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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 1996, 24,737,600 shares of Asset Investors
Corporation Common Stock were outstanding.
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<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of September 30, 1996 (unaudited)
and December 31, 1995.................................. 1
Statements of Operations for the three and nine
months ended September 30, 1996 and 1995 (unaudited)... 2
Statements of Cash Flows for the nine months
ended September 30, 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.......... 11
Definitions............................................ 21
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K....................... 24
(i)
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
September 30, December 31,
1996 1995
---- ----
(Unaudited)
Assets
<S> <C> <C>
Cash and cash equivalents $ 430 $ 5,328
Non-agency MBS Bonds 62,798 52,753
Investment in Commercial Assets 19,427 19,225
Other assets, net 2,866 2,347
------------ ------------
Total Assets $ 85,521 $ 79,653
============ ============
Liabilities
Accounts payable and accrued liabilities $ 560 $ 416
Dividends payable 2,355 --
Management fees payable 8 478
Short-term borrowings 2,600 --
------------ ------------
Total Liabilities 5,523 894
------------ ------------
Stockholders' Equity
Common Stock, par value $.01 per share, 50,000,000 shares authorized;
24,737,600 and 24,355,862 shares issued and
outstanding, respectively 247 244
Additional paid-in capital 228,613 227,546
Cumulative dividends (236,007) (229,239)
Cumulative net income 88,029 80,965
------------ ------------
Dividends in excess of net income (147,978) (148,274)
Unrealized holding losses on debt securities (884) (757)
------------ ------------
Total Stockholders' Equity 79,998 78,759
------------ ------------
Total Liabilities and Stockholders' Equity $ 85,521 $ 79,653
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 1 -
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
Ongoing Operations: 1996 1995 1996 1995
---- ---- ---- ----
Revenues
<S> <C> <C> <C> <C>
Non-agency MBS bonds $ 2,860 $ 2,644 $ 8,525 $ 5,866
Equity in earnings of Commercial Assets 473 476 1,449 1,331
Other income and expenses, net (6) 44 123 298
--------- --------- --------- ---------
Total revenues 3,327 3,164 10,097 7,495
--------- --------- --------- ---------
Expenses
Management fees 466 303 1,268 667
General and administrative 261 329 916 1,481
Elimination of DERs -- -- 825 --
Interest 24 6 24 62
--------- --------- --------- ---------
Total expenses 751 638 3,033 2,210
--------- --------- --------- ---------
Earnings from ongoing operations 2,576 2,526 7,064 5,285
Earnings from liquidating operations
-- 189 -- 3,307
--------- --------- --------- ---------
Net income $ 2,576 $ 2,715 $ 7,064 $ 8,592
========= ========= ========= =========
Net income per share $ .11 $ .11 $ .29 $ .35
========= ======== ========= =========
Weighted-average shares outstanding 24,738 24,294 24,535 24,260
Dividends per share $ .095 $ .090 $ .275 $ .250
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
1996 1995
---- ----
Cash Flows From Operating Activities
<S> <C> <C>
Net income $ 7,064 $ 8,592
Adjustments to reconcile net income to net cash flows from operating
activities:
Accretion of discounts on non-agency MBS bonds 1,934 948
Equity in earnings of Commercial Assets (1,449) (1,331)
Issuance of Common Stock for the elimination of DERs 825 --
Decrease (increase) in other assets 53 (172)
Decrease in accounts payable and accrued liabilities (209) (1,300)
Net gain on sale of assets -- (2,167)
Amortization of CMO Ownership Interests -- 907
-------- ----------
Net Cash Provided By Operating Activities 8,218 5,477
-------- ----------
Cash Flows From Investing Activities
Acquisition of non-agency MBS bonds (14,746) (20,646)
Principal collections on non-agency MBS bonds 1,996 1,210
Indemnifications from non-agency MBS bonds 354 503
Dividends from Commercial Assets 939 1,960
Principal collections on CMO Ownership Interests -- 1,867
Proceeds from the sale of assets -- 19,520
Release of restricted cash upon repayment of secured notes payable -- 15,862
--------- ----------
Net Cash (Used By) Provided By Investing Activities (11,457) 20,276
--------- ----------
Cash Flows From Financing Activities
Dividends paid (4,418) (4,605)
Increase (decrease) in short-term borrowings, net 2,600 (2,758)
Repayment of secured notes payable -- (30,592)
Issuance of Common Stock from the exercise of stock options 159 --
---------- ----------
Net Cash Used By Financing Activities (1,659) (37,955)
---------- ----------
Cash and Cash Equivalents
Decrease (4,898) (12,202)
Beginning of period 5,328 14,961
---------- ----------
End of period $ 430 $ 2,759
========== ==========
</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. The Common Stock is listed on the New York Stock Exchange
under the symbol "AIC." The Company's assets primarily are non-agency MBS bonds
and 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 September 30, 1996, and for the periods then ended and for all
prior periods presented. These financial statements are condensed and do not
include all the information required by GAAP in a full set of financial
statements. These financial 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 the CMBS bonds of Commercial Assets.
Income Taxes - The Company operates in a manner that permits 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 its 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 prepayment and interest rate sensitive CMO Ownership Interests
- 4 -
<PAGE>
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 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 made interest
payments of $14,000 and $903,000 for the nine months ended September 30, 1996
and 1995, respectively.
Non-cash investing and financing activities for the nine months ended
September 30, 1996 and 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
---- ----
<S> <C> <C>
Dividends declared but not yet received from Commercial Assets $ 580 --
Unrealized holding losses on debt securities $ 127 --
Distributions of Common Stock pursuant to DERs $ 87 $ 191
Distributions of Common Stock as consideration for the elimination of DERs $ 825 --
Dividends declared but not yet paid $ 2,350 $1,460
</TABLE>
D. Non-agency MBS Bonds
From April 1994 through September 30, 1996, the Company acquired 209
subordinate, non-agency MBS bonds, with an aggregate outstanding principal
balance on the date of acquisition of $242,455,000 and an aggregate total cost
of $71,940,000. The net carrying value of the Company's non-agency MBS bonds was
as follows (dollar amounts in thousands):
- 5 -
<PAGE>
<TABLE>
<CAPTION>
Outstanding Balance
September 30, December 31,
Price(1) Coupon(2) 1996 1995
----- ------ ---- ----
(Unaudited)
Non-agency MBS bonds backed by:
<S> <C> <C> <C> <C>
30-year fixed-rate mortgage loans 31.4% 7.2% $ 161,660 $ 116,757
15-year fixed-rate mortgage loans 37.0 6.6 20,219 16,611
Adjustable-rate mortgage loans 24.9 7.5 4,846 4,149
Lesser quality mortgage loans(3) 58.9 8.4 11,556 14,083
Other subordinate, non-agency MBS bonds(4) 27.3 6.9 27,648 28,565
---- --- ---------- -----------
34.3% 7.2% 225,929 180,165
==== ===
Less:
Allowance for credit losses (117,609) (71,365)
Unamortized discount (45,522) (56,446)
---------- -----------
Amortized cost 62,798 52,354
Net unrealized holding gains -- 399
---------- -----------
Total net book value $ 62,798 $ 52,753
========== ===========
<FN>
- ---------------------------------
1 Weighted-average price as a percentage of the principal balance of the
non-agency MBS bonds.
2 Weighted-average coupon of non-agency MBS bonds on September 30, 1996.
3 The Lesser quality mortgage loans, commonly referred to as "B and C"
mortgage loans, are adjustable-rate mortgages. The average price of these
bond classes is higher because they represent a larger percentage of their
respective bond issuances than other non-agency MBS bonds.
4 The non-agency MBS bonds that are backed by "other subordinate, non-agency
MBS bonds" are also known as "re-REMICs."
</FN>
</TABLE>
The Company's non-agency MBS bonds are subject to the risk of default
and foreclosure loss from the $43.7 billion principal balance of non-conforming
mortgage loans that, on September 30, 1996, backed its bonds. The subordinate
non-agency MBS bonds owned by the Company represent, on average, .52% of the
bond issuances that are collateralized by these mortgages. The future credit
losses for each bond are limited to the outstanding balance of each bond
(averaging $1,081,000 at September 30, 1996). Additionally, the Company's
economic exposure from its investment in a non-agency MBS bond is limited to the
purchase price of the bond (averaging 34.3% of the acquired principal balance at
September 30, 1996), less principal payments received.
The servicers of the mortgage loans that back the Company's non-agency
MBS bonds reported to the Company that mortgage loans with an outstanding
principal balance of $124,110,000 (0.3% of the total outstanding balance of the
mortgage loans) were in foreclosure or REO at September 30, 1996. If a mortgage
loan in foreclosure or REO is not cured, and if the proceeds from the property
sale are not sufficient to repay the outstanding mortgage and related
foreclosure and servicing costs, any losses will be passed on to the Company as
the holder of the subordinate non-agency MBS bond. Consequently, the amount of
the losses passed on to the holders of the subordinate bonds from the mortgage
loans in foreclosure or REO is dependent upon what portion of these mortgages
are not cured and the loss severity from a foreclosure sale. The Company
performs certain surveillance activities with respect to these loans to attempt
to minimize the impact of these two factors. The Company has established an
allowance for future credit losses of $117,609,000 at September 30, 1996.
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<PAGE>
The allowance for credit losses is: (i) increased or decreased for
changes in the Company's expectations of future credit losses; (ii) increased
for expectations of future credit losses when a non-agency MBS bond is acquired;
and (iii) reduced by actual credit losses allocated to the Company's non-agency
MBS bonds. The activity in the allowance for credit losses during the nine
months ended September 30, 1996 and 1995 was as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
---- ----
<S> <C> <C>
Balance at the beginning of the period $ 71,365 $ 22,075
Additions to the allowance for credit losses on non-agency MBS bonds 54,982 35,976
Credit losses (net of indemnifications of $354 and $503, respectively) (8,738) (1,864)
---------- ---------
Balance at the end of the period $ 117,609 $ 56,187
========== =========
</TABLE>
E. Investment in Commercial Assets
On September 30, 1996, and December 31, 1995, the Company owned
2,761,126 shares (approximately 27%) of the common stock of Commercial Assets, a
REIT which owns and manages debt interests backed by loans on multi-family real
estate. According to Commercial Assets, the mortgages which comprise the
collateral for its CMBS bonds are secured by apartment communities in 36 states.
Approximately 26%, 12% and 8% of the mortgage loans are collateralized by
properties in Texas, Arizona and Florida, respectively. Presented below is the
summarized financial information of Commercial Assets as reported by Commercial
Assets (in thousands):
<TABLE>
<CAPTION>
Balance Sheets September 30, December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
CMBS bonds, net of unrealized holding losses $ 61,468 $ 69,503
Cash and other assets 12,919 2,087
--------- ---------
Total Assets 74,387 71,590
--------- ---------
Short-term borrowings -- 700
Other liabilities 2,222 425
--------- ---------
Total Liabilities 2,222 1,125
--------- ---------
Stockholders' Equity $ 72,165 $ 70,465
========= =========
</TABLE>
- 7 -
<PAGE>
<TABLE>
<CAPTION>
Statements of Income Three Months Ended Nine Months Ended
(Unaudited) September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
CMBS bonds $ 2,038 $ 2,243 $ 7,811 $ 6,662
Other revenues 129 12 200 182
---------- ---------- ---------- ----------
Total revenues 2,167 2,255 8,011 6,844
---------- ---------- ---------- ----------
Management fees 297 343 1,127 859
General and administrative 105 212 549 878
Elimination of dividend equivalent rights -- -- 966 --
Interest -- 14 5 239
---------- ---------- ---------- ----------
Total expenses 402 569 2,647 1,976
---------- ---------- ---------- ----------
Net Income $ 1,765 $ 1,686 $ 5,364 $ 4,868
========== ========== ========== ==========
</TABLE>
According to Commercial Assets, at September 30, 1996, and December 31,
1995, it had $3,302,000 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 $884,000 and $1,156,000 at September 30, 1996 and December 31,
1995, 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 and nine months ended September 30, 1995, are
reported as liquidating operations. The components of revenues and expenses from
CMO Ownership Interests during the three and nine months ended September 30,
1995, are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1995 September 30, 1995
------------------ ------------------
Revenues
<S> <C> <C>
CMO Ownership Interests $ 83 $ 1,702
Interest income -- 225
Net gain on sale of CMO Ownership Interests 145 2,167
-------- --------
Total revenues 228 4,094
-------- --------
Expenses
Management fees 33 195
General and administrative 6 28
Interest -- 564
-------- --------
Total expenses 39 787
-------- --------
Earnings from liquidating operations $ 189 $ 3,307
======== ========
</TABLE>
- 8 -
<PAGE>
During the nine months ended September 30, 1995, the Company, as issuer
of certain CMO Ownership Interests, exercised the Call Rights on these interests
recognizing net gains of $2,153,000. 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 CMO Ownership Interests 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
On July 19, 1995, the Company obtained a one-year, $1,000,000 unsecured
line of credit. The line of credit was renewed for an additional year on July
19, 1996. Advances under this line bear interest at the prime rate. At September
30, 1996, and December 31, 1995, there were no borrowings under this line of
credit.
On July 24, 1996, the Company secured a $10,000,000 revolving credit
and term loan agreement with a bank, which, at the election of the Company, may
be increased to $15,000,000 at any time prior to January 24, 1997. The revolving
portion of the agreement expires on July 23, 1997, and then can be converted to
a term loan, amortizing over the following 30 months. The Company is able to
select either a fixed or floating interest rate. Borrowings under the agreement
are limited by the value of the pledged collateral, which is set at the
Company's original purchase price percentage multiplied by the outstanding
balance of the bonds. The value of the collateral is not subject to market price
fluctuations but is impacted by credit losses and principal repayments. The
credit facility is collateralized by a portion of the Company's non-agency MBS
bonds with a net carrying value of $19,930,000 at September 30, 1996. At
September 30, 1996, $2,600,000 was borrowed under this credit facility at an
average effective interest rate of 8.23%. One of the Company's Independent
Directors is a member of the Board of Directors of the parent holding company of
the bank.
The Company also has a credit facility that extends through December
23, 1996, secured by certain non-agency MBS bonds. The credit facility is
subject to certain financial covenants, with which the Company is in compliance,
and bears interest, payable monthly, based on one-month LIBOR. At September 30,
1996, and December 31, 1995, there were no borrowings outstanding under this
credit facility.
H. Other Matters
The Company has entered into a series of Management Agreements with the
Manager which extends 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 and
nine months ended September 30, 1996, the Company incurred combined Incentive
Fees and Base Fees of $275,000 and $732,000, respectively, compared with
$214,000 and $505,000, respectively, for the same periods in 1995. 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.
- 9 -
<PAGE>
Administrative Fees incurred for the three and nine months ended September 30,
1996, were $191,000 and $536,000, respectively, compared with $205,000 and
$766,000, respectively, for the same periods in 1995.
Prior to April 1, 1996, the Company was managed by an indirect, wholly
owned subsidiary of MDC. Effective April 1, 1996, Financial Asset Management LLC
assumed the obligations of the Manager under the Management Agreement. From
April 1, 1996, through September 30, 1996, Financial Asset Management LLC was
80% owned by two wholly owned subsidiaries of MDC and 20% owned by Spencer I.
Browne who was the President and a Director of the Company. On September 30,
1996, MDC acquired Mr. Browne's 20% interest in Financial Asset Management LLC
and then sold 100% of the Manager to an investor group lead by Terry Considine
and Thomas L. Rhodes. In connection with the sale, Larry A. Mizel resigned as
Chairman of the Board of Directors and Spencer I. Browne resigned as President,
Chief Executive Officer and a Director of the Company. Terry Considine was
elected as Chairman of the Board of Directors and Co-Chief Executive Officer,
Thomas L. Rhodes as Vice Chairman of the Board and Co-Chief Executive Officer
and Leslie B. Fox as President of the Company. No change has been made to the
Management Agreement, and Financial Asset Management LLC will continue its
obligations under the Management Agreement.
The Company had a net operating loss carryover of approximately
$98,000,000 at September 30, 1996, which could be used to reduce the Company's
requirement under the Code to distribute at least 95% of REIT income. As of
September 30, 1996, the Company also had a capital loss carryover of
approximately $35,000,000 which expires beginning in 1998.
- 10 -
<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 under Maryland law in 1986. Its shares of Common Stock are
listed on the New York Stock Exchange 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. which is a REIT listed on the American Stock Exchange
under the symbol "CAX."
The Company's asset 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, performance and disposition of assets. The Company
has no employees.
Prior to April 1, 1996, the Company was managed by an indirect, wholly
owned subsidiary of MDC. Effective April 1, 1996, Financial Asset Management LLC
assumed the obligations of the Manager under the Management Agreement. From
April 1, 1996, through September 30, 1996, Financial Asset Management LLC was
80% owned by two wholly owned subsidiaries of MDC and 20% owned by Spencer I.
Browne who was the President and a Director of the Company. On September 30,
1996, MDC acquired Mr. Browne's 20% interest in Financial Asset Management LLC
and then sold 100% of the Manager to an investor group lead by Terry Considine
and Thomas L. Rhodes. In connection with the sale, Larry A. Mizel resigned as
Chairman of the Board of Directors and Spencer I. Browne resigned as President,
Chief Executive Officer and a Director of the Company. Terry Considine was
elected as Chairman of the Board of Directors and Co-Chief Executive Officer,
Thomas L. Rhodes as Vice Chairman of the Board and Co-Chief Executive Officer
and Leslie B. Fox as President of the Company. No change has been made to the
Management Agreement, and Financial Asset Management LLC will continue its
obligations under the Management Agreement.
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 has acquired 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. Because REITs
must distribute at least 95% of their REIT income (and generally distribute
- 11 -
<PAGE>
100%, because undistributed REIT income is subject to income tax) to maintain
their favorable tax status, most REITs would have to issue additional capital,
sell assets or find some other way to provide funds to distribute at least 95%
of this non-cash, phantom income.
At September 30, 1996, the Company had an available NOL carryover of
approximately $98,000,000. The Company uses its NOL carryover to reduce its
requirement to distribute REIT income, including the non-cash, phantom income
which results from the amortization of the purchase discount. Because of its NOL
carryover, the Company is able to use the cash flow that otherwise would be
required to be distributed as dividends to increase its earnings and cash flow
by acquiring additional assets, while maintaining high dividend yields for the
Company's shareowners. The Company believes that its NOL carryover gives it a
unique competitive advantage in acquiring "deep-discount," non-agency MBS bonds.
The Company generated $14,107,000 in cash from operations (net of
expenses) during the nine months ended September 30, 1996, of which $6,768,000,
or 48%, was declared distributions to shareowners, and the remaining $7,339,000,
or 52%, was available for additional acquisitions. The Company's Board of
Directors and management determine the amount of the net cash flow to use to pay
dividends and to acquire additional assets. The Company's REIT income for the
nine months ended September 30, 1996, was $9,932,000. Without the use of its NOL
carryover, and based upon REIT income for the first nine months of 1996, the
Company would have been required by the Code to: (i) distribute at least
$9,435,000 (95% of REIT income) in dividends to maintain its REIT status; and
(ii) pay taxes on the remaining 5% of REIT income.
The Company acquired 50 non-agency MBS bonds with an aggregate
outstanding balance on the date of acquisition of $56,533,000 during the first
nine months of 1996. These non-agency MBS bonds were acquired at a total cost of
$14,746,000, a weighted-average acquisition price of 27.8%, and with a
weighted-average pass-through coupon interest rate of 7.3%.
The Company's subordinate non-agency MBS bonds have significant 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 non-agency MBS bond 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, will suffer a
loss. The loss would be equal to the unpaid principal balance of the mortgage
loan plus Foreclosure Costs and servicer advances, net of proceeds from the
property 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 Public Securities Association has defined a standardized benchmark
curve, known as the SDA model, which represents an assumed rate of default each
month relative to the then outstanding performing principal balance of the
non-conforming mortgage loan pools comprising the Mortgage Collateral. The SDA
model reflects the historical fact that defaults on non-conforming mortgage loan
pools generally occur with greater frequency in years three through five.
The SDA model is one of the primary factors used by the Company in
determining its allowance for credit losses. Projections of losses on the
- 12 -
<PAGE>
Company's bonds indicated that losses were anticipated to increase by $6,500,000
for the nine months ended September 30, 1996, as compared to the same period in
1995. This projected increase is due to acquisitions of additional non-agency
MBS bonds and the aging of existing bonds. The actual increase in losses for the
nine months ended September 30, 1996, as compared to the same period in 1995 was
$6,874,000.
RESULTS OF OPERATIONS FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 1996 and 1995
The table below summarizes the Company's results of operations during
the three and nine months ended September 30, 1996 and 1995 (in thousands,
except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
Ongoing Operations:
Revenues
<S> <C> <C> <C> <C>
Non-agency MBS bonds $ 2,860 $ 2,644 $ 8,525 $ 5,866
Equity in earnings of Commercial Assets 473 476 1,449 1,331
Other income and expenses, net (6) 44 123 298
--------- --------- -------- --------
3,327 3,164 10,097 7,495
--------- --------- -------- --------
Expenses
Management fees 466 303 1,268 667
General and administrative 261 329 916 1,481
Elimination of DERs -- -- 825 --
Interest 24 6 24 62
--------- --------- -------- --------
751 638 3,033 2,210
--------- --------- -------- --------
Earnings from ongoing operations 2,576 2,526 7,064 5,285
Earnings from liquidating operations -- 189 -- 3,307
--------- --------- -------- --------
Book income $ 2,576 $ 2,715 $ 7,064 $ 8,592
========= ========= ======== ========
Earnings from ongoing operations per share $ .11 $ .10 $ .29 $ .22
Earnings from liquidating operations per share -- .01 -- .13
--------- --------- -------- --------
Book income per share $ .11 $ .11 $ .29 $ .35
========= ========= ======== ========
REIT Income (Loss):
Ongoing operations $ 3,686 $ 3,883 $ 10,902 $ 8,780
Liquidating operations (374) (253) (970) (5,793)
--------- --------- -------- --------
REIT income $ 3,312 $ 3,630 $ 9,932 $ 2,987
========= ========= ======== ========
REIT income per share $ .13 $ .15 $ .40 $ .12
========= ========= ======== ========
Dividends $ 2,350 $ 2,186 $ 6,768 $ 6,065
========= ========= ======== ========
Dividends per share $ .095 $ .090 $ .275 $ .250
========= ========= ======== ========
Weighted-average shares outstanding 24,738 24,294 24,535 24,260
</TABLE>
- 13 -
<PAGE>
Book Income
Non-agency MBS Bonds - Book income from the Company's non-agency MBS
bonds increased during the three and nine months ended September 30, 1996,
compared with the same periods in 1995 primarily due to the acquisition of 61
non-agency MBS bonds during the last quarter of 1995 through the first nine
months of 1996 with an outstanding principal balance of $71,190,000 and a
weighted-average coupon at September 30, 1996, of 7.3%.
The effective book yield on the Company's non-agency MBS bonds has
increased during the nine months ended September 30, 1996, compared with the
same period in the prior year, from 17.9% to 18.6%, primarily due to the
decrease in the weighted-average purchase price of the non-agency MBS bonds from
36.5% at September 30, 1995, to 34.3% at September 30, 1996. Also, the
weighted-average coupon on the non-agency MBS bonds increased from 7.0% at
September 30, 1995, to 7.2% at September 30, 1996.
However, the lower prices and higher coupons have been offset by higher
estimates of future credit losses, in particular for non-agency MBS bonds
collateralized by mortgages originated in 1995 and 1996. As a result, the book
yields of non-agency MBS bonds acquired in the second half of 1995 and in 1996
have been lower than for previously acquired non-agency MBS bonds. Accordingly,
the effective book yield on the Company's non-agency MBS bonds during the three
months ended September 30, 1996, was 17.7%, or 380 basis points lower than the
same period in 1995 and 140 basis points lower than the three months ended June
30, 1996. Additionally, the actual credit losses on the Company's non-agency MBS
bonds backed by B and C credit quality mortgages (representing 6.3% of the
market value of the Company's non-agency MBS bonds at September 30, 1996) have
been higher than our original estimates. Effective July 1, 1996, the revenue
recognition rate on these bonds was reduced, resulting in earnings from these
bonds being $60,000 less in the third quarter of 1996 than in the second quarter
of 1996.
The Company's non-agency MBS bonds are subject to the risk of default
and foreclosure loss from the $43.7 billion principal balance of non-conforming
mortgage loans that, at September 30, 1996, backed its bonds. The subordinate
non-agency MBS bonds owned by the Company represent, on average, .52% of the
bond issuances that are collateralized by these mortgages. The future credit
losses for each bond are limited to the outstanding balance of each bond
(averaging $1,081,000 at September 30, 1996). Additionally, the Company's
economic exposure from its investment in a non-agency MBS bond is limited to the
purchase price of the bond (averaging 34.3% of the acquired principal balance at
September 30, 1996), less principal payments received.
The servicers of the mortgage loans that back the Company's non-agency
MBS bonds reported to the Company that mortgage loans with an outstanding
principal balance of $124,110,000 (0.3% of the total outstanding balance of the
mortgage loans) were in foreclosure or REO at September 30, 1996. If a mortgage
loan in foreclosure or REO is not cured, and if the proceeds from the property
sale are not sufficient to repay the outstanding mortgage and related
foreclosure and servicing costs, any losses will be passed on to the Company as
the holder of the subordinate non-agency MBS bond. Consequently, the amount of
the losses passed on to the holders of the subordinate bonds from the mortgage
loans in foreclosure or REO is dependent upon what portion of these mortgages
are not cured and the loss severity from a foreclosure sale. The Company
performs certain surveillance activities with respect to these loans to attempt
to minimize the impact of these two factors. The Company has established an
allowance for future credit losses of $117,609,000 at September 30, 1996, which
it believes is sufficient to cover future credit losses from the subordinate
non-agency MBS bonds. See "FORWARD LOOKING INFORMATION" below.
- 14 -
<PAGE>
For the nine months ended September 30, 1996 and 1995, the principal
amount of credit losses on the Company's non-agency MBS bonds was $8,773,000 and
$2,241,000, respectively. The credit losses and indemnifications allocated to
the Company's non-agency MBS bonds resulted in a net economic loss to the
Company of $2,294,000 for the nine months ended September 30, 1996, and $402,000
for the nine months ended September 30, 1995. The significant increase in credit
losses allocated to the Company is due to: (i) the acquisition of $71,900,000 of
principal amount of bonds during the year ended September 30, 1996; and (ii) as
mortgages mature, in particular during their first five years, the defaults and
the resulting credit losses are expected to increase.
The Company believes that the increase in credit losses from the
Company's non-agency MBS bonds is consistent with the Public Securities
Association SDA model, which is one of the primary factors used by the Company
in determining its allowance for credit losses. The SDA model assumes that
defaults on mortgage loan pools are generally highest during years three through
five of the life of the mortgage loan pools. Most of the mortgage loan pools
that collateralize the Company's subordinate non-agency MBS bonds were
originated in 1993 through 1995 and have just begun to reach the years during
which defaults are anticipated to be at their highest.
As a result of acquisitions of non-agency MBS bonds over the past year
and the expected growth of mortgage loan defaults as a mortgage matures (per the
Public Securities Association SDA model), the Company had expected its allocated
credit losses during the nine months ended September 30, 1996, to be
significantly higher than those for the same period in the prior year.
Projections of losses on the Company's bonds indicated that losses were
anticipated to increase by $6,500,000 for the nine months ended September 30,
1996, as compared to the same period in 1995. The actual increase in losses for
the nine months ended September 30, 1996, as compared to the same period in 1995
was $6,874,000.
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. 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. See "FORWARD LOOKING INFORMATION" below.
Commercial Assets - Income from the Company's shares of Commercial
Assets (which, for book income purposes, is based on the Company's pro rata
share of Commercial Assets' book income) for the three and nine months ended
September 30, 1996, was $473,000 and $1,449,000, respectively, compared with
$476,000 and $1,331,000, respectively, for the same periods in 1995. The
increase in income from Commercial Assets for the nine months is primarily due
to the early redemption of two bonds in May 1996 offset by a one-time, non-cash
charge resulting from the issuance of 157,413 shares of Commercial Assets common
stock for the elimination of dividend equivalent rights under its stock option
plan. At September 30, 1996, and December 31, 1995, the CMBS bonds held by
Commercial Assets had outstanding principal balances of $89,407,000 and
$100,368,000, respectively, and weighted-average coupons of 8.16% and 8.24%,
respectively. The decrease in the outstanding principal balance and
weighted-average coupon of the CMBS bonds from December 31, 1995, to September
30, 1996, was primarily the result of the early bond redemptions in May 1996.
According to Commercial Assets, at September 30, 1996, and December 31,
1995, it had $3,302,000 and $4,245,000, respectively, of unrealized holding
losses on its CMBS bonds. The Company's share of these unrealized holding
losses, $884,000 and $1,156,000 as of September 30, 1996 and December 31, 1995,
- 15 -
<PAGE>
respectively, was recorded as a reduction in the carrying value of its
investment in Commercial Assets and as a component of stockholders' equity.
Other Income and Expenses, Net - Other income and expenses, net
decreased during the three and nine months ended September 30, 1996, compared
with the same period in 1995 primarily because the Company has used its
available cash to acquire non-agency MBS bonds.
Management Fees - Management fees increased during the three and nine
months ended September 30, 1996, compared with the same period in 1995 due to:
(i) higher Administrative Fees as a result of acquisitions of non-agency MBS
bonds during 1995 and the first nine months of 1996; (ii) a change in the method
of calculating Incentive Fees pursuant to the terms of an amendment to the
Management Agreement dated January 1, 1996; and (iii) a decrease in the average
Ten-Year U.S. Treasury Rate during the nine months ended September 30, 1996,
from the same period in 1995, by 33 basis points which had the effect of
lowering the threshold above which the Incentive Fees are paid.
Prior to April 1, 1996, the Company was managed by an indirect, wholly
owned subsidiary of MDC. Effective April 1, 1996, Financial Asset Management LLC
assumed the obligations of the Manager under the Management Agreement. From
April 1, 1996, through September 30, 1996, Financial Asset Management LLC was
80% owned by two wholly owned subsidiaries of MDC and 20% owned by Spencer I.
Browne who was the President and a Director of the Company. On September 30,
1996, MDC acquired Mr. Browne's 20% interest in Financial Asset Management LLC
and then sold 100% of the Manager to an investor group lead by Terry Considine
and Thomas L. Rhodes. In connection with the sale, Larry A. Mizel resigned as
Chairman of the Board of Directors and Spencer I. Browne resigned as President,
Chief Executive Officer and a Director of the Company. Terry Considine was
elected as Chairman of the Board of Directors and Co-Chief Executive Officer,
Thomas L. Rhodes as Vice Chairman of the Board and Co-Chief Executive Officer
and Leslie B. Fox as President of the Company. No change has been made to the
Management Agreement, and Financial Asset Management LLC will continue its
obligations under the Management Agreement.
General and Administrative Expenses - General and administrative
expenses decreased during the three and nine months ended September 30, 1996,
compared with the same periods in 1995 due primarily to the elimination of DER
expense in the second quarter of 1996, reductions in legal and consulting fees,
and lower costs associated with the Company's annual report.
Elimination of DERs - The nine months ended September 30, 1996,
included a one-time, non-cash expense from the issuance of Common Stock pursuant
to an amendment to the Stock Option Plan which eliminated the future accrual of
DERs on outstanding stock options. At their annual meeting in May 1996, the
Company's shareowners approved an amendment to the Stock Option Plan which
permitted the Company to issue shares of Common Stock to the holders of options
who voluntarily relinquished their right to receive DERs in the future. The
issuance of Common Stock in exchange for the right to receive DERs in the future
resulted in a one-time, non-cash charge to second quarter 1996 earnings of
$825,000 and the issuance of 244,391 shares of Common Stock. The effect of the
amendment will be to reduce general and administrative expenses from the accrual
of DERs from options granted under the Stock Option Plan. General and
administrative expenses related to DERs totaled $337,000 in 1995.
Interest Expense - Interest expense on the Company's borrowing
facilities increased during the three months ended September 30, 1996, compared
with the same period in 1995, reflecting higher interest rates on borrowings and
the increase in the average daily balance to $952,000 from $475,000. Interest
expense decreased for the nine months ended September 30, 1996, compared with
- 16 -
<PAGE>
the same period in 1995, reflecting the decrease in the average daily balance to
$336,000 from $1,146,000, offset in part by higher interest rates.
Liquidating Operations - In 1993, the Company began to liquidate its
CMO Ownership Interests and acquire credit-sensitive non-agency MBS bonds and
shares of Commercial Assets. 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 and nine months
ended September 30, 1995, were comprised of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1995 September 30, 1995
------------------ ------------------
Revenues
<S> <C> <C>
CMO Ownership Interests $ 83 $ 1,702
Interest income -- 225
Net gain on sale of CMO Ownership Interests 145 2,167
------- -------
Total revenues 228 4,094
------- -------
Expenses
Management fees 33 195
General and administrative 6 28
Interest -- 564
------- -------
Total expenses 39 787
------- -------
Earnings from liquidating operations $ 189 $ 3,307
======= =======
</TABLE>
Earnings from CMO Ownership Interests during the three and nine months
ended September 30, 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 nine months ended September 30, 1995, the Company exercised
Call Rights on certain CMO Ownership Interests resulting in gains of $2,153,000.
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 nine months
ended September 30, 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 nine
months ended September 30, 1995, was principally from the $30,592,000 of secured
notes payable which were repaid during the first quarter of 1995.
- 17 -
<PAGE>
REIT Income
The Company's REIT income from ongoing operations during the nine
months ended September 30, 1996, increased $2,122,000 to $10,902,000 over the
same period in 1995 due to $3,510,000 of higher REIT earnings from non-agency
MBS bonds, partially offset by the cost to eliminate DERs and lower dividend
income due to the timing of Commercial Assets' third quarter dividend.
The Company's REIT losses from liquidating operations for the nine
months ended September 30, 1996, were $970,000, 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 and Capital Loss Carryovers
At September 30, 1996, the Company's NOL carryover was approximately
$98,000,000 and its 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, to reduce the amount of income that the Company must
distribute to shareowners to maintain its status as a REIT. The NOL carryover is
scheduled to expire between 2007 and 2009 and the capital loss carryover is
scheduled to expire between 1998 and 2000.
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; (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; and
(iv) recognition of income from Commercial Assets which for REIT income purposes
is based upon dividends received and which for book income purposes is based on
the Company's pro rata share of Commercial Assets' book income.
Dividend Distributions
On September 19, 1996, the Company declared a third quarter dividend of
$2,350,000 or $.095 per share, compared with $2,186,000, or $.090 per share, for
the same period in 1995. The 1996 third quarter dividend was paid on October 10,
1996, to shareowners of record on September 30, 1996. For the nine months ended
September 30, 1996 and 1995, the Company declared dividends of $6,768,000 ($.275
per share) and $6,065,000 ($.250 per share), respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has used 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 nine months ended September 30, 1996 and 1995 (in
thousands):
- 18 -
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
---- ----
Cash Generated by (Used in) Ongoing Operations:
Non-agency MBS bonds:
<S> <C> <C>
Interest $ 10,459 $ 6,814
Principal 1,996 1,210
Indemnifications 354 503
Dividends from Commercial Assets 939 1,960
Borrowings (repayment) of short-term debt 2,600 (2,758)
Cash Generated by (Used in) Liquidating Operations:
CMO Ownership Interests -- 4,476
Release of restricted cash upon repayment of secured notes payable -- 15,862
Sale of assets -- 19,520
Repayment of secured notes payable -- (30,592)
Total Expenses, Net of Interest Income and Other (2,241) (3,946)
---------- ----------
Cash Generated by Operations $ 14,107 $ 13,049
========== ==========
Other Sources and (Uses):
Issuances of Common Stock from exercise of stock options $ 159 $ --
========== ==========
Dividends paid $ (4,418) $( 4,605)
========== ==========
Acquisitions of non-agency MBS bonds $ (14,746) $( 20,646)
========== ==========
</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 process of liquidating the Company's
CMO Ownership Interests was completed as of December 31, 1995.
On July 19, 1995, the Company obtained a one-year, $1,000,000 unsecured
line of credit. The line of credit was renewed for an additional year on July
19, 1996. Advances under this line bear interest at the prime rate. At September
30, 1996, and December 31, 1995, there were no borrowings under this line of
credit.
On July 24, 1996, the Company secured a $10,000,000 revolving credit
and term loan agreement with First Bank National Association, which, at the
election of the Company, may be increased to $15,000,000 at any time prior to
January 24, 1997. The revolving portion of the agreement expires on July 23,
1997, and then can be converted to a term loan, amortizing over the following 30
months. The Company is able to select either a fixed or floating interest rate.
Borrowings under the facility are limited by the value of the pledged
collateral, which is set at the Company's original purchase price percentage
multiplied by the outstanding balance of the bonds. The value of the collateral
is not subject to market price fluctuations but is impacted by credit losses and
principal repayments. The credit facility is collateralized by non-agency MBS
- 19 -
<PAGE>
bonds with a net carrying value of $19,930,000 at September 30, 1996. At
September 30, 1996, $2,600,000 was outstanding on this facility. One of the
Company's Independent Directors is a member of the Board of Directors of the
parent holding company of the bank.
The Company also has a credit facility that extends through December
23, 1996, secured by certain non-agency MBS bonds. The credit facility is
subject to certain financial covenants, with which the Company is in compliance,
and bears interest, payable monthly, based on one-month LIBOR. At September 30,
1996, and December 31, 1995, there were no borrowings outstanding under this
credit facility.
The future cash expected to be 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 on the Company's income. The Company has
provided $117,609,000 of allowances for credit losses at September 30, 1996, to
absorb future credit losses, including losses from natural disasters not covered
by standard homeowner policies. See "FORWARD LOOKING INFORMATION" below.
The Company's NOL carryover allows it to use 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, generated cash from ongoing operations of
$14,107,000 during the nine months ended September 30, 1996, and borrowed
$2,600,000 on the revolving credit and term loan agreement, enabling the Company
to acquire 50 non-agency MBS bonds for $14,746,000. The Company also declared
$6,768,000 ($.275 per share) in dividends during the first nine months of 1996.
In the next few months, the management and the Board of Directors of
the Company will evaluate its existing structure and strategy and consider
whether changes are warranted. The goal of management and the Board of Directors
is to invest in assets with the greatest risk-adjusted rates of return. A change
in the Company's existing portfolio may impact the future dividends of the
Company. See "FORWARD LOOKING INFORMATION" below.
FORWARD LOOKING INFORMATION
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.
- 20 -
<PAGE>
DEFINITIONS
The following terms used in the text are understood to have the meanings
indicated below.
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.
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 - A commercial mortgage-backed security or a debt instrument which is
secured by mortgage loans on commercial real property.
CMO Class or CMO Bond - A debt obligation resulting from the issuance of a
collateralized mortgage obligation. 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 Interests - Ownership interests in 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 a specific
group of mortgage loans, mortgage-backed certificates or other collateral.
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.
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."
- 21 -
<PAGE>
Company - Asset Investors Corporation, a Maryland corporation.
DERs - Dividend equivalent rights as defined in the 1986 Stock Option Plan, as
amended. Prior to adoption of an amendment to the Stock Option Plan that
eliminated DERs in May 1996, option holders earned shares of Common Stock equal
to the value of dividends received as if the options were outstanding shares of
Common Stock.
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 - As of April 1, 1996, Financial Asset Management LLC, a Colorado
limited liability corporation succeeded Financial Asset Management Corporation,
the previous Manager of the Company and an indirect, wholly owned subsidiary of
MDC.
MDC - M.D.C. Holdings, Inc., a Delaware corporation which organized the Company
in 1986, but as of September 30, 1996, was no longer affiliated with the
management of the Company or the Manager.
- 22 -
<PAGE>
Mortgage Collateral - Private certificates representing undivided beneficial
interests in pools of mortgage loans and individual mortgage loans which secure
CMO bonds and non-agency MBS bonds.
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.
Real estate owned (REO) - The ownership of real property acquired as a result of
foreclosure.
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 loan pools.
Stock Option Plan - The Company's 1986 Stock Option Plan, as restated November
15, 1990, as amended.
- 23 -
<PAGE>
PART II
OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
4 Form of certificate representing Common Stock of the
Registrant (incorporated herein by reference to Exhibit 10.15
to the Annual Report on Form 10-K of the Registrant for the
fiscal year ended December 31, 1988, Commission File No.
1-9360, filed on April 5, 1989).
4.1 Revolving Credit and Term Loan Agreement, dated as of July 24,
1996, by and between the Registrant and First Bank National
Association (incorporated herein by reference to Exhibit 4.1
to the Quarterly Report on Form 10-Q of the Registrant for the
quarter ended June 30, 1996, Commission File No. 1-9360, filed
on August 14, 1996).
4.1(a) Pledge Agreement, dated as of July 24, 1996, by and between
the Registrant and First Bank National Association
(incorporated herein by reference to Exhibit 4.1(a) to the
Quarterly Report on Form 10-Q of the Registrant for the
quarter ended June 30, 1996, Commission File No.
1-9360, filed on August 14, 1996).
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 September 30, 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 (incorporated herein by reference to Exhibit
10.1(a) to the Quarterly Report on Form 10-Q of the Registrant
for the quarter ended March 31, 1996, Commission File No.
1-9360, filed on May 15, 1996).
10.1(b) Assignment of Management Agreements dated as of April 1, 1996,
between Financial Asset Management Corporation and Financial
Asset Management LLC (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, 1996, Commission
File No. 1-9360, filed on May 15, 1996).
10.2 CMO Participation Agreement, dated as of December 15, 1986,
among the Registrant, Holdings and Yosemite Financial, Inc.
(incorporated herein by reference to Exhibit 10.10 to the
Quarterly Report on Form 10-Q of the Registrant for the
quarter ended September 30, 1988, Commission File No. 1-9360,
filed on August 15, 1988).
10.4 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).
- 24 -
<PAGE>
10.5(a) 1986 Stock Option Plan of the Registrant as restated November
15, 1990 (incorporated herein by reference to Exhibit A to the
Proxy Statement of the Registrant, Commission File No. 1-9360,
dated April 22, 1991).
10.5(b) First Amendment to the Registrant's 1986 Stock Option Plan as
restated November 15, 1990 (incorporated herein by reference
to Exhibit 10.9(b) to the Annual Report on Form 10-K of the
Registrant for the fiscal year ended December 31, 1992,
Commission File No. 1-9360, filed on April 5, 1993).
10.5(c) Second Amendment to the Registrant's 1986 Stock Option Plan as
restated November 15, 1990, as amended (incorporated herein by
reference to Exhibit 10.9(c) to the Annual Report on Form 10-K
of the Registrant for the fiscal year ended December 31, 1992,
Commission File No. 1-9360, filed on April 5, 1993).
10.5(d) Form of Non-Qualified Stock Option Agreement pursuant to the
1986 Stock Option Plan of the Registrant as amended and
restated through November 15, 1990 (incorporated here-in by
reference to Exhibit 10.9(b) to the Annual Report on Form 10-K
of the Registrant for the fiscal year ended December 31, 1991,
Commission File No. 1-9360, filed on March 30, 1992).
10.5(e) Third Amendment to the Registrant's 1986 Stock Option Plan as
restated November 15, 1990, as amended (incorporated herein by
reference to Exhibit 10.9(e) to the Quarterly Report on Form
10-Q of the Registrant for the quarter ended September 30,
1993, Commission File No. 1-9360, filed on November 15, 1993).
10.5(f) Fourth Amendment to the Registrant's 1986 Stock Option Plan as
restated November 15, 1990, as amended, dated March 11, 1996
(incorporated herein by reference to Exhibit 10. 5(f) to the
Quarterly Report on Form 10-Q of the Registrant for the
quarter ended June 30, 1996, Commission File No. 1-9360, filed
on August 14, 1996).
10.15 Contribution Agreement, dated as of August 20, 1993, by and
between the Registrant and Commercial Assets, Inc.
(incorporated herein by reference to Exhibit 10.19 to the
Quarterly Report on Form 10-Q of the Registrant for the
quarter ended September 30, 1993, Commission File No. 1-9360,
filed on November 15, 1993).
27 Financial Data Schedule.
99 Automatic Dividend Reinvestment Plan relating to the Common
Stock of the Registrant, as amended (incorporated herein by
reference to Exhibit 28 to the Annual Report on Form 10-K of
the Registrant for the fiscal year ended December 31, 1991,
Commission File No. 1-9360, filed on March 30, 1992).
(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.
- 25 -
<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: November 12, 1996 By /s/Kevin J. Nystrom
-----------------------------
Kevin J. Nystrom
Chief Financial Officer
- 26 -
<PAGE>
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