SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-9360
ASSET INVESTORS CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 84-1038736
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 South Yosemite Street, Suite 900 80237
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
(303) 793-2703
(Registrant's telephone number, including area code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __.
As of May 1, 1996, 24,382,656 shares of Asset Investors Corporation
Common Stock were outstanding.
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements: PAGE
Balance Sheets as of March 31, 1996
(unaudited) and December 31, 1995.......................... 1
Statements of Operations for the three months ended
March 31, 1996 and 1995 (unaudited)........................ 2
Statements of Cash Flows for the three months ended
March 31, 1996 and 1995 (unaudited)........................ 3
Notes to Financial Statements
(unaudited)................................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 10
Definitions................................................ 19
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K........................... 22
(i)
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
March 31, December 31,
1996 1995
---- ----
(Unaudited)
Assets
<S> <C> <C>
Cash and cash equivalents $ 3,240 $ 5,328
Non-agency MBS Bonds 55,671 52,753
Investment in Commercial Assets 19,201 19,225
Other assets, net 2,114 2,347
------------ ------------
Total Assets $ 80,226 $ 79,653
============ ============
Liabilities
Accounts payable and accrued liabilities $ 586 $ 416
Management fees payable 561 478
------------ ------------
Total Liabilities 1,147 894
------------ ------------
Stockholders' Equity
Common Stock, par value $.01 per share, 50,000,000 shares authorized;
24,382,656 and 24,355,862 shares issued and
outstanding, respectively 244 244
Additional paid-in capital 227,633 227,546
Cumulative dividends (231,431) (229,239)
Cumulative net income 83,368 80,965
------------ ------------
Dividends in excess of net income (148,063) (148,274)
Unrealized holding losses on debt securities (735) (757)
------------ ------------
Total Stockholders' Equity 79,079 78,759
------------ ------------
Total Liabilities and Stockholders' Equity $ 80,226 $ 79,653
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
---------
Ongoing Operations: 1996 1995
--------- ------
Revenues
<S> <C> <C>
Non-agency MBS bonds $ 2,830 $ 1,333
Equity in earnings of Commercial Assets 437 420
Interest and other income 86 149
--------- ---------
Total revenues 3,353 1,902
--------- ---------
Expenses
Management fees 452 148
General and administrative 498 776
Interest -- 33
--------- ---------
Total expenses 950 957
--------- ---------
Earnings from ongoing operations 2,403 945
Earnings from liquidating operations -- 3,062
--------- ---------
Net income $ 2,403 $ 4,007
========= =========
Net income per share $ .10 $ .17
========= =========
Weighted-average shares outstanding 24,365 24,227
Dividends per share $ .09 $ .08
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
---------
1996 1995
---- ----
Cash Flows From Operating Activities
<S> <C> <C>
Net income $ 2,403 $ 4,007
Adjustments to reconcile net income to net cash flows from operating
activities:
Amortization of discounts on non-agency MBS bonds 484 269
Equity in earnings of Commercial Assets (437) (420)
Decrease (increase) in other assets 208 (195)
Increase (decrease) in accounts payable and accrued liabilities 365 (845)
Net gain on sale of assets -- (2,031)
Amortization of CMO Ownership Interests -- 654
--------- ----------
Net Cash Provided By Operating Activities 3,023 1,439
--------- ----------
Cash Flows From Investing Activities
Acquisition of non-agency MBS bonds (4,157) (11,697)
Principal collections on non-agency MBS bonds 769 411
Dividends from Commercial Assets 469 552
Principal collections on CMO Ownership Interests -- 1,571
Proceeds from the sale of assets -- 16,562
Decrease in restricted cash for secured notes payable -- 15,862
--------- ----------
Net Cash (Used By) Provided By Investing Activities (2,919) 23,261
--------- ----------
Cash Flows From Financing Activities
Dividends paid (2,192) (727)
Decrease in short-term borrowings, net -- (1,160)
Decrease in secured notes payable -- (30,592)
---------- ----------
Net Cash Used By Financing Activities (2,192) (32,479)
---------- ----------
Cash and Cash Equivalents
Decrease (2,088) (7,779)
Beginning of period 5,328 14,961
---------- ----------
End of period $ 3,240 $ 7,182
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Capitalized terms not otherwise defined in the narrative below shall
have the meaning indicated in the "Definitions" following "Management`s
Discussion and Analysis of Financial Condition and Results of
Operations."
A. The Company
Asset Investors Corporation was incorporated under Maryland law on
October 14, 1986 by MDC. The Common Stock is listed on the NYSE under the symbol
"AIC." The Company's assets primarily are non-agency MBS bonds and the ownership
of shares of Commercial Assets common stock.
B. Presentation of Financial Statements
The Condensed Consolidated Financial Statements of the Company
presented herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. These
financial statements reflect all adjustments, consisting of only normal
recurring accruals, which, in the opinion of management, are necessary to
present fairly the financial position, results of operations and cash flows of
the Company as of March 31, 1996 and for the period then ended and for all prior
periods presented. These statements are condensed and do not include all the
information required by GAAP in a full set of financial statements. These
statements should be read in conjunction with the Company's Consolidated
Financial Statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995.
Certain reclassifications have been made in the 1995 Condensed
Consolidated Financial Statements to conform to the classifications used in the
current year.
C. Summary of Significant Accounting Policies
Principles of Consolidation - The Condensed Consolidated Financial
Statements include the accounts of the Company and its wholly owned corporate
subsidiaries. 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.
Income Taxes - The Company currently operates in a manner intended to
permit it to qualify for the income tax treatment accorded to a REIT. If it so
qualifies, the Company's REIT income, with certain limited exceptions, will not
be subject to federal income tax at the corporate level. Accordingly, no
provision for taxes has been made in the Condensed Consolidated Financial
Statements.
In order to maintain its status as a REIT, the Company generally is
required, among other things, to distribute annually to its shareowners at least
95% of its REIT income reduced by the NOL carryover. The Company also is
required to meet certain asset, income and stock ownership tests.
Statements of Operations - In 1993, the Company began a program of
liquidating its CMO Ownership Interests and acquiring credit-sensitive assets
(non-agency MBS bonds and shares of Commercial Assets) that should benefit from
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<PAGE>
an improving economy. Accordingly, the Company has classified as liquidating
operations 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.
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 $0 and $869,000 for the three
months ended March 31, 1996 and 1995, respectively. Non-cash financing
activities of the Company during the three months ended March 31, 1996 and 1995
were $87,000 and $28,000, respectively, from distributions of Common Stock
pursuant to DERs and $0 and $1,938,000, respectively, from dividends payable.
D. Non-agency MBS Bonds
From April 1994 through March 31, 1996, the Company acquired 176
non-agency MBS bonds, with an aggregate outstanding principal balance on the
date of acquisition of $202,034,000 and an aggregate total cost of $61,351,000.
The net carrying value of the Company's non-agency MBS bonds was as follows
(dollar amounts in thousands):
<TABLE>
<CAPTION>
Outstanding Balance
-------------------
March 31, December 31,
Price1 Coupon2 1996 1995
----- ------ ---------- ------------
(Unaudited)
Non-agency MBS bonds backed by:
<S> <C> <C> <C> <C>
30-year fixed-rate mortgage loans 32.4% 7.1% $ 128,400 $ 116,757
15-year fixed-rate mortgage loans 37.3 6.6 19,523 16,611
Adjustable-rate mortgage loans 27.2 7.7 4,122 4,149
Lesser quality mortgage loans3 58.9 8.1 13,561 14,083
Other subordinate, non-agency MBS bonds4 27.3 6.9 28,398 28,565
---- --- ---------- -----------
35.4% 7.1% 194,004 180,165
==== ===
Less:
Allowance for credit losses (81,952) (71,365)
Unamortized discount (56,794) (56,446)
---------- -----------
Amortized cost 55,258 52,354
Net unrealized holding gains 413 399
---------- -----------
Total net book value $ 55,671 $ 52,753
========== ===========
- ---------------------------------
<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 March 31, 1996.
3 The Lesser quality mortgage loans are adjustable-rate mortgages and include $8,112,000 of B-rated,
non-agency MBS bonds at March 31, 1996 and December 31, 1995.
4 The non-agency MBS bonds backed by other subordinate non-agency MBS bonds are referred to as re-REMICs.
</FN>
</TABLE>
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<PAGE>
The allowance for credit losses is: (i) increased or decreased for
changes to the Company's expectations of future credit losses; (ii) increased
for allowances for credit losses 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
three months ended March 31, 1996 and 1995 was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Balance at the beginning of the period $ 71,365 $ 22,075
Allowance related to non-agency MBS bonds acquired during the period 12,091 8,137
Credit losses (net of indemnifications of $165 and $0, respectively) (1,504) (81)
--------- ---------
Balance at the end of the period $ 81,952 $ 30,131
========= =========
</TABLE>
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; (ii) the
purchase price of the related non-agency MBS bonds (averaging $349,000 at March
31, 1996); and (iii) cash received through the foreclosure date. As of March 31,
1996, 320 mortgage loans (out of approximately 140,000) that collateralize the
Company's non-agency MBS bonds were in foreclosure. These mortgage loans had an
outstanding principal balance of $75,171,000 and an amortized cost of
$16,027,000.
The principal amount of the credit support classes of non-agency MBS
bonds acquired by the Company represents a small percentage of the aggregate
principal amount of non-agency MBS bonds issued to securitize a pool of
residential mortgage loans. At March 31, 1996, the weighted-average percentage
of the principal amount of the credit support non-agency MBS bonds owned by the
Company represented .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 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 $36,611,801,000 and $36,417,797,000, respectively, at
March 31, 1996.
E. Investment in Commercial Assets
On March 31, 1996 and December 31, 1995, the Company owned 2,761,126
shares (approximately 27%) of the common stock of Commercial Assets. Commercial
Assets, Inc. is a REIT which owns and manages debt interests backed by loans on
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):
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<PAGE>
<TABLE>
<CAPTION>
Balance Sheets March 31, December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
CMBS bonds, net of unrealized holding losses $ 69,182 $ 69,503
Cash and other assets 2,178 2,087
--------- ---------
Total Assets 71,360 71,590
--------- ---------
Short-term borrowings 400 700
Other liabilities 492 425
--------- ---------
Total Liabilities 892 1,125
--------- ---------
Stockholders' Equity $ 70,468 $ 70,465
========= =========
Statements of Income Three Months Ended
March 31,
---------
1996 1995
---- ----
(Unaudited)
CMBS bonds $ 2,311 $ 2,210
Other revenues 7 139
-------- --------
Total revenues 2,318 2,349
-------- --------
Management fees 378 232
General and administrative 330 394
Interest 3 190
-------- --------
Total expenses 711 816
-------- --------
Net Income $ 1,607 $ 1,533
======== ========
</TABLE>
At March 31, 1996 and December 31, 1995, Commercial Assets had
$4,221,000 and $4,245,000, respectively, of unrealized holding losses on its
CMBS bonds. The Company's share of these unrealized holding losses on CMBS bonds
of $1,146,000 and $1,156,000, respectively, is recorded as a reduction in the
carrying value of its investment in Commercial Assets and as a component of
stockholders' equity.
F. Liquidating Operations
The Company, as of December 31, 1995, had substantially liquidated its
investment in CMO Ownership Interests. Revenues and expenses from CMO Ownership
Interests during the three months ended March 31, 1995 are reported as
liquidating operations. The components of revenues and expenses from CMO
Ownership Interests during the three months ended March 31, 1995 are as follows
(in thousands):
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<PAGE>
<TABLE>
<CAPTION>
Revenues
<S> <C>
CMO Ownership Interests $ 1,474
Interest income 225
Net gain on sale of CMO Ownership Interests 2,031
--------
Total revenues 3,730
--------
Expenses
Management fees 89
General and administrative 15
Interest 564
--------
Total expenses 668
--------
Earnings from liquidating operations $ 3,062
========
</TABLE>
During the three months ended March 31, 1995, the Company exercised the
Call Rights on certain CMO Ownership Interests, recognizing net gains of
$2,008,000. The exercise of Call Rights resulted in the sale of $45,698,000
principal amount of Mortgage Collateral and the early redemption of the related
CMO Bonds.
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.
G. Short-Term Borrowings
The Company has several Repurchase Agreement facilities collateralized
by certain non-agency MBS bonds. The collateral value and interest rate related
to the Repurchase Agreements are subject to periodic adjustment. At March 31,
1996, the Company was able to borrow $9,155,000 under eight Repurchase
Agreements, based on the value of the pledged collateral. At March 31, 1996 and
December 31, 1995, there were no borrowings outstanding under these Repurchase
Agreements.
The Company has entered into a credit facility that extends through
December 23, 1996 secured by certain non-agency MBS bonds. At March 31, 1996,
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 March 31, 1996 and
December 31, 1995, there were no borrowings outstanding under the 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
March 31, 1996 and December 31, 1995, there were no borrowings under this line
of credit.
-8-
<PAGE>
H. Other Matters
The Company has entered into a series of Management Agreements with the
Manager through December 31, 1996. Pursuant to the Management Agreements, 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 three months ended March
31, 1996 and 1995, the Company incurred combined Incentive Fees and Base Fees of
$288,000 and $126,000, respectively. The Company also incurred Administrative
Fees pursuant to the Management Agreements and certain administration agreements
entered into with the Manager in connection with certain of the Company's CMO
Ownership Interests and non-agency MBS bonds. Administrative Fees incurred for
the three months ended March 31, 1996 and 1995 were $164,000 and $327,000,
respectively.
Effective April 1, 1996, Financial Asset Management LLC assumed the
obligations of the Management Agreement. Financial Asset Management LLC is 80%
owned by two indirect, wholly owned subsidiaries of MDC and 20% owned by Spencer
I. Browne, the President of the Company.
The Company had an NOL carryover of approximately $100,000,000 at March
31, 1996 which could be used to reduce the Company's requirement under the Code
to distribute at least 95% of REIT income. As of March 31, 1996, the Company
also had a capital loss carryover of approximately $35,000,000 which expires
beginning in 1998.
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Capitalized terms not otherwise defined in the narrative below shall
have the meaning indicated in the "Definitions" which may be found at
the end of this report.
Asset Investors Corporation is a real estate investment trust (REIT)
that was incorporated by MDC under Maryland law in 1986. Its shares of Common
Stock are listed on the NYSE under the symbol "AIC." Asset Investors owns and
manages debt 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's acquisition and other policies are determined by its
Board of Directors. The Company's By-laws require that a majority of the Board
of Directors and each committee thereof be comprised of Independent Directors.
The Company's day-to-day operations are performed by the Manager
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.
Effective April 1, 1996, Financial Asset Management LLC assumed the
obligations of the Management Agreement. Financial Asset Management LLC is 80%
owned by two indirect, wholly owned subsidiaries of MDC and 20% owned by Spencer
I. Browne, the President of the Company.
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, with certain limited exceptions, is 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 its REIT
income. The Company must also meet certain asset, income and stock ownership
tests.
The Company currently acquires its subordinate, unrated non-agency MBS
bonds at a 70% to 80% discount from the principal amount of the bond. As with
any "deep-discount" bond, the Company's non-agency MBS bonds generate non-cash
or "phantom" income from the amortization of the purchase discount.
At March 31, 1996, the Company had a NOL carryover of approximately
$100,000,000. Because of the NOL carryover, the Company believes it has a unique
competitive advantage in acquiring deep discount, non-agency MBS bonds. The
Company is able to use its NOL carryover to offset the non-cash, phantom income
which results from the amortization of the purchase discount. Because REITs must
distribute at least 95% of their REIT income (and generally distribute 100%
because undistributed REIT income is subject to income tax) to maintain their
favorable tax status, most REITs would have to sell additional equity, sell
assets or find some other way to provide funds to distribute at least 95% of
this non-cash, phantom income.
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<PAGE>
The NOL carryover allows the Company to retain cash flow that otherwise
would be required to be distributed as dividends to grow its business by
acquiring additional non-agency MBS bonds while maintaining high dividend yields
for the Company's shareowners. The Company generated $4,261,000 in cash from
operations (net of expenses) during the three months ended March 31, 1996, of
which $2,192,000 or 51.4% was distributed to shareowners, and the remaining
$2,069,000 or 48.6% was available for additional acquisitions of non-agency MBS
bonds.
The Company acquired 17 non-agency MBS bonds with an aggregate
outstanding balance on the date of acquisition of $16,112,000 during the first
three months of 1996. These non-agency MBS bonds were acquired at a total cost
of $4,157,000, a weighted-average acquisition price of 28.1%, and with a
weighted-average pass-through coupon interest rate of 7.2%.
The Company's subordinate 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 (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 backs a residential mortgage loan
securitization and the proceeds from 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 of the mortgage loan 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 pay dividends and 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.
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<PAGE>
RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
The table below summarizes the Company's results of operations during
the three months ended March 31, 1996 and 1995 (in thousands, except per share
data).
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1996 1995
---- ----
Ongoing Operations:
Revenues
<S> <C> <C>
Non-agency MBS bonds $ 2,830 $ 1,333
Equity in earnings of Commercial Assets 437 420
Interest and other income 86 149
--------- --------
3,353 1,902
--------- --------
Expenses
Management fees 452 148
General and administrative 498 776
Interest -- 33
--------- --------
950 957
--------- --------
Earnings from ongoing operations 2,403 945
Earnings from liquidating operations -- 3,062
--------- --------
Book income $ 2,403 $ 4,007
========= ========
Earnings from ongoing operations per share $ .10 $ .04
Earnings from liquidating operations per share -- .13
--------- --------
Book income per share $ .10 $ .17
========= ========
Estimated REIT Income (Loss):
Ongoing operations $ 4,184 $ 1,583
Liquidating operations (296) (2,028)
--------- --------
Estimated REIT income (loss) $ 3,888 $ (445)
========= ========
Estimated REIT income (loss) per share $ .16 $ (.02)
========= ========
Dividends $ 2,192 $ 1,938
========= ========
Dividends per share $ .09 $ .08
========= ========
Weighted-average shares outstanding 24,365 24,227
</TABLE>
Book Income
Non-agency MBS Bonds - Book income from the Company's non-agency MBS
bonds increased significantly during the first quarter of 1996 compared with the
same period in 1995 primarily due to the acquisition of 91 non-agency MBS bonds
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<PAGE>
during 1995 and the first quarter of 1996 with an outstanding principal balance
of $113,094,000 and a weighted-average coupon at March 31, 1996 of 7.1%. As the
Company continues to acquire non-agency MBS bonds, earnings from the bonds
should continue to increase as long as future credit losses and prepayment
speeds on the Mortgage Collateral are within the Company's estimates.
The Company's effective book yield on its non-agency MBS bonds based
upon their original purchase price percentage for the three months ended March
31, 1996 and 1995, taking into consideration the Company's estimate of future
credit losses, was 19.8% and 15.0%, respectively. The effective book yield on
the Company's non-agency MBS bonds has increased primarily from the decrease in
the weighted-average purchase price of the non-agency MBS bonds from 39.2% at
March 31, 1995 to 35.4% at March 31, 1996. Also, the weighted-average coupon on
the non-agency MBS bonds increased from 6.9% at March 31, 1995 to 7.1% at March
31, 1996. 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, the effective interest rate received by the Company
(stated coupon divided by purchase price) increased from 17.6% at March 31, 1995
to 20.1% at March 31, 1996.
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. At March 31, 1996 and December 31, 1995, the
allowance for credit losses related to the Company's non-agency MBS bonds was
$81,952,000 and $71,365,000, respectively, on an outstanding principal balance
of $194,004,000 and $180,165,000, 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 and 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 is impacted by any changes in
estimates of future credit losses.
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; (ii) the
purchase price of the related non-agency MBS bonds (averaging $349,000 at March
31, 1996); and (iii) cash received through the foreclosure date. As of March 31,
1996, 320 mortgage loans (out of approximately 140,000) that collateralize the
Company's non-agency MBS bonds were in foreclosure. These mortgage loans had an
outstanding principal balance of $75,171,000 and an amortized cost of
$16,027,000.
For the three months ended March 31, 1996 and 1995, the allowance for
credit losses on the Company's non-agency MBS bonds was reduced by $1,504,000
and $81,000, respectively, as a result of the allocation of credit losses net of
indemnifications on the home mortgage loan collateral backing the bonds. The net
economic loss to the Company as a result of the credit losses allocated to the
Company's non-agency MBS bonds was $266,000 and $34,000 for the three months
ended March 31, 1996 and 1995, respectively.
The increase in credit losses from the Company's non-agency MBS bonds
is consistent with the Public Securities Association SDA model. The 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. While the Company anticipates that the
amount of credit losses allocated to the Company's non-agency MBS bonds will
continue to increase in future periods, it believes that the current balance of
the allowance for credit losses is adequate to absorb such future credit losses.
-13-
<PAGE>
This assumes, among other things, no significant changes in general economic
conditions or widespread natural disasters which may impact adversely the values
of the single-family homes securing the mortgage loans backing the Company's
non-agency MBS bonds.
On December 31, 1995, the Company changed the classification of its
non-agency MBS bonds for financial reporting purposes 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 $413,000 and $399,000 at March 31, 1996 and December
31, 1995, respectively, from the Company's non-agency MBS bonds are reported as
a net amount in stockholders' equity until realized.
Commercial Assets - Commercial Assets commenced operations on October
12, 1993 and has reported that it has acquired, since its inception, 11 CMBS
bonds from six securitizations at a cost of $74,433,000. At March 31, 1996 and
December 31, 1995, these CMBS bonds had outstanding principal balances of
$99,781,000 and $100,368,000, respectively, and weighted-average coupons of
8.24% at both dates. Income from the Company's shares of Commercial Assets
(which, for book income purposes, is based on the Company's pro rata share of
Commercial Assets' book income) for the three months ended March 31, 1996 and
1995 was $437,000 and $420,000, respectively. Commercial Assets completed the
investment of its original $75,000,000 of capital in November 1994 and has not
acquired any CMBS bonds since then.
Interest and Other Income - Interest and other income decreased during
the three months ended March 31, 1996 compared with the same period in 1995
because the Company has used its available cash to acquire non-agency MBS bonds.
Management Fees - Management fees increased during the three months
ended March 31, 1996 compared with the same period in 1995 due to: (i)
acquisitions of non-agency MBS bonds during 1995 and the first quarter of 1996;
(ii) a change in the method of calculating Incentive Fees per the terms of the
amendment to the Management Agreement dated January 1, 1996; and (iii) a
decrease in the average Ten-Year U.S. Treasury Rate during the three months
ended March 31, 1996 from the same period in 1995 by over 1.5%.
Effective April 1, 1996, Financial Asset Management LLC assumed the
obligations of the Management Agreement. Financial Asset Management LLC is 80%
owned by two indirect, wholly owned subsidiaries of MDC and 20% owned by Spencer
I. Browne, the President of the Company.
General and Administrative Expenses - General and administrative
expenses decreased during the three months ended March 31, 1996 compared with
the same period in 1995 due primarily to lower legal, accounting and consulting
fees.
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 relinquish their right to DERs. If approved, the
amendment also will eliminate the issuance of DERs in the future. The effect of
the proposal, if approved and the rights to DERs are relinquished, will be to
reduce general and administrative expenses from DERs by approximately $220,000
-14-
<PAGE>
in 1996 and approximately $300,000 per year in subsequent years. The issuance of
Common Stock in exchange for the right to receive DERs will result in a one-time
charge to second quarter 1996 earnings of approximately $750,000 and issuance of
approximately 250,000 shares of Common Stock.
Interest Expense - Interest expense on the Company's borrowing
facilities decreased during the three months ended March 31, 1996 compared with
the same period in 1995 due to the repayment of $1,598,000 of short-term
borrowings outstanding at March 31, 1995 in the second quarter of 1995.
Liquidating Operations - 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 had classified as liquidating operations its
revenues from CMO Ownership Interests along with expenses directly allocable to
the CMO Ownership Interests. As of December 31, 1995, the Company had
substantially liquidated all of its CMO Ownership Interests. Earnings from
liquidating operations during the three months ended March 31, 1995 was
comprised of the following (in thousands):
<TABLE>
<CAPTION>
Revenues
<S> <C>
CMO Ownership Interests $ 1,474
Interest income 225
Net gain on sale of CMO Ownership Interests 2,031
--------
Total revenues 3,730
--------
Expenses
Management fees 89
General and administrative 15
Interest 564
--------
Total expenses 668
--------
Earnings from liquidating operations $ 3,062
========
</TABLE>
Earnings from CMO Ownership Interests during the three months ended
March 31, 1995 were from the $22,490,000 net carrying amount of CMO Ownership
Interests at December 31, 1994. These CMO Ownership Interests were liquidated
throughout 1995.
During the three months ended March 31, 1995, the Company exercised
Call Rights on certain CMO Ownership Interests resulting in gains of $2,008,000.
The exercise of these Call Rights reduced the outstanding principal amount of
the Company's Mortgage Collateral by $45,698,000.
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. Asset Securitization was liquidated in May 1995.
Interest income from liquidating operations during the three months
ended March 31, 1995 was earned primarily from restricted cash for the secured
notes payable. The restricted cash was used to repay the secured notes on March
30, 1995. Interest expense from liquidating operations during the three months
ended March 31, 1995 was principally from the $30,592,000 of secured notes
payable which was repaid during the first quarter of 1995.
-15-
<PAGE>
REIT Income
The Company's estimated REIT income from ongoing operations during the
three months ended March 31, 1996 improved over the same period in 1995 due to
$2,146,000 of higher REIT earnings from non-agency MBS bonds and $470,000 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 1995 and
1996, and the increase in dividends from Commercial Assets was due to timing of
dividend payments.
The Company's estimated REIT losses from liquidating operations for the
three months ended March 31, 1996 were $296,000, significantly less than the
same period in 1995 primarily due to sales during 1995 of the CMO Ownership
Interests that were generating REIT losses.
NOL Carryover
At March 31, 1996, the Company's NOL carryover was approximately
$100,000,000 and capital loss carryover was approximately $35,000,000. The NOL
carryover may be used to offset all or a portion of the Company's REIT income,
and as a result, reduce the amount of income that the Company must distribute to
maintain its status as a REIT.
Reconciliation of REIT Income and Book Income
Substantially all of the difference between REIT income and book income
is due to: (i) 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; (ii)
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; and (iii) gains on the sales of assets recorded for book
income purposes that resulted in either capital losses or capital gains for REIT
income purposes that are reduced to zero by the Company's capital loss
carryover.
Dividend Distributions
On March 12, 1996, the Company declared a first quarter dividend of
$2,192,000 or nine cents per share, compared with $1,938,000, or eight cents per
share, for the same period in 1995. The 1996 first quarter dividend was paid on
March 29, 1996 to shareowners of record on March 22, 1996.
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 and for the acquisition of assets.
The table below summarizes the Company's operating cash flows and uses
of those cash flows for the three months ended March 31, 1996 and 1995 (in
thousands):
-16-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1996 1995
---- ----
Cash Generated By (Used In) Ongoing Operations:
Non-agency MBS bonds:
<S> <C> <C>
Interest $ 3,314 $ 1,602
Principal and indemnifications 769 411
Dividends from Commercial Assets 469 552
Repayment of short-term borrowings -- (1,160)
Cash Generated By (Used In) Liquidating Operations:
CMO Ownership Interests -- 3,699
Restricted cash for secured notes payable -- 15,862
Sale of assets -- 16,562
Repayment of secured notes payable -- (30,592)
Total expenses, net of interest income and other (291) (2,291)
--------- ----------
Cash Generated By Operations $ 4,261 $ 4,645
========= ==========
Dividends Paid $ 2,192 $ 727
========= ==========
Acquisitions of Non-agency MBS bonds $ 4,157 $ 11,697
========= ==========
</TABLE>
The Company's cash from ongoing operations continues to increase due to
acquisitions of non-agency MBS bonds. The Company received no cash from
liquidating operations in 1996 because the program of liquidating the Company's
CMO Ownership Interests was completed as of December 31, 1995.
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 March 31, 1996, the Company was able to borrow $18,611,000 under
these agreements, based on the value of the pledged collateral. At March 31,
1996, 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
March 31, 1996, there were no borrowings under this line of credit.
The cash generated by the Company's non-agency MBS bonds is reduced by
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
-17-
<PAGE>
on the Company's income. The Company has provided $81,952,000 of allowances for
credit losses at March 31, 1996 to absorb future credit losses, including losses
from natural disasters not covered by standard homeowner policies.
The Company's NOL carryover allows it to grow its business by using
internally generated cash flow to acquire additional non-agency MBS bonds while
maintaining high dividend yields for the Company's shareowners. The Company had
available cash of $5,328,000 at December 31, 1995 and generated cash from
ongoing operations of $4,261,000 during the three months ended March 31, 1996
enabling the Company to acquire 17 non-agency MBS bonds for $4,157,000. The
Company also paid $2,192,000 ($.09 per share) in dividends during the first
quarter of 1996.
Other
Some of the statements in this Form 10-Q 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 earnings 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.
-18-
<PAGE>
DEFINITIONS
The following terms used in the text are understood to have the meanings
indicated below.
Acquired CMO Class - A CMO Class acquired by the company which does not
constitute a CMO Subsidiary or CMO Residual.
Administrative Fee - A fee up to $3,500 per annum per non-agency MBS bond, for
bond administration and other services related to the Company's non-agency MBS
bonds paid pursuant to the Management Agreement.
agency - GNMA, FNMA or FHLMC.
AMEX - American Stock Exchange, Inc.
Asset Securitization - Asset Investors Securitization Corporation, a wholly
owned subsidiary of the Company incorporated under Delaware law, liquidated
effective May 2, 1995.
Base Fee - An annual management fee equal to 3/8 of one percent of the Company's
consolidated Average Invested Assets (as defined in the Management Agreement)
which is payable quarterly to the Manager pursuant to the Management Agreement.
book income - Income computed in accordance with GAAP.
By-laws - The By-laws of the Company, as amended from time to time.
Call Rights - The rights provided in the Indenture of a CMO Bond that allow the
issuer of the CMO Bond to sell the Mortgage Collateral and redeem the bonds at
par at a predetermined date or if the bond balance falls below a predetermined
amount (for example, 10% of the original bond balance). Any excess proceeds from
the sale of the Mortgage Collateral over the funds required to redeem the bonds
is passed on to the residual interest holder.
CMBS bond - Commercial mortgage-backed security is a debt instrument which is
secured by mortgage loans on commercial real property.
CMO - Collateralized mortgage obligation. CMOs are multi-class issuances of
bonds which are secured and funded as to the payment of interest and repayment
of principal by a specific group of mortgage loans, mortgage-backed certificates
or other 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, and "IO
Class," "PO Class" and "Regular Class") or a disproportionate amount of interest
and principal.
CMO Ownership Interests - 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.
Commercial Assets - Commercial Assets, Inc., (AMEX: CAX) a publicly traded REIT
formed by the Company in August 1993, incorporated under Maryland law.
-19-
<PAGE>
Commission - The Securities and Exchange Commission.
Common Stock - Asset Investors Corporation common stock, par value $.01 per
share, listed on the New York Stock Exchange, Inc. under the symbol "AIC."
Company - Asset Investors Corporation, a Maryland corporation.
DERs - Dividend equivalent rights as defined in the 1986 Stock Option Plan, as
amended. Option holders earn shares of Common Stock equal to the value of
dividends received as if the options were outstanding Common Stock.
Excess Inclusion income - Excess Inclusion income is attributable to residual
interests of a REMIC. Excess Inclusion income is the amount of income from a
residual interest in a REMIC which exceeds a specified return as provided in the
Code. Excess Inclusion income cannot be reduced by any expenses or reductions,
including normal operating expenses, losses from the Company's CMO Ownership
Interests and NOLs.
FHLMC - Federal Home Loan Mortgage Corporation.
FNMA - Federal National Mortgage Association.
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.
GAAP - Generally accepted accounting principles.
GNMA - Government National Mortgage Association.
Incentive Fee - An annual management fee equal to 20% of the dollar amount by
which GAAP Net Income (as defined in the Management Agreement) of the Company
exceeds an amount equal to the Average Net Worth (as defined in the Management
Agreement) of the Company multiplied by the Ten-Year U.S. Treasury Rate (as
defined in the Management Agreement) plus one percent, payable quarterly to the
Manager pursuant to the Management Agreement.
Independent Director - Pursuant to the Company's By-laws, an Independent
Director is a person "who is not affiliated, directly or indirectly, with the
person or entity responsible for directing or performing the day-to-day business
affairs of the corporation (the "advisor"), including a person or entity to
which the advisor subcontracts substantially all of such functions, whether by
ownership of, ownership interest in, employment by, any material business or
professional relationship with, or by serving as an officer of the advisor or an
affiliated business entity of the advisor."
Lesser quality 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. Also referred to as B and C credit quality mortgage loans.
LIBOR - The London Interbank Offered Rate on Eurodollar deposits.
Management Agreement - The one-year management agreement entered into between
the Company and the Manager.
Manager - Financial Asset Management LLC, a Colorado limited liability
corporation 80% owned by two indirect, wholly owned subsidiaries of MDC and 20%
owned by Spencer I. Browne, President of the Company. As of April 1, 1996,
Financial Asset Management LLC was successor to Financial Asset Management
Corporation, the previous Manager of the Company and an indirect, wholly owned
subsidiary of MDC.
-20-
<PAGE>
MDC - M.D.C. Holdings, Inc., a Delaware corporation.
Mortgage Certificates - FNMA mortgage certificates, FHLMC mortgage certificates,
fully-modified pass-through mortgage-backed certificates guaranteed by GNMA and
private certificates representing undivided beneficial interests in pools of
mortgage loans.
Mortgage Collateral - Mortgage Certificates and Mortgage Loans which secure CMO
bonds and non-agency MBS bonds.
Mortgage Loans - Mortgage loans which are secured by single-family, residential
(one-to four-unit) properties.
NOL - Net operating loss.
NYSE - New York Stock Exchange, Inc.
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.
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.
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.
-21-
<PAGE>
PART II
OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
4 Form of certificate representing Common Stock of the
Registrant (incorporated herein by reference to Exhibit 10.15
to the Annual Report on Form 10-K of the Registrant for the
fiscal year ended December 31, 1988, Commission File No.
1-9360, filed on April 5, 1989).
10.1 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).
10.1(a) Amendment to Management Agreement dated as of January 1, 1996
between the Registrant and Financial Asset Management
Corporation.
10.1(b) Assignment of Management Agreements dated as of April 1, 1996
between Financial Asset Management Corporation and Financial
Asset Management LLC.
10.2 CMO Participation Agreement, dated as of December 15, 1986,
among the Registrant, Holdings and Yosemite Financial, Inc.
(incorporated herein by reference to Exhibit 10.10 to the
Quarterly Report on Form 10-Q of the Registrant for the
quarter ended March 31, 1988, Commission File No.
1-9360, filed on August 15, 1988).
10.4 Form of Indemnification Agreement between the Registrant and
each Director of the Registrant (incorporated herein by
reference to Appendix A to the Proxy Statement of the
Registrant, Commission File No. 1-9360, dated May 18, 1987).
10.5(a) 1986 Stock Option Plan of the Registrant as restated November
15, 1990 (incorporated herein by reference to Exhibit A to the
Proxy Statement of the Registrant, Commission File No. 1-9360,
dated April 22, 1991).
10.5(b) First Amendment to the Registrant's 1986 Stock Option Plan as
restated November 15, 1990 (incorporated herein by reference
to Exhibit 10.9(b) to the Annual Report on Form 10-K of the
Registrant for the fiscal year ended December 31, 1992,
Commission File No. 1-9360, filed on April 5, 1993).
10.5(c) Second Amendment to the Registrant's 1986 Stock Option Plan as
restated November 15, 1990, as amended (incorporated herein by
reference to Exhibit 10.9(c) to the Annual Report on Form 10-K
of the Registrant for the fiscal year ended December 31, 1992,
Commission File No. 1-9360, filed on April 5, 1993).
-22-
<PAGE>
10.5(d) Form of Non-Qualified Stock Option Agreement pursuant to the
1986 Stock Option Plan of the Registrant as amended and
restated through November 15, 1990 (incorporated here-in by
reference to Exhibit 10.9(b) to the Annual Report on Form 10-K
of the Registrant for the fiscal year ended December 31, 1991,
Commission File No. 1-9360, filed on March 30, 1992).
10.5(e) Third Amendment to the Registrant's 1986 Stock Option Plan as
restated November 15, 1990, as amended (incorporated herein by
reference to Exhibit 10.9(e) to the Quarterly Report on Form
10-Q of the Registrant for the quarter ended March 31, 1993,
Commission File No. 1-9360, filed on November 15, 1993).
10.15 Contribution Agreement, dated as of August 20, 1993, by and
between the Registrant and Commercial Assets, Inc.
(incorporated herein by reference to Exhibit 10.19 to the
Quarterly Report on Form 10-Q of the Registrant for the
quarter ended March 31, 1993, Commission File No.
1-9360, filed on November 15, 1993).
27 Financial Data Schedule.
99 Automatic Dividend Reinvestment Plan relating to the Common
Stock of the Registrant, as amended (incorporated herein by
reference to Exhibit 28 to the Annual Report on Form 10-K of
the Registrant for the fiscal year ended December 31, 1991,
Commission File No. 1-9360, filed on March 30, 1992).
(b) Reports on Form 8-K:
No current reports on Form 8-K were filed by the Registrant
during the period covered by this Quarterly Report on Form
10-Q.
-23-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ASSET INVESTORS CORPORATION
(Registrant)
Date: May 14 , 1996 By /s/ Paris G. Reece III
-----------------------
Paris G. Reece III
Chief Financial Officer
-24-
AMENDMENT TO MANAGEMENT AGREEMENT
AMENDMENT as of January 1, 1996 to the Management Agreement dated as of
January 1, 1995 (the "Management Agreement"), between ASSET INVESTORS
CORPORATION, a Maryland corporation (the "Company"), and FINANCIAL ASSET
MANAGEMENT CORPORATION, a Delaware corporation (the "Manager").
RECITALS
A. The Company and the Manager entered into the Management Agreement
pursuant to which the Manager performs the duties and responsibilities set forth
in the Management Agreement, subject to the supervision of the Company's Board
of Directors; and
B. The Company desires to engage the Manager to perform the duties and
responsibilities set forth in the Management Agreement on the terms set forth in
the Management Agreement and this Amendment and the Manager desires to be so
engaged for an additional one-year term.
NOW, THEREFORE, in consideration for the mutual agreements herein set
forth, the parties hereto agree as follows:
1. A new definition of "GAAP Net Income" to be designated Section
2(d)(i) shall be added to the Management Agreement as follows:
(s)(i) "GAAP Net Income" means income as reported by the
Company in its Form 10-Q or Form 10-K, as the case may be, filed with
the Securities and Exchange Commission reduced by the Company's share
of CAI's net income and increased by the expense for incentive
compensation determined pursuant to Section 9(b) of this Agreement.
2. Section 9(b) of the Management Agreement is amended and restated
hereby as follows:
(b) Incentive Compensation. The Company shall pay the Manager
as incentive compensation a yearly fee, in an amount equal to 20% of
the dollar amount, if any, by which the Company's GAAP Net Income for
each fiscal year, exceeds an amount equal to the Stockholders Equity,
reduced by the basis of the Company's investment in CAI, multiplied by
the Ten Year U.S. Treasury Rate plus one percentage point. If the GAAP
Net Income of the Company is less than the amount equal to the
Stockholders Equity, reduced by the basis of the Company's investment
in CAI, multiplied by the Ten Year U.S. Treasury Rate plus one
percentage point, the Manager shall refund to the Company the net
year-to-date incentive compensation previously paid to the Manager
during the current fiscal year, if any.
1
<PAGE>
The quarterly payment of such amount by the Company to the
Manager, or refund to the Company from the Manager in the event the
incentive compensation for any year-to-date period is less than the
incentive compensation computed and paid to the Manager as of the
previous year-to-date period, shall be computed each fiscal quarter on
a cumulative year-to-date basis in an amount equal to (A) 20% of the
dollar amount, if any, by which the year-to-date GAAP Net Income of the
Company applicable to such fiscal quarter, exceeds an amount equal to
the Stockholders Equity, reduced by the basis of the Company's
investment in CAI, for such year-to-date period multiplied by the
year-to-date Ten Year U.S. Treasury Rate plus one percentage point
multiplied by the number of quarters during such year-to-date period
divided by four; and (B) minus the year-to-date incentive compensation
for the prior fiscal quarter. If the year-to-date incentive
compensation computed through such fiscal quarter of the Company is
less than the net year-to-date incentive compensation computed for the
previous year-to-date fiscal quarter, the Manager shall refund to the
Company the lesser of (i) the difference between the net year-to-date
incentive compensation computed for the previous year-to-date fiscal
quarter and the net year-to-date incentive compensation computed for
the current fiscal quarter or (ii) the net year-to-date incentive
compensation computed for the previous year-to-date fiscal quarter, if
any. Such quarterly payment shall be paid to the Manager, or refunded
to the Company, as provided by, and subject to adjustment under,
Section 9(e) of this Agreement.
3. The first paragraph of Section 9(d)((iii) of the Management
Agreement is amended and restated hereby as follows:
(iii) for each Series of Non-Agency MBS Bonds issued or owned
by the Company or any subsidiary of the Company with respect to the
first class of such Series, the lesser of (A) $3,500 annually and (B)
an amount equal to $3,500 multiplied by the percentage ownership of the
Company or such subsidiary of the Company in such Non-Agency MBS Bonds,
and for each additional class of such Series (C) $875 annually and (D)
an annual amount equal to $875 multiplied by the percentage ownership
of the Company or such subsidiary of the Company in such Non-Agency MBS
Bond.
4. Section 9(e) of the Management Agreement is amended and restated
hereby as follows:
(e) Adjustment and Payment. The Manager shall compute
the estimated compensation payable or refundable under Sections 9(a),
9(b), 9(c) and 9(d) hereof as soon as practicable after the end of each
fiscal quarter, but no later than 35 days after the end of such
quarter. A copy of such computations shall be thereafter promptly
submitted to the Company. Such compensation shall be paid to the
Manager, or refunded to the Company, no later than the 45th day after
2
<PAGE>
such fiscal quarter as payment on account, subject to adjustment under
this Section 9(e) of this Agreement. The aggregate amount of the
Manager's compensation under Sections 9(a), 9(b), 9(c) and 9(d) for
each fiscal year shall be adjusted within: (x) 120 days after the end
of such fiscal year; or (y) 120 days after the filing of the Company's
federal income tax return for such fiscal year, whichever is later.
Such adjustment shall be made to reflect additional information
provided by the Company's tax return for such fiscal year. Any excess
owed to, or refund owed by, the Manager shall be paid to the Manager or
remitted by the Manager to the Company within ten days of presentment
of the adjustment.
5. Section 9(f) is hereby added as follows:
(f) Certain Expenses. If the Company requests any third party
to render services to the Company or provide the Company with any data
or information, other than those services and data required to be
rendered and delivered by the Manager hereunder, such costs and
expenses charged by such third parties, shall be paid by the Company.
The Manager shall notify the Company's Board of Directors if the costs
and expenses to be charged to the Company pursuant to this Section 9(f)
shall exceed $50,000 per year.
6. Section 16 of the Management Agreement is amended and
restated hereby as follows:
"This Agreement shall continue in force until December 31,
1996 unless otherwise renewed or extended."
7. This Amendment shall be deemed assigned to Financial Asset
Management LLC in the same manner and to the same extent as the Management
Agreement. Except as amended hereby, the Management Agreement shall remain in
full force and effect. In the event of a conflict between this Amendment and the
Management Agreement, the terms of this Amendment shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
[CORPORATE SEAL] ASSET INVESTORS CORPORATION
ATTEST: By:/s/Spencer I. Browne
-----------------------
Name: Spencer I. Browne
/s/ Daniel S. Japha Title: President and Chief
- ------------------- Executive Officer
Daniel S. Japha, Secretary
3
<PAGE>
FINANCIAL ASSET MANAGEMENT
CORPORATION
By:/s/Kevin J. Nystrom
-------------------------
Name: Kevin J. Nystrom
Title: Vice President and Chief
Accounting Officer
4
ASSIGNMENT
OF
MANAGEMENT AGREEMENTS
This Agreement is entered into effective as of April 1, 1996, by and
between Financial Asset Management Corporation, a Delaware corporation ("Old
FAMC"), MDC Residual Holdings, Inc., a Delaware corporation ("MDC Sub"), and
Financial Asset Management LLC, a Colorado limited liability company ("FAMC").
Recitals
A. Old FAMC is a party to two Management Agreements, each dated as of
January 1, 1995 and amended effective as of January 1, 1996, with Commercial
Assets, Inc. ("CAI") and with Asset Investors Corporation ("AIC") (the
"Management Agreements").
B. Old FAMC, MDC Sub and Spencer I. Browne formed FAMC effective as of
April 1, 1996.
C. Old FAMC desires to convey to MDC Sub an undivided 1.25% interest in
the Management Agreements (the "MDC Sub Interest"). Old FAMC desires to convey
to FAMC an undivided 98.75% interest in the Management Agreements (the "Old FAMC
Interest") and MDC Sub desires to convey to FAMC the MDC Sub Interest, together
with all goodwill associated therewith, including without limitation all rights
to the name "Financial Asset Management" and rights under the Management
Agreements, including without limitation rights to renew such agreements in
accordance with their terms, and such other rights or assets as may be specified
in a separate document executed by Old FAMC, MDC Sub and FAMC (collectively, the
"Transferred Interests") in exchange for a 79% membership interest in FAMC as to
Old FAMC and a 1% membership interest as to MDC Sub. FAMC is willing to accept
the Transferred Interests and become a party to and to adopt and agree to comply
with the terms of the Management Agreements.
Assignment and Acceptance
For good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, Old FAMC, MDC Sub and FAMC agree as follows:
1. Assignment. Old FAMC assigns and transfers to MDC Sub the MDC Sub
Interest. Old FAMC and MDC Sub assign and transfer to FAMC the Transferred
Interests. Old FAMC and MDC Sub covenant and agree not to take any action that
would interfere with FAMC's continuing relationship with CAI and AIC. Old FAMC
and MDC Sub shall execute and deliver to FAMC such further assignments,
<PAGE>
acknowledgments and documents as FAMC reasonably may request in order to confirm
or give notice of the transfers effected by this Agreement.
2. Acceptance. FAMC accepts the assignment of the Transferred Interests
made by paragraph 1 of this Agreement, and agrees to be bound by all of the
terms of the Management Agreements. FAMC agrees to execute and deliver a
counterpart of the Management Agreements. FAMC shall faithfully perform any and
all obligations of the Manager as such term is defined in the Management
Agreements.
3. Reliance by CAI and AIC. CAI and AIC shall be entitled to rely upon
and enforce the covenants and obligations of FAMC as stated in paragraph 2
above, and FAMC shall execute and deliver such further instruments as CAI and
AIC shall consider necessary or appropriate to effect FAMC's admission as
Manager under the Management Agreements.
4. Consent of Unaffiliated Directors. Old FAMC, MDC Sub and FAMC
acknowledge that the assignment and acceptance of the Management Agreements set
forth herein shall be subject to the consent to such assignment by the
Unaffiliated Directors of CAI and AIC as evidenced by a Consent to Assignment in
the forms attached hereto.
5. Miscellaneous. Capitalized terms used in this Agreement without
definition have the meanings given in the Management Agreements. This Agreement
shall inure to the benefit of and be binding upon the parties and their
successors, heirs, personal representatives and assigns. This Agreement is
governed by the laws of the State of Colorado. This Agreement may be executed in
counterparts.
Old FAMC and FAMC have executed this Agreement as of the date first
above written.
FINANCIAL ASSET MANAGEMENT CORPORATION
By:/s/Leslie B. Fox
-------------------
Name: Leslie B. Fox
Title: Senior Vice President
MDC RESIDUAL HOLDINGS, INC.
By:/s/Daniel S. Japha
---------------------
Name: Daniel S. Japha
Title: Vice President
2
<PAGE>
FINANCIAL ASSET MANAGEMENT LLC
By:/s/Spencer I. Browne
-----------------------
Name: Spencer I. Browne
Title: Manager
3
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,240
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,240
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 80,226
<CURRENT-LIABILITIES> 1,147
<BONDS> 0
0
0
<COMMON> 244
<OTHER-SE> 78,835
<TOTAL-LIABILITY-AND-EQUITY> 79,079
<SALES> 0
<TOTAL-REVENUES> 3,353
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 950
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,403
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,403
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,403
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
