SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
X SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9360
ASSET INVESTORS CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 84-1038736
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 South Yosemite Street, Suite 900 80237
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
(303) 793-2703
(Registrant's telephone number, including area code)
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 February 15, 1996, 24,355,862 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 $71,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K is incorporated by reference to the registrant's 1996
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.
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1995
TABLE OF CONTENTS
PAGE
Part I
ITEM 1. BUSINESS
(a) General Development of Business......................... 1
(b) Narrative Description of Business....................... 3
ITEM 2. PROPERTIES..................................................... 18
ITEM 3. LEGAL PROCEEDINGS.............................................. 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 18
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREOWNER MATTERS............................................. 18
ITEM 6. SELECTED FINANCIAL DATA........................................ 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 20
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....... F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................ 31
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 31
ITEM 11. EXECUTIVE COMPENSATION......................................... 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................... 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 31
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K............................................ 31
SIGNATURES................................................................ 35
(i)
<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 following the consolidated financial statements of the
company.
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 owns approximately 27% of the common stock of
Commercial Assets, Inc. (AMEX: CAX).
The company operates in a manner that permits it to qualify for the
income tax treatment accorded to a REIT under the Code. Accordingly, the
company's REIT income and its Excess Inclusion income, with certain limited
exceptions, are not subject to state or 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. Certain employees of the Manager or of MDC have been
designated as officers of the company.
Effective April 1, 1996, Financial Asset Management LLC will assume the
obligations of the Management Agreement from the Manager. Financial Asset
Management LLC is 80% owned by two subsidiaries of MDC and 20% owned by Spencer
I. Browne, the President of the company.
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 and other rights with respect to the underlying mortgage
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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.
Because 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: (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.
Overview - During 1995, the company continued to acquire residential
mortgage loan-related assets that are less sensitive to mortgage interest rates
and prepayments than its CMO Ownership Interests. While these assets should
benefit from an improving economy, they are sensitive to credit risks. The
company acquired 159 non-agency MBS bonds (also referred to as high-yield bonds
backed by home mortgage loans) during 1994 and 1995 with an aggregate
outstanding balance on the date of acquisition of $188,338,000. These non-agency
MBS bonds were acquired at a total cost of $57,588,000, a weighted-average
acquisition price of 35.8%, and currently have a weighted-average pass-through
coupon interest rate of 7.0%.
Sale 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. These assets
also generated substantial amounts of Excess Inclusion income which the company
was required to distribute in dividends to maintain its status as a REIT. As a
result, the company was required to distribute much of its capital. For these
reasons, among others, the company has sold substantially all of its CMO
Ownership Interests over the past three years.
Formation of Commercial Assets - 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, valued at $52,598,000, to
the company's shareowners as a taxable dividend. The Distribution satisfied a
significant portion of the company's REIT distribution requirements for 1993 and
1992, and diversified a portion of its assets. The company's capital was reduced
by the amount of the distribution.
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.
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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."
The company's non-agency MBS bonds have credit risk. Non-agency MBS
bonds are collateralized by mortgage loans that do not meet GNMA, FNMA or FHLMC
guarantee standards, typically because the mortgage loans exceed agency size
limits (e.g., currently $207,000) or because the borrower does not meet other
agency credit underwriting criteria (a "non-conforming mortgage loan"). The
company generally acquires the subordinate class of the non-agency MBS bond
which bears the first losses from the related Mortgage Collateral. If a borrower
defaults on a mortgage loan which is pledged as collateral for a residential
mortgage loan securitization and the proceeds of the foreclosure sale of the
property securing the mortgage loan are less than the unpaid balance of the
mortgage, foreclosure costs and servicer advances, the company, as the holder of
the first-loss class, would suffer a loss. The loss would equal the unpaid
principal balance plus foreclosure costs and servicer advances, net of proceeds
from the foreclosure sale, mortgage insurance and loss indemnifications, if any.
Conversely, the holder of an agency-guaranteed mortgage loan virtually is
assured of full payment of principal and interest because of the agency
guarantee.
The company intends to use its available funds to acquire additional
non-agency MBS bonds. Although the company's primary emphasis will be on the
acquisition of subordinate unrated non-agency MBS bonds, future acquisitions may
include, among other things, rated classes of residential mortgage loan
securitizations, participations in residential real estate or other assets. The
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) enhance stockholders' equity. There can be no
assurance that the company will achieve any or all of these objectives.
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 interest advances. In contrast, agency-guaranteed mortgage loans or
CMO Bonds secured by agency-guaranteed or insured mortgage certificates do not
have credit risk because of the agency guarantee.
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<PAGE>
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. 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 first to the
senior bond classes and then to the subordinated non-agency MBS bond classes.
The senior class consists of securities that 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, credit support non-agency MBS bond class (which
generally incurs the first losses). 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 substantially higher yield than the more senior
classes, have the 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 the more
senior, rated classes.
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 company's right to
distributions of principal and interest is subordinated to all the more senior
classes of the non-agency MBS bond issuance. Furthermore, as the holder of the
credit support non-agency MBS bond class, the company 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.
Despite credit underwriting of the non-conforming mortgage loans and
the borrowers by mortgage originators, the nationally recognized credit rating
agencies generally are unwilling to give favorable ratings to classes of
non-conforming mortgage loan securitizations unless these classes have the
benefit of credit enhancement. An unrated credit support class absorbs the first
losses when homeowners default on their mortgage loans. Therefore, the inclusion
of the unrated credit support class in a non-conforming mortgage loan
securitization enables the rating agencies to rate the more senior non-agency
MBS bond classes.
A substantial portion 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 as of the date the loan was originated. 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 date subsequent to origination of the loan as a result of changes
in the value of the 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 effect of the mortgage insurance is to reduce
the loan-to-value ratio at the origination date to generally less than 75%. In
addition, the borrower must meet certain credit underwriting criteria.
An illustration of a non-conforming mortgage loan securitization
follows. The example assumes the existence of a home with an appraised value of
$375,000 securing a non-conforming mortgage loan with a principal balance of
$300,000. If an issuer purchased 1,000 similar $300,000 mortgage loans 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, assuming a
loan-to-value ratio of 80%.
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<PAGE>
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 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.
1,000 Homes $300,000,000 Aggregate Non-Conforming Mortgage
Principal Amount of Loan Securitization
Non-Conforming Mortgage Structure (2,3)
Loans (1)
[Illustration
of a house] [Illustration $282,000,000
of a Mortgage Total principal amount
Certificate] of AAA, AA, A and BBB-
Rated Senior Non-
Agency MBS Bonds
$16,500,000
Total Principal Amount
of BB and B-Rated,
$300,000,000 Subordinate Non-Agency
Deeds of Trust MBS Bonds
First Mortgage Liens
$1,500,000 (*)
$375,000,000
Aggregate
Appraised Value
$75,000,000 $75,000,000
Aggregate Homeowners' Aggregate Homeowners'
Equity Based on Appraised Equity Based on Appraised
Value Value
* Total Principal Amount of Unrated Credit Support Non-Agency MBS Bonds
- ---------------
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(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% of the
appraised value of the home. As a result, no homeowner is required to
obtain private mortgage insurance.
(2) The principal amount of each non-agency MBS bond class (often referred to
as "splits") 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 proceeds from the sale
of the property securing the mortgage loan, including private mortgage
insurance, is 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.
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. The non-agency MBS bond represents an interest in the
securitization. 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 each payment date, the trustee first makes payments of interest to
the senior classes followed by principal payments to these classes. Next,
interest and principal payments are made to the credit support classes, most
often in their order of seniority as determined by the terms of the indenture.
Prepayments of principal on the non-conforming mortgage loans backing the
non-agency MBS bonds are generally allocated to the senior classes during the
first five years. After that period, the credit support classes receive a
portion of the prepayments that increases over time.
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 prepayments, defaults and the severity and timing of
foreclosure losses on the non-conforming mortgage loans comprising the Mortgage
Collateral for such non-agency MBS bonds. As a holder of the credit support
class of non-agency MBS bonds, the company's right 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 company's 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 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 to a lesser extent by the amount and timing of principal
prepayments on the 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
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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 to the holders of the credit support
class. Because the company is acquiring the non-agency MBS bonds at significant
discounts from their outstanding principal balances, 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 anticipated.
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.
<TABLE>
<CAPTION>
THE PUBLIC SECURITIES ASSOCIATION PREPAYMENT ASSUMPTION MODEL
CONSTANT PREPAYMENT RATE
Years 0 1 2 3 4 30
- ----- - - - - - --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
100 PSA 0.00% 1.20% 2.40% 3.60% 4.80% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%
200 PSA 0.00% 2.40% 4.80% 7.20% 9.60% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00%
300 PSA 0.00% 3.60% 7.20% 10.80% 14.40% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00%
</TABLE>
The graph is a representation of prepayments (100 PSA, 200 PSA and 300 PSA) as
expressed as an annual percentage of the outstanding mortgage balance over time.
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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, as well
as 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 and changes in the value of
the mortgaged properties.
The rate and timing 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 Mortgage Defaults 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, known as the "SDA 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.
<TABLE>
<CAPTION>
THE PUBLIC SECURITIES ASSOCIATION STANDARD DEFAULT ASSUMPTION MODEL
ANNUALIZED DEFAULT RATE
MONTHS 1 31 61 91 121 151 181 221 241 271 301 331 360
- ------ - -- -- -- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
100% SDA 0.00020 0.00600 0.00600 0.00306 0.00030 0.00030 0.00030 0.00030 0.00030 0.00030 0.00030 0.00030 0.00030
50% SDA 0.00010 0.00300 0.00300 0.00153 0.00015 0.00015 0.00015 0.00015 0.00015 0.00015 0.00015 0.00015 0.00015
30% SDA 0.00006 0.00180 0.00180 0.00095 0.00010 0.00010 0.00010 0.00010 0.00010 0.00010 0.00010 0.00010 0.00010
</TABLE>
The graph is a representation of 100% SDA, 50% SDA and 30% SDA as expressed as
an annual percentage of the outstanding mortgage balance over time.
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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, 50% SDA assumes half the default rates of 100% of SDA. The SDA
curve reflects the historical fact that defaults on non-conforming mortgage
loans generally occur with greater frequency in years three through five 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, particularly
those owned by the company, but merely a standard to compare and analyze default
risk in non-agency MBS bonds.
The Effect of Loss Severity on Non-agency MBS Bonds - 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, foreclosure costs and interest advances. 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.
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 Mortgage Collateral for the non-agency MBS bonds currently owned by
the company is geographically concentrated in California and the New England
states.
Illustration of Cash Generated from and Losses Allocated to a
Non-agency MBS Bond - The company receives a high cash return on its non-agency
MBS bonds because the monthly scheduled principal and interest payments are
computed on the outstanding principal balance of the bonds even though they were
acquired at a significant discount. Presented below are the computations of cash
that would be generated during the first year of holding a hypothetical first
loss, non-agency MBS bond.
-9-
<PAGE>
Principal balance of a first loss,
non-agency MBS bond $ 1,000,000
Acquisition cost 25%
-----------
Cost of first loss, non-agency MBS bond $250,000
===========
Scheduled principal and interest payment on the non-agency MBS bonds in year
one:
Interest (7.5% coupon) $ 74,687
Principal 9,218
------------
$ 83,905
============
Cash-on-cash return in year one ($83,905 / $250,000) 33.6%
============
Presented below is an example of the effects of a loss from a
foreclosed mortgage loan that backs the hypothetical non-agency MBS bond at the
end of the first year.
<TABLE>
<S> <C> <C> <C>
Original balance of foreclosed mortgage with an 8.0% coupon and 30-year term $ 400,000
Outstanding balance of the foreclosed mortgage at the end of year one 396,658
Outstanding Acquisition Economic
Balance Cost Interest
------- ---- --------
Outstanding balance of the first loss non-agency MBS bond at the end
of year one $ 990,782 25% $ 247,696
Foreclosure loss at the end of year one assuming a 20% loss severity
($396,658 x 20%) 79,332 25% 19,833
---------- -----------
Adjusted balance after allocated loss of the first loss non-agency
MBS bond $ 911,450 25% $ 227,863
========== ===========
Scheduled principal and interest payment in year two based on
the adjusted balance of the non-agency MBS bond:
Interest (7.5% coupon) $ 68,054
Principal 9,139
-----------
$ 77,193
===========
Cash-on-cash return adjusted for the loss ($77,193 / $250,000) 30.9%
===========
</TABLE>
The original investment in the first loss non-agency MBS bond of
$250,000 would be returned within three years ($83,905 per year) if there are no
credit losses. If the bond is allocated a loss of $79,332 from the mortgage
foreclosure of a $400,000 mortgage at the end of year one, the annual cash flow
is reduced by $6,712 to $77,193 and the pay back period is increased from 3.0
years to 3.2 years.
THE PRECEDING ILLUSTRATION IS ONLY INTENDED TO BE AN EXAMPLE OF CASH GENERATED
AND LOSSES ALLOCATED TO A NON-AGENCY MBS BOND AND DOES NOT REFLECT ANY ACTUAL
NON-AGENCY MBS BONDS OWNED OR TO BE ACQUIRED BY THE COMPANY. THE ACTUAL CASH
GENERATED AND LOSSES ALLOCATED TO SUCH MBS BONDS ARE LIKELY TO DIFFER FROM THE
ILLUSTRATION.
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Illustration of Potential Yields on the Company's Non-agency MBS Bonds
- - The table below illustrates the sensitivity of the yield-to-maturity of the
company's portfolio of non-agency MBS bonds to a range of potential prepayments
and defaults on the mortgage loans backing the non-agency MBS bonds.
The computed pre-tax yields-to-maturity on the company's non-agency MBS
bonds are computed from: (i) the amortized cost of the non-agency MBS bonds at
December 31, 1995; and (ii) future cash flows from the company's non-agency MBS
bonds. The computations were prepared based upon the assumptions that: (i) the
non-conforming mortgage loans backing the non-agency MBS bonds prepay at each of
the indicated percentages of PSA; (ii) defaults occur monthly at rates equal to
the SDAs indicated; (iii) liquidation of a defaulted non-conforming mortgage
loan through foreclosure sale occurs 12 months after the default; and (iv) a
loss severity of 10%, 20% and 30% in the month in which the non-conforming
mortgage loans first defaulted. To the extent these assumptions are incorrect,
the computed yields would be different.
<TABLE>
<CAPTION>
Illustration of Potential Pre-Tax Yields-to-Maturity
of the Company's Non-Agency MBS Bonds
Potential Pre-tax
Yield-to-Maturity (in percentages)
----------------------------------
Half Double
Loss Severity Assumed Assumed Assumed
Prepayment Rate Percentage (2) SDA SDA (3) SDA
- ------------------- -------------- --------- -------- --------
<S> <C> <C> <C> <C>
Half Expected PSA 10% 29.4% 27.6% 23.5%
20 27.6 23.4 13.8
30 25.5 18.6 6.1
Expected PSA (1) 10 32.0 30.6 27.2
20 30.5 27.1 18.2
30 28.9 22.7 9.8
Double Expected PSA 10 36.0 34.9 32.4
20 34.8 32.3 25.9
30 33.6 29.3 18.1
- ---------------
<FN>
1 Prepayment speeds ranging from 200 PSA to 300 PSA.
2 Expressed as a percentage of loss of principal amount of mortgage loans.
3 Future default rates ranging from 30 SDA to 100 SDA.
</FN>
</TABLE>
The pre-tax yields set forth above were calculated by determining the
monthly discount rate which, when applied to the assumed stream of cash flows to
be paid on the company's non-agency MBS bonds, would cause the discounted
present value of such assumed stream of cash flows to equal the amortized cost
of the company's non-agency MBS bonds at December 31, 1995 of $52,354,000. These
yields do not take into account the different interest rates at which the
company would reinvest payments of interest and principal on such non-agency MBS
bond.
THE PRECEDING TABLE IS 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
-11-
<PAGE>
CASH FLOWS IS CRITICAL TO DETERMINING YIELDS, THE YIELDS-TO-MATURITY IN THIS
EXAMPLE ARE LIKELY TO DIFFER FROM THE ACTUAL YIELDS ON THE NON-AGENCY MBS BONDS
OWNED BY THE COMPANY, AND SUCH DIFFERENCES MAY BE MATERIAL. THERE CAN BE NO
ASSURANCE THAT THE MORTGAGE COLLATERAL WILL PREPAY AT ANY PARTICULAR RATE, 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 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 OF THE NET CARRYING VALUE OF ITS NON-AGENCY MBS BONDS.
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 bond classes primarily
secured by mortgage loans on multi-family real estate. The company has been
advised by Commercial Assets that it intends to operate in a manner that will
permit it to qualify as a REIT for federal income tax purposes.
The process of commercial mortgage loan securitization is similar to
the process of single-family mortgage loan securitization. Commercial Assets
owns and manages interests that are heavily weighted toward 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 from defaults on the
underlying commercial mortgage loans comprising the Mortgage Collateral and have
substantially greater credit risk than the more senior classes of such bonds.
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 had
historically consisted of CMO Subsidiaries, CMO Residuals and Acquired CMO
Classes. CMO Subsidiaries and CMO Residuals entitled 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). The company has liquidated substantially all of its CMO Ownership
Interests.
Subsidiaries of the Company
At December 31, 1995, the company had four wholly-owned corporate
subsidiaries: Asset Mortgage Funding, Asset Funding, Asset Acceptance and Asset
Southwest. Each of these entities is a limited-purpose finance subsidiary which
was created for the purpose of issuing CMOs.
-12-
<PAGE>
Competition
In acquiring mortgage-related assets, including non-agency MBS bonds,
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.
Capital Resources
Substantially all of the proceeds received by the company from the
issuance of Common Stock has been 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 24,355,862 shares were issued
and outstanding as of February 15, 1996.
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 February
15, 1996, 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 in the open market with voluntary cash payments
through the Reinvestment Plan.
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. Compliance with this requirement limits the
assets the company may acquire. In connection with its acquisition of non-agency
MBS bonds, the company has adopted a policy of obtaining substantial foreclosure
-13-
<PAGE>
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.
More than 55% of the company's consolidated assets are Qualifying
Interests. 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.
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, 1996. 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.
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 resulting 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 equal to 3/8 of 1%
of the "average invested assets" of the company and its subsidiaries for such
-14-
<PAGE>
year. In 1993, 1994 and 1995, the Incentive Fee was based on the company's cash
distributions to shareowners. The Manager was entitled to the Incentive Fee only
after the company's shareowners first received a return on the company's
stockholders' equity equal to the "Ten-Year U.S. Treasury Rate" plus one
percent. Twenty percent of the company's distributions in excess of this minimum
return to shareowners was 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.
In 1996, the Management Agreement was amended to provide that the
Incentive Fee be based on the company's net income calculated in accordance with
generally accepted accounting principles ("GAAP"). As of January 1, 1996, the
Incentive Fee provides that the Manager will receive 20% of the amount by which
GAAP net income exceeds the product of the "Ten-Year U.S. Treasury Rate" plus
one percent multiplied by the company's stockholders equity.
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.
Federal Income Taxation of the Company
General - For all taxable years commencing on or after January 1, 1987,
the company has operated in a manner that permits 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 (in each case other than another REIT). 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 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.
-15-
<PAGE>
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 result from 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 non-qualifying income.
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. 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. Because of the nature of the company's income from its assets and its
deductions with respect to its obligations, under certain circumstances, the
company may generate REIT income in excess of its cash flow. At December 31,
1995, the company had a NOL carryover of approximately $101,000,000. 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 shareowners treat distributions from the company for tax purposes
under the Code.
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 pension plans and other
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.
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.
-16-
<PAGE>
Excess Inclusion Income - Between 1987 and 1995, 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 1995, 1994 and 1993, 12%,
100% and 100%, respectively, of the cash dividends paid to the company's
shareowners was Excess Inclusion income.
Between 1993 and 1995, the company sold substantially all 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 negligible. The company's ownership interests in Commercial Assets and
non-agency MBS bonds do not generate Excess Inclusion income.
THE PROVISIONS OF THE CODE ARE EXTREMELY 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. 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
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 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
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<PAGE>
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 and MDC 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 February 15, 1996, 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 1995.
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
---- --- ---------
1995
- ----
<S> <C> <C> <C>
First Quarter $2-3/8 $1-5/8 $.08
Second Quarter 2-5/8 2-1/4 .08
Third Quarter 2-7/8 2-3/8 .09
Fourth Quarter 3-3/8 2-5/8 .09
1994
- ----
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(1)
- ----------------
<FN>
(1) Consisted of a regular dividend of $.08 per share and two special dividends
of $.03 per share each.
</FN>
</TABLE>
-18-
<PAGE>
As of February 15, 1996, 24,355,862 shares of Common Stock were
outstanding and were held by 3,222 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.
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, 1995 and 1994, and for each of the three years in the period ended December
31, 1995, is included elsewhere in this Annual Report on Form 10-K (in
thousands, except per share data).
<TABLE>
<CAPTION>
Statement of Operations Data: (1)
Year Ended December 31,
-----------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Revenues from:
<S> <C> <C> <C> <C> <C>
Ongoing operations $ 10,871 $ 3,448 $ 1,126 $ -- $ --
Liquidating operations 7,328 15,456 (41,697)(2) (24,874) 41,649
--------- --------- ---------- ----------- ---------
$ 18,199 $ 18,904 $ (40,571) $ (24,874) $ 41,649
========= ========= ========== =========== =========
Net income (loss) from:
Ongoing operations $ 7,933 $ 1,461 $ (3,105) $ (2,482) $ (1,696)
Liquidating operations 6,507 11,897 (47,913)(2) (29,640) 30,869
--------- --------- ---------- ----------- ---------
$ 14,440 $ 13,358 $ (51,018) $ (32,122) $ 29,173
========= ========= ========== =========== =========
Net income (loss) per share $ 0.60 $ 0.92 $ (3.64)(2) $ (2.30) $ 2.09
Dividends per share $ 0.34 $ 0.33 $ 3.99(3) $ 1.18 $ 2.70
Weighted-average shares
outstanding 24,279 14,548 14,024 13,986 13,953
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data:
December 31,
------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $ 79,653 $ 109,539 $ 94,250 $ 241,116 $266,861
Secured notes payable -- 30,592 42,000 48,000 --
Total stockholders' equity 78,759 72,965(4) 47,187(5) 153,316 201,941
Book value per share $ 3.23 $ 3.01(4) $ 3.35(5) $ 10.96 $ 14.44
- --------------------------
<FN>
(1) In 1993, the company began to liquidate its CMO Ownership Interests and
acquire credit-sensitive assets (non-agency MBS bonds and shares of
Commercial Assets) that should benefit from an improving economy.
Accordingly, the company has classified as revenues and income from
liquidating operations its revenues from CMO Ownership Interests along with
expenses directly allocable to the CMO Ownership Interests. All other
revenues and expenses of the company, including corporate general and
administrative expenses, are classified as being generated by ongoing
operations.
(2) Includes $24,399,000 ($1.74 per share) of cumulative effect
of an accounting change from adoption of FAS 115, Accounting for Certain
Investments in Debt and Equity Securities.
-19-
<PAGE>
(3) Includes $.25 per share in cash and $3.74 per share in shares of Commercial
Assets, Inc. common stock.
(4) Includes $17,208,000 of net proceeds and 10,053,794 shares of Common
Stock from the Rights Offering. Shares of Common Stock were sold at $1.90
per share, $2.04 per share less than the book value of the Common Stock
prior to the Rights Offering which reduced the book value per share from
approximately $3.94 to $3.01.
(5) 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.
</FN>
</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 following the consolidated financial statements of the company.
RESULTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The table below summarizes the company's results of operations during
the three years ended December 31, 1995 (in thousands, except per share data).
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Ongoing Operations:
Revenues
<S> <C> <C> <C>
Non-agency MBS bonds $ 8,499 $ 1,531 $ --
Equity in earnings of Commercial Assets 1,742 1,354 187
Interest and other income 630 563 939
-------- --------- --------
10,871 3,448 1,126
-------- --------- --------
Expenses
Management fees 980 253 --
General and administrative 1,895 1,586 4,231
Interest expense 63 148 --
-------- --------- ---------
2,938 1,987 4,231
-------- --------- ---------
Earnings (loss) from ongoing operations 7,933 1,461 (3,105)
-------- --------- ---------
Liquidating Operations:
Revenues
CMO Ownership Interests 1,734 2,082 (37,151)
Interest income 225 728 604
Net gain (loss) on the sale of assets 5,369 12,646 (5,150)
--------- ---------- ----------
7,328 15,456 (41,697)
--------- ---------- ----------
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Expenses
<S> <C> <C> <C>
Management fees 234 496 1,013
General and administrative 23 339 350
Interest expense 564 2,724 4,853
--------- ---------- ----------
821 3,559 6,216
--------- ---------- ----------
Earnings (loss) from liquidating operations 6,507 11,897 (47,913)
--------- ---------- ----------
Book income (loss) $ 14,440 $ 13,358 $ (51,018)
========= ========== ==========
Earnings (loss) from ongoing
operations per share $ .33 $ .10 $ (.22)
Earnings (loss) from liquidating
operations per share .27 .82 (3.42)
--------- ---------- ----------
Book income (loss) per share $ .60 $ .92 $ (3.64)
========= ========== ==========
Estimated REIT Income (Loss):
Ongoing operations $ 13,172 $ 3,401 $ (1,476)
Liquidating operations (6,507) (25,521) (14,337)
--------- ---------- ----------
Estimated REIT income (loss) $ 6,665 $ (22,120) $ (15,813)
========= ========== ==========
Estimated REIT income (loss) per share $ .27 $ (1.52) $ (1.13)
========= ========== ==========
Excess Inclusion income $ 636 $ 3,769 $ 30,665
========= ========== ==========
Excess Inclusion income per share $ .03 $ .26 $ 2.19
========= ========== ==========
Dividends $ 8,255 $ 4,959 $ 56,107
========= ========== ==========
Dividends per share $ .34 $ .33 $ 3.99
========= ========== ==========
Weighted-average shares outstanding 24,279 14,548 14,024
</TABLE>
In 1993, the company began to liquidate its CMO Ownership Interests and
acquire credit-sensitive assets (non-agency MBS bonds and shares of Commercial
Assets) that should benefit from an improving economy. Accordingly, the company
has classified as liquidating operations its revenues from CMO Ownership
Interests along with expenses directly allocable to the CMO Ownership Interests.
All other revenues and expenses of the company, including corporate general and
administrative expenses, are classified as ongoing operations. Earnings from
liquidating operations will be negligible in future years, primarily as a result
of the sale of substantially all CMO Ownership Interests.
In December 1994, the company completed a Rights Offering that resulted
in net proceeds of $17,208,000 and increased the company's outstanding Common
Stock by 71%, from 14,158,208 shares to 24,212,002 shares. Shares issued in the
Rights Offering were sold for $1.90 per share, $2.04 per share less than the
$3.94 book value of such shares immediately prior to completion of the Rights
Offering. The proceeds of the Rights Offering principally were used to acquire
non-agency MBS bonds.
-21-
<PAGE>
Book Income
Non-agency MBS Bonds - Book income from the company's non-agency MBS
bonds increased significantly during 1995 compared with 1994 primarily due to
the acquisition of 74 non-agency MBS bonds during 1995 with an outstanding
principal balance of $99,398,000 and a weighted-average coupon at December 31,
1995 of 6.9% and a full year of earnings on the 85 non-agency MBS bonds acquired
during 1994 with an outstanding principal balance of $88,940,000 and a
weighted-average coupon at December 31, 1995 of 7.0%. As the company continues
to acquire non-agency MBS bonds, earnings from non-agency MBS bonds should
continue to increase.
The company's effective book yield on its non-agency MBS bonds for the
years ended December 31, 1995 and 1994, taking into consideration an estimate of
future credit losses, was 18.7% and 15.0%, respectively. The effective book
yield on the company's non-agency MBS bonds increased during 1995 primarily from
the decrease in the weighted-average purchase price of the non-agency MBS bonds
from 40.3% at December 31, 1994 to 35.8% at December 31, 1995. Also, the
weighted-average interest rate on the non-agency MBS bonds increased from 6.9%
at December 31, 1994 to 7.0% at December 31, 1995. As a result of the decrease
in the weighted-average purchase price together with the increase in the
weighted-average coupon of the company's non-agency MBS bonds during 1995, the
effective interest rate received by the company (stated coupon divided by
purchase price) increased from 16.4% at December 31, 1994 to 19.6% at December
31, 1995.
The company records an allowance for credit losses at the time a
non-agency MBS bond is acquired which reduces the amount of book income the
company records from these assets to the effective book yield. At December 31,
1995 and 1994, the allowance for credit losses related to the company's
non-agency MBS bonds was $71,365,000 and $22,075,000, respectively, on an
outstanding principal balance of $180,165,000 and $88,011,000, respectively.
Based on the cost of the applicable non-agency MBS bonds, the allowance for
credit losses had an economic value (allowance multiplied by the purchase price
percentage) at December 31, 1995 and 1994 of $18,332,000 and $7,387,000,
respectively.
The allowance for credit losses is increased by the amount of
anticipated future credit losses when the company acquires a non-agency MBS
bond. The allowance for credit losses is decreased by credit losses allocated to
the subordinate non-agency MBS bonds owned by the company, net of any
indemnification payments received. Book income, however, is impacted by any
changes in estimates of future credit losses. The company believes that the
current balance of the allowance for credit losses is adequate to absorb future
credit losses allocated to its non-agency MBS bonds. This assumes, among other
things, no significant changes in general economic conditions or widespread
natural disasters which may impact adversely the credit quality of the
underlying mortgage loans as a result of a reduction in the values of the
single-family home securing the loans.
As of December 31, 1995, there were 247 mortgage loans (out of
approximately 140,000) in foreclosure that collateralize the company's
non-agency MBS bonds, with an outstanding principal balance of $51,988,000 and
an amortized cost of $18,016,000. The company's economic exposure to credit
losses is equal to the principal loss multiplied by the company's original
purchase price percentage, net of indemnification claims collected. The
company's economic exposure to credit losses from the mortgage loans in
foreclosure is dependent upon: (i) the net amount recovered from the foreclosure
sale of the defaulted mortgage loans plus any indemnifications available, less
related foreclosure costs and servicing advances; and (ii) the purchase price of
the related non-agency MBS bonds. The company's economic loss with respect to
any one non-agency MBS bond is limited to the bond's acquisition price
-22-
<PAGE>
(currently averaging $358,000) less principal and interest payments received by
the company through the foreclosure date.
For the year ended December 31, 1995, the outstanding principal balance
of the company's non-agency MBS bonds was reduced by $3,056,000 as a result of
the allocation of credit losses on the home mortgage loan collateral backing the
bonds. The net economic loss to the company as a result of allocated credit
losses on the company's non-agency MBS bonds was $151,000 for the year ended
December 31, 1995. This economic loss is net of $807,000 collected by the
company from indemnification agreements.
The company anticipates that the amount of credit losses allocated to
the company's non-agency MBS bonds will increase in future periods. The Public
Securities Association SDA model assumes that defaults on mortgage loans are
generally highest during years three through five of the life of the mortgage
loan. Most of the mortgage loans that collateralize the company's subordinate
non-agency MBS bonds were originated in 1993 through 1995 and have not yet
reached the years during which defaults are anticipated to be at their highest.
On December 31, 1995, the company changed the classification of its
non-agency MBS bonds from held-to-maturity to available-for-sale. The change in
classification is not attributable to any current plans to liquidate its
non-agency MBS bonds; however, from time to time, the company may evaluate
opportunities to sell a non-agency MBS bond as part of its efforts to maximize
portfolio value and increase shareowner returns. Accordingly, the company has
classified its non-agency MBS bonds as available-for-sale, carried at fair value
in the financial statements. Unrealized holding gains of $399,000 at December
31, 1995 from the company's non-agency MBS bonds were excluded from earnings in
1995 and reported as a net amount in stockholders' equity until realized.
Commercial Assets - Commercial Assets commenced operations on October
12, 1993 and had only limited operations in 1993 and the first quarter of 1994.
Commercial Assets has reported that it has acquired, since its inception, 11
CMBS bonds from six securitizations at a cost of $74,433,000. At December 31,
1995, 1994 and 1993, these CMBS bonds had outstanding principal balances of
$100,368,000, $101,319,000 and $10,000,000, respectively, and weighted-average
coupons of 8.24%, 8.25% and 8.88%, respectively. Income from the company's
shares of Commercial Assets (which, for book income purposes, is based on the
company's pro rata share of Commercial Assets' book income) for the years ended
December 31, 1995 and 1994 was $1,742,000 and $1,354,000, respectively. The
increase was due to a full year of earnings in 1995 from the $91,971,000
principal amount of CMBS bonds acquired during 1994. Commercial Assets completed
the investment of its original $75,000,000 of capital in 1994 and has not
acquired any CMBS bonds in 1995. Commercial Assets reported to the company its
earnings and dividends should remain relatively stable subject to, among other
things, no additional acquisitions of CMBS bonds, and stable expense levels,
credit losses and principal prepayments on the CMBS bonds.
CMO Ownership Interests - The company's book income from CMO Ownership
Interests decreased during 1995 compared to 1994 primarily due to the exercise
of Call Rights and the sale of CMO Ownership Interests in 1994 and 1995. The
improvement in 1994 over 1993 is due to lower prepayments in the second half of
1994 compared with 1993 and the reduction in the carrying amount of the
company's CMO Ownership Interests at December 31, 1993 pursuant to a change in
accounting principle. As a result of the sales of CMO Ownership Interests in
1994 and 1995, future book income from these assets will not be material.
-23-
<PAGE>
Net Gain on Sale of Assets - During the years ended December 31, 1995,
1994 and 1993, the company exercised Call Rights on its CMO Ownership Interests
resulting in gains of $2,153,000, $12,883,000 and $1,062,000, respectively. The
exercise of these Call Rights during the years ended December 31, 1995, 1994 and
1993 reduced the outstanding principal amount of the company's Mortgage
Collateral by $45,698,000, $184,491,000 and $22,320,000, respectively.
On March 30, 1995, Asset Securitization sold 28 CMO Ownership Interests
and repaid the outstanding secured notes payable. As of December 31, 1994, the
company recognized $1,205,000 of net holding losses for book income purposes
related to the 28 CMO Ownership Interests sold. As a result, no gain or loss was
recorded on the sale of the CMO Ownership Interests and repayment of the secured
notes in 1995. During the years ended December 31, 1995, 1994 and 1993, the
company earned book income (loss) from Asset Securitization of $733,000,
$3,306,000 and ($19,882,000) (including $4,664,000 and $1,949,000 of gains from
the exercise of Call Rights in 1994 and 1993), respectively. Asset
Securitization was liquidated in May 1995.
On November 10, 1995, the company sold 23 CMO Ownership Interests with
a net carrying value of $2,315,000 for $5,517,000 resulting in a net gain of
$3,202,000 which is included in earnings from liquidating operations in 1995.
During June 1993, the company sold 21 CMO Ownership Interests for an
aggregate of $29,200,000, resulting in a net loss of $6,225,000.
Interest and Other Income - Interest and other income from ongoing
operations increased during 1995 compared with 1994 due to an increase in income
from other sources, which was partially offset by lower interest income from
cash and cash equivalents, because the company has used substantially all of its
available cash to acquire non-agency MBS bonds. Interest income decreased during
1994 as compared with 1993 because the company had significant cash reserves in
1993 prior to the capitalization of Commercial Assets.
Interest income from liquidating operations decreased during 1995
compared with 1994 because it was earned primarily from restricted cash for the
secured notes payable. Restricted cash was used to repay the secured notes on
March 30, 1995. Interest income from liquidating operations increased during
1994 compared with 1993 due to higher interest rates.
General and Administrative Expenses - General and administrative
expenses from ongoing operations increased during 1995 compared with 1994 due
to, among other things, an increase in DER expense, legal fees and printing
costs. General and administrative expenses from ongoing operations decreased
during 1994 compared with 1993 primarily due to costs including DER expense
incurred in 1993 in connection with the distribution of shares of Commercial
Assets. General and administrative expenses from liquidating operations
decreased during 1995 compared with 1994 and 1993 because of the discontinuance
of amortization of debt issue costs resulting from the sale of CMO Ownership
Interests.
At its annual meeting in May 1996, the company intends to solicit
shareowner approval of an amendment to the Stock Option Plan. The amendment
would permit the company to issue shares of Common Stock in 1996 to the holders
of options who voluntarily give up their right to receive shares of Common Stock
in the future pursuant to DERs. If approved, the amendment will also eliminate
provisions in the Stock Option Plan that permit the issuance of DERs in
connection with stock options granted in the future. The effect of the proposal
will be to reduce general and administrative expenses from DERs by approximately
$220,000 in 1996 and approximately $300,000 per year in subsequent years.
-24-
<PAGE>
However, the issuance of Common Stock in exchange for the right to receive DERs,
if approved, will result in a one-time charge to 1996 earnings of approximately
$750,000 and issuance of approximately 250,000 shares of Common Stock.
Management Fees - Included in Management Fees attributable to ongoing
operations are Incentive Fees incurred by the company along with Base Fees and
Administrative Fees applicable to the non-agency MBS bonds. Management Fees
included in ongoing operations increased during 1995 compared with 1994 and 1993
due to acquisitions of non-agency MBS bonds during 1994 and 1995. Also, as a
result of higher dividends in 1995 compared with 1994, the company incurred
$517,000 of Incentives Fees in 1995 compared to $137,000 of Incentive Fees in
1994. Management Fees included in liquidating operations decreased during 1995
compared with 1994 and 1993 due to sales and calls of CMO Ownership Interests
and collateral repayments during 1994 and 1995. Effective January 1, 1996, the
method of calculating Administrative Fees and Incentive Fees was changed which
should result in higher fees during 1996.
Effective April 1, 1996, Financial Asset Management LLC will assume the
obligations of the Management Agreement from the Manager. Financial Asset
Management LLC is 80% owned by two subsidiaries of MDC and 20% owned by Spencer
I. Browne, the President of the company.
Interest Expense - Interest expense on the company's borrowing
facilities, primarily included in liquidating operations, decreased during 1995
compared with 1994, principally due to the repayment of $11,408,000 and
$30,592,000, respectively, of the secured notes payable in 1994 and in the first
quarter of 1995. The effective interest rate under the company's short-term
borrowing facilities during 1995, 1994 and 1993 was 7.21%, 5.02% and 3.93% per
annum, respectively.
Accounting Change - The book loss in 1993 includes the cumulative
effect of an accounting change of $24,399,000. On December 31, 1993, the company
adopted FAS 115, Accounting for Certain Investments in Debt and Equity
Securities. In accordance with FAS 115, 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.
REIT Income
The company's estimated REIT income from ongoing operations during 1995
improved over 1994 and 1994 improved over 1993 due to $11,256,000 and
$2,639,000, respectively, of higher REIT earnings from non-agency MBS bonds and
$414,000 and $1,270,000, respectively, of increased dividends from Commercial
Assets. The increase in REIT earnings from non-agency MBS bonds was due to
acquisitions of non-agency MBS bonds in 1994 and 1995.
The company's estimated REIT losses from liquidating operations for
1995 were significantly less than 1994 primarily due to high levels of
prepayments of the Mortgage Collateral underlying the company's CMO Ownership
Interests during the first half of 1994. The high levels of prepayments in 1994
resulted in significant amounts of non-cash interest expense from amortization
of the discounts on the company's CMO Bonds. Also, many of the CMO Ownership
Interests sold during 1995 and 1994 were generating REIT losses. The company was
able to eliminate these losses as a result of the sales. The company's REIT loss
-25-
<PAGE>
increased during 1994 compared with 1993 primarily because of the sale of 21
REMIC assets in June 1993 which generated REIT income during the first half of
1993.
The estimated REIT losses from liquidating operations during the years
ended December 31, 1995 and 1994 included $2,568,000 and $4,778,000,
respectively, of interest expense related to the write-off of unamortized
discount from CMO Bonds redeemed during the period in conjunction with the
exercise of Call Rights. Exclusive of the interest expense related to the
exercise of Call Rights, the company earned estimated REIT income of $9,233,000
compared with REIT losses of $17,342,000 for the years ended December 31, 1995
and 1994, respectively.
The company recognized approximately $24,350,000 of net capital losses
during the year ended December 31, 1995. The net capital losses are not included
in REIT income, but increased the company's capital loss carryover to
approximately $35,100,000 at December 31, 1995. For the year ended December 31,
1994, the company recognized $5,550,000 of net capital gains which reduced the
company's capital loss carryover of $16,300,000 from 1993, as required by the
Code.
Excess Inclusion Income
The company's Excess Inclusion income for the years ended December 31,
1995, 1994 and 1993 was $636,000, $3,769,000 and $30,665,000, respectively.
Excess Inclusion income was generated from certain of the CMO Ownership
Interests owned by the company. Due to the liquidation of these CMO Ownership
Interests, Excess Inclusion income is not expected to be material in future
periods.
NOL Carryover
The company's NOL carryover was approximately $101,000,000 as of
December 31, 1995. The NOL can be used to reduce the company's requirement to
distribute at least 95% of its REIT income.
Reconciliation of REIT Income and Book Income
Substantially all of the difference between REIT income and book income
is due to: (i) capital gains and losses on the sales of assets recorded for book
income purposes that for REIT purposes are reduced to zero by the company's
capital loss carryover; (ii) the method of recording credit losses, which for
REIT income purposes are not deducted until they occur and which for book income
purposes are estimated and reflected as a reduction of revenues in the form of
lower discount amortization included in income from non-agency MBS bonds; and
(iii) differences in the calculation of discount and premium amortization for
REIT income compared to book income, attributable to non-agency MBS bonds and
CMO Ownership Interests.
Dividend Distributions
During 1995, the company declared regular dividends of $8,255,000,
($.34 per share). Twenty percent, or $.07 per share, of the 1995 distributions
constituted return of capital distributions, generally not taxable to the
shareowners to the extent of their basis in their stock. The company does not
anticipate that a material portion of future dividends will be return of capital
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). During
1993, the company paid $3,509,000 ($.25 per share) in cash dividends and
distributed to its shareowners approximately 70% of the outstanding shares of
-26-
<PAGE>
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).
Since its inception, the company has distributed dividends to its
shareowners totaling $229,239,000 ($17.29 per share). The distributions included
cash dividends of $176,641,000 ($13.55 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). The amount of previously distributed
dividends is not necessarily indicative of the amount of future dividends which
may be declared and paid 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.
The table below summarizes the sources and uses of the company's cash
for the years ended December 31, 1995, 1994 and 1993 (in thousands).
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Cash Generated By Ongoing Operations:
Non-agency MBS bonds:
<S> <C> <C> <C>
Interest $ 9,830 $ 1,869 $ --
Principal and indemnifications 2,824 736 --
Dividends from Commercial Assets 2,430 911 193
Cash Generated By (Used In) Liquidating Operations:
CMO Ownership Interests 4,743 21,083 110,249
Restricted cash for secured notes payable 15,862 1,201 (8,700)
Sale of assets 25,038 17,194 30,393
Total expenses, net of interest income and other (4,064) (2,035) (7,117)
--------- --------- ----------
Cash Generated By Operations $ 56,663 $ 40,959 $ 125,018
========= ========= ==========
Issuance of Common Stock $ -- $ 17,208 $ --
========= ========= ==========
Dividends Paid $ 8,981 $ 4,232 $ 3,509
========= ========= ==========
Acquisitions:
Non-agency MBS Bonds $ 23,965 $ 33,624 $ --
CMO Ownership Interests -- -- 4,250
Capital Contribution to Commercial Assets -- -- 75,000
--------- --------- ----------
Total Acquisitions $ 23,965 $ 33,624 $ 79,250
========= ========= ==========
Repayment of Debt $ 33,350 $ 12,890 $ 38,172
========= ========= ==========
</TABLE>
-27-
<PAGE>
The company's cash from ongoing operations continues to increase due to
acquisitions of non-agency MBS bonds. Dividends from Commercial Assets increased
in 1995 compared with 1994 and 1993 due to acquisitions of CMBS bonds by
Commercial Assets in 1994. Commercial Assets has stated that its dividend should
remain stable in the future assuming, among other things, no additional
acquisitions of CMBS bonds, and stable expense levels, credit losses and
principal prepayments on the CMBS bonds.
Cash from liquidating operations, primarily consisting of CMO Ownership
Interests, is declining because of the exercises of Call Rights and sales of CMO
Ownership Interests in 1994 and 1995. As a result of these transactions, the
company expects no significant cash flow from its CMO Ownership Interests in
future years.
The company has available sources of liquidity from several Repurchase
Agreements and a credit facility which expires on December 23, 1996, in each
case collateralized by certain non-agency MBS bonds. The collateral value and
interest rate related to these borrowing agreements are subject to periodic
adjustment. At December 31, 1995, the company was able to borrow $18,611,000
under these agreements, based on the value of the pledged collateral. At
December 31, 1995, there were no borrowings under the Repurchase Agreements or
credit facility.
On July 19, 1995, the company obtained a one-year, $1,000,000 unsecured
line of credit. Advances under this line bear interest at the prime rate. At
December 31, 1995, there were no borrowings under this line of credit.
The cash generated by the company's non-agency MBS bonds is dependent
upon the credit losses allocated to the bonds. The amount of defaults and
resulting credit losses on the company's non-agency MBS bonds may be impacted
adversely by natural disasters not generally insured against by a standard
homeowners insurance policy (e.g., floods, earthquakes, etc.) in geographic
areas in which residential properties that collateralize the company's
non-agency MBS bonds are located. The company is unable to predict the impact
natural disasters may have on the company's income. The company has provided
$71,365,000 of allowances for credit losses at December 31, 1995 to absorb
future credit losses, including losses from natural disasters not covered by
standard homeowners policies.
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 and CMO Ownership Interest varies significantly from
issuance to issuance. The Collateral for each issuance is separate and distinct
from that underlying the Collateral of another issuance. These instruments are
not listed or traded on any 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.
-28-
<PAGE>
THE ESTIMATES OF FAIR VALUE PRESENTED HEREIN ARE NOT NECESSARILY
INDICATIVE OF THE AMOUNTS THE COMPANY COULD REALIZE IN A CURRENT MARKET
TRANSACTION. 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, 1995. FUTURE ESTIMATES OF FAIR VALUE MAY DIFFER
SIGNIFICANTLY FROM THE AMOUNTS PRESENTED HEREIN.
At December 31, 1995, the estimated fair value of the company's
ownership interest in Commercial Assets was $15,531,000, compared to $15,876,000
and $17,257,000 at December 31, 1994 and 1993, respectively. 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 December 31, 1994 and $5.625
per share at December 31, 1995. At February 15, 1996, the closing price of
Commercial Assets was $6.00 per share.
The December 31, 1995 and 1994 estimated fair value of the company's
non-agency MBS bonds approximated their carrying values of $52,753,000 and
$32,544,000, respectively. The increase in the fair value was due to the
acquisition of 74 non-agency MBS bonds during 1995 offset by $2,824,000 of
principal repayments and indemnifications paid on and $1,331,000 of amortization
of the non-agency MBS bonds during 1995. The estimated fair value of the
company's non-agency MBS bonds will fluctuate over time due to, among other
things, changes in collateral prepayments and credit performance, size of the
company's class relative to the size of the offering, liquidity in the
mortgage-backed securities market, changes in the values of the related real
estate and changes in prevailing long-term interest rates.
The net estimated fair value of the company's CMO Ownership Interests
classified as available-for-sale was $368,000 at December 31, 1995 as compared
with an estimated fair value of $15,319,000 at December 31, 1994. The company
owned no CMO Ownership Interests classified as held-to-maturity at December 31,
1995 compared with assets with an estimated fair value of $9,000,000 and
$49,400,000 at December 31, 1994 and 1993, respectively. The decreases are due
to the sales of CMO Ownership Interests in 1994 and 1995.
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
-29-
<PAGE>
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..
Other
Certain statements in this Form 10-K Annual Report, the company's
Summary Annual Report to Shareowners, as well as statements made by the company
in periodic press releases, oral statements made by the company's officials to
analysts and shareowners in the course of presentations about the company and
conference calls following quarterly earning releases, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). The statements include
projections of the company's estimated 1996 cash flow and dividends. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the company to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. Such
factors include the following: general economic and business conditions;
interest rate changes; competition; the availability of additional non-agency
MBS bonds at approximately the same prices currently paid by the company; the
company's ability to maintain or reduce expense levels and the assumption that
losses on non-agency MBS bonds do not exceed the company's estimates.
Congressional considerations of major reform to the federal tax system
have been increasing over the past year. Proposed tax plans currently being
sponsored by various members of Congress, include variations of a consumption
tax (sales tax) and flat tax. Under the current tax system, deductions are
allowed for mortgage interest and property taxes. Tax reform may reduce or
eliminate these deductions. The likelihood of major tax reform and the impact
such reform would have on, among other things: (i) the value of single family
homes that collateralize the mortgage loans backing the company's non-agency MBS
bonds and the value of multi-family properties that collateralize the mortgage
loans backing the CMBS bonds of Commercial Assets; (ii) values of the company's
non-agency MBS bonds; and (iii) the company's financial position or results of
operations, are not determinable.
-30-
<PAGE>
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements
PAGE
Consolidated Financial Statements of Asset Investors Corporation and
Subsidiaries
Report of Independent Auditors..................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994....... F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993................................ F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995, 1994 and 1993.......................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993................................ F-6
Notes to Consolidated Financial Statements......................... F-7
Financial Statements of Commercial Assets, Inc. (a significant unconsolidated
subsidiary of the company)
Report of Independent Auditors..................................... F-23
Balance Sheets as of December 31, 1995 and 1994.................... F-24
Statements of Income for the years ended December 31, 1995
and 1994 and for the period from October 12, 1993 (date
operations commenced) to December 31, 1993...................... F-25
Statements of Stockholders' Equity for the years ended
December 31, 1995 and 1994 and for the period from
October 12, 1993 (date operations commenced) to
December 31, 1993............................................... F-26
Statements of Cash Flows for the years ended December 31, 1995
and 1994 and for the period from October 12, 1993 (date
operations commenced) to December 31, 1993...................... F-27
Notes to Financial Statements...................................... F-28
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
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, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. 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 consolidated financial position of
Asset Investors Corporation and subsidiaries as of December 31, 1995 and 1994,
and the results of their consolidated operations and their cash flows for each
of the three years in the period ended December 31, 1995 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.
ERNST & YOUNG LLP
Phoenix, Arizona
February 9, 1996
F-2
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
December 31,
------------
1995 1994
---- ----
Assets
<S> <C> <C>
Cash and cash equivalents $ 5,328 $ 14,961
Restricted cash for secured notes payable -- 15,862
Non-agency MBS Bonds 52,753 32,544
Investment in Commercial Assets 19,225 21,068
CMO Ownership Interests 368 22,490
Other assets, net 1,979 2,614
---------- ------------
Total Assets $ 79,653 $ 109,539
========== ============
Liabilities
Accounts payable and accrued liabilities $ 416 $ 2,698
Management fees payable to Manager 478 526
Short-term borrowings -- 2,758
Secured notes payable -- 30,592
---------- ------------
Total Liabilities 894 36,574
---------- ------------
Stockholders' Equity
Common Stock, par value $.01 per share,
50,000,000 shares authorized 24,355,862 and
24,212,002 shares issued and
outstanding 244 242
Additional paid-in capital 227,546 227,182
Cumulative dividends (229,239) (220,984)
Cumulative net income 80,965 66,525
---------- ------------
Dividends in excess of net income (148,274) (154,459)
Unrealized holding losses on debt securities (757) --
---------- ------------
Total Stockholders' Equity 78,759 72,965
---------- ------------
Total Liabilities and Stockholders' Equity $ 79,653 $ 109,539
========== ============
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
Ongoing Operations: 1995 1994 1993
Revenues ---- ---- ----
<S> <C> <C> <C>
Non-agency MBS bonds $ 8,499 $ 1,531 $ --
Equity in earnings of Commercial Assets 1,742 1,354 187
Interest and other income 630 563 939
--------- --------- ----------
Total Revenues 10,871 3,448 1,126
--------- --------- ----------
Expenses
Management fees 980 253 --
General and administrative 1,895 1,586 4,231
Interest expense 63 148 --
--------- --------- ----------
Total Expenses 2,938 1,987 4,231
--------- --------- ----------
Earnings (loss) from ongoing operations 7,933 1,461 (3,105)
--------- --------- ----------
Liquidating Operations:
Revenues
CMO Ownership Interests 1,734 2,082 (12,752)
Interest income 225 728 604
Net gain (loss) on sale of assets 5,369 12,646 (5,150)
--------- --------- ----------
Total Revenues 7,328 15,456 (17,298)
--------- --------- ----------
Expenses
Management fees 234 496 1,013
General and administrative 23 339 350
Interest expense 564 2,724 4,853
--------- --------- ----------
Total Expenses 821 3,559 6,216
--------- --------- ----------
Earnings (loss) from liquidating operations 6,507 11,897 (23,514)
--------- --------- ----------
Net income (loss) before cumulative effect of accounting change 14,440 13,358 (26,619)
Cumulative effect of accounting change -- -- (24,399)
--------- --------- ----------
Net income (loss) $ 14,440 $ 13,358 $ (51,018)
========= ========= ==========
Net income (loss) before cumulative effect of accounting change
per share $ .60 $ .92 $ (1.90)
Cumulative effect of accounting change per share -- -- (1.74)
--------- --------- ----------
Net income (loss) per share $ .60 $ .92 $ (3.64)
========= ========= ==========
Weighted-average shares outstanding 24,279 14,548 14,024
Cash dividends per share $ .34 $ .33 $ .25
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 STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(In thousands)
<TABLE>
<CAPTION>
Unrealized
Dividends Holding Total
Additional In Excess Losses on Stock-
Common Stock Paid-In of Net Debt holders'
Shares Amount Capital Income Securities Equity
------ ------ ------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
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
Issuance of Common Stock 144 2 364 -- -- 366
Net income -- -- -- 14,440 -- 14,440
Dividends -- -- -- (8,255) -- (8,255)
Unrealized depreciation of
CMBS bonds net of
appreciation of non-agency
MBS bonds -- -- -- -- (757) (757)
------- ------ ---------- ----------- ------- ---------
Balances - December 31, 1995 24,356 $ 244 $ 227,546 $ (148,274) $ (757) $ 78,759
======= ====== ========== =========== ======= ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Cash Flows From Operating Activities
<S> <C> <C> <C>
Net income (loss) $ 14,440 $ 13,358 $ (51,018)
Cumulative effect of accounting change -- -- 24,399
--------- --------- ----------
Net income (loss) before cumulative effect of accounting
change 14,440 13,358 (26,619)
Adjustments to reconcile net income (loss) to net cash flows
from operating activities:
Amortization of discounts on non-agency MBS bonds 1,331 338 --
Amortization of CMO Ownership Interests 923 7,738 40,213
Write-down of CMO Ownership Interests -- 2,715 15,334
(Increase) decrease in other assets (138) 375 1,581
(Decrease) increase in accounts payable and accrued
liabilities (1,022) 1,845 206
Equity in earnings of Commercial Assets (1,742) (1,354) (187)
Net (gain) loss on sale of assets (5,369) (12,646) 5,150
--------- --------- ----------
Net Cash Provided By Operating Activities 8,423 12,369 35,678
--------- --------- ----------
Cash Flows From Investing Activities
Proceeds from the sale of assets 25,038 17,194 30,393
Decrease (increase) in restricted cash for secured notes
payable 15,862 1,201 (8,700)
Principal collections on non-agency MBS bonds 2,824 736 --
Dividends from Commercial Assets 2,430 911 193
Principal collections on CMO Ownership Interests 2,086 8,548 67,454
Acquisition of non-agency MBS bonds, CMO Ownership Interests
and investment in Commercial Assets (23,965) (33,624) (4,450)
--------- --------- ----------
Net Cash Provided By (Used By) Investing Activities 24,275 (5,034) 84,890
--------- --------- ----------
Cash Flows From Financing Activities
Decrease in short-term borrowings, net (2,758) (1,482) (32,172)
Dividends paid (8,981) (4,232) (3,509)
Decrease in secured notes payable (30,592) (11,408) (6,000)
Payments on the Contribution Agreement -- -- (74,800)
Issuance of Common Stock -- 17,208 --
---------- --------- ----------
Net Cash (Used By) Provided By Financing Activities (42,331) 86 (116,481)
---------- --------- ----------
Cash and Cash Equivalents
(Decrease) increase (9,633) 7,421 4,087
Beginning of year 14,961 7,540 3,453
---------- ---------- ----------
End of year $ 5,328 $ 14,961 $ 7,540
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<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 following these financial statements.
A. The Company
Asset Investors Corporation was incorporated under Maryland law on
October 14, 1986 by MDC. The Common Stock is listed on the NYSE under the symbol
"AIC." The company's assets primarily are non-agency MBS bonds (which it began
acquiring in the second quarter of 1994) and the ownership of shares of common
stock of Commercial Assets.
B. Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements
include the accounts of the company and its wholly-owned corporate subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation. The company's investment in Commercial Assets is recorded under
the equity method. The company has recorded its proportionate share of the
unrealized holding losses on CMBS bonds of Commercial Assets.
Non-agency MBS Bonds - The company's non-agency MBS bonds (also
referred to as high-yield bonds backed by home mortgage loans) are acquired at a
significant discount to par value. The amortized cost of the non-agency MBS
bonds is equal to the outstanding principal amount net of unamortized discount
and allowances for credit losses. The company records an allowance for credit
losses when it acquires a non-agency MBS bond in an amount equal to the expected
future credit losses allocated to the subordinate bond. Future credit losses are
estimated using a methodology which assumes defaults on mortgage loans reach
their highest levels during years three through five of the mortgage loan. The
allowance for credit losses is adjusted for realized credit losses and changes
in estimates of future credit losses. Earnings from non-agency MBS bonds are
recognized based upon the relationship of cash flows received during the period
and estimates of future cash flows to be received over the life of the bonds.
The subordinate non-agency MBS bonds owned by the company generally are not
scheduled to receive principal prepayments for at least their first five years.
The principal repayments from the subordinate bonds after year five may be
reduced by credit losses allocated to the bonds during the first five years.
Accordingly, the pricing discount is generally not amortized into income until
after year five when the effects of credit losses are more determinable. The
effect of this income recognition methodology is to defer income from
amortization of the significant discount on the bonds until later periods when
the ultimate cash flows from the subordinate non-agency MBS bonds are more
predictable.
On December 31, 1995, the company changed the classification of its
non-agency MBS bonds from held-to-maturity to available-for-sale. The change in
classification is not attributable to any current plans to liquidate its
non-agency MBS bonds; however, from time to time the company may evaluate
opportunities to sell a non-agency MBS bond as part of its efforts to maximize
portfolio value and increase shareowner returns. Accordingly, the company has
classified its non-agency MBS bonds as available-for-sale, carried at fair value
in the financial statements. Unrealized holding gains for available-for-sale
securities are excluded from earnings and reported as a net amount in
stockholders' equity until realized.
F-7
<PAGE>
If the fair value of a non-agency MBS bond declines below its amortized
cost basis and the decline is considered to be "other than temporary," the
amount of the write-down would be included in the company's income (i.e.,
accounted for as a realized loss). The decline in fair value is considered to be
other than temporary if the cost basis exceeds the related projected cash flow
from the non-agency MBS bond discounted at a risk-free rate of return.
Income Taxes - The company currently operates in a manner intended to
permit it to qualify for the income tax treatment accorded to a REIT. If it so
qualifies, the company's REIT income, with certain limited exceptions, will not
be subject to federal income tax at the corporate level. Accordingly, no
provision for taxes has been made in the consolidated financial statements.
In order to maintain its status as a REIT, the company generally is
required, among other things, to distribute annually to its shareowners at least
95% of its REIT income reduced by the NOL carryover. The company also is
required to meet certain asset, income and stock ownership tests.
Statements of Operations - In 1993, the company began a program of
liquidating its CMO Ownership Interests and acquiring credit-sensitive assets
(non-agency MBS bonds and shares of Commercial Assets) that should benefit from
an improving economy. Accordingly, the company has classified as liquidating
operations its revenues from CMO Ownership Interests along with expenses
directly allocable to the CMO Ownership Interests including interest on
borrowings collateralized by CMO Ownership Interests. All other revenues and
expenses of the company, including corporate general and administrative
expenses, are classified as ongoing operations.
Net Income (Loss) Per Share - Net income (loss) per share for the years
ended December 31, 1995, 1994 and 1993 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 1995 and 1994 and was antidilutive with respect to the net loss per
share in 1993.
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.
The company paid interest in cash of $903,000, $2,972,000 and
$3,980,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Non-cash financing activities of the company during the years ended December 31,
1995, 1994 and 1993 were $366,000, $171,000 and $996,000, respectively, from
distribution of Common Stock pursuant to DERs. During the year ended December
31, 1993, additional non-cash investing and financing activities were: the
capital contribution to Commercial Assets, $74,800,000, the distribution of
Commercial Assets common stock, $52,598,000, and distribution of Commercial
Assets common stock as DERs, $1,771,000.
Reclassifications - Certain reclassifications have been made in the
1994 and 1993 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 and recognized
a $24,399,000 charge to income from the cumulative effect of adopting the new
standard.
F-8
<PAGE>
C. Non-agency MBS Bonds
Through December 31, 1995, the company acquired 159 non-agency MBS
bonds, with an aggregate outstanding principal balance on the date of
acquisition of $188,338,000 and an aggregate total cost of $57,588,000. The net
carrying value of the company's non-agency MBS bonds was as follows (dollar
amounts in thousands):
<TABLE>
<CAPTION>
Outstanding Balance
at December 31,
---------------
Price(1) Coupon(2) 1995 1994
------ ------- ---- ----
Non-agency MBS bonds collateralized by:
<S> <C> <C> <C> <C>
30-year fixed-rate mortgage loans 32.8% 7.1% $116,757 $ 56,955
15-year fixed-rate mortgage loans 38.1 6.6 16,611 12,364
Adjustable-rate mortgage loans 27.2 7.3 4,149 4,219
B and C mortgage loans(3) 56.6 6.7 14,083 14,473
Other subordinate non-agency MBS bonds(4) 27.3 6.9 28,565 --
---- --- -------- ---------
35.8% 7.0% 180,165 88,011
==== ===
Less:
Allowance for credit losses (71,365) (22,075)
Unamortized discount (56,446) (33,392)
---------- ---------
Amortized cost 52,354 32,544
Net unrealized holding gains 399 --
---------- ---------
Total net book value $ 52,753 $ 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, 1995.
(3) The B and C mortgages are lesser quality, adjustable-rate mortgages and
include $8,112,000 and $8,165,000, respectively, of "B" rated non-agency
MBS bonds at December 31, 1995 and 1994.
(4) Referred to as re-REMICs.
</FN>
</TABLE>
The allowance for credit losses is adjusted as follows: (i) increased
or decreased for changes to the company's expectations of future credit losses;
(ii) increased for allowances established when non-agency MBS bonds are
acquired; and (iii) reduced by actual credit losses allocated to the company's
non-agency MBS bonds. The activity in the allowance for credit losses during the
years ended December 31, 1995 and 1994 was as follows (in thousands):
<TABLE>
1995 1994
---- ----
<S> <C> <C>
Balance at the beginning of the year $ 22,075 $ --
Allowance related to non-agency MBS bonds acquired during the period 51,680 22,269
Credit losses (net of indemnifications of $807,000 and $137,000, respectively,
for 1995 and 1994) (2,390) (194)
---------- ---------
Balance at the end of the year $ 71,365 $ 22,075
========== =========
</TABLE>
As of December 31, 1995, there were 247 mortgage loans (out of
approximately 140,000) in foreclosure that collateralize the company's
non-agency MBS bonds, with an outstanding principal balance of $51,988,000 and
F-9
<PAGE>
an amortized cost of $18,016,000. The company's economic exposure to credit
losses from the mortgage loans in foreclosure is dependent upon: (i) the net
amount recovered from the foreclosure sale of the defaulted mortgage loans, less
related foreclosure costs and servicing advances; and (ii) the purchase price of
the related non-agency MBS bonds. The company's economic loss with respect to
any one non-agency MBS bond is limited to the bond's acquisition price less cash
received through the foreclosure date.
The principal amount of the credit support classes of non-agency MBS
bonds acquired by the company represents a small percentage of the principal
amount of the total non-agency MBS bonds issued to securitize a pool of
residential mortgage loans. At December 31, 1995, the weighted-average
percentage of the principal amount of the credit support non-agency MBS bonds
owned by the company represented 0.53% of the principal amount of the total
non-agency MBS bonds issued in the related securitizations. The outstanding
principal balance of the mortgage loans collateralizing all of the non-agency
MBS bonds within the bond issuances in which the company owns subordinate
non-agency MBS bonds and the outstanding principal balance of the non-agency MBS
bonds senior to the company's subordinate non-agency MBS bonds was
$34,288,987,000 and $34,108,822,000, respectively, at December 31, 1995.
The mortgages which comprise the collateral for the company's
non-agency MBS bonds are secured by single family residences in 52 states and
U.S. territories. Approximately 43%, 8% and 6% of the mortgage loans are
collateralized by properties in California, New York and New Jersey,
respectively.
D. Investment in Commercial Assets
On December 31, 1995 and 1994, the company owned 2,761,126 shares
(approximately 27%) of the common stock of Commercial Assets. Commercial Assets,
Inc. is a REIT which manages ownership interests in commercial mortgage loan
securitizations of multi-family real estate. The mortgages which comprise the
collateral for Commercial Assets' CMBS bonds are secured by apartment
communities and mobile home parks in 36 states. Approximately 24%, 13% and 10%
of the mortgage loans are collateralized by properties in Texas, Florida and
Arizona, respectively. Presented below is the summarized financial information
of Commercial Assets as reported by Commercial Assets (in thousands):
<TABLE>
<CAPTION>
Balance Sheets December 31,
- -------------- ------------
1995 1994
---- ----
<S> <C> <C>
CMBS bonds, net of $4,245 of unrealized
holding losses at December 31, 1995 $ 69,503 $ 74,046
Cash and other assets 2,087 13,558
--------- ---------
Total Assets 71,590 87,604
--------- ---------
Short-term borrowings 700 10,295
Other liabilities 425 2,637
--------- ---------
Total Liabilities 1,125 12,932
--------- ---------
Stockholders' Equity $ 70,465 $ 74,672
========= =========
</TABLE>
F-10
<PAGE>
<TABLE>
<CAPTION>
Statements of Income Period From
October 12,
1993(1) to
Year Ended December 31, December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CMBS bonds $ 8,980 $ 5,938 $ 125
Other revenues 189 1,126 869
------- ------- -----
Total revenues 9,169 7,064 994
------- ------- -----
Management fees 1,151 598 6
General and administrative expenses 1,393 1,220 309
Interest on borrowings 249 319 --
------- ------- -----
Total expenses 2,793 2,137 315
------- ------- -----
Net income $ 6,376 $ 4,927 $ 679
======= ======= =====
- ------------------
<FN>
(1) Date operations commenced.
</FN>
</TABLE>
At December 31, 1995, Commercial Assets recorded $4,245,000 of
unrealized holding losses on its CMBS bonds. The company recorded its
proportionate share of these unrealized holding losses on CMBS bonds of
$1,156,000, as a reduction in the carrying value of its investment in Commercial
Assets and as a component of stockholders' equity.
E. CMO Ownership Interests
In prior periods, certain of the company's CMO Ownership Interests that
were considered equity ownership interests in a CMO issuance, in accordance with
the EITF Issue 89-4 consensus, were presented on a gross basis on the balance
sheets and statements of operations. Accordingly, the book values of the
Mortgage Collateral and CMO Bonds were presented separately as assets and
liabilities, respectively, on the balance sheets, and interest income on
Mortgage Collateral and interest expense on CMO Bonds were presented separately
as income and expenses, respectively, on the statements of operations.
Due to significant sales of CMO Ownership Interests and a change in the
type of assets the company has been acquiring since 1993, CMO Ownership
Interests represented less than one percent of the company's total assets at
December 31, 1995. Substantially all of the remaining CMO Ownership Interests of
the company are at, or are nearing, the end of their economic lives.
Beginning in 1995, the company presented all of its CMO Ownership
Interests under the Prospective Method. The company's balance sheets reflect all
the CMO Ownership Interests at their net carrying amount and the statements of
operations reflect earnings from CMO Ownership Interests on a net basis. Below
is certain information relating to the company's CMO Ownership Interests (in
thousands):
F-11
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
CMO Subsidiaries:
<S> <C> <C>
Restricted cash $ 1,150 $ 109,830
Accrued interest receivable 228 11,250
CMO issuance costs, net 41 586
Mortgage Collateral 32,391 934,975
Unamortized discount, net of premium,
on Mortgage Collateral (364) (2,013)
---------- ------------
CMO Subsidiaries - assets 33,446 1,054,628
---------- ------------
Accrued interest payable 454 17,781
CMO Bonds 32,874 1,027,641
Unamortized discount on CMO Bonds (1,302) (60,390)
Reserve 1,052 53,937
---------- ------------
CMO Subsidiaries - liabilities 33,078 1,038,969
---------- ------------
Minority interest -- 3,003
---------- ------------
Total CMO Subsidiaries 368 12,656
CMO Residuals and Acquired CMO Classes -- 9,834
---------- ------------
Total CMO Ownership Interests, net $ 368 $ 22,490
========== ============
</TABLE>
During the years ended December 31, 1995, 1994 and 1993, the company
exercised the Call Rights on certain CMO Ownership Interests, recognizing net
gains of $2,153,000, $12,833,000 and $1,062,000, respectively. The exercise of
Call Rights resulted in the sale of $45,698,000, $184,491,000 and $22,320,000
principal amount of Mortgage Collateral from CMO Subsidiaries during 1995, 1994
and 1993, respectively, and the early redemption of the related CMO Bonds.
At December 31, 1994, $79,658,000 in restricted cash was held by a
trustee representing proceeds from the sale of Mortgage Collateral related to
the exercise of Call Rights pending the redemption of the related CMO Bonds. The
restricted cash was used primarily to redeem CMO Bonds with an outstanding
principal balance of $76,019,000 at December 31, 1994 at par on January 1 and
February 1, 1995.
On March 30, 1995, Asset Securitization sold 28 CMO Ownership Interests
classified as available-for-sale for $14,927,000. No gain or loss was recognized
at the time of the sale; however, the company recognized $1,205,000 of net
holding losses related to the assets sold as of December 31, 1994. The proceeds
from the sale and $15,569,000 of restricted cash for secured notes payable were
used to repay the $28,437,000 outstanding principal balance of the secured notes
and $355,000 of accrued interest, and to provide $1,704,000 of cash to the
company.
On November 10, 1995, the company sold 23 CMO Ownership Interests with
a net carrying value of $2,315,000 for $5,517,000. The sale substantially
liquidated the company's holdings of CMO Ownership Interests.
F-12
<PAGE>
F. Short-Term Borrowings
The company has several Repurchase Agreement facilities collateralized
by certain non-agency MBS bonds. The collateral value and interest rate related
to the Repurchase Agreements are subject to periodic adjustment. At December 31,
1995, the company was able to borrow $9,155,000 under eight Repurchase
Agreements, based on the value of the pledged collateral. At December 31, 1995,
there were no borrowings outstanding under these Repurchase Agreements. At
December 31, 1994, borrowings under these Repurchase Agreements had an original
maturity of 30 days, an effective interest rate of 7.38% and an aggregate
outstanding principal balance of $658,000.
The company has entered into a credit facility with a bank that extends
through December 23, 1996 secured by certain non-agency MBS bonds. At December
31, 1995, the company was able to borrow $9,456,000 under the credit facility,
based on the value of the pledged collateral. The credit facility is also
subject to certain financial covenants, with which the company is in compliance,
and bears interest, payable monthly, based on one-month LIBOR. At December 31,
1995, there were no borrowings outstanding under the credit facility. At
December 31, 1994, $2,100,000 was borrowed under the credit facility at an
effective interest rate of 7.49%.
On July 19, 1995, the company obtained a one-year, $1,000,000 unsecured
line of credit. Advances under this line bear interest at prime rate. At
December 31, 1995, there were no borrowings under this line of credit.
G. 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, 1995. 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 by
multiplying the outstanding principal balance at December 31, 1995
by current prices of non-agency MBS bonds with similar
characteristics.
F-13
<PAGE>
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 1995.
CMO Ownership Interests - 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 discounted present value of the
projected Excess Cash Flow.
The carrying amounts and fair values of certain of the
company's financial instruments at December 31, 1995 and 1994, are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------- -----------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
<S> <C> <C> <C> <C>
Non-agency MBS bonds $ 52,354 $ 52,753 $ 32,544 $ 32,544
============ ============ ============ ============
Investment in Commercial Assets $ 19,225 $ 15,531 $ 21,068 $ 15,876
============ ============ ============ ============
CMO Ownership Interests
Available-for-sale $ 368 $ 368 $ 15,319 $ 15,319
Held-to-maturity -- -- 7,171 9,000
------------ ------------ ------------ ------------
$ 368 $ 368 $ 22,490 $ 24,319
============ ============ ============ ============
</TABLE>
H. 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. Shares sold in
the Rights Offering were sold at $1.90 per share, $2.04 less than the $3.94 per
share book value immediately prior to the completion of the Rights Offering. On
December 31, 1995 and 1994, the shares of Common Stock owned by MDC represented
approximately 1.2% of the outstanding shares of Common Stock.
I. 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, 1996 and 1995, permitted the issuance of up to an aggregate of
1,502,639 and 1,319,970 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-14
<PAGE>
Presented below is a summary of the changes in stock options for the
three years ended December 31, 1995:
<TABLE>
<CAPTION>
Average
Option
Price Shares
----- ------
<S> <C> <C>
Outstanding-December 31, 1992 $ 11.98 331,500
Granted 4.75 143,286
Canceled 8.95 (81,169)
-------- -------
Outstanding-December 31, 1993 9.97 393,617
Granted 2.44 188,750
Canceled 7.05 (33,723)
Issued in connection with the Rights Offering -- 388,993
-------- -------
Outstanding-December 31, 1994 4.42 937,637
Granted 2.37 165,000
Canceled 4.05 (135,012)
-------- --------
Outstanding-December 31, 1995 $ 3.80 967,625
======== ========
</TABLE>
No options were exercised during the three years ended December 31,
1995.
During 1995, 1994 and 1993, the company recognized expense of $337,000,
$180,000 and $100,000, respectively, associated with the accrual of DERs
covering 128,857, 82,627 and 27,430 shares of Common Stock, respectively. In
1995 and 1994, 143,860 and 67,624 shares, respectively, of Common Stock were
distributed in connection with 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.
J. Other Matters
The company has entered into a series of management agreements with the
Manager through December 31, 1996. 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,
1995, 1994 and 1993, the company incurred combined Incentive Fees and Base Fees
of $731,000, $372,000 and $592,000, 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, 1995, 1994 and
1993 were $914,000, $1,440,000 and $1,582,000, respectively.
Effective April 1, 1996, Financial Asset Management LLC will assume the
obligations of the Management Agreement from the Manager. Financial Asset
Management LLC is 80% owned by two subsidiaries of MDC and 20% owned by Spencer
I. Browne, the President of the company.
F-15
<PAGE>
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.
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, 1995, 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 1995, 1994 and 1993, 12%, 100% and 100%, 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.
During 1995, 20% of the dividends distributed constituted return of
capital distributions.
The company has an NOL carryover of approximately $101,000,000 at
December 31, 1995, which can be used to reduce the company's requirement under
the Code to distribute at least 95% of REIT income but does not reduce the
requirement to distribute 95% of Excess Inclusion income. As of December 31,
1995, the company also has a capital loss carryover of approximately
$35,100,000, which expires beginning in 1998.
F-16
<PAGE>
K. Selected Quarterly Financial Data (Unaudited)
Presented below is selected quarterly financial data for the years
ended December 31, 1995 and 1994 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
------------------ ------------------- ------------------ ------------------
1995
- ------------------------------------- ------------------ ------------------- ------------------ ------------------
Revenues:
<S> <C> <C> <C> <C>
Ongoing operations $ 3,376 $ 3,164 $ 2,429 $ 1,902
Liquidating operations 3,234(1) 228 136 3,730(1)
Net income 5,848 2,715 1,870 4,007
Net income per share .25 .11 .07 .17
Dividends per share .09 .09 .08 .08
Closing stock prices (2)
High 3-3/8 2-7/8 2-5/8 2-3/8
Low 2-5/8 2-3/8 2-1/4 1-5/8
Common Stock outstanding(3) 24,336 24,294 24,259 24,227
1994
- ------------------------------------- ------------------ ------------------- ------------------ ------------------
Revenues:
Ongoing operations $ 1,424 $ 1,045 $ 760 $ 219
Liquidating operations 3,682 1,612 2,323 7,839
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
- ------------------------
<FN>
(1) Includes gains on sales of CMO Ownership Interests.
(2) As reported on the NYSE Composite Tape.
(3) Weighted average for the period indicated.
(4) Consisted of a regular dividend of $.08 per share and two special dividends
of $.03 per share each.
</FN>
</TABLE>
F-17
<PAGE>
ASSET INVESTORS CORPORATION
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.
Administrative Fee - A fee, of up to $35,000 per annum per CMO Ownership
Interest, and up to $3,500 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.
agency - GNMA, FNMA or FHLMC.
AMEX - American Stock Exchange, Inc.
ARMs - Adjustable-rate mortgages.
Asset Acceptance - Asset Investors Acceptance, Inc., a wholly-owned subsidiary
of the company incorporated under Colorado law.
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.
B and C mortgage loans - Mortgage loans made to borrowers who have credit
histories of a lower overall quality than most borrowers generally resulting
from previous repayment difficulties, brief job histories, previous bankruptcies
or other causes.
Base Fee - An annual management fee equal to 3/8 of 1% 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.
F-18
<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, 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 - A non-equity ownership interest in a CMO issuance.
CMO Subsidiary - An equity ownership interest in a CMO issuance.
Code - The Internal Revenue Code of 1986, as amended.
Collateral - A specific group of mortgage loans or mortgage-backed certificates
and other collateral pledged to secure an issuance of CMOs.
Commercial Assets - Commercial Assets, Inc., a publicly-traded REIT formed by
the company in August 1993, incorporated under Maryland law. (AMEX: CAX)
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.
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. Option holders earn shares of Common Stock equal to the value of
dividends received as if the options were outstanding.
Distribution - The company's distribution of approximately 70% of the common
stock of Commercial Assets to the company's shareowners on October 12, 1993.
EITF - Emerging Issues Task Force, a task force of the Financial Accounting
Standards Board.
F-19
<PAGE>
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 115 - Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities.
FHLMC - Federal Home Loan Mortgage Corporation.
FHLMC Certificate - A FHLMC mortgage certificate.
FNMA - Federal National Mortgage Association.
FNMA Certificate - A FNMA mortgage pass-through certificate.
foreclosure costs - Necessary repair and maintenance costs during the
foreclosure period, brokerage fees, legal fees, taxes and insurance, net of
proceeds from mortgage insurance, if any.
GNMA - Government National Mortgage Association.
GNMA Certificate - A fully-modified pass-through mortgage-backed certificate
guaranteed by GNMA.
Incentive Fee - In 1993, 1994 and 1995, 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.
In 1996, an annual management fee equal to 20% of the dollar amount by which the
company's net income computed in accordance with generally accepted accounting
principles exceeds an amount equal to the company's Average Net Worth (as
defined in the Management Agreement) multiplied by the Ten-Year U.S. Treasury
Rate (as defined in the Management Agreement) plus one percent, also 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
F-20
<PAGE>
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").
LIBOR - The London Interbank Offered Rate on Eurodollar deposits.
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 or its successors.
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 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 (one- to four-unit) mortgage loans.
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.
Prospective Method - The accounting method used by the company for CMO Ownership
Interests.
PSA - A standardized measurement of prepayments of mortgages developed by the
Public Securities Association, a national statistical analysis organization.
Qualifying Interests - Mortgages and other liens on and interests in real
estate.
F-21
<PAGE>
REIT - A real estate investment trust as defined in the Code.
REIT income/loss - Taxable income/loss computed as prescribed for REITs prior to
consideration of any NOL carryovers and prior to the "dividends paid deduction"
(including the dividends paid deduction for dividends related to capital gains).
REMIC - A pass-through tax entity known as a "real estate mortgage investment
conduit" created by the Tax Reform Act of 1986 to facilitate the structuring of
mortgage-asset transactions.
Repurchase Agreements - Financial transactions involving the sale and subsequent
repurchase of an identical security on a specified date at two different,
pre-negotiated prices. Because Repurchase Agreements require the same security
to be returned when the transaction is completed, these agreements are perceived
as and accounted for as collateralized borrowing/lending arrangements.
Rights 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.
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 mortgage loans.
Stock Option Plan - The company's 1986 Stock Option Plan, as restated November
15, 1990, as amended.
1940 Act - The Investment Company Act of 1940, as amended.
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareowners
Commercial Assets, Inc.
Denver, Colorado
We have audited the accompanying balance sheets of Commercial Assets,
Inc. at December 31, 1995 and 1994, and the related statements of income,
stockholders' equity and cash flows for the years ended December 31, 1995 and
1994, and for the period from October 12, 1993 (date operations commenced) to
December 31, 1993. 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 financial statements referred to above present
fairly, in all material respects, the financial position of Commercial Assets,
Inc. at December 31, 1995 and 1994, and the results of its operations and its
cash flows for the years ended December 31, 1995 and 1994, and for the period
from October 12, 1993 (date operations commenced) to December 31, 1993, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Phoenix, Arizona
February 9, 1996
F-23
<PAGE>
COMMERCIAL ASSETS, INC.
BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
Assets
<S> <C> <C>
Cash and cash equivalents $ 598 $ 12,367
Accrued interest receivable 675 681
Restricted cash 768 371
CMBS bonds 69,503 74,046
Other assets, net 46 139
---------- ----------
Total Assets $ 71,590 $ 87,604
========== ==========
Liabilities
Accounts payable and accrued liabilities $ 133 $ 381
Management fees payable 292 245
Dividends payable -- 2,011
Short-term notes payable 700 10,295
---------- ----------
Total Liabilities 1,125 12,932
---------- ----------
Stockholders' Equity
Preferred Stock, par value $.01 per share, 25,000,000 shares authorized; no
shares issued or outstanding -- --
Common Stock, par value $.01 per share, 75,000,000 shares authorized;
10,142,034 and 10,052,794 shares issued and outstanding, respectively
102 101
Additional paid-in capital 75,523 74,994
Cumulative dividends declared (12,897) (6,029)
Cumulative net income 11,982 5,606
---------- ----------
Dividends in excess of net income (915) (423)
---------- ----------
Net unrealized holding losses on CMBS bonds (4,245) --
---------- ----------
Total Stockholders' Equity 70,465 74,672
---------- ----------
Total Liabilities and Stockholders' Equity $ 71,590 $ 87,604
========== ==========
</TABLE>
See Notes to Financial Statements.
F-24
<PAGE>
COMMERCIAL ASSETS, INC.
STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Period from
October 12, 1993 (date
operations commenced)
Year Ended December 31, to December 31,
Revenues 1995 1994 1993
- -------- ---- ---- ----
<S> <C> <C> <C>
CMBS bonds $ 8,980 $ 5,938 $ 125
Interest 189 1,126 869
--------- --------- ---------
Total Revenues 9,169 7,064 994
--------- --------- ---------
Expenses
Management fees 1,151 598 6
General and administrative 1,393 1,220 309
Interest 249 319 --
--------- --------- ---------
Total Expenses 2,793 2,137 315
--------- --------- ---------
Net Income $ 6,376 $ 4,927 $ 679
========= ========= =========
Net income per share $ .63 $ 0.49 $ 0.07
Weighted-average shares outstanding 10,104 10,047 10,039
Dividends per share $ .68 $ 0.53 $ 0.07
</TABLE>
See Notes to Financial Statements.
F-25
<PAGE>
COMMERCIAL ASSETS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1995 and 1994 and for the Period
from October 12, 1993 (Date Operations Commenced) to December 31, 1993
(In thousands)
<TABLE>
<CAPTION>
Unrealized
Holding
Additional Dividends In Losses Total
Common Stock Paid-In Excess of on Stockholders'
Shares Amount Capital Net Income CMBS Bonds Equity
------ ------ ------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock 10,039 $ 100 $ 74,900 $ -- $ -- $ 75,000
Net income -- -- -- 679 -- 679
Dividends -- -- -- (703) -- (703)
------- ------ --------- -------- ------- ---------
Balances - December 31, 1993 10,039 100 74,900 (24) -- 74,976
Issuance of Common Stock 14 1 94 -- -- 95
Net income -- -- -- 4,927 -- 4,927
Dividends -- -- -- (5,326) -- (5,326)
------- ------ --------- -------- ------- ---------
Balances - December 31, 1994 10,053 101 74,994 (423) -- 74,672
Issuance of Common Stock 89 1 529 -- -- 530
Net income -- -- -- 6,376 -- 6,376
Dividends -- -- -- (6,868) -- (6,868)
Unrealized depreciation of CMBS bonds -- -- -- -- (4,245) (4,245)
------- ------ --------- -------- ------- ---------
Balances - December 31, 1995 10,142 $ 102 $ 75,523 $ (915) $(4,245) $ 70,465
======= ====== ========= ======== ======= =========
</TABLE>
See Notes to Financial Statements.
F-26
<PAGE>
COMMERCIAL ASSETS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Period from
October 12, 1993
(date operations
commenced) to
Year Ended December 31, December 31,
1995 1994 1993
---- ---- ----
Cash Flows From Operating Activities
<S> <C> <C> <C>
Net income $ 6,376 $ 4,927 $ 679
Adjustments to reconcile net income to net cash flows from
operating activities:
Amortization of discount on CMBS bonds and other assets (638) (331) (11)
Decrease (increase) in accrued interest receivable 6 (569) (112)
Increase in accounts payable and accrued liabilities 329 481 240
-------- --------- ---------
Net Cash Provided By Operating Activities 6,073 4,508 796
-------- --------- ---------
Cash Flows From Investing Activities
Principal collections from CMBS bonds 554 377 --
Acquisitions of CMBS bonds -- (65,628) (8,709)
Increase in restricted cash -- (96) --
-------- --------- ---------
Net Cash Provided By (Used In) Investing Activities 554 (65,347) (8,709)
-------- --------- ---------
Cash Flows From Financing Activities
Dividends paid (8,879) (3,315) (703)
(Repayments) borrowings of short-term notes payable (9,595) 10,295 --
Decrease (increase) in other assets 78 (76) (82)
Proceeds from Contribution Agreement -- -- 74,800
Proceeds from issuance of Common Stock -- -- 200
-------- --------- ---------
Net Cash (Used In) Provided By Financing Activities (18,396) 6,904 74,215
-------- --------- ---------
Cash and Cash Equivalents
(Decrease) increase (11,769) (53,935) 66,302
Beginning of period 12,367 66,302 --
-------- --------- ---------
End of period $ 598 $ 12,367 $ 66,302
======== ========= =========
</TABLE>
See Notes to Financial Statements.
F-27
<PAGE>
COMMERCIAL ASSETS, INC.
NOTES TO 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 the financial statements.
A. Organization
Commercial Assets, Inc. was incorporated under Maryland law on August
11, 1993 by Asset Investors. The company commenced operations on October 12,
1993, the date on which Asset Investors contributed $75,000,000 ($74,800,000
pursuant to the Contribution Agreement plus $200,000 cash) to the capital of the
company and distributed approximately 70% of the shares of Common Stock of
Commercial Assets, Inc. to Asset Investors' shareowners (the "Distribution").
The company's Common Stock is listed on the AMEX under the symbol "CAX."
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 company's Independent Directors. The Manager is
subject to the supervision of the company's Board of Directors. As part of its
duties, the Manager presents the company with asset acquisition opportunities
and furnishes the Board of Directors with information concerning the
acquisition, holding and disposition of portfolio assets. The company has no
employees.
The company owns, and the Manager administers on the company's behalf,
subordinate ownership interests in CMBS bonds issued in commercial mortgage loan
securitizations. Commercial mortgage loan securitizations generally are
multi-class issuances of debt securities 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, accounts and other collateral.
To date, the company's primary emphasis has been on the acquisition of
credit support classes of commercial securitizations backed by mortgage loans on
multi-family real property.
B. Summary of Significant Accounting Policies
CMBS bonds - Earnings from CMBS bonds are comprised of coupon interest
and the amortization of the purchase discount. Amortization of the purchase
discount is recognized by the interest method using a constant effective yield
and assumes an estimated rate of future prepayments, defaults and credit losses
which is adjusted for actual experience. The allowance for credit losses is
equal to the undiscounted total of future estimated credit losses.
Adjustments to the estimate of future credit losses are included in current
period earnings.
On December 31, 1995, the company changed the classification of its
CMBS bonds from held-to-maturity to available-for-sale. Accordingly, the CMBS
bonds are carried at fair value in the financial statements. The change in
classification is not attributable to any immediate plans to liquidate its CMBS
bonds, but instead, is intended to give the company added flexibility in
managing its CMBS bond portfolio and assist the shareowners in understanding the
fair value of the company's net assets. Unrealized holding losses for
F-28
<PAGE>
available-for-sale securities are excluded from earnings and reported as a net
amount in stockholders' equity until realized.
If the fair value of a CMBS bond declines below its amortized cost
basis and the decline is considered to be "other than temporary," the amount of
the write-down would be included in the company's income (i.e., accounted for as
a realized loss). The decline in fair value is considered to be other than
temporary if the cost basis exceeds the related projected cash flow from the
CMBS bond discounted at a risk-free rate of return.
Fair Value of Financial Instruments - The fair value of the company's
CMBS bonds is discussed in Note C. The fair value of all other financial
instruments of the company generally approximate their carrying basis or
amortized cost.
Income Taxes - The company intends to operate in a manner that will
permit it to qualify for the income tax treatment accorded to a REIT. If it so
qualifies, the company's 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 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
its REIT income and to meet certain asset, income and stock ownership tests. The
company currently intends to distribute 100% of its REIT income to its
shareowners within the time limits prescribed by the Code. Dividends declared in
1995, 1994 and 1993 represented ordinary income to the shareowners, in
accordance with the Code.
Net Income Per Share - Net income per share for the years ended
December 31, 1995 and 1994 and for the period from October 12, 1993 to December
31, 1993, was based upon the weighted-average number of shares of Common Stock
outstanding during each such period. In 1995 and 1994, the effect of unexercised
stock options was not material with respect to net income per share and was not
dilutive in 1993.
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. The company paid interest
expense in cash of $290,000, $278,000 and $0 for the years ended December 31,
1995 and 1994 and for the period from October 12, 1993 to December 31, 1993,
respectively. The company had non-cash investing activities of $397,000 and
$275,000 for the years ended December 31, 1995 and 1994, respectively, from
principal collections on CMBS bonds transferred to restricted cash. The company
had non-cash financing activities of $74,800,000 during the period from October
12, 1993 to December 31, 1993, from capital contributions pursuant to the
Contribution Agreement.
F-29
<PAGE>
C. CMBS Bonds
Presented below is a schedule of the CMBS bonds owned by the company as
of December 31, 1995 and 1994 (dollar amounts in thousands).
<TABLE>
<CAPTION>
Weighted- Outstanding Balance
Maturity Average Date Senior at December 31,
Description Coupon Date Life(5) Acquired Rating CMBS Bonds(4) 1995 1994
----------- ------ -------- ---------- -------- ------ ---------- --------- ------
Kidder, Peabody Acceptance
Corporation I, Series 1993-M2,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class E(1) 8.88% 8/2021 4.7 11/16/93 BB $ 84,048 $ 10,000 $ 10,000
Lehman Capital Corporation
Trust Certificate, Series 1994-2(2) 6.50% 10/2003 7.8 2/24/94 Unrated 2,143 2,143
Lehman Capital Corporation
Trust Certificate, Series 1994-3 6.50% 10/2003 7.8 2/24/94 Unrated 127,446 4,162 4,162
Aspen MHC, Series 1994-1, Class C(3) 9.00% 3/2024 4.5 3/08/94 BB 6,261 6,815
Aspen MHC, Series 1994-1, Class D-1(3) 9.00% 3/2024 14.4 3/08/94 Unrated 95,159 3,596 3,596
Fannie Mae Multi-Family REMIC Trust
1994-M2, Class C(6) 7.99% 1/2001 4.8 3/30/94 Unrated 11,587 11,681
Fannie Mae Multi-Family REMIC Trust
1994-M2, Class D(6) 8.18% 1/2004 7.4 3/30/94 Unrated 383,755 38,715 39,018
DLJ Mortgage Acceptance Corporation,
Series 1994-MF4, Class B-3 8.50% 4/2001 5.3 6/15/94 B 3,136 3,136
DLJ Mortgage Acceptance Corporation,
Series 1994-MF4, Class C 8.50% 4/2001 5.3 6/15/94 Unrated 93,653 4,183 4,183
Kidder, Peabody Acceptance
Corporation I, Series 1994-M1, Class C 8.25% 11/2002 5.6 11/29/94 B 8,930 8,930
Kidder, Peabody Acceptance
Corporation I, Series 1994-M1, Class D 8.25% 11/2002 5.9 11/29/94 Unrated 236,499 7,655 7,655
---- --- ---------- -------- --------
Total outstanding balance 8.24% 6.5 $1,020,560 100,368 101,319
==== === ==========
Unamortized discount (14,393) (15,106)
Allowance for credit losses (12,720) (12,720)
Unamortized acquisition costs 493 553
-------- --------
Amortized cost 73,748 74,046
Net unrealized holding losses (4,245) --
-------- --------
Total net book value $ 69,503 $ 74,046
======== ========
- ---------------------------------------------------------------
<FN>
(1) The company has a 75.2% ownership interest in this CMBS bond.
(2) The company has a 51.7% ownership interest in this CMBS bond.
(3) There is a bond class subordinate to Aspen 94-1C and Aspen 94-1D with an
outstanding balance at December 31, 1995, of $11,986,000.
(4) The outstanding principal balance at December 31, 1995, of the CMBS bonds
senior to the company's subordinate CMBS bond classes. The amount is
combined for classes from a single issuance.
(5) Remaining weighted-average life at December 31, 1995, in years.
(6) Payment of principal and interest is not guaranteed by FNMA.
</FN>
</TABLE>
F-30
<PAGE>
Based on the timing and amount of future credit losses estimated by the
company, the weighted-average yield-to-maturity of the company's CMBS bonds at
December 1995 and 1994, was 11.9%. The yield on the CMBS bonds acquired by the
company will be extremely sensitive to defaults on the mortgage loans
collateralizing such CMBS bonds and the severity of losses resulting from such
defaults. The losses are due to a decline in the value of the properties
collateralizing the mortgage loans underlying the company's CMBS bonds. The
losses may not be apparent until the maturity dates of the mortgage loans as the
property owner attempts to refinance or sell the property to repay the mortgage
loan. The weighted-average lives of the mortgage loans generally coincide with
the weighted-average lives of the CMBS bonds owned by the company. The
weighted-average lives listed in the table above indicate the approximate time
until the maturity date of the company's CMBS bonds.
The company's Subordinate CMBS bonds provide credit support to the more
senior bond classes of the related commercial securitization and are
collateralized by mortgage loans on multi-family properties and mobile home
parks located throughout the country. Generally, any loss on an individual
mortgage loan, which comprises a portion of the collateral for all bond classes
in a CMBS issuance, is absorbed first by the company to the extent of the
principal balance and interest payments of the company's related CMBS bonds. The
mortgage loans collateralizing certain CMBS bonds are held by a group of related
entities, none of which individually represent greater than 10% of the mortgage
loans collateralizing the company's CMBS bonds. The company's exposure to loss
from its CMBS bonds is limited to their amortized cost and restricted cash.
The outstanding balance of the mortgage loans collateralizing the CMBS
bonds and the outstanding principal of the CMBS bonds that are senior to the
company's CMBS bonds was $1,133,901,000 and $1,020,560,000, respectively, at
December 31, 1995. The company has provided an allowance for credit losses of
$12,720,000 at December 31, 1995 and 1994 on certain of its CMBS bonds. At
December 31, 1995, there were no delinquent mortgage loans that collateralize
the company's CMBS bonds. During the years ended December 31, 1995 and 1994,
there were no credit losses charged to operations or write-downs charged against
the allowance for credit losses. The mortgages which comprise the collateral for
the company's subordinate CMBS bonds are secured by apartment complexes and
mobile home parks in 36 states, with concentrations in Texas (24%), Florida
(13%) and Arizona (10%).
Pursuant to the provisions of certain of the company's CMBS bonds, cash
collections which would otherwise be attributable to the company's interests are
required to be set aside in reserve accounts to support the eventual payment of
more senior classes of CMBS bonds. At December 31, 1995 and 1994, the amounts
set aside of $768,000 and $371,000, respectively, is shown as restricted cash on
the balance sheet.
Due to the complex nature of CMBS bonds, each instrument has a
discrete and unique risk/return profile. Not only do CMBS bonds vary
significantly from issuance to issuance, but the characteristics of the
individual mortgage loans underlying the securities of one issuance are distinct
from the mortgage loans underlying certificates of another issuance. There is no
exchange or other active market from which to obtain a quoted market price for
these financial instruments. 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
F-31
<PAGE>
ESTIMATES PRESENTED HEREIN ARE BASED ON PERTINENT INFORMATION AVAILABLE TO
MANAGEMENT AS OF DECEMBER 31, 1995. FUTURE ESTIMATES OF FAIR VALUE MAY DIFFER
SIGNIFICANTLY FROM THE AMOUNTS PRESENTED HEREIN.
The estimated fair value of the company's CMBS bonds at December 31,
1995 and 1994 was $69,503,000 and $70,000,000, respectively. The estimate of
fair value was determined by discounting the future cash flows before estimates
of credit losses of the CMBS bonds at interest rates equal to a spread over U.S.
Treasury rates with comparable terms to maturity. The discount rates range from
10% to 21%. The interest rate spread over the U.S. Treasury rate was based upon
current market information of CMBS bonds with similar characteristics. The fair
value of CMBS bonds will fluctuate over time due to, among other things, changes
in prevailing interest rates, liquidity in the CMBS bonds market, paydowns on
the mortgage loans collateralizing the CMBS bonds and changes in real estate
values of the related commercial properties. The decline in fair value below
amortized cost is considered temporary, and, accordingly, is excluded from
earnings and reported as a component of stockholders' equity.
Certain of the company's CMBS bonds are pledged as collateral for the
company's short-term notes payable (see Note E).
D. Contribution Agreement
In August 1993, the company entered into the Contribution Agreement
with Asset Investors. In connection with the Contribution Agreement, Asset
Investors contributed $74,800,000 to the initial capital of the company. In
addition, based on the number of shares of Asset Investors Common Stock
outstanding on October 1, 1993, the record date of the Distribution: (i) Asset
Investors distributed 7,040,043 shares of Common Stock to Asset Investors'
shareowners on the basis of one share of Common Stock for every two shares of
Asset Investors Common Stock outstanding on the record date of the distribution;
and (ii) Asset Investors retained 2,998,518 shares of Common Stock. As of
October 12, 1993, 10,038,561 shares of Common Stock were outstanding.
The terms of the Contribution Agreement provide that, among other
things, neither Asset Investors nor the company shall assume any liability or
obligation of the other. Each party has agreed to indemnify the other against
any such liability or obligation. The Contribution Agreement further provides
that the company will not acquire interests in single-family (one- to four-unit)
securitizations and that Asset Investors will not acquire interests in
commercial securitizations, including commercial securitizations secured by
multi-family residential properties.
E. Short-Term Notes Payable
On November 29, 1994, the company entered into a $50,000,000 Loan and
Security Agreement which is currently collateralized by four CMBS bonds (FNMA
94-M2C, FNMA 94-M2D, Kidder 94-M1C and Kidder 94-M1D), pursuant to which the
company can borrow amounts based upon the value of the collateral pledged
through November 29, 1996. Advances bear interest based upon a spread over the
LIBOR with a term that most closely approximates the term of the advance. The
Loan and Security Agreement contains certain covenants with which the company
was in compliance at December 31, 1995 and 1994. No borrowings were outstanding
on this line at December 31, 1995, and $21,616,000 was available to be borrowed.
At December 31, 1994, $4,000,000 was borrowed at an effective interest rate of
8.06%.
F-32
<PAGE>
On April 12, 1994, the company entered into a one-year secured note
payable which was paid in full on April 11, 1995. The note was collateralized by
two CMBS bonds. Interest on the note was based on a spread over one-month LIBOR.
At December 31, 1994, $6,295,000 was borrowed under this loan at an effective
interest rate of 8.37% per annum.
On July 19, 1995, the company entered into a one-year, unsecured line
of credit with a bank for $1,000,000. Advances bear interest at prime. Two of
the company's Independent Directors are members of the Board of Directors of the
holding company of the bank. At December 31, 1995, $700,000 was outstanding on
this line of credit at an interest rate of 8.50% per annum. The advance was
repaid in January 1996.
F. Stock Option Plan
The company has a Stock Option Plan for the issuance of non-qualified
stock options to its directors and officers which as of January 1, 1996 and
1995, permits the issuance of up to an aggregate of 601,420 and 600,528 shares
of Common Stock. On January 1st of each year, the number of shares of Common
Stock available under the Stock Option Plan increases automatically by an amount
equal to one percent of the number of shares of Common Stock outstanding on
December 31st of the previous year. The exercise price for stock options may not
be less than 100% of the fair market value of the shares of Common Stock at the
date of the grant. Each of the stock options granted to date expires in five
years.
Stock options granted under the Stock Option Plan automatically accrue
DERs based on: (i) the number of shares underlying the unexercised portion of
the option; (ii) dividends declared on the outstanding shares of the company
between the option grant date and the option exercise date; and (iii) the market
price of the shares on the dividend record date. DERs are paid in shares of
Common Stock (or in other property that constitutes the dividend) at the time of
each dividend distribution. During the years ended December 31, 1995 and 1994
and the period from October 12, 1993 to December 31, 1993, the company incurred
$376,000, $227,000 and $22,000, respectively, of general and administrative
expenses from DERs covering 63,566, 36,485 and 3,422, respectively, of shares of
Common Stock which are subject to issuance pursuant to options granted under the
Plan.
Presented below is a summary of the changes in stock options for the
two years ended December 31, 1995. The options outstanding at December 31, 1993
were granted at the inception of the company.
Average
Option Price Shares
------------ ------
Outstanding - December 31, 1993 $ 7.50 311,500
Granted 6.32 169,500
------ -------
Outstanding - December 31, 1994 7.09 481,000
Granted 6.15 92,500
------ -------
Outstanding - December 31, 1995 $ 6.94 573,500
====== =======
No options have been exercised or canceled during 1995 and 1994.
F-33
<PAGE>
G. Other Matters
The company operates under a Management Agreement with the Manager,
pursuant to which 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.
Effective April 1, 1996, Financial Asset Management LLC will assume the
obligations of the Management Agreement from the Manager. Financial Asset
Management LLC is 80% owned by two subsidiaries of MDC and 20% owned by Spencer
I. Browne, the President and a Director of the company.
During the years ended December 31, 1995 and 1994 and for the period
from October 12, 1993 to December 31, 1993, the company's total management fees
were $1,151,000, $924,000 and $6,000, respectively, consisting of: (i)
Acquisition Fees of $0, $326,000 and $0, respectively; (ii) Base Fees of
$751,000, $556,000 and $5,000, respectively; and (iii) Administrative Fees of
$65,000, $42,000 and $1,000, respectively, pursuant to the Management Agreement.
Incentive Fees of $335,000 were incurred during 1995. No Incentive Fees were
incurred during 1994 and the period from October 12, 1993 to December 31, 1993.
Acquisition fees are capitalized as part of the cost of acquiring CMBS bonds.
The company's Charter authorizes the Board of Directors to issue
25,000,000 shares, par value $.01 per share, of Preferred Stock. To date, the
company has not issued any classes of stock other than its Common Stock and has
not determined the terms under which any other classes would be issued. The
Charter of the company authorizes the Board of Directors, without further
shareowner action, to fix the terms of the Preferred Stock, including
preferences, powers and rights (including voting rights) senior to the Common
Stock.
The officers and certain directors of the company also serve as
officers, employees, directors or all three of Asset Investors, MDC and certain
related entities, including the Manager.
At December 31, 1995, 1994 and 1993, the shares of Common Stock owned
by MDC represented 0.8% of the outstanding shares of Common Stock.
F-34
<PAGE>
H. Selected Quarterly Financial Data (unaudited)
Presented below is selected quarterly financial data for the years
ended December 31, 1995 and 1994, (in thousands, except per share data).
<TABLE>
<CAPTION>
Three Months Ended,
-------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
1995
- -------------------------------------------- ----------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Revenues $2,325 $2,243 $2,240 $2,349
Net income 1,508 1,686 1,649 1,533
Net income per share .15 .17 .16 .15
Dividends declared per share .17 .17 .17 .17
Stock prices (1)
High 6 6-5/16 6-1/2 6-3/8
Low 5-5/8 5-3/4 5-3/4 5-1/2
Common Stock outstanding 10,142,034 10,124,698 10,092,674 10,078,468
1994
- -------------------------------------------- ----------------- ------------------ --------------- ------------------
Revenues $2,262 $2,052 $1,881 $869
Net income 1,588 1,509 1,377 453
Net income per share .16 .15 .13 .05
Dividends declared per share
.20 .14 .12 .07
Stock prices (1)
High 6-1/2 7-1/4 7-3/8 6-3/4
Low 5-1/2 6-3/8 6-1/8 6-1/4
Common Stock outstanding 10,052,794 10,052,794 10,041,983 10,041,983
- ---------------
<FN>
(1) As reported on the AMEX Composite Tape.
</FN>
</TABLE>
F-35
<PAGE>
COMMERCIAL ASSETS, INC.
SUMMARY OF DEFINITIONS
When the following terms are used in the text, they will be
understood to have the meanings indicated below.
Acquisition Fee - a one-time fee paid to the Manager pursuant to the Management
Agreement for performing due diligence procedures in connection with the
acquisition by the company of each asset equal to 0.5% of the cost of such
acquisition.
Administration Fee - a fee of up to $10,000 per annum which is paid to the
Manager pursuant to the Management Agreement for administration and other
services related to each of the company's CMBS bonds. If the company owns more
than one class of a commercial securitization the Manager is entitled to receive
an additional fee of $2,500 per annum for each additional class.
Asset Investors - Asset Investors Corporation, a Maryland corporation.
AMEX - American Stock Exchange, Inc.
Base Fee - an annual management fee equal to 1% 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.
By-laws - the by-laws, as amended, of the company.
Charter - the corporate charter, as amended, of the company.
CMBS bond - commercial mortgage-backed security, which is a debt instrument
which is secured by mortgage loans on commercial real property.
Code - the Internal Revenue Code of 1986, as amended.
Commission - the Securities and Exchange Commission.
Common Stock - the common stock, par value of $.01 per share, of the company.
company - Commercial Assets, Inc., a Maryland corporation.
Contribution Agreement - the contribution agreement between Asset Investors and
the company, dated as of August 20, 1993.
CPR - constant prepayment rate.
DERs - dividend equivalent rights, as defined in the company's Stock Option
Plan.
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
F-36
<PAGE>
income cannot be reduced by any expenses or deductions, including normal
operating expenses and net operating losses.
FAS 115 - Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities.
first loss - a first loss security is the most subordinate class of a security
having multiple classes and is the first to bear the risk of default on the
underlying collateral.
GAAP - generally accepted accounting principles.
Incentive Fee - an annual management fee equal to 20% of the dollar amount by
which the annual REIT income 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 1%, payable quarterly to the Manager pursuant to the Management
Agreement.
Independent Director - pursuant to the company's By-laws, an Independent
Director is a person "who is not affiliated, directly or indirectly, with the
person or entity responsible for directing or performing the day-to-day business
affairs of the corporation (the "advisor"), including a person or entity to
which the advisor subcontracts substantially all of such functions, whether by
ownership of, ownership interest in, employment by, any material business or
professional relationship with, or by serving as an officer of the advisor or an
affiliated business entity of the advisor."
1940 Act - the Investment Company Act of 1940, as amended.
LIBOR - the London Interbank Offered Rate on Eurodollar deposits.
loss severity percentage - the rate of losses on the outstanding principal
balance of defaulted mortgage loans.
Management Agreement - the one-year management agreements entered into between
the company and the Manager dated as of October 12, 1993, and amended effective
as of January 1, 1994, 1995 and 1996.
Manager - Financial Asset Management Corporation, an indirect, wholly-owned
subsidiary of MDC.
MDC - M.D.C. Holdings, Inc., a Delaware corporation.
Mortgage-backed bonds - instruments that, directly or indirectly, evidence
interests in, or are secured by and payable from, mortgage loans on real
property.
Mortgage Collateral - mortgage loans which secure Mortgage-backed bonds.
NYSE - New York Stock Exchange, Inc.
Preferred Stock - preferred stock, par value $.01 per share, of the company.
REIT - a real estate investment trust, as defined in the Code.
F-37
<PAGE>
REIT income - taxable income computed as prescribed for REITs 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.
Stock Option Plan - the Commercial Assets, Inc. 1993 Stock Option Plan.
Subordinate CMBS bond - class of CMBS bonds that provide credit enhancement to
the more senior investment grade classes. May be the bonds that absorbed the
first losses from the related Mortgage Collateral.
F-38
<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 to the company's Proxy Statement for its 1996
Annual Meeting of Shareowners, when filed.
Item 11. EXECUTIVE COMPENSATION.
Information required to be set forth hereunder has been omitted and
will be incorporated by reference to the company's Proxy Statement for its 1996
Annual Meeting of Shareowners, when filed.
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 to the company's Proxy Statement for its 1996
Annual Meeting of Shareowners, when filed.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required to be set forth hereunder has been omitted and
will be incorporated by reference to the company's Proxy Statement for its 1996
Annual Meeting of Shareowners, when filed.
-31-
<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:
Asset Investors Corporation: PAGE
Report of Independent Auditors................ F-2
Consolidated Balance Sheets as of
December 31, 1995 and 1994.................. F-3
Consolidated Statements of Operations
for the years ended December 31, 1995,
1994 and 1993............................... F-4
Consolidated Statements of Stockholders'
Equity for the years ended December 31,
1995, 1994 and 1993......................... F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1995,
1994 and 1993............................... F-6
Notes to Consolidated Financial Statements.... F-7
Commercial Assets, Inc. (a significant unconsolidated
subsidiary of the company):
Report of Independent Auditors................ F-23
Balance Sheets as of December 31, 1995
and 1994.................................... F-24
Statements of Income for the years ended
December 31, 1995 and 1994 and for the
period from October 12, 1993 (date
operations commenced) to December 31,
1993........................................ F-25
Statements of Stockholders' Equity
for the years ended December 31, 1995
and 1994 and for the period from
October 12, 1993 (date operations commenced)
to December 31, 1993........................ F-26
Statements of Cash Flows for the years ended
December 31, 1995 and 1994 and for the
period from October 12, 1993 (date
operations commenced) to December 31, 1993.. F-27
Notes to Financial Statements................. F-28
-32-
<PAGE>
2. Schedules 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 No.
1-9360 filed March 31, 1994).
3.3(b) June 21, 1994 Amendment to the By-laws of
the Registrant (incorporated herein by
reference to Exhibit 3.3(b) to the Annual
Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1994,
Commission File No. 1-9360 filed March 30,
1995).
3.3(c) March 15, 1995 Amendment to the By-laws of
the Registrant (incorporated herein by
reference to Exhibit 3.3(c) to the Annual
Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1994,
Commission File No. 1-9360 filed March 30,
1995).
4 Form of certificate representing Common
Stock of the Registrant (incorporated herein
by reference to Exhibit 10.15 to the Annual
Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1988,
Commission File No. 1-9360, filed on April
5, 1989).
10.1(b) Management Agreement dated as of January 1,
1995, between the Registrant and Financial
Asset Management Corporation (incorporated
herein by reference to Exhibit 10.1(b) to
the Quarterly Report on Form 10-Q of the
Registrant for the quarter ended March 31,
1995, Commission File No. 1-9360, filed on
May 15, 1995).
10.4 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).
-33-
<PAGE>
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).
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).
10.19 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 Consent of Independent Auditors - Ernst &
Young LLP.
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). (b) Reports on Form 8-K
-34-
<PAGE>
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.
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 27, 1996 By /s/ Spencer I. Browne
-----------------------
Spencer I. Browne
President and Chief Executive Officer
Date: March 27, 1996 By /s/ Paris G. Reece III
------------------------
Paris G. Reece III
Executive Vice President and
Chief Financial Officer
Date: March 27, 1996 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 27, 1996
- -----------------------------
Larry A. Mizel
/s/ Spencer I. Browne Director March 27, 1996
- -----------------------------
Spencer I. Browne
/s/ Elliot H. Kline Director March 27, 1996
- -----------------------------
Elliot H. Kline
/s/ Richard L. Robinson Director March 27, 1996
- -----------------------------
Richard L. Robinson
/s/ Tim Schultz Director March 27, 1996
- -----------------------------
Tim Schultz
-35-
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-42605) of Asset Investors Corporation of our reports (a) dated
February 9, 1996, with respect to the consolidated financial statements of Asset
Investors Corporation for the year ended December 31, 1995 and (b) dated
February 9, 1996 with respect to the financial statements of Commercial Assets,
Inc., both of which are included in this Annual Report (Form 10-K) for the year
ended December 31, 1995.
Phoenix, Arizona
March 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,328
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,328
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 79,653
<CURRENT-LIABILITIES> 894
<BONDS> 0
0
0
<COMMON> 244
<OTHER-SE> 78,515
<TOTAL-LIABILITY-AND-EQUITY> 79,653
<SALES> 0
<TOTAL-REVENUES> 10,871
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,875
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> 7,933
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,933
<DISCONTINUED> 6,507
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,440
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.60
</TABLE>
