accounted for under the Prospective Method.
CMO SUBSIDIARY - In connection with the EITF Issue 89-4 consensus, the term CMO
Subsidiary has been revised to refer to an equity ownership interest in a CMO
issuance that is accounted for under the Consolidation Method (or equity
method), including CMO issuances of the company's corporate subsidiaries.
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.
COMMERCIAL ASSETS - Commercial Assets, Inc., a publicly-traded REIT formed by
the company in August 1993, incorporated under Maryland law. (AMEX: CAX)
COMMERCIAL MORTGAGE LOAN SECURITIZATIONS - multi-class issuances of debt
securities (CMBS bonds) which are secured and funded as to the payments of
principal and interest by a specific group of mortgage loans on multi-family or
other commercial real estate, accounts and other collateral.
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.
-48-
<PAGE>
COMPOUND INTEREST CLASS - A CMO Class on which interest accrues and is added to
the principal amount thereof on each CMO payment date until the conditions set
forth in the Indenture related to the CMO issuance have been satisfied.
CONSOLIDATION METHOD - The accounting method used by the company for CMO
Subsidiaries. Under the Consolidation Method, the Collateral, the CMO bonds,
interest income, interest expense and operating expenses of CMO Subsidiaries are
consolidated in the company's financial statements. The portion of the
ownership interest of each such CMO Subsidiary not owned by the company is
accounted for as minority interest. Additionally, the net book value of CMO
Subsidiaries may be subject to write-downs in accordance with FAS 115.
CONTRIBUTION AGREEMENT - The contribution agreement between the company and
Commercial Assets, Inc. dated as of August 20, 1993.
DERS - Dividend equivalent rights as defined in the 1986 Stock Option Plan, as
amended.
DISTRIBUTION - The company's distribution of approximately 70% of the common
stock of Commercial Assets to the company's shareowners on October 12, 1993.
DISTRIBUTION DATE - October 12, 1993.
EITF - Emerging Issues Task Force, a task force of the Financial Accounting
Standards Board.
EXCESS CASH FLOW - The company's proportionate share of the difference between
(i) the cash flow from the Collateral pledged to secure the related CMO issuance
together with reinvestment income thereon, if any; and (ii) the amount required
for debt service payments on such CMO issuance together with administrative
expenses.
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.
FAS 91 - Statement of Financial Accounting Standards No. 91, ACCOUNTING FOR NON-
REFUNDABLE FEES AND COSTS ASSOCIATED WITH ORIGINATING OR ACQUIRING LOANS AND
INDIRECT COSTS OF LEASES (see "Level-Yield Method").
FAS 107 - Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS.
FAS 115 - Statement of Financial Accounting Standards No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES.
FASB - The Financial Accounting Standards Board.
FHLMC - Federal Home Loan Mortgage Corporation.
-49-
<PAGE>
FHLMC CERTIFICATE - A FHLMC mortgage certificate.
FIXED-RATE CMO OWNERSHIP INTEREST - A CMO Ownership Interest related to a CMO
issuance comprised of CMO Classes which, in the aggregate, respond like fixed-
rate CMO Classes.
FNMA - Federal National Mortgage Association.
FNMA CERTIFICATE - A FNMA mortgage pass-through certificate.
GAAP - Generally accepted accounting principles.
GIC - Guaranteed investment contract. A contract pursuant to which the cash
flow from the Collateral related to a CMO issuance is reinvested at a specified
fixed rate or variable rate until the next payment date of such CMO issuance.
GNMA - Government National Mortgage Association.
GNMA CERTIFICATE - A fully-modified pass-through mortgage-backed certificate
guaranteed by GNMA.
GUILD - Guild Mortgage Investments, Inc., a former San Diego-based CMO Mortgage
REIT that the company acquired on July 1, 1988.
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.
INDENTURE - A formal agreement between the issuer of each of the company's CMOs
and the related bondholders.
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 (see "Prospective Method").
LEVEL-YIELD METHOD - The accounting method used, in accordance with FAS 91, by
the company for CMO instruments other than CMO Subsidiaries and CMO Residuals,
such as Acquired CMO Classes. Under the Level-Yield Method, income is
recognized as the difference between the actual cash flow received from the CMO
instrument and the amortization of the related acquisition cost. The amount of
acquisition cost amortized each period is equal to the difference between the
discounted projected cash flow at the beginning of the period and at the end of
the period. Cash flow for this purpose is calculated
-50-
<PAGE>
assuming an estimated principal prepayment rate on the Mortgage Collateral
related to the CMO issuance, which is adjusted for actual experience, and, for
CMO issuances that include one or more LIBOR Classes, the interest rate on such
LIBOR Classes as of the acquisition date of the CMO instrument.
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.
LOSS SEVERITY PERCENTAGE - the rate of losses on the outstanding principal
balance of defaulted mortgage loans.
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 MDC.
MDC - M.D.C. Holdings, Inc., a Delaware corporation and the indirect parent of
the Manager.
MORTGAGE CERTIFICATES - GNMA Certificates, FNMA Certificates, FHLMC Certificates
and Private Certificates owned by the company.
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) property.
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 mortgage loans.
ONE-MONTH LIBOR CLASS - A LIBOR Class on which the interest rate is adjusted
each month.
PO CLASS - A CMO Class that represents the right to receive principal only and,
as a result, is sold at a significant discount to par value.
PREPAYMENT ASSUMPTION MODEL - The prepayment model used to measure prepayments
on pools of mortgage loans.
PRIVATE CERTIFICATES - Private pass-through mortgage certificates, owned by the
company, representing undivided beneficial interests in pools of Mortgage Loans.
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<PAGE>
PROSPECTIVE METHOD - The accounting method used by the company for CMO Residuals
as required by Issue 89-4. Under the Prospective Method, the effective yield
for each CMO Residual is recalculated (at the end of each reporting quarter)
using the then current carrying amount and an estimate of future Excess Cash
Flow. The recalculated effective yield is then used to accrue income on the CMO
Residual carrying amount for the next accounting period. Excess Cash Flow
received from the CMO Residual is first applied to the accrued income from the
CMO Residual with any excess reducing the recorded carrying amount. Future
Excess Cash Flow for this purpose is calculated assuming estimates of projected
prepayments, and for Variable-Rate CMO Ownership Interests, the 90-day average
of LIBOR, all as of or near the balance sheet date. Additionally, the book
value of CMO Residuals may be subject to write-downs in accordance with FAS 115.
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.
REPO FACILITY - A credit facility that provides financing for qualifying assets
up to an agreed upon principal amount through the use of Repurchase Agreements.
A repo transaction can be for a period ranging from one day to one year (30 days
is the usual repo period). The amount borrowed (sale price) depends upon the
value of eligible collateral as determined by the lender (buyer) and is subject
to margin calls if it declines in value during the repo period. Repo Facilities
can be underwritten agreements to insure the availability of their principal
amount for a specified period of time.
REPURCHASE AGREEMENTS (REPOS, REVERSE REPURCHASE AGREEMENTS AND REVERSE REPOS) -
Financial transactions involving the sale and subsequent repurchase of an
identical security on a specified date at two different, pre-negotiated prices.
Since 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.
SECOND TIER MORTGAGE LOANS - mortgage loans made to borrowers who have credit
histories of a lower overall quality than most borrowers. These credit
histories generally result from previous repayment difficulties, brief job
histories, previous bankruptcies or other causes. The loan-to-value ratio for a
second tier mortgage loan is typically lower than the loan-to-value ratio on
most mortgages, and the coupon for a second tier mortgage loan is typically
higher than the coupon on most mortgage loans.
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<PAGE>
STANDARD DEFAULT ASSUMPTION (SDA) - A standardized benchmark default curve
developed by the Public Securities Association used for the measurement of the
rates of default on non-conforming mortgage loans.
STOCK OPTION PLAN - The company's 1986 Stock Option Plan, as restated November
15, 1990, as amended.
THREE-MONTH LIBOR CLASS - A LIBOR Class on which the interest rate is adjusted
quarterly.
VARIABLE-RATE ACQUIRED CMO CLASS - An Acquired CMO Class on which the interest
rate is adjusted quarterly or monthly based on specified margins in relation to
a specified index, also referred to as an Inverse Class.
VARIABLE-RATE CMO OWNERSHIP INTEREST (ALSO VARIABLE-RATE CMO SUBSIDIARY AND
VARIABLE-RATE CMO RESIDUAL) - A CMO Ownership Interest related to a CMO issuance
that includes one or more LIBOR Classes unless such CMO Ownership Interest has
the characteristics of a Fixed-Rate CMO Ownership Interest (e.g., a Variable-
Rate CMO Ownership Interest with one or more inverse LIBOR Classes which offset
the effect of the LIBOR Classes).
1940 ACT - the Investment Company Act of 1940, as amended.
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<PAGE>
EXHIBIT 3.3(b)
AMENDMENT TO BYLAWS
OF
ASSET INVESTORS CORPORATION
(hereinafter called the "Corporation")
June 21, 1994
ARTICLE II
MEETING OF STOCKHOLDERS
Section 2.02 ANNUAL MEETINGS. Annual meetings of stockholders shall be
held at such date and time during the 31 day period from July 25 to August 24 as
shall be determined by the Board of Directors and stated in the notice of
meeting, at which meeting stockholders shall elect directors and transact any
other business within the powers of the corporation. Any business of the
corporation may be transacted at the annual meeting without being specifically
designated in the notice, except such business as is specifically required by
law to be stated in the notice.
<PAGE>
EXHIBIT 3.3(c)
AMENDMENT TO BY-LAWS
OF
ASSET INVESTORS CORPORATION
(hereinafter called the "Corporation")
March 14, 1995
ARTICLE II
MEETING OF STOCKHOLDERS
Section 2.02 ANNUAL MEETINGS. Annual meetings of stockholders shall
be held at such date and time during the 31 day period from May 15 to June 15 as
shall be determined by the Board of Directors and stated in the notice of
meeting, at which meeting stockholders shall elect directors and transact any
other business within the powers of the corporation. Any business of the
corporation may be transacted at the annual meeting without being specifically
designated in the notice, except such business as is specifically required by
law to be stated in the notice.
<PAGE>
EXECUTION COPY
MANAGEMENT AGREEMENT
THIS AGREEMENT, dated as of January 1, 1994 by and between ASSETS
INVESTORS CORPORATION, a Maryland corporation (hereinafter referred to as the
"Company"), and FINANCIAL ASSET MANAGEMENT CORPORATION, a Delaware corporation
(hereinafter referred to as the "Manager").
W I T N E S S E T H:
--------------------
WHEREAS, the Company owns Mortgage Assets and qualifies for the tax
benefits accorded by Section 856 through 860 of the Internal Revenue Code of
1986; and
WHEREAS, the Company has engaged and desires to continue to retain the
Manager to manage the assets of the Company and to perform administrative
services for the Company in the manner and on the terms set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements herein set
forth, the parties hereto agree as follows:
Section 1. DEFINITIONS. Capitalized terms used but not defined
herein shall have the respective meanings assigned them below.
(a) "Affiliate" means, when used with reference to a specified
person, (i) any person that directly or indirectly controls or is controlled by
or is under common control with the specified person, (ii) any person that is an
officer, director or employee of, partner in or trustee
<PAGE>
2
of, or serves in a similar capacity with respect to, the specified person, or of
which the specified person is an officer, director or employee of, partner in or
trustee of or with respect to which the specified person serves in a similar
capacity, (iii) any person that, directly or indirectly, is the beneficial owner
of 5% or more of any class of equity securities issued by the specified person,
or any person 5% or more of whose equity securities are, directly or indirectly
beneficially owned by such other person, or (iv) any person that has a material
business or professional relationship with the specified person, PROVIDED,
however, that a person shall not be deemed to be an Affiliate of the Manager or
of any person that is an Affiliate of the Manager solely by reason of serving as
a director of one or more investment companies of which the Manager or an
Affiliate of the Manager serves as investment advisor or in any other capacity;
(b) "Affiliated Issuer" means any Person that issues Mortgage-
Backed Obligations and which is organized by or on behalf of the Company;
(c) "Agreement" means this Management Agreement, as amended from
time to time;
(d) "Average Invested Assets" for any period means the average
of the aggregate book value of the consolidated assets of the Company, its
trusts and subsidiaries, computed in accordance with GAAP, invested, directly or
indirectly, in equity interests in and loans secured by real
<PAGE>
3
estate, including assets that are pledged to secure Mortgage-Backed Obligations,
after reserves for depreciation or bad debts or other similar noncash reserves,
less the book value of minority interest (the portion of equity interest in a
Mortgage-Backed Obligation not owned by the Company) and the liabilities
associated with issued and outstanding Mortgage-Backed Obligations of the
Company, its trusts and subsidiaries, computed for any period by adding the
Average Invested Assets at the end of each month during such period and dividing
by the number of months in the period (provided that Average Invested Assets
shall not include (A) investments in any other REIT for which the Manager or an
Affiliate of the Manager acts as a manager and (B) cash, certificates of
deposit, treasury instruments and other non-real estate related assets);
(e) "Board of Directors" means the Board of Directors of the
Company;
(f) "CAI" means Commercial Assets, Inc., a Maryland corporation;
(g) "Cash Distribution" means any cash distribution other than
those resulting from a complete or partial liquidation of the assets of the
Company as determined by the Independent Directors;
(h) "CMO" means Collateralized Mortgage Obligations which are
secured and funded as to the payment of interest and principal by a specific
group of residential mortgage loans;
<PAGE>
4
(i) "Commercial Mortgage-Backed Obligations" means debt
Obligations which are secured and funded as to the payment of interest and
principal by a specific group of mortgage loans on multi-family or other
commercial real estate, accounts and other collateral;
(j) "Commitment" means, with respect to any Mortgage Asset, the
agreement containing the terms pursuant to which the Company agrees to acquire
on a forward basis such Mortgage Asset from any Person;
(k) "Company" means Asset Investors Corporation, a Maryland
corporation, for all purposes; provided, however, that with respect to
references to Series of Mortgage-Backed Obligations issued by the Company, the
term "Company" shall include subsidiaries of the Company which issue such
Mortgage-Backed Obligations;
(l) "Conforming Mortgage Loan" means a mortgage loan that
complies with the requirements for inclusion in a guaranty or purchase program
sponsored by any of FNMA, FHLMC or GNMA;
(m) "Direct Issuance Costs" means all fees and expenses incurred
in connection with the issuance of Mortgage-Backed Obligations issued or caused
to be issued by the Company, including trustee, accounting, consulting, legal,
rating agency, registration, printing and engraving, tax advisory and tax
preparation (but not including preparation of annual tax returns) fees and
expenses, underwriting
<PAGE>
5
discounts, up-front master servicing fees, and up-front costs of credit
enhancements;
(n) "FDIC" means the Federal Deposit Insurance Corporation or
any successor or assign or any resulting, surviving or transferee entity;
(o) "FHLMC" means the Federal Home Loan Mortgage Corporation, a
corporation organized and existing under the laws of the United States of
America, or any successor or assign or any resulting, surviving or transferee
entity;
(p) "FHLMC Certificate" means a FHLMC mortgage participation
certificate;
(q) "FNMA" means the Federal National Mortgage Association, a
corporation organized and existing under the laws of the United States of
America, or any successor or assign or any resulting, surviving or transferee
entity;
(r) "FNMA Certificate" means a FNMA mortgage pass-through
certificate;
(s) "GAAP" means generally accepted accounting principles;
(t) "GNMA" means the Government National Mortgage Association, a
corporation organized and existing under the laws of the United States of
America, or any successor or assign or any resulting, surviving or transferee
entity;
<PAGE>
6
(u) "GNMA Certificate" means a fully-modified pass-through
mortgage-backed certificate guaranteed by GNMA;
(v) "Governing Instruments" means, the Company's Articles of
Incorporation, as amended, By-Laws, as amended, and any resolutions duly adopted
by the Board of Directors;
(w) "Independent Directors" shall have the meaning ascribed to
that term in the By-Laws of the Company, as the same may be amended or
supplemented from time to time;
(x) "Internal Revenue Code" or "Code" means the Internal Revenue
Code of 1986, as amended;
(y) "Mortgage Assets" means, collectively, Mortgage Instruments,
Residual Interests, Mortgage-Backed Obligations and Non-Agency MBS Bonds;
(z) "Mortgage-Backed Obligations" means, collectively,
collateralized mortgage obligations, mortgage-backed bonds and mortgage
collateralized debt, mortgage pass-through obligations or other instruments
collateralized by, or representing interests in, mortgage debt or Mortgage
Instruments;
(aa) "Mortgage Certificates" means, collectively (i) GNMA
Certificates, (ii) FHLMC Certificates, (iii) FNMA Certificates and (iv) any
other mortgage certificates; including private label pass-through certificates,
<PAGE>
7
and other mortgage instruments as reasonably determined by the Company;
(bb) "Mortgage Instruments" means, collectively, Mortgage
Certificates and Mortgage Loans;
(cc) "Mortgage Loans" means, collectively, Conforming Mortgage
Loans and Non-conforming Mortgage Loans;
(dd) "Net Income" means the Company's taxable income including
capital gains and capital losses arising from the Company's operations in the
year they are generated before (i) the Manager's incentive compensation,
(ii) net operating loss deductions arising from losses in prior periods,
(iii) dividends from CAI, (iv) special deductions permitted by the Internal
Revenue Code in calculating taxable income for a REIT, and (v) the deduction
arising from the exercise of stock options permitted under Code Section 83 and
the deduction for dividend equivalent rights. In addition, taxable income will
also be reduced by 25% of the expense otherwise deductible for tax purposes
relating to the exercise of stock options and the issuance of Common Stock
relating to dividend equivalent rights;
(ee) "Non-Agency MBS Bonds" means interests issued in residential
mortgage loan securitizations supported by pools of non-conforming (non-agency
guaranteed) mortgage loans.
(ff) "Non-conforming Mortgage Loan" means a mortgage loan that
meets the requirements of the guaranty programs of either FNMA, FHLMC or GNMA;
except for the
<PAGE>
8
requirements with respect to the maximum original outstanding principal amounts
of such mortgage loans and such other particular requirements of such programs
presented to and approved by the Board of Directors;
(gg) "Other Mortgage Assets" means (i) interest-only
certificates, (ii) principal-only certificates, (iii) subordinated interests in
mortgage pass-through transactions and (iv) other mortgage-derivative assets;
(hh) "Person" means a natural person, corporation, partnership,
association, trust (including any beneficiary thereof), company, joint venture,
joint stock company, unincorporated organization or other entity;
(ii) "REIT" means a real estate investment trust under the
Internal Revenue Code;
(jj) "REIT Income" means taxable income computed as prescribed
for REITs under the Code prior to the "dividends paid deduction" (including the
dividends paid deduction for dividends related to capital gains) and any net
operating loss carryover;
(kk) "Residual Interests" means interests in Mortgage-Backed
Obligations that entitle the holder to receive excess cash flow from the
collateral pledged to secure such obligations;
(ll) "Repurchase Agreement" means a financing transaction
pursuant to which the Company would sell Mortgage Assets for cash and
simultaneously agree to repurchase them at a specified date for the same amount
of cash
<PAGE>
9
plus an interest component;
(mm) "Series of Mortgage-Backed Obligations" means a separate
series of Mortgage-Backed Obligations issued or caused to be issued by the
Company or an Affiliated Issuer or other person pursuant to an indenture or
other agreement;
(nn) "Servicing Agreement" means a servicing agreement between
the Company and any servicer of the Company's Mortgage Loans;
(oo) "Stockholders" means the registered owners of the shares of
common stock of the Company;
(pp) "Stockholders Equity" means GAAP Stockholders Equity;
(qq) "Ten Year U.S. Treasury Rate" for any period means the
arithmetic average of the weekly average yield to maturity for actively traded
current coupon U.S. Treasury fixed interest rate securities (adjusted to con-
stant maturities of ten years) published by the Federal Reserve Board during
such period, or, if such rate is not published by the Federal Reserve Board,
then any Federal Reserve Bank or agency or department of the federal government
selected by the Company; or, if the Company determines in good faith that for
any reason the Company cannot determine the Ten Year U.S. Treasury Rate for any
period as provided above, then the Ten Year U.S. Treasury Rate for such period
shall be the arithmetic average of the per annum average yields to maturity,
based upon the closing asked
<PAGE>
10
price on each business day during such period, as chosen and quoted in New York
City for each business day (or less frequently if daily quotations shall not be
generally available) by at least three recognized dealers in U.S. government
securities selected by the Company, for each actively traded marketable U.S.
Treasury fixed interest rate security (other than securities which can, at the
option of the holder, be surrendered at face value in payment of any federal
estate tax) with a final maturity date not less than eight nor more than twelve
years from the date of such closing asked price;
(rr) "Total Operating Expenses" means the expenses indicated in
Section 9(c)(iii);
Section 2. GENERAL DUTIES OF THE MANAGER.
The Manager undertakes to use its best efforts to (i) present to the
Company asset acquisition opportunities consistent with the policies and
objectives of the Company and (ii) furnish the Board of Directors with
information concerning the making, acquisition, holding and disposing of assets.
Subject to the supervision and control of the Board of Directors, the Manager
shall provide services to the Company and, to the extent directed by the Board
of Directors, shall provide similar services to any Affiliated Issuer, if any,
or subsidiary of the Company as follows:
(a) serve as the Company's consultant with respect to the
formulation of asset acquisition criteria and
<PAGE>
11
policy guidelines for recommendation to the Board of Directors;
(b) counsel the Company in connection with policy decisions to
be made by the Board of Directors;
(c) issue Commitments on behalf of the Company to acquire
Mortgage Assets;
(d) represent the Company in connection with the acquisition and
accumulation of Mortgage Assets;
(e) furnish reports and statistical and economic research to the
Company regarding the Company's portfolio activities and the services performed
for the Company by the Manager as reasonably requested by the Board of
Directors;
(f) monitor and provide to the Board of Directors, on an on-
going basis, rate information and other data regarding Repurchase Agreements and
alternative lending sources;
(g) negotiate and enter into agreements on behalf of the Company
with banking institutions and other lenders to provide for the borrowing of
funds by the Company;
(h) monitor and provide to the Board of Directors, on an on-
going basis, price information and other data obtained from certain nationally
recognized dealers that maintain markets in Mortgage Assets and Other Mortgage
Assets identified by the Board of Directors from time to
<PAGE>
12
time, and provide data and advice to the Board of Directors in connection with
the identification of such dealers;
(i) provide a full time chief operating officer of the Company,
a full time chief accounting officer of the Company, provide the personnel to
perform or supervise the duties of the computer programmer and analyst
(including necessary computer support staff), senior investment officer,
controller, shareholder relations, press officer, cash manager, tax manager
(including necessary support staff) (any of which functions may be performed by
the same person or persons) and other personnel necessary to manage the Company
on a day-to-day basis and provide to the Company, commencing as of the date
hereof and thereafter on a semi-annual basis, a list of all the full time and
part time employees of the Manager and a description of the functions of such
employees (for purposes of this subsection, full-time shall mean full time
obligation to both CAI and the Company);
(j) administer the day-to-day operations of the Company and
perform or supervise the performance of such other administrative functions
necessary in the management of the Company as may be agreed upon by the Manager
and the Board of Directors, including the collection of revenues and the payment
of the Company's expenses, debts and obligations and maintenance of appropriate
computer services to perform such administrative functions;
<PAGE>
13
(k) communicate on behalf of the Company with the holders of the
equity and debt securities of the Company as required to satisfy the continuous
reporting and other requirements of any governmental bodies or agencies, securi-
ties exchanges and bond indentures and to maintain effective relations with such
holders;
(l) prepare, draft and file all the Company's filings with the
Securities and Exchange Commission, PROVIDED THAT filing fees, legal fees,
accounting fees and any other third-party fees shall be the responsibility of
the Company;
(m) to the extent not otherwise subject to an agreement executed
by the Company, designate a servicer for those Mortgage Loans sold to the
Company by originators that have elected not to service such loans and arrange
for the monitoring and administering of such servicers;
(n) monitor and administer the servicing of the Company's
Mortgage Loans, other than Mortgage Loans pooled to back Mortgage Certificates
or pledged to secure Mortgage-Backed Obligations or Non-Agency MBS Bonds,
including serving as the Company's consultant with respect to the servicing of
loans; collecting information and submitting reports pertaining to the Mortgage
Loans and to moneys remitted to the Manager or the Company by servicers;
periodically reviewing and evaluating the performance of each servicer to
determine its compliance with the terms and conditions of the servicing
agreement and, if deemed
<PAGE>
14
appropriate, recommending to the Company the termination of such servicing
agreement; acting as a liaison between servicers and the Company and working
with servicers to the extent necessary to improve their servicing performance;
reviewing recommendations as to fire losses, easement problems and condemnation,
delinquency and foreclosure procedures with regard to the Mortgage Loans;
reviewing servicers' delinquency, foreclosure and other reports on Mortgage
Loans; supervising claims filed under any mortgage insurance policies; and
enforcing the obligation of any servicer to repurchase Mortgage Loans from the
Company;
(o) in accordance with criteria set up by the Board of
Directors, invest or reinvest the Company's cash consistent with the Company's
status as a REIT provided, however, that the Company shall not invest in
Commercial Mortgage-Backed Obligations;
(p) provide to the Company itself or through another appropriate
party (but the Manager shall not charge for the services of such an appropriate
party unless authorized by the Board of Directors) all services in connection
with the issuance of each Series of Mortgage-Backed Obligations or Non-Agency
MBS Bonds issued by the Company or any Affiliated Issuer, including:
(i) representing the Company with respect to the
structuring of each such Series of Mortgage-Backed Obligations or Non-
Agency MBS Bonds;
<PAGE>
15
(ii) negotiating the rating requirements with rating
agencies with respect to the rating of each such Series of Mortgage-Backed
Obligations or Non-Agency MBS Bonds;
(iii) representing the Company in connection with the
acquisition and accumulation of any Mortgage Instruments and the pooling
and exchange of Mortgage Loans into Mortgage Certificates in connection
with each Series of Mortgage-Backed Obligations or Non-Agency MBS Bonds
issued by the Company or any Affiliated Issuer;
(iv) issuing Commitments on behalf of the Company to acquire
Mortgage Instruments to be used to secure or constitute the mortgage pool
for each such Series of Mortgage-Backed Obligations or Non-Agency MBS
Bonds;
(v) with respect to the issuance of each such Series of
Mortgage-Backed Obligations or Non-Agency MBS Bonds for which the
underlying collateral consists of Mortgage Instruments owned by the Company
or an Affiliated Issuer, accumulating and reviewing all Mortgage Instru-
ments which may secure or constitute the mortgage pool for each such Series
of Mortgage-Backed Obligations or Non-Agency MBS Bonds;
(vi) with respect to the issuance of each such Series of
Mortgage-Backed Obligations or Non-Agency MBS Bonds for which the
underlying collateral
<PAGE>
16
does not consist of Mortgage Instruments owned by the Company or an Affili-
ated Issuer, reviewing interest rates, maturity dates and other attributes
of the Mortgage Instruments;
(vii) negotiating all agreements and credit enhancements with
respect to each such Series of Mortgage-Backed Obligations or Non-Agency
MBS Bonds;
(viii) organizing and administering all activities in
connection with the closing of each such Series of Mortgage-Backed
Obligations or Non-Agency MBS Bonds including all negotiations and
agreements with underwriters, trustees, servicers, master servicers and
other parties; and
(ix) performing such other services as may be required from
time to time for completing the issuance of each such Series of Mortgage-
Backed Obligations or Non-Agency MBS Bonds.
(q) provide to the Company itself or through another appropriate
party (but the Manager shall not charge for the services of such an appropriate
party unless authorized by the Board of Directors) all services in connection
with the administration of each Series of Mortgage-Backed Obligations or Non-
Agency MBS Bonds issued by the Company or any Affiliated Issuer, including:
(i) communicating on behalf of the Company with the holders
of each such Series of Mortgage-Backed Obligations or Non-Agency MBS Bonds
as
<PAGE>
16
required to satisfy the reporting and tax informational requirements of any
governmental bodies or agencies with respect to holders of each such Series
of Mortgage-Backed Obligations or Non-Agency MBS Bonds and as required to
satisfy any governmental bodies and the provisions of any indenture,
pooling and servicing agreement or other agreement with respect to each
such Series of Mortgage-Backed Obligations or Non-Agency MBS Bonds;
(ii) determining the amount of, and making, all payments
with respect to each such Series of Mortgage-Backed Obligations or Non-
Agency MBS Bonds and directing the reinvestment of principal and interest
from the Mortgage Instruments in accordance with the terms of any inden-
ture, pooling and servicing agreement or other agreement relating to each
such Series of Mortgage-Backed Obligations or Non-Agency MBS Bonds;
(iii) furnishing all reports and statistical information
required with respect to the administration of each such Series of
Mortgage-Backed Obligations or Non-Agency MBS Bonds;
(iv) working with the Company and with accountants, counsel,
trustees, servicers, master servicers and other parties with respect to the
administration of each such Series of Mortgage-Backed Obligations or Non-
Agency MBS Bonds;
<PAGE>
18
(v) assisting trustees and paying agents in distributing
all excess or residual payments with respect to each such Series of
Mortgage-Backed Obligations or Non-Agency MBS Bonds as directed by the
Company or any indenture, pooling and servicing agreement or other
agreement with respect to each such Series of Mortgage-Backed Obligations
or Non-Agency MBS Bonds;
(vi) monitoring and providing, on an on-going basis,
information with respect to each such Series of Mortgage-Backed Obligations
or Non-Agency MBS Bonds as is required by the Company;
(vii) advising the Company with respect to the administration
of each such Series of Mortgage-Backed Obligations or Non-Agency MBS Bonds;
and
(viii) performing such other services as may be required from
time to time in connection with the administration of each such Series of
Mortgage-Backed Obligations or Non-Agency MBS Bonds as the Company shall
deem appropriate under the particular circumstances.
(r) provide to the Company itself or through another appropriate
party (but the Manager shall not charge for the services of such an appropriate
party unless authorized by the Board of Directors) services in connection with
reviewing and monitoring the administration of each series of Mortgage-Backed
Obligations or Non-Agency MBS Bonds
<PAGE>
19
managed by a party other than the Manager or any of its Affiliates, including:
(i) reviewing monthly financial statements and/or other
financial data prepared by the third-party bond administrator and
distributed to the Company;
(ii) reviewing bond payment information and verifying
the excess cash flow payment received by the Company;
(iii) monitoring on-going expenses related to each series of
Mortgage-Backed Obligations or Non-Agency MBS Bonds, where expense
information has been provided to the Company;
(iv) reviewing federal income tax reports prepared by the
third-party bond administrator and distributed to the Company, including
but not limited to, reports for real estate mortgage investment conduits;
and
(v) providing and preparing for Residual Interests in
Mortgage-Backed Obligations or Non-Agency MBS Bonds which are accounted for
under a level-yield method: (A) necessary services for computing monthly
income in accordance with GAAP; and (B) the necessary calculations to
compute the carrying amount adjustment in accordance with the Company's
accounting principles.
<PAGE>
20
(s) monitor the Company's portfolio with regard to interest rate
risk and recommend to the Board of Directors, and negotiate and enter into on
behalf of the Company, transactions to reduce interest rate risk including, but
not limited to, interest rate swap agreements, forward rate agreements, interest
rate cap agreements, interest rate floor agreements and financial futures and
option contracts in accordance with the criteria established by the Board of
Directors;
(t) perform such other services as may be required from time to
time for management and other activities relating to the assets of the Company
as the Board of Directors shall deem appropriate under the particular cir-
cumstances;
(u) provide tax planning and advisory services and prepare and
file on behalf of the Company all filings required by federal, state and local
governments, including but not limited to, federal and state REIT income tax
returns (including the preparation of the related REIT qualification
calculations), personal property tax returns, sales tax returns, payroll tax
returns, franchise tax returns, annual reports and federal and state information
returns; and
(v) provide the executive, administrative and other personnel,
office space and services required in rendering services to the Company listed
in this Section 2.
<PAGE>
21
The Manager agrees to use its best efforts at all times in performing
services for the Company hereunder.
Section 3. ADDITIONAL ACTIVITIES OF MANAGER. Nothing herein shall
prevent or restrict the Manager or any of its officers, employees or Affiliates
from engaging in any business or rendering services of any kind to any other
Person, including investment in, or advisory service to others investing in, any
type of real estate assets, including assets which meet the principal portfolio
objectives of the Company, except that, without the consent of the Board of
Directors, which consent shall not be unreasonably withheld, the Manager shall
not provide general management services to any REIT or similar entity other than
the Company and its subsidiaries and affiliates other than acting as a manager
to CAI. Directors, officers, employees and agents of the Manager or Affiliates
of the Manager may serve as directors, officers, employees, agents, nominees or
signatories for the Company or any subsidiary of the Company, to the extent
permitted by their Governing Instruments, as from time to time amended, or by
any resolutions duly adopted by the Board of Directors pursuant to its Governing
Instruments. When executing documents or otherwise acting in such capacities
for the Company, such persons shall use their respective titles in the Company.
Section 4. COMMITMENTS. In order to meet the portfolio requirements
of the Company, as determined by the Board of Directors from time to time, the
Manager agrees to
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22
issue on behalf of the Company Commitments on such terms as are established by
the Board of Directors, including a majority of the Independent Directors, for
the acquisition of Mortgage Assets originated by, or acquired from, any Person.
Section 5. BANK ACCOUNTS. At the direction of the Board of
Directors, the Manager may establish and maintain one or more bank accounts in
the name of the Company or any subsidiary of the Company, and may collect and
deposit into any such account or accounts, and disburse funds from any such
account or accounts, under such terms and conditions as the Board of Directors
may approve; and the Manager shall from time to time render appropriate
accountings of such collections and payments to the Board of Directors and, upon
request, to the auditors of the Company or any subsidiary of the Company. Such
accounts shall be insured by the FDIC.
Section 6. RECORDS; CONFIDENTIALITY. The Manager shall maintain
appropriate books of account and records relating to services performed
hereunder, and such books of account and records shall be accessible for inspec-
tion by representatives of the Company or any subsidiary of the Company at any
time during normal business hours. The Manager shall keep confidential any and
all information obtained in connection with the services rendered hereunder and
shall not disclose any such information to nonaffiliated
<PAGE>
23
third parties except with the prior written consent of the Board of Directors.
Section 7. OBLIGATIONS OF MANAGER.
(a) The Manager shall require each seller or transferor of
Mortgage Assets to the Company to make such representations and warranties
regarding such Mortgage Assets as may, in the judgment of the Manager, be
necessary and appropriate. In addition, the Manager shall take such other
action as it deems necessary or appropriate with regard to the protection of the
Company's assets. Notwithstanding any other provision herein, the Manager shall
act in accordance with any portfolio management guidelines that may be
established by the Board of Directors and, in the absence of specific
guidelines, in accordance with industry standards.
(b) The Manager shall refrain from any action which would
adversely affect the status of the Company as a REIT or, if applicable, any
subsidiary of the Company as a REIT or as a qualified REIT subsidiary or which
would violate any law, rule or regulation of any governmental body or agency
having jurisdiction over the Company or any such subsidiary or which would
otherwise not be permitted by the Company's or such subsidiary's Governing
Instruments. If the Manager is ordered to take any such action by the Board of
Directors, the Manager shall promptly notify the Board of Directors of the
Manager's judgment that such action would adversely affect such status or
violate any
<PAGE>
24
such law, rule or regulation or the Governing Instruments and refrain from
taking such action pending further clarification from the Board of Directors.
If the Manager receives further clarification or instructions expressly ordering
that the action be taken, the Manager shall act as instructed by the Board of
Directors and shall have no liability for such action. Notwithstanding the
foregoing, the Manager, its directors, officers, stockholders and employees
shall not be liable to the Company, any Affiliated Issuer, any subsidiary of the
Company, the Independent Directors or the Company's or its subsidiary's
stockholders for any act or omission by the Manager, its directors, officers,
stockholders or employees except as provided in Section 13 of this Agreement.
Section 8. INVESTMENT COMPANY STATUS.
Notwithstanding any other provision of this Agreement to the contrary,
the Company and the Manager each shall use its best efforts to refrain from
taking any action which, in its judgment made in good faith and with the
exercise of reasonable care, would cause the Company or any subsidiary of the
Company to be required to register as an investment company under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). It shall be the
duty of the Manager to perform such calculations necessary to insure that the
Company or any subsidiary of the Company shall not be required to register under
the Investment Company Act. If an action is ordered by the Board of Direc-
<PAGE>
25
tors, which in the Manager's judgment might cause such registration to be
required, the Manager shall promptly notify the Board of Directors and shall
refrain from taking such action pending further clarification or instructions
from the Board of Directors. If the Manager receives further clarification or
instructions expressly ordering that the action be taken, the Manager shall act
as instructed by the Board of Directors and shall have no liability for such
action.
Section 9. COMPENSATION.
(a) BASE FEE. Subject to Sections 9(c) and 9(e) hereof, the
Company shall pay to the Manager, for services rendered under this Agreement, a
base management fee in an amount equal to 3/8 of 1% per annum of the Average
Invested Assets of the Company during each fiscal year. An amount equal to 3/32
of 1% of the Average Invested Assets for each fiscal quarter (pro rata based on
the number of days elapsed during any partial fiscal quarter), shall be paid to
the Manager, as provided by, and subject to adjustment under, Section 9(e) of
this Agreement.
(b) INCENTIVE COMPENSATION. The Company shall pay the Manager
as incentive compensation a yearly fee, in an amount equal to 20% of the dollar
amount, if any, by which the Cash Distributions of the Company for each fiscal
year exceeds an amount equal to the Stockholders Equity multiplied by the Ten
Year U.S. Treasury Rate plus one percentage point. If the Cash Distributions of
the
<PAGE>
26
Company are less than the amount equal to the Stockholders Equity multiplied by
the Ten Year U.S. Treasury Rate plus one percentage point, the Manager shall
refund to the Company the net year-to-date incentive compensation previously
paid to the Manager during the current fiscal year, if any.
The quarterly payment of such amount by the Company to the Manager, or
refund to the Company from the Manager in the event the incentive compensation
for any year-to-date period is less than the incentive compensation computed and
paid to the Manager as of the previous year-to-date period, shall be computed
each fiscal quarter on a cumulative year-to-date basis in an amount equal to
(A) 20% of the dollar amount, if any, by which the year-to-date Cash
Distributions applicable to such fiscal quarter, exceeds an amount equal to the
Stockholders Equity for such year-to-date period multiplied by the year-to-date
Ten Year U.S. Treasury Rate plus one percentage point multiplied by the number
of quarters during such year-to-date period divided by four; and (B) minus the
year-to-date incentive compensation computed for the prior fiscal quarter. If
the year-to-date incentive compensation computed through such fiscal quarter of
the Company is less than the net year-to-date incentive compensation computed
for the previous year-to-date fiscal quarter, the Manager shall refund to the
Company the lesser of (i) the difference between the net year-to-date incentive
compensation computed for the
<PAGE>
27
previous year-to-date fiscal quarter and the net year-to-date incentive
compensation computed for the current fiscal quarter or (ii) the net year-to-
date incentive compensation computed for the previous year-to-date fiscal
quarter, if any. Such quarterly payment shall be paid to the Manager, or
refunded to the Company, as provided by, and subject to adjustment under,
Section 9(e) of this Agreement. A sample calculation of the incentive
compensation is shown in Exhibit A.
(c) LIMITATION ON BASE FEE AND INCENTIVE COMPENSATION.
(i) REDUCTION OF BASE FEE AND INCENTIVE COMPENSATION.
During any fiscal quarter, the base management fee described in
Section 9(a) above and incentive compensation described in Section 9(b)
above shall be reduced by the amount, up to the total amount of such base
management fee and incentive compensation, by which the year-to-date Total
Operating Expenses (as defined below) of the Company and its subsidiaries
exceed the greater of 2% of its Average Invested Assets multiplied by the
number of quarters during such year-to-date period divided by four or 25%
of its year-to-date Cash Distributions through such fiscal quarter,
provided, however, that a majority of the Independent Directors may waive
part or all of any such reduction to the extent that they determine, based
upon unusual or nonrecurring factors which they deem sufficient,
<PAGE>
28
that a higher level of expenses is justified for such year.
(ii) RECOVERY OF BASE FEE AND INCENTIVE COMPENSATION. If at
the close of any fiscal year the limitation on the base management fee and
incentive compensation pursuant to Section 9(c)(i) above is imposed, the
Manager shall be entitled to recover without interest any reduction of fees
during such fiscal year pursuant to Section 9(c)(i) when, if, and to the
extent that, the Total Operating Expenses of the Company and its
subsidiaries in any future calendar year, including the recovery of the
base management fee and incentive compensation or any portion thereof, are
less than the greater of 2% of the Company's Average Invested Assets or 25%
of its Cash Distributions for such year.
(iii) TOTAL OPERATING EXPENSES. For the purposes of Section
9(c) only, "Total Operating Expenses" for any period means the aggregate
year-to-date expenses for such period of every character payable by the
Company which constitute ordinary operating expenses of the Company,
exclusive of:
(1) expenses relating to raising capital and all
interest and discounts;
(2) taxes and license fees;
(3) expenses connected directly with the issuance,
sale and distribution, and of list-
<PAGE>
29
ing on any stock exchange, of securities of the Company including, but not
limited to, underwriting and brokerage discounts and commissions, private
placement fees and expenses, legal and accounting costs, printing,
engraving and mailing costs, and listing and registration fees;
(4) expenses connected directly with the acquisition,
disposition, operation, maintenance, management (including the Administra-
tive fee) or ownership of the Company's assets, including but not limited
to costs of foreclosure, maintenance, repair and improvement of property,
maintenance and protection of the lien of mortgages, property management
fees, loan origination fees, servicing and master servicing fees, legal
fees, premiums for insurance on property owned by or mortgaged to the
Company, taxes, brokerage and acquisition fees and commissions, appraisal
fees, title insurance and abstract expenses, provisions for depreciation,
depletion and amortization, disposition fees and subordinated real estate
commissions, and losses on the disposition of assets and provisions for
such losses;
(5) fees and expenses payable to public accountants,
consultants, or persons employed for the Company directly by the Board of
Directors;
(6) legal, accounting and other expenses incurred in
connection with (a) formal or
<PAGE>
30
informal administrative actions or legal proceedings which involve a
challenge of the status of the Company as a REIT, (b) advice regarding
obtaining or maintaining such status, (c) determination by the Company of
its taxable income as computed in accordance with the REIT provisions of
the Internal Revenue Code or (d) a claim that the activities of the Company
or of any member of the Board of Directors, officer or stockholder of the
Company were improper;
(7) expenses of organizing, reorganizing or
terminating the Company;
(8) non cash expenditures (including depreciation,
amortization and bad debt reserves);
(9) fees and expenses of transfer agents, registrars,
warrant agents, right agents, dividend payment and dividend reinvestment
agents, escrow holders and indenture trustees;
(10) all expenses connected with communications to
holders of securities of the Company and other bookkeeping and clerical
work necessary in maintaining relations with holders of securities,
including the costs of printing and mailing certificates for securities,
proxy solicitation materials and reports to such holders and the cost of
holding meetings of holders of securities of the Company; and
(11) legal, accounting, printing and other costs,
including clerical costs, of reports
<PAGE>
31
required to be filed with state or federal governmental agencies.
(d) ADMINISTRATIVE FEE. Unless otherwise agreed by the parties
hereto, in addition to any other fee payable to the Manager under this
Agreement, the Manager shall be paid:
(i) for each Series of CMOs issued or owned by the Company
or any subsidiary of the Company and with respect to which the Manager or
any Affiliate of the Manager serves as manager, in the case of CMOs sold or
intended to be sold primarily to institutional investors, the lesser of
(A) $35,000 annually and (B) an annual amount equal to $35,000 multiplied
by the percentage ownership of the Company or such subsidiary of the
Company in such CMO, or in the case of CMOs sold or intended to be sold
primarily to retail investors, the lesser of (C) $10,000 annually and
(D) an annual amount equal to $10,000 multiplied by the percentage
ownership of the Company or such subsidiary of the Company in such CMO;
(ii) for each Series of CMOs issued or owned by the Company
or any subsidiary of the Company and with respect to which the Manager or
any Affiliate of the Manager does not serve as manager, in the case of CMOs
sold or intended to be sold primarily to institutional investors, the
lesser of (A) $10,000 annually and (B) an annual amount equal to $10,000
<PAGE>
32
multiplied by the percentage ownership of the Company or such subsidiary of
the Company in such CMO, or in the case of CMOs sold or intended to be sold
primarily to retail investors, the lesser of (C) $5,000 annually and (D) an
annual amount equal to $5,000 multiplied by the percentage ownership of the
Company or such subsidiary of the Company in such CMOs; or
(iii) for each Series of Non-Agency MBS Bonds issued or owned
by the Company or any subsidiary of the Company with respect to the first
class of such Series the lesser of (A) $2,500 annually and (B) an annual
amount equal to $2,500 multiplied by the percentage ownership of the
Company or such subsidiary of the Company in such Non-Agency MBS Bonds,
and, for each additional class of such Series (C) $625 annually and (D) an
annual amount equal to $625 multiplied by the percentage ownership of the
Company or such subsidiary of the Company in such Non-Agency MBS Bond.
With respect to any series of CMOs or Non-Agency MBS Bonds issued
or acquired on any day other than the first day of the month, the applicable
portion of such fees shall be calculated as if such CMOs or Non-Agency MBS Bonds
were issued or acquired on the first day of the month following the month in
which they were issued or acquired.
Where the Manager serves as manager for a Series of CMOs issued
by the Company or any subsidiary of the Company, such fees shall be compensation
to the Manager
<PAGE>
33
for bond administration, reinvestment direction, computer operations, special
redemption calculations, preparation in sending bondholder notices and like
functions. Where the Manager serves as manager for a Series of CMOs owned by
but not issued by the Company or any subsidiary of the Company, compensation to
the Manager shall be agreed upon between the issuer of such CMOs and the
Manager. Where the Manager does not serve as manager for a Series of CMOs
issued or owned by the Company or any subsidiary of the Company, such fees shall
be compensation for related accounting functions and overseeing the third-party
management and administration. Notwithstanding any other provision of this
Agreement, the Manager shall be entitled to reimbursement for its actual costs
in providing servicing functions for any pool of Mortgage Loans.
(e) ADJUSTMENT AND PAYMENT. The Manager shall compute the
estimated compensation payable or refundable under Sections 9(a), 9(b), 9(c) and
9(d) hereof as soon as practicable after the end of each fiscal quarter, but no
later than 50 days after the end of each such quarter. A copy of such computa-
tions shall be thereafter promptly submitted to the Company. Such compensation
shall be paid to the Manager, or refunded to the Company, on the first business
day of the third month after such fiscal quarter as payment on account, subject
to adjustment under this Section 9(e) of this Agreement. The aggregate amount
of the Manager's compensation under Sections 9(a), 9(b), 9(c) and
<PAGE>
34
9(d) for each fiscal year shall be adjusted within: (x) 120 days after the end
of such fiscal year; or (y) 120 days after the filing of the Company's federal
income tax return for such fiscal year, whichever is later. Such adjustment
shall be made to reflect additional information provided by the Company's tax
return for such fiscal year. Any excess owed to, or refund owed by, the Manager
shall be paid to the Manager or remitted by the Manager to the Company within
ten days of presentment of the adjustment.
Section 10. COMPENSATION FOR ADDITIONAL SERVICES. If the Company
requests the Manager (or any Affiliate or any officer or employee thereof) to
render services for the Company other than those required to be rendered by the
Manager hereunder, such additional services, if performed, shall be compensated
separately on terms to be agreed upon between such party and the Board of
Directors from time to time. To the extent that the Manager or any Affiliate of
the Manager performs any brokerage, leasing, loan servicing, loan
administration, property management or other similar services for the Company
other than as required hereunder, the rate of compensation for such services
shall be either (a) the rate at which the Manager or such Affiliate of the
Manager is then performing similar services for unaffiliated parties in the same
geographic area or (b) the rate at which qualified unaffiliated persons are then
performing such services for similar investors in the same geographic area.
<PAGE>
35
Section 11. EXPENSES OF THE MANAGER. Without regard to the
compensation received hereunder by the Manager, the Manager shall bear the
following expenses (unless agreed otherwise by the Board of Directors):
(a) Employment expenses of the personnel employed by the
Manager, including, but not limited to, salaries, wages, payroll taxes, and the
cost of employee benefit plans for such employees;
(b) Rent, telephone, utilities, office furniture, equipment,
machinery (including computers), subscriptions and such other overhead expenses
incurred in connection with the conduct of the Manager's business;
(c) Travel and other expenses of directors, officers and
employees of the Manager, except expenses of such persons incurred in connection
with attending meetings, conferences or conventions that relate solely to the
business affairs of the Company or any subsidiary of the Company;
(d) Legal, accounting and auditing fees, and tax advisory and
tax preparation fees, relating to the corporate affairs of the Manager;
(e) If the Manager or an Affiliate acts as bond administrator
for a Series of Mortgage-Backed Obligations, all expenses relating to the
performance of the services set forth in Sections 2(p) and 2(q) of this Agree-
ment for such Series of Mortgage-Backed Obligations;
<PAGE>
36
(f) Expenses incurred (including personnel) in preparation of
the Company's monthly financial statements; and
(g) Miscellaneous administrative expenses incurred in
supervising and monitoring the Company's assets or any subsidiary's assets or
relating to performance by the Manager of its functions hereunder.
If any of the expenses set out above total $5,000 or more
individually, or $15,000 or more in the aggregate and are incurred by the
Manager in part for the purposes of the Company and in part for purposes
unrelated to the Company (including expenses incurred on behalf of CAI), the
Manager shall submit an accounting to the Company's Audit Committee of the Board
of Directors on a quarterly basis to show the allocation of such expenses. The
Manager shall also submit a quarterly schedule of its allocation of expenses
between the Company and CAI.
Section 12. EXPENSES OF THE COMPANY. The Company or any subsidiary
of the Company shall pay all of its expenses, except those that are the
responsibility of the Manager pursuant to Section 11 of this Agreement or other
provisions of this Agreement, and without limiting the generality of the
foregoing, the following expenses of the Company or any subsidiary of the
Company shall be paid by the Company or such subsidiary and shall not be paid by
the Manager:
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37
(a) Expenses related to raising capital, including the cost of
borrowed money, interest payments, discounts, loan and commitment fees, points
and any other related charges;
(b) All license fees and all taxes applicable to the Company or
any subsidiary of the Company, including interest and penalties thereon;
(c) Legal, audit, accounting, underwriting, brokerage, listing,
rating agency, registration and other fees, printing, engraving and other
expenses and taxes incurred in connection with the issuance, sale, distribution,
transfer, registration and stock exchange listing of the securities of the
Company or of any subsidiary of the Company;
(d) Employment expenses, fees and out-of-pocket costs of the
Company and fees and expenses paid to employees, agents, advisers and
independent contractors, consultants, managers, and other agents (other than the
Manager) employed directly by the Company or any subsidiary of the Company or by
the Manager at the request of the Company or such subsidiary for the account of
the Company or the subsidiary;
(e) Expenses connected with the acquisition, disposition,
operation (except for those duties performed by the Manager) and ownership of
the assets of the Company or any subsidiary of the Company, including, without
limitation, commitment, appraisal, guaranty and hedging fees,
<PAGE>
38
brokerage and acquisition fees and commissions, ad valorem taxes, costs of
foreclosure, maintenance, repair and improvement of property, maintenance and
protection of the lien of mortgages, property management fees, loan origination
fees, servicing and master servicing fees, legal fees, premiums for insurance on
property owned by the Company or any subsidiary of the Company and insurance and
abstract expenses; PROVIDED, that with regard to brokerage fees, unless approved
by a majority of the Independent Directors, neither the Manager nor any of its
Affiliates shall charge a brokerage commission or similar fee to the Company or
any subsidiary of the Company in connection with the acquisition, disposition or
ownership of the assets of the Company or the subsidiary;
(f) Expenses of organizing, reorganizing, dissolving or winding-
up the Company or any subsidiary of the Company;
(g) All insurance costs not included in paragraph (e) hereof and
incurred by the Company or any subsidiary of the Company, including without
limitation, the cost of officer and director liability insurance;
(h) Expenses connected with payments of dividends or interest or
distributions in cash or any other form made or caused to be made by the Board
of Directors to holders of the securities of the Company or any subsidiary of
the Company;
(i) Direct Issuance Costs;
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39
(j) All expenses connected with communications to holders of
equity securities or debt securities of the Company or any subsidiary of the
Company and with governmental agencies and the other bookkeeping and clerical
work necessary in maintaining relations with holders of such securities and in
complying with the continuous reporting and other requirements of governmental
bodies or agencies, including, without limitation, the cost of printing and
mailing certificates for such securities and proxy solicitation materials and
reports to holders of the Company's or any subsidiary's securities and reports
to third-parties required under any indenture to which the Company or any
subsidiary of the Company is a party, except such expenses that are the
responsibility of the Manager as set forth in Section 11 hereof, including but
not limited to the expenses listed in Sections 11(a) and 11(b) incurred by the
Manager in connection with this Section 12(j);
(k) Fees and charges of any transfer agent or registrar;
(l) Fees and expenses paid to directors of the Company or any
subsidiary of the Company, except, in each case, directors who are Affiliates of
the Manager;
(m) Legal, accounting and auditing fees, and tax advisory and
tax preparation fees, relating to the operations of the Company or any
subsidiary;
(n) Legal, accounting and auditing fees, tax advisory and tax
preparation fees, consulting fees and
<PAGE>
40
expenses relating to the administration of Mortgage-Backed Obligations issued or
caused to be issued by the Company;
(o) Any judgment rendered against the Company or any subsidiary
of the Company, or against any officer or director of the Company or any
subsidiary of the Company in his capacity as such by any court or governmental
agency;
(p) If the Manager or an Affiliate does not act as bond
administrator for a Series of Mortgage-Backed Obligations issued by an
Affiliated Issuer by or on behalf of the Company, all fees charged by the bond
administrator who performs the services set forth in Sections 2(p) and 2(q) of
this Agreement for such Series of Mortgage-Backed Obligations;
(q) Fees paid to the Manager with the approval of a majority of
the Independent Director for participation by the Company in programs operated
by the Manager for the pricing and acquisition of Mortgage Loans;
(r) Amounts payable by the Company to the Manager under Section
13 of this Agreement;
(s) Third-party fees and expenses incurred by the Manager under
Section 14 of this Agreement; and
(t) Other miscellaneous expenses in connection with the
operation of the Company or any subsidiary of the Company which are not expenses
of the Manager under Section 11 of this Agreement, provided that any such single
expense in excess of $10,000 shall be submitted to the
<PAGE>
41
Company's Audit Committee of the Board of Directors on a quarterly basis.
Section 13. LIMITS OF RESPONSIBILITY OF THE MANAGER.
(a) The Company shall 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 this Agreement.
(b) Notwithstanding subsection (a) of this Section 13, the
Company shall not be responsible for any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liabilities arising out of or
attributable to the Manager's failure to comply with the terms of this Agreement
or any action or failure or omission to act by the Manager as a result of the
gross negligence, willful misconduct or lack of good faith of the Manager or any
of its agents or as a result of its or any of their reckless disregard of its
duties and any obligations hereunder, or which arise out of the willful breach
of any representation or warranty of the Manager hereunder.
(c) The Manager shall indemnify and hold harmless the Company
with respect to all expenses, losses, damages, liabilities, demands, charges or
claims of any nature in respect of acts or omissions of the Manager not in
accordance with the standards set forth in this Agreement.
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42
(d) The Manager shall promptly notify the Board of Directors of
any litigation or governmental investigation involving the Company and shall
keep the Board of Directors fully informed of the status of any such litigation
or governmental investigation.
Section 14. POOLING OF MORTGAGE LOANS; ISSUANCE OF MORTGAGE
CERTIFICATES. If the Manager determines it to be in the best interests of the
Company and consistent with the portfolio criteria approved by the Board of
Directors of the Company, the Manager shall, directly or indirectly and on
behalf of the Company, pool Mortgage Loans acquired by the Company and use its
best efforts to have Mortgage Certificates issued backed by such Mortgage Loans
which meet all underwriting and other requirements for such issuance. In
connection therewith, the Manager shall, directly or indirectly and on behalf of
the Company, apply to the respective issuer for a commitment to issue the
related Mortgage Certificates and, once such commitment has been approved,
contract to pool such Mortgage Loans and cause to be issued Mortgage
Certificates backed by such Mortgage Loans, which Mortgage Certificates shall be
owned by and registered in the name, or deposited into a depository institution
for the account, of the Company. After the issuance of such Mortgage
Certificates, unless otherwise specified by the Company, the servicer of the
related Mortgage Loans shall have all responsibilities and duties to the issuer
of such Mortgage Certificates with respect to
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43
such Mortgage Loans and Mortgage Certificates, and shall service such Mortgage
Loans after the issuance of the Mortgage Certificates which they back in
accordance with the requirements of the issuer of such Mortgage Certificates.
In connection therewith, the Manager shall apply conditions of the
Servicing Agreement, and, if deemed appropriate, recommend to the Company the
termination of such Servicing Agreement; acting as a liaison between servicers
and the Company and working with servicers to the extent necessary to improve
their servicing performance; review of and recommendations as to fire losses,
easement problems and condemnation, delinquency and foreclosure procedures with
regard to the Mortgage Loans; review of servicers' delinquency, foreclosing and
other reports on Mortgage Loans; supervising claims filed under any mortgage
insurance policies; and enforcing the obligation of any servicer to repurchase
Mortgage Loans from the Company.
Section 15. NO JOINT VENTURE. The Company and the Manager are not
partners or joint venturers with each other and nothing herein shall be
construed to make them such partners or joint venturers or impose any liability
as such on either of them.
Section 16. TERM. This Agreement shall continue in force until
December 31, 1994 unless otherwise renewed or extended.
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44
Section 17. TERMINATION OF AGREEMENT.
(a) Notwithstanding any other provision of this Agreement to the
contrary, this Agreement may be terminated by either party with or without cause
upon 60 days' written notice. In addition, this Agreement may be terminated at
any time by a majority vote of (i) the Independent Directors or (ii) the holders
of the Common Stock of the Company.
(b) This Agreement may be immediately terminated by the Company
by written notice of termination from the Company to the Manager upon the
occurrence of any of the following events:
(i) if the Manager shall violate any material provision of
this Agreement which, after written notice of such violation, is not cured
within 30 days;
(ii) if the Manager or any of its Affiliates shall be
adjudged bankrupt or insolvent by a court of competent jurisdiction, or any
order shall be made by a court of competent jurisdiction for the
appointment of a receiver, liquidator or trustee of the Manager or any of
its Affiliates or of all or substantially all of its property by reason of
the foregoing or approving any petition filed against the Manager or any of
its Affiliates for its reorganization and such adjudication, order or
petition has not been stayed or discharged pending appeal within 60 days of
its entry;
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45
(iii) if the Manager or any of its Affiliates shall
institute proceedings for voluntary bankruptcy or shall file a petition
seeking reorganization under the federal bankruptcy laws, or for relief
under any law for the relief of debtors, or shall consent to the appoint-
ment of a receiver, or shall make a general assignment for the benefit of
its creditors, or shall admit in writing its inability to pay its debts
generally as they become due;
(iv) if any governmental authority, court or self-regulatory
authority shall withdraw, suspend or revoke or declare invalid any license,
charter, authorization or, registration required or necessary for the con-
duct by the Manager or any of its Affiliates of any material portion of its
business or businesses and such adjudication, order or petition has not
been stayed or discharged pending appeal within 60 days of its entry; or
(v) if any event or circumstances shall occur which
materially impairs the financial condition of the Manager or any of its
Affiliates or the ability of the Manager to perform its obligations
hereunder.
The Manager agrees that if any of the events specified in
subsection (b) of this Section 17 shall occur, it will give written notice
thereof to the Board of Directors within five days after the occurrence of such
event.
<PAGE>
46
Section 18. ASSIGNMENTS.
(a) Except as set forth in Section 18(b) of this Agreement, this
Agreement shall terminate automatically in the event of its assignment, in whole
or in part, by the Manager, unless such assignment is consented to in writing by
the Company with the consent of a majority of the Independent Directors. Any
such assignment shall bind the assignee hereunder in the same manner as the
Manager is bound. In addition, the assignee shall execute and deliver to the
Company a counterpart of this Agreement naming such assignee as Manager. This
Agreement shall not be assigned by the Company without the prior written consent
of the Manager, except in the case of assignment by the Company to a REIT or
other organization which is a successor (by merger, consolidation or purchase of
assets) to the Company, in which case such successor organization shall be bound
hereunder and by the terms of such assignment in the same manner as the Company
is bound hereunder.
(b) Notwithstanding any provision of this Agreement, the Manager
may subcontract and assign any or all of its responsibilities at no additional
cost to the Company under Sections 2(p), 2(q) and 2(r) of this Agreement to any
of its Affiliates, and the Company hereby consents to any such assignment and
subcontracting.
<PAGE>
47
Section 19. ACTION UPON TERMINATION.
(a) Except as provided in Section 19(b) of this Agreement, from
and after the effective date of termination of this Agreement, pursuant to
Sections 16, 17 or 18 of this Agreement, the Manager shall not be entitled to
compensation for further services hereunder, but shall be paid all compensation
accruing to the date of termination. Upon such termination, the Manager shall
forthwith:
(i) Pay over to the Company or any subsidiary of the
Company all money collected and held for the account of the Company or any
subsidiary of the Company pursuant to this Agreement;
(ii) Deliver to the Board of Directors a full accounting,
including a statement showing all payments collected by it and a statement
of all money held by it, covering the period following the date of the last
ended fiscal quarter;
(iii) Deliver to the Board of Directors all property and
documents of the Company or any subsidiary of the Company then in the
custody of the Manager;
(iv) Present an accounting to the Independent Directors of
any accrued compensation pursuant to Section 9 above and an accounting of
any expenses for which it seeks reimbursement; and
(v) If the Company so requests, sell the items listed on
Exhibit B back to the Company at a
<PAGE>
48
price equal to the net book value of such items, computed in accordance
with GAAP, as of the date of termination.
(b) Notwithstanding any provisions of this Agreement, if the
Manager is terminated pursuant to Section 17(a) of this Agreement within twelve
months after the occurrence of any of the events set forth in Section 19(c)
hereunder, the Manager shall be entitled to compensation as follows:
(i) The Manager shall be paid all compensation to the date
of termination; and
(ii) On the final day of each fiscal quarter after the date
of termination and ending one year thereafter, the Manager shall receive an
amount equal to one-quarter of the average of the annual aggregate of all
compensation incurred under this Agreement and its predecessors during the
three fiscal years prior to the fiscal year in which termination occurred.
(c) The events referred to in Section 19(b) are as follows:
(i) Any corporation, person or other entity (other than the
Company, the Manager or their respective affiliates) makes a tender or
exchange offer for shares of the Company's Common Stock pursuant to which
such corporation, person or other entity acquires
<PAGE>
48
15% or more of the issued and outstanding shares of the Company's Common
Stock;
(ii) The stockholders of the Company approve a definitive
agreement to merge or consolidate the Company with or into another
corporation or to sell or otherwise dispose of all or substantially all of
its assets, except in the case of a merger or consolidation with, or sale
to, the Manager or an affiliate of the Manager; or
(iii) Any person, within the meaning of Section 3(a)(9) or
Section 13(d)(3) of the Securities Exchange Act of 1934, acquires more than
15% (30% in the case of a passive investor) of the Company's issued and
outstanding voting securities.
Section 20. RELEASE OF MONEY OR OTHER PROPERTY UPON WRITTEN REQUEST.
The Manager agrees that any money or other property of the Company or any
subsidiary of the Company held by the Manager under this Agreement shall be held
by the Manager as custodian for the Company or such subsidiary, and the
Manager's records shall be appropriately marked clearly to reflect the ownership
of such money or other property by the Company or such subsidiary. Upon the
receipt by the Manager of a written request signed by a duly authorized officer
of the Company requesting the Manager to release to the Company or any
subsidiary of the Company any money or other property then held by the Manager
for the account of the Company or any subsidiary of the Company
<PAGE>
50
under this Agreement, the Manager shall forthwith release such money or other
property to the Company or such subsidiary. The Manager shall not be liable to
the Company, any subsidiary of the Company, the Independent Directors, or the
Company's or its subsidiary's stockholders for any acts performed or omissions
to act by the Company or any subsidiary of the Company in connection with the
money or other property released to the Company or any subsidiary of the Company
in accordance with this Section. The Company and any subsidiary of the Company
shall indemnify the Manager, its directors, officers and employees against any
and all expenses, losses, damages, liabilities, demands, charges and claims of
any nature whatsoever, which arise in connection with the Manager's release of
such money or other property to the Company or any subsidiary of the Company in
accordance with the terms of this Section 20 of this Agreement, except insofar
as such expenses, losses, damages, liabilities, demands, charges and claims
arise out of acts of the Manager, its directors, officers and employees
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties. Indemnification pursuant to this provision shall be
in addition to any right of the Manager to indemnification under Section 13 of
this Agreement.
<PAGE>
51
Section 21. REPRESENTATIONS AND WARRANTIES.
(a) The Company hereby represents and warrants to the Manager as
follows:
(i) The Company has been duly organized and is validly
existing and in good standing under the laws of the State of Maryland; the
Company has the corporate power to own its assets and to transact the
business in which it is now engaged and is duly qualified as a foreign
corporation and in good standing under the laws of each jurisdiction where
its ownership or lease of property or the conduct of its business requires
such qualification, except for failures to be so qualified, authorized or
licensed that could not in the aggregate have a material adverse effect on
the business operations, assets or financial condition of the Company and
its subsidiaries, taken as a whole. The Company does not do business under
any fictitious business name.
(ii) The Company has the corporate power and authority to
execute, deliver and perform this Agreement and all obligations required
hereunder and has taken all necessary corporate action to authorize the
execution, delivery and performance of this Agreement and all obligations
required hereunder. No consent of any other person including, without
limitation, directors, stockholders and creditors of the Company, and no
license, permit, approval or authoriza-
<PAGE>
52
tion of, exemption by, notice or report to, or registration, filing or
declaration with, any governmental authority is required by the Company in
connection with this Agreement or the execution, delivery, performance,
validity or enforceability of this Agreement and all obligations required
hereunder. This Agreement has been, and each instrument or document
required hereunder will be, executed and delivered by a duly authorized
officer of the Company, and this Agreement constitutes, and each instrument
or document required hereunder when executed and delivered hereunder will
constitute, the legally valid and binding obligation of the Company
enforceable against the Company in accordance with its terms.
(iii) The execution, delivery and performance of this
Agreement and the documents or instruments required hereunder will not
violate any provision of any existing law or regulation binding on the
Company, or any order, judgment, award or decree of any court, arbitrator
or governmental authority binding on the Company, or the Governing
Instruments of, or any securities issued by, the Company or of any
mortgage, indenture, lease, contract or other agreement, instrument or
undertaking to which the Company is a party or by which the Company or any
of its assets may be bound, the violation of which would have a material
adverse effect on the business operations, assets or
<PAGE>
53
financial condition of the Company and its subsidiaries, taken as a whole,
and will not result in, or require, the creation or imposition of any lien
on any of its property, assets or revenues pursuant to the provisions of
any such mortgage, indenture, lease, contract or other agreement,
instrument or undertaking.
(b) The Manager hereby represents and warrants to the Company as
follows:
(i) The Manager is duly organized, validly existing and in
good standing under the laws of the State of Delaware; the Manager has the
power to own its assets and to transact the business in which it is now
engaged and is duly qualified to do business and is in good standing under
the laws of each jurisdiction where its ownership or lease of property or
the conduct of its business requires such qualification, except for
failures to be so qualified, authorized or licensed that could not in the
aggregate have a material adverse effect on the business operations, assets
or financial condition of the Manager and its subsidiaries, taken as a
whole. The Manager does not do business under any fictitious business
name.
(ii) The Manager has the power and authority to execute,
deliver and perform this Agreement and all obligations required hereunder
and has taken all necessary corporate action to authorize the execution,
delivery and performance of this
<PAGE>
54
Agreement and all obligations required hereunder. No consent of any other
person including, without limitation, directors and creditors of the
Manager, and no license, permit, approval or authorization of, exemption
by, notice or report to, or registration, filing or declaration with, any
governmental authority is required by the Manager in connection with this
Agreement or the execution, delivery, performance, validity or enforcea-
bility of this Agreement and all obligations required hereunder. This
Agreement has been, and each instrument or document required hereunder will
be, executed and delivered by a duly authorized agent of the Manager, and
this Agreement constitutes, and each instrument or document required here-
under when executed and delivered hereunder will constitute, the legally
valid and binding obligation of the Manager enforceable against the Manager
in accordance with its terms.
(iii) The execution, delivery and performance of this
Agreement and the documents or instruments required hereunder, will not
violate any provision of any existing law or regulation binding on the
Manager, or any order, judgment, award or decree of any court, arbitrator
or governmental authority binding on the Manager, or the Governing
Instruments of, or any securities issued by, the Manager or of any mort-
gage, indenture, lease, contract or other agreement,
<PAGE>
55
instrument or undertaking to which the Manager is a party or by which the
Manager or any of its assets may be bound, the violation of which would
have a material adverse effect on the business operations, assets or
financial condition of the Manager and its subsidiaries, taken as a whole,
and will not result in, or require, the creation or imposition of any lien
on any of its property, assets or revenues pursuant to the provisions of
any such mortgage, indenture, lease, contract or other agreement,
instrument or undertaking.
Section 22. NOTICES. Unless expressly provided otherwise herein, all
notices, requests, demands and other communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been duly given,
made and received when delivered against receipt or upon actual receipt of
registered or certified mail, postage prepaid, return receipt requested,
addressed as set forth below:
(a) If to the Company:
3600 South Yosemite Street
Suite 900
Denver, Colorado 80237
Attention: President
with a copy given in the manner prescribed above, to the
Chief Operating Officer/Chief Financial Officer, Chief
Accounting Officer and each member of the Board of Directors
at their addresses as set forth in the records of the
Company.
If to the Manager:
<PAGE>
56
3600 South Yosemite Street
Suite 900
Denver, Colorado 80237
Attention: President
with a copy given in the manner prescribed above, to the
General Counsel at the same address.
Either party may alter the address to which communications or copies
are to be sent by giving notice of such change of address in conformity with the
provisions of this Section 22 for the giving of notice.
Section 23. BINDING NATURE OF AGREEMENT; SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, personal representatives, successors and
assigns as provided herein.
Section 24. ENTIRE AGREEMENT. This Agreement contains the entire
agreement and understanding between the parties hereto with respect to the
subject matter hereof. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
Section 25. CONTROLLING LAW. This Agreement and all questions
relating to its validity, interpretation, performance and enforcement shall be
governed by and construed, interpreted and enforced in accordance with the laws
of the State of Colorado, notwithstanding any Colorado or other conflict-of-law
provisions to the contrary.
<PAGE>
57
Section 26. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument.
Section 27. COMPUTATION OF INTEREST. Interest will be computed on
the basis of a 360-day year consisting of twelve months of thirty days each.
Section 28. INDULGENCES, NOT WAIVERS. Neither the failure nor any
delay on the part of a party to exercise any right, remedy, power or privilege
under this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or of any other right, remedy, power or privilege,
nor shall any waiver of any right, remedy, power or privilege with respect to
any occurrence be construed as a waiver of such right, remedy, power or
privilege with respect to any other occurrence. No waiver shall be effective
unless it is in writing and is signed by the party asserted to have granted such
waiver.
Section 29. COSTS AND EXPENSES. Each party hereto shall bear its own
costs and expenses (including the fees and disbursements of counsel and
accountants) incurred in connection with the negotiations and preparation of and
the closing under this Agreement, and all matters incident thereto.
<PAGE>
58
Section 30. SCHEDULES AND EXHIBITS. All Schedules and Exhibits
referred to herein or attached hereto are hereby incorporated by reference into,
and made a part of, this Agreement.
<PAGE>
59
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
ASSETS INVESTORS CORPORATION
By: /s/ Spencer I. Browne
---------------------
Spencer I. Browne
President and Chief
Executive Officer
FINANCIAL ASSET MANAGEMENT
CORPORATION
By: /s/ Paris G. Reese III
----------------------
Vice President
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our report dated March 17,
1995, appearing on Page F-2 of the Annual Report on Form 10-K on the
consolidated financial statements of Asset Investors Corporation appearing on
pages F-3 through F-30 of the Annual Report on Form 10-K for the year ended
December 31, 1994.
KENNETH LEVENTHAL & COMPANY
Phoenix, Arizona
March 28, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-1-1994
<PERIOD-END> DEC-31-1994
<CASH> 14,961
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,961
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,151,511
<CURRENT-LIABILITIES> 5,982
<BONDS> 1,021,188
<COMMON> 242
0
0
<OTHER-SE> 72,723
<TOTAL-LIABILITY-AND-EQUITY> 1,151,511
<SALES> 0
<TOTAL-REVENUES> 136,715
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 120,485
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,872
<INCOME-PRETAX> 13,358
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,358
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0.92
</TABLE>
