SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q/A
AMENDMENT NO. 1
(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, 1998
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 (IRS Employer
incorporation or organization) Identification No.)
3410 South Galena Street, Suite 210 80231
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
(303) 614-9400
(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 April 24, 1998, 5,116,794 shares of Asset Investors Corporation Common
Stock were outstanding.
This Amendment No. 1 on Form 10-Q/A for the quarterly period ended March 31,
1998 reflects the Company's change in accounting estimate for two participating
mortgage loans.
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
FORM 10-Q/A
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of March 31, 1998 (unaudited)
and December 31, 1997........................................... 1
Statements of Income for the three months ended
March 31, 1998 and 1997 (unaudited)............................. 2
Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 (unaudited)............................. 3
Notes to Financial Statements (unaudited)....................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 12
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K................................ 23
(i)
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
March 31, 1998 (unaudited)
----------------------------------------------
As Previously December
Reported Change Revised 31, 1997
-------- ------ ------- --------
ASSETS
Real estate, net of accumulated depreciation
<S> <C> <C> <C> <C>
of $1,086 and $693 $ 45,434 $ -- $ 45,434 $ 40,726
Investments in participating mortgages 15,930 9,769 25,699 15,872
Real estate joint ventures 9,690 (9,690) -- 9,543
Cash and cash equivalents 19,417 -- 19,417 21,802
Investment in CAX 21,133 -- 21,133 20,866
Other assets, net 9,751 -- 9,751 10,352
---------- ----------- ---------- ----------
Total Assets $ 121,355 $ 79 $ 121,434 $ 119,161
========== =========== ========== ==========
LIABILITIES
Secured notes payable $ 10,567 $ -- $ 10,567 $ 10,677
Unsecured short-term financing -- -- -- --
Accounts payable and accrued liabilities 2,051 -- 2,051 2,607
---------- ----------- ---------- ----------
12,618 -- 12,618 13,284
---------- ----------- ---------- ----------
MINORITY INTEREST IN OPERATING PARTNERSHIP 24,724 16 24,740 22,362
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share, 50,000
shares authorized 5,109 and 5,108 shares issued
and outstanding, respectively 51 -- 51 51
Additional paid-in capital 231,237 -- 231,237 231,221
Dividends in excess of accumulated earnings (147,275) 63 (147,212) (147,757)
---------- ----------- ---------- ----------
84,013 63 84,076 83,515
---------- ----------- ---------- ----------
Total Liabilities and Stockholders' Equity $ 121,355 $ 79 $ 121,434 $ 119,161
========== =========== ========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 1 -
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended March 31, 1998
-------------------------------------------- Three Months
Ended
As Previously March 31,
RENTAL PROPERTY OPERATIONS Reported Change Revised 1997
------------- --------- --------- ----------
<S> <C> <C> <C> <C>
Rental and other property revenues $ 1,744 $ -- $ 1,744 $ --
Interest on participating mortgages 393 390 783 --
Equity in earnings of real estate joint ventures 311 (311) -- --
Property operating expenses (759) -- (759) --
Owned property management expenses (34) -- (34) --
--------- ------- ------- ---------
Income from property operations before
depreciation 1,655 79 1,734 --
Depreciation (393) -- (393) --
--------- ------- ------- ---------
Income from rental property operations 1,262 79 1,341 --
--------- ------- ------- ---------
SERVICE OPERATIONS
Property management fees and other income 77 -- 77 --
Property management costs and other expenses (24) -- (24) --
Amortization of management contracts (827) -- (827) --
--------- ------- ------- ---------
Loss from service operations (774) -- (774) --
--------- ------- ------- ---------
OTHER ACTIVITIES
Non-agency MBS bonds revenues 50 -- 50 2,000
Equity in earnings of CAX 268 -- 268 464
Management fees to former manager -- -- -- (277)
--------- ------- ------- ---------
Income from other activities 318 -- 318 2,187
--------- ------- ------- ---------
General and administrative expenses (322) -- (322) (336)
Interest and other income 333 -- 333 52
Interest expense (208) -- (208) (26)
--------- ------- ------- ---------
INCOME BEFORE GAIN ON RESTRUCTURING OF BONDS
AND MINORITY INTEREST 609 79 688 1,877
Gain on restructuring of bonds -- -- -- 5,287
--------- ------- ------- ---------
INCOME BEFORE MINORITY INTEREST 609 79 688 7,164
Minority interest in Operating Partnership (127) (16) (143) --
--------- ------- ------- ---------
NET INCOME $ 482 $ 63 $ 545 $ 7,164
========= ======= ======= =========
BASIC EARNINGS PER SHARE $ 0.09 $ 0.02 $ 0.11 $ 1.44
========= ======= ======= =========
DILUTED EARNINGS PER SHARE $ 0.09 $ 0.02 $ 0.11 $ 1.43
========= ======= ======= =========
DIVIDENDS DECLARED PER SHARE $ -- $ -- $ -- $ 0.475
========= ======= ======= =========
Weighted-Average Common Shares Outstanding 5,109 5,109 5,109 4,968
Weighted-Average Common Shares And Common Share
Equivalents Outstanding 5,143 5,143 5,143 5,003
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31, 1998
------------------------------------------- Three Months
As Ended
Previously March 31,
Reported Change Revised 1997
------------ ---------- ----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net income $ 482 $ 63 $ 545 $ 7,164
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 1,220 -- 1,220 --
Minority interest in Operating Partnership 127 16 143 --
Amortization of non-agency MBS bonds -- -- -- 469
Equity in earnings of CAX (268) -- (268) (464)
Equity in earnings of real estate joint ventures (311) 311 -- --
Accrued interest on participating mortgages -- (144) (144) --
Decrease in other assets 120 -- 120 405
Increase (decrease) in accounts payable and
accrued liabilities (783) -- (783) 2,440
Gain on restructuring of assets -- -- -- (7,359)
------- ------- ------- --------
Net cash provided by operating activities 587 246 833 2,655
------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of real estate (2,936) -- (2,936) --
Investments in participating mortgages, net (180) -- (180) --
Improvements of real estate (8) -- (8) --
Principal collections and indemnifications on
non-agency MBS bonds -- -- -- 547
Dividends from CAX -- -- -- 469
Distributions from real estate joint ventures 246 (246) -- --
Proceeds from the restructuring of assets -- -- -- 69,743
------- ------- ------- --------
Net cash provided by (used in) investing (2,878) (246) (3,124) 70,759
------- ------- ------- --------
activities
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Common Stock dividends -- -- -- (2,360)
Decrease in unsecured short-term financings -- -- -- (3,000)
Principal repayments on secured notes payable (110) -- (110) --
Proceeds from the issuance of Common Stock 16 -- 16 6
-------- -------- -------- --------
Net cash used in financing activities (94) -- (94) (5,354)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(2,385) -- (2,385) 68,060
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
21,802 -- 21,802 417
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$ 19,417 $ -- $ 19,417 $ 68,477
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. The Company
Asset Investors Corporation (the "Company") is a Maryland corporation that owns
and operates manufactured home communities and has elected to be taxed as a real
estate investment trust ("REIT"). The Company's Common Stock, par value $.01 per
share, is listed on the New York Stock Exchange under the symbol "AIC." In May
1997, the Company contributed its net assets to Asset Investors Operating
Partnership, L.P. (the "Operating Partnership") in exchange for the sole general
partner interest in the Operating Partnership. The Operating Partnership also
owns the non-voting stock of both AIC Manufactured Housing Corp. ("AICMHC") and
AIC Management Corp. ("Management Corp.") and approximately 27% of the Common
Stock of Commercial Assets, Inc. ("CAX"). AICMHC owns interests in manufactured
home community management contracts and Management Corp. owns the management
agreement pursuant to which it manages CAX. CAX is a publicly-traded REIT
(American Stock Exchange, Inc.: CAX) formed by the Company in August 1993.
Prior to 1997, the Company owned debt interests in residential mortgage loan
securitizations collateralized by pools of non-conforming (non-agency
guaranteed) single-family mortgage loans ("non-agency MBS bonds"). In February
1997, the Company decided to restructure the Company's asset base and redeploy
its assets in an attempt to both reduce risks associated with the Company's
non-agency MBS bonds and maximize long-term, risk-adjusted returns to
stockholders. In March 1997, the Company contributed its portfolio of non-agency
MBS bonds into an owner trust in a structured transaction in which the Company
received $67,671,000 cash proceeds and retained a small equity interest.
Subsequent to the restructuring of the non-agency MBS bond portfolio, the
Company used $49,868,000 of the proceeds from the structured transaction to
acquire interests in 20 manufactured home communities and a recreational vehicle
park with approximately 2,950 developed homesites, 380 recreational vehicle
sites, 760 sites ready for homes and 1,840 sites available for future
development. The Company plans to invest its remaining cash in additional
manufactured home communities and related assets. This is intended to shift the
Company's strategic emphasis to the ownership and management of income producing
real estate with the potential of achieving capital appreciation, and also
reduce the risk previously borne by the Company in its non-agency MBS bonds.
Prior to November 1997, the Company was managed by Financial Asset Management
LLC (the "Manager"). An investor group led by Terry Considine, Thomas L. Rhodes
and Bruce D. Benson acquired the Manager in September 1996. Mr. Considine is the
Chairman and Chief Executive Officer of both the Company and CAX. Mr. Rhodes is
Vice Chairman and Mr. Benson is a director of both the Company and CAX. In
November 1997, the Company's stockholders approved the acquisition of the assets
and operations of the Manager, which allowed the Company to become a fully
integrated, self-managed and self-administered REIT. The $11,692,000 purchase
price was paid by issuing 676,700 limited partnership units of the Operating
Partnership ("OP Units") plus up to 240,000 additional OP Units if certain
performance goals, including investment and share price targets, are achieved by
the Company within a specified time period.
- 4 -
<PAGE>
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, 1998, 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 generally accepted accounting principles ("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 year ended December 31, 1997.
Certain reclassifications have been made in the 1997 Condensed Consolidated
Financial Statements to conform to the classifications used in the current year.
This Amendment No. 1 on Form 10-Q/A for the quarterly period ended March 31,
1998 reflects the Company's change in accounting estimate for two participating
mortgage loans (see Note E).
C. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the
Operating Partnership and all controlled subsidiaries. The minority interest in
the Operating Partnership represents the OP Units which are convertible, at the
option of the holder. When a holder elects to convert OP Units, the Company
determines whether such OP Units will be converted into cash or shares of Common
Stock. The holders of OP Units receive the same amount per OP Unit in
distributions as the holders of Common Stock at the time of dividend
distributions. As of March 31, 1998, 1,425,000 OP Units were outstanding. All
significant intercompany balances and transactions have been eliminated in
consolidation. The Company's investment in CAX is recorded under the equity
method.
Rental Properties and Depreciation
Rental properties are recorded at cost less accumulated depreciation.
Depreciation is computed using the straight line method over an estimated useful
life of 25 years for land improvements and buildings and five years for
furniture and other equipment. Significant renovations and improvements, which
improve and/or extend the useful life of the asset, are capitalized and
depreciated over the remaining estimated life. Maintenance, repairs and minor
improvements are expensed as incurred.
When conditions exist which indicate that the carrying amount of a property may
be impaired, the Company will evaluate the recoverability of its net investment
in the property by assessing current and future levels of income and cash flows.
As of March 31, 1998, there has been no impairment of the Company's investment
in rental properties.
- 5 -
<PAGE>
Amortization
Included in other assets is the cost related to the acquisition of management
contracts, which is being amortized over a period of three years.
Revenue Recognition
The Company derives its income from the rental of homesites. The leases entered
into by residents for the rental of the site are generally for terms not longer
than one year and the rental revenues associated with the leases are recognized
when earned and due from residents. Property management income for services
provided to communities not owned by the Company are also recognized when
earned.
Income Taxes
The Company has elected to be taxed as a REIT as defined under the Internal
Revenue Code of 1986, as amended (the "Code"). In order for the Company to
qualify as a REIT, at least 95% of the Company's gross income in any year must
be derived from qualifying sources. The activities of AICMHC and Management
Corp. are not qualifying sources.
As a REIT, the Company generally will not be subject to federal income taxes at
the corporate level if it distributes at least 95% of its REIT taxable income to
its stockholders. REITs are also subject to a number of other organizational and
operational requirements. If the Company fails to qualify as a REIT in any
taxable year, its taxable income will be subject to federal income tax at
regular corporate rates (including any applicable alternative minimum tax). Even
if the Company qualifies as a REIT, it may be subject to certain state and local
income taxes and to federal income and excise taxes on its undistributed income.
At March 31, 1998, the Company's net operating loss ("NOL") carryover was
approximately $95,000,000 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 stockholders 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.
In November 1997, the Company incorrectly documented a transaction. The effect
of which is that the Company was not in compliance with the requirements
necessary to maintain its status as a REIT. The Company has submitted a request
to the Internal Revenue Service to confirm or restore its status as a REIT and
expects to receive a response to such request during the second quarter of 1998.
Due to the Company's NOL carryover, its failure to maintain its status as a REIT
is immaterial to its financial position and results of operations for 1997 and
1998.
Earnings Per Share
Basic earnings per share for the three months ended March 31, 1998 and 1997 are
based upon the weighted-average number of shares of Common Stock outstanding
during each such period. Diluted earnings per share reflect the effect of any
dilutive, unexercised stock options in each such period. In November 1997, the
Company's stockholders approved a one-for-five reverse split of the Company's
Common Stock. Accordingly, all historical weighted-average share and per share
amounts have been restated to reflect the reverse stock split.
- 6 -
<PAGE>
Statements of Cash Flows
For purposes of reporting cash flows, cash maintained in bank accounts, money
market funds and highly-liquid investments with an initial maturity of three
months or less are considered to be cash and cash equivalents. The Company made
interest payments of $210,000 and $42,000 for the three months ended March 31,
1998 and 1997, respectively.
Non-cash investing and financing activities for the three months ended March 31,
1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Unrealized holding gains and losses on debt securities $ -- $ 5,728
Real estate acquired under earn-out agreements 52 --
Issuance of OP Units as consideration for the acquisition of:
Real Estate 2,145 --
Participating Mortgages 17 --
Receivables from minority interest in controlled subsidiaries 319 --
</TABLE>
D. Real Estate
Real estate at March 31, 1998 and December 31, 1997, was as follows (in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Land $ 5,640 $ 5,286
Land improvements and buildings 40,436 35,689
Furniture and other equipment 444 444
--------- ---------
46,520 41,419
Less accumulated depreciation (1,086) (693)
--------- ---------
Investment in real estate, net $ 45,434 $ 40,726
========= =========
</TABLE>
Land improvements and buildings consist primarily of infrastructure, roads,
landscaping, clubhouses, maintenance buildings and common amenities. In
connection with the acquisition of two manufactured home communities, the
Company assumed the obligations under existing ground leases. Accordingly, no
portion of the purchase price of these communities was allocated to land.
E. Investments in Participating Mortgages
As of December 31, 1997, the Company had investments in and notes receivable of
$15,872,000 from joint ventures in which the Company owned a 50% joint venture
interest. Effective January 1, 1998, the Company sold its interest in the
various joint ventures and consolidated the various notes into a single note
secured by a number of manufactured home communities. The note bears 10%
interest, matures in 20 years and provides for additional advances up to a
maximum of $20,000,000. In addition, the Company receives additional interest up
to 50% of the borrower's profit from such communities.
- 7 -
<PAGE>
In addition, the Company has first and second mortgage loans secured by four
contiguous manufactured home communities in Arizona. The first mortgage loan
bears 10% interest. The second mortgage loan accrues 15% interest and pays 9%
interest through July 1998, with the pay rate increasing 1% each year thereafter
to a maximum of 12% per annum. Both loans mature in April 2001. The Company
receives additional interest of 3% of gross revenues, increasing to 11% of gross
revenues in the event of a refinancing of the communities, and 50% of net
proceeds from a sale or refinancing of the properties. In 1997, the mortgage
loans were accounted for as an equity investment in real estate. Effective
January 1, 1998, the Company reclassified the investment to participating
mortgages.
As of March 31, 1998, the Company had investments in participating mortgages of
$25,699,000, and it recognized earnings of $783,000 during the three months then
ended from these mortgages.
Rental Property Joint Ventures
F. Non-agency MBS Bonds
In March 1997, the Company resecuritized its portfolio of non-agency MBS bonds
by contributing them to a trust in which it retained the equity interest. In a
private placement, the trust sold $199,894,000 principal amount of debt
securities representing senior interests in the trust's assets. The debt
securities are without recourse to the Company. The Company realized net
proceeds of $67,671,000 and recorded a net gain of $5,287,000 from the sale. The
Company's retained equity interest in the trust represents the first-loss class
of the portfolio, providing credit support for the senior debt securities. The
future cash flow from the retained equity interest is not determinable and,
accordingly, no carrying value has been assigned to it. During the first quarter
of 1997, the Company recognized $2,000,000 of interest income, net of discount
amortization, prior to the resecuritization. The Company recorded revenues of
$50,000 from the retained equity interest during the first quarter of 1998.
G. Investment in Commercial Assets
On March 31, 1998 and December 31, 1997, the Company owned 2,761,126 shares
(approximately 27%) of the Common Stock of CAX. In November 1997, CAX sold or
resecuritized its entire portfolio of commercial mortgage loan securitizations
of multi-family real estate ("CMBS bonds"). CAX received $77,693,000 of cash and
an equity interest in an owner trust arising from the resecuritization
transaction, and recognized a net gain of $5,786,000 in the fourth quarter of
1997. In March 1998, CAX acquired a 12% interest in Westrec Marina Management,
Inc. ("Westrec") as the initial step in its strategy to acquire interests in
marinas. Presented below is the summarized financial information of CAX as
reported by CAX (in thousands):
- 8 -
<PAGE>
<TABLE>
<CAPTION>
Balance Sheets March 31, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 73,873 $ 74,153
Investment in and notes receivable from Westrec and affiliates 4,250 1,710
CMBS bonds 1,921 1,981
Other assets 212 304
----------- -----------
Total assets 80,256 78,148
Total liabilities 1,549 443
----------- -----------
Stockholders' equity $ 78,707 $ 77,705
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Statements of Income Three Months Ended March 31,
- -------------------- ----------------------------
1998 1997
---- ----
<S> <C> <C>
Interest $ 1,053 $ 111
CMBS bonds 40 2,044
----------- -----------
Total revenues 1,093 2,155
----------- -----------
General and administrative 86 123
Management fees 5 297
----------- -----------
Total expenses 91 420
----------- -----------
Net income $ 1,002 $ 1,735
=========== ===========
</TABLE>
H. Secured Notes Payable and Unsecured Short-Term Financing
Secured notes payable at March 31, 1998 and December 31, 1997 consist of
$4,735,000 and $4,805,000, respectively, of notes payable which bear interest at
8.25%, and $5,832,000 and $5,872,000, respectively, of notes payable which bear
interest at 7.5%. All of the notes mature in October 2000. The notes are secured
by four manufactured home communities, which have net carrying values of
$23,305,000 and $23,517,000, respectively, at March 31, 1998 and December 31,
1997. The scheduled payments of principal on the secured notes payable
subsequent to March 31, 1998 are as follows: 1998 - $327,000, 1999 - $487,000,
and 2000 - $9,753,000. The secured notes payable require escrow payments for the
payment of property taxes. At March 31, 1998 and December 31, 1997, $125,000 and
$34,000, respectively, was held in escrow.
The Company has a $1,000,000 unsecured line of credit with a bank through July
31, 1998. Advances under this line bear interest at prime. At March 31, 1998 and
December 31, 1997, no advances were outstanding.
In 1996, the Company had a $10,000,000 revolving credit and term loan agreement
with a bank. Borrowings of $3,000,000 under this credit facility were repaid and
the agreement was canceled during the first quarter of 1997 as a result of the
resecuritization of the non-agency MBS bonds. One of the Company's directors is
a member of the Board of Directors of the parent holding company of the bank.
- 9 -
<PAGE>
I. Commitments and Contingencies
In connection with the acquisition of a manufactured home community, the Company
entered into an earn-out agreement with respect to unoccupied homesites. The
Company pays a $17,000 fee for each newly occupied homesite, and the recipient
may elect to receive such fee in the form of cash or 946 OP Units. During the
three months ended March 31, 1998, one new homesite was occupied and the Company
paid $17,000 in the form of 946 OP Units. Any fees paid will be capitalized as
part of the cost of the acquired community.
J. Common Stock and Dividends
In November 1997, the Company's stockholders approved a one-for-five reverse
split of the Company's Common Stock. The par value per share and number of
authorized shares were not changed as a result of the reverse stock split. In
connection with the split, $202,000 was transferred from Common Stock to
additional paid-in capital. All outstanding OP Units and options were also
adjusted to reflect the one-for-five reverse stock split.
In February 1998, the Company announced that it was changing the date on which
its quarterly dividends are declared from the last month of the quarter to the
first month of the subsequent quarter. This change was made to allow the
dividend to be based on actual results instead of estimated results.
Accordingly, no dividend was declared during the first quarter of 1998. In April
1998, the Company declared a $0.25 per share dividend on the Common Stock for
the first quarter of 1998. During the three months ended March 31, 1997, the
Company declared and paid a $0.475 per share dividend on the Common Stock.
K. Other Matters
In November 1997, the stockholders approved a proposal to acquire the Manager
for $11,692,000, which allowed the Company to become a self-managed and
self-administered REIT. As a result of such acquisition, the Company now
provides management services to CAX through a management agreement (the "CAX
Management Agreement") in effect through December 31, 1998. The Manager was
acquired from an investor group led by Terry Considine, Thomas L. Rhodes and
Bruce D. Benson. Mr. Considine is Chairman of the Board of Directors and Chief
Executive Officer of both the Company and CAX. Mr. Rhodes is Vice Chairman and
Mr. Benson is a director of both companies. This investment group acquired the
Manager in September 1996 at the same price that they sold it to the Company in
November 1997.
Prior to the Manager's acquisition by the Company, the Manager received various
fees for the advisory and other services performed in connection with the
management agreement between the Company and the Manager (the "AIC Management
Agreement"). The Manager provided all personnel and related overhead necessary
to conduct the Company's regular business. As a result of the acquisition of the
Manager, the AIC Management Agreement was cancelled and the employees of the
Manager are now employed by the Company. In the fourth quarter of 1997, the
Company expensed the $6,553,000 portion of the acquisition price allocated to
the AIC Management Agreement. Any fees earned in the future pursuant to the CAX
Management Agreement will be paid to the Company. During the first quarter of
1998, the Company earned management fees of $5,000 under the CAX Management
Agreement. Certain officers and directors of the Company also serve as officers,
directors or both of CAX.
Through March 31, 1997, the Manager received a "Base Fee," an "Incentive Fee"
and an "Administrative Fee," all of which were payable quarterly per the terms
of the AIC Management Agreement. The Base Fee was an annual fee equal to 3/8 of
1% of the "average invested assets" of the Company and its subsidiaries for such
- 10 -
<PAGE>
year. The Incentive Fee was equal to 20% of the amount of the Company's book net
income which was in excess of the return on the Company's "average net worth"
equal to the "Ten-Year U.S. Treasury rate" plus 1%. The Manager also performed
certain bond administration and other related services for the Company pursuant
to the AIC Management Agreement and received an Administrative Fee of up to
$3,500 per annum per non-agency MBS bond for such services.
In connection with the change in the Company's asset base, the AIC Management
Agreement was amended effective April 1, 1997, to: (i) increase the Base Fee
from 3/8 of 1% to 1% per annum of "average invested assets;" (ii) provide for an
acquisition fee (the "Acquisition Fee") of 1/2 of 1% of the cost of real estate
investments acquired; and (iii) change the Incentive Fee to be calculated from
Adjusted Funds From Operations ("AFFO") rather than book net income. AFFO is
generally equal to the Company's GAAP net income plus depreciation and
amortization of rental properties and management contracts less capital
replacement reserves. The Administrative Fee was substantially eliminated as a
result of the resecuritization of the non-agency MBS bonds.
During the three months ended March 31, 1997, the Company incurred fees under
the AIC Management Agreement of $277,000, including Base Fees of $46,000,
Incentive Fees of $32,000, and Administrative Fees of $199,000. The Company also
incurred $1,472,000 of Incentive Fees during the three months ended March 31,
1997 from its gains on the restructuring of its bonds and an additional fee of
$600,000 in exchange for the Manager agreeing to continue as a loss mitigation
advisor on the non-agency MBS bonds.
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Introduction
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements in certain circumstances. Certain information
included in this Report, the Company's Annual Report to Stockholders and other
Company filings (collectively "SEC Filings") under the Securities Act of 1933,
as amended, and the Securities Exchange Act of 1934, as amended (as well as
information communicated orally or in writing between the dates of such SEC
Filings) contains or may contain information that is forward looking, including,
without limitation, statements regarding the effect of acquisitions, the
Company's future financial performance and the effect of government regulations.
Actual results may differ materially from those described in the forward looking
statements and will be affected by a variety of risks and factors including,
without limitation, national and local economic conditions, the general level of
interest rates, terms of governmental regulations that affect the Company and
interpretations of those regulations, the competitive environment in which the
Company operates, financing risks, including the risk that the Company's cash
flow from operations may be insufficient to meet required payments of principal
and interest, real estate risks, including variations of real estate values and
the general economic climate in local markets and competition for tenants in
such markets, acquisition and development risks, including failure of such
acquisitions to perform in accordance with projections, and possible
environmental liabilities, including costs which may be incurred due to
necessary remediation of contamination of properties presently owned by the
Company. In addition, the Company's continued qualification as a real estate
investment trust involves the application of highly technical and complex
provisions of the Internal Revenue Code. Readers should carefully review the
Company's financial statements and the notes thereto, as well as the risk
factors described in the SEC Filings.
Business
Asset Investors Corporation, a Maryland corporation formed in 1986, (together
with its consolidated subsidiaries, "AIC" or the "Company") is a
self-administered and self-managed real estate investment trust ("REIT") engaged
in the ownership, acquisition, development and management of manufactured home
communities. The Company's shares of Common Stock ("Common Stock") are listed on
the New York Stock Exchange ("NYSE") under the symbol "AIC." The Company also
owns approximately 27% of the common stock of Commercial Assets, Inc. ("CAX").
CAX is a publicly-traded REIT (American Stock Exchange, Inc.: CAX). In May 1997,
the Company contributed all of its net assets to Asset Investors Operating
Partnership, L.P. (the "Operating Partnership") in exchange for the sole general
partner interest in the Operating Partnership and all of the Operating
Partnership's initial capital. As of March 31, 1998, the Company owned 78% of
the Operating Partnership.
A manufactured home community is a residential subdivision designed and improved
with sites for the placement of manufactured homes and related improvements and
amenities. Manufactured homes are detached, single-family homes which are
produced off-site by manufacturers and installed on sites within the community.
Manufactured homes are available in a variety of designs and floor plans,
offering many amenities and custom options.
Modern manufactured home communities are similar to typical residential
subdivisions containing centralized entrances, paved streets, curbs and gutters
and parkways. The communities frequently provide a clubhouse for social and
recreation activities and other amenities, which may include golf courses,
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<PAGE>
swimming pools, shuffleboard courts and laundry facilities. Utilities are
provided or arranged for by the owner of the community. Community lifestyles,
primarily promoted by resident managers, include a wide array of social
activities that serve to promote a sense of neighborhood. The communities
provide an attractive and affordable housing alternative for retirees, empty
nesters and start-up or single-parent families.
The owner of each home in the Company's communities leases the site on which the
home is located. The typical lease entered into between the tenant and one of
the Company's manufactured home communities for the rental of a site is
month-to-month or year-to-year, renewable upon the consent of both parties or,
in some instances, as provided by statute. In some circumstances, the Company
also offers a 99-year lease to a tenant in order to enable the tenant to have
some benefits of an owner of real property (e.g. the Homestead exemption). These
leases are cancelable, depending on state law, for non-payment of rent,
violation of community rules and regulations or other specified defaults.
Generally, market rate adjustments are made on an annual basis. The Company owns
the underlying land, utility connections, streets, lighting, driveways, common
area amenities and other capital improvements and is responsible for enforcement
of community guidelines and maintenance. Each homeowner within the manufactured
home community is responsible for the maintenance of his home and leased site
including lawn care in some communities.
The Company believes that manufactured home communities, once fully occupied,
tend to achieve a stable rate of occupancy. The cost and effort involved in
relocating a home to another community generally encourages the owner of the
home to resell it within the community.
REIT Status
In November 1997, the Company incorrectly documented a transaction by having the
Operating Partnership acquire all of the voting common stock of Asset Investors
Equity, Inc. ("AIE"), a consolidated subsidiary of the Company, instead of
having another subsidiary acquire AIE's voting common stock. As a result of the
transaction, the Company was not in compliance with the technical requirements
necessary to maintain its status as a REIT. The Company has submitted a request
to the Internal Revenue Service to confirm or restore AIC's status as a REIT.
The Company expects to receive a response to such request during the second
quarter of 1998. After consulting with the Company's tax and legal advisors,
management believes that the outcome of this matter will not have a material
effect on its results of operations or financial position for 1997 or 1998 due
to its $95 million net operating loss ("NOL") carryover.
Recent Developments
Manufactured Home Community Acquisitions
During the first quarter of 1998, AIC acquired interests in two adult
manufactured home communities, for total consideration of $5.1 million
consisting of $2.9 million in cash, and units of limited partnership interests
in the Operating Partnership ("OP Units") with a total recorded value of $2.2
million. As of March 31, 1998, the Company has interests in 20 adult
manufactured home communities, one recreational vehicle park and one golf course
adjacent to one of the Company's communities. The communities consist of 2,971
developed homesites, 758 sites ready for homes, 1,842 sites available for future
development and 377 recreational vehicle sites. Of such properties, 14
communities are located in Florida, four are in Arizona and one each is in
Pennsylvania and New Jersey. The recreational vehicle park is in California.
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<PAGE>
President and Chief Operating Officer
In February 1998, Mr. Bruce Moore became AIC's President and Chief Operating
Officer. Mr. Moore has over 20 years experience in various aspects of the real
estate industry including manufactured home communities. Mr. Moore is employed
for a period of three years and, in lieu of cash salary, was granted 10-year
options to purchase 250,000 shares of Common Stock, subject to stockholders'
approval of an increase in the number of shares of Common Stock covered by the
Company's Stock Option Plan. The options vest in three equal, annual
installments commencing in February 1999.
Growth and Operating Strategies
The Company measures its economic profitability based on Funds From Operations
("FFO"). The Company's management believes that FFO provides investors with an
understanding of the Company's ability to incur and service debt and make
capital expenditures. The Board of Governors of the National Association of Real
Estate Investment Trusts ("NAREIT") defines FFO as net income (loss), computed
in accordance with generally accepted accounting principles ("GAAP"), excluding
gains and losses from debt restructuring and sales of property, plus real estate
related depreciation and amortization (excluding amortization of financing
costs), and after adjustments for unconsolidated partnerships and joint
ventures. The Company calculates FFO in a manner consistent with the NAREIT
definition, which includes adjustments for minority interest in the Operating
Partnership and amortization of goodwill related to controlled management
contracts, including the investment advisory agreement between an AIC subsidiary
and CAX. FFO should not be considered an alternative to net income or net cash
flows from operating activities, as calculated in accordance with GAAP, as an
indication of the Company's performance or as a measure of liquidity. FFO is not
necessarily indicative of cash available to fund future cash needs.
The Company's primary objective is to maximize stockholder value by increasing
the amount and predictability of FFO on a per share basis. The Company seeks to
achieve this objective primarily by improving net operating income from its
existing portfolio of manufactured home communities and by acquiring additional
communities at values that are accretive on a per share basis. The Company
intends to follow operating and financial strategies, including: (i) obtaining a
geographically diverse portfolio of communities; (ii) providing a minimum $50
per homesite per year for capital replacements to maintain its communities;
(iii) utilizing long-term, fixed-rate, fully-amortizing debt; and (iv)
maintaining a ratio of (a) Adjusted Funds From Operations ("AFFO") plus interest
expense to (b) interest expense of at least 2 to 1. AFFO is equal to FFO less an
estimated annual reserve for capital replacements of $50 per homesite. In
addition, the Company seeks to: (i) selectively acquire manufactured home
communities that have potential long-term appreciation of value through, among
other things, rent increases, expense efficiencies and in-park homesite
absorption and development; (ii) improve the profitability of its communities
through aggressive management of occupancy, community development and
maintenance and expense control; (iii) develop and maintain resident
satisfaction and a reputation for quality communities through maintenance of the
physical condition of the communities and providing activities that improve the
community lifestyle; and (iv) recruit and retain quality community management
personnel.
Future Acquisitions
From time to time, the Company evaluates acquisition opportunities in the
manufactured home community industry and expects to acquire additional
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<PAGE>
properties as opportunities can be identified on terms considered beneficial by
management. The acquisition of interests in additional communities could also
result in the Company becoming increasingly leveraged as it incurs debt in
connection with these transactions.
When evaluating potential acquisitions, the Company considers such factors as:
(i) the geographic area and type of property; (ii) the location, construction
quality, condition and design of the property; (iii) the current and projected
cash flow of the property and the ability to increase cash flow; (iv) the
potential for capital appreciation of the property; (v) the terms of tenant
leases, including the potential for rent increases; (vi) the potential for
economic growth and the tax and regulatory environment of the community in which
the property is located; (vii) the potential for expansion of the physical
layout of the property and/or the number of sites; (viii) the occupancy and
demand by residents for properties of a similar type in the vicinity and the
residents' profile; (ix) the prospects for liquidity through sale, financing or
refinancing of the property; (x) competition from existing manufactured home
communities and the potential for the construction of new communities in the
area; and (xi) the replacement cost of the property.
Expansion of Existing Communities
The Company also seeks to increase the number of homesites and earnings
generated from its existing portfolio of manufactured home communities and from
future acquisitions by expanding the number of sites available to be leased to
residents if justified by local market conditions and permitted by zoning and
other applicable laws. As of March 31, 1998, the Company has an interest in
eight communities with 758 sites ready for homes and 1,842 sites available for
future development.
Properties
The manufactured home communities in which the Company has interests in are
primarily located in Florida and Arizona. The following table sets forth certain
information as of March 31, 1998, with respect to the Company's principal
markets:
<TABLE>
<CAPTION>
Number of Sites
-----------------------------------------------------------
Available for
Number of Ready for Future Recreational
Communities Developed Homes Development Vehicles
----------- --------- ----- ----------- --------
<S> <C> <C> <C> <C> <C>
Florida 14 2,405 758 1,789 --
Arizona 4 448 -- 53 312
New Jersey 1 90 -- -- --
Pennsylvania 1 28 -- -- --
California 1 -- -- -- 65
--- ------ ---- ------ ----
Total 21 2,971 758 1,842 377
=== ====== ==== ====== ====
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Average
Monthly
Developed Rent Recreational Sites Ready Sites Available
Community Location Homesites Occupancy (1) per Site Vehicle Sites for Homes for Development
- ---------------------------------------------------------------------------------------------------------------------------------
Owned, Participating Mortgage and Joint
Venture Communities
<S> <C> <C> <C>
Cardinal Court Largo, FL 138 99% $252 -- -- --
Forest View Homosassa, FL 181 100 220 -- 130 (2) --
Marina Dunes Marina, CA -- -- -- 65 -- --
Park Royale Pinellas Park, FL 258 96 336 -- 51 (2) --
Pinewood St. Petersburg, FL 220 98 277 -- -- --
Pleasant Living Riverview, FL 243 100 251 -- -- --
Stonebrook Homosassa, FL 120 99 230 -- 98 (2) --
Sun Valley Tarpon Springs, FL 261 100 329 -- -- --
Westwind I Dunedin, FL 195 99 345 -- -- --
Westwind II Dunedin, FL 189 99 369 -- -- --
Mullica Woods Egg Harbor City, NJ 90 100 422 -- -- --
Salem Farm Bensalem, PA 28 100 392 -- -- --
Apache Acres Apache Junction, AZ (3) 34 100 180 97 -- --
Blue Star Apache Junction, AZ (3) 28 100 198 108 -- --
Lost Dutchman Apache Junction, AZ (3) 122 100 234 107 -- 53
Sun Valley Apache Junction, AZ (3) 264 100 216 -- -- --
Brentwood Hudson, FL (2) 67 84 191 -- 79 74
Casa del Mar Punta Gorda, FL (2) 103 100 223 -- 140 212
Royal Palm Haines City, FL (2) 218 99 204 -- 68 175
Savanna Club Port St. Lucie, FL (2) 1 100 155 -- -- 1,328
Sun Lake Grand Island, FL (2) 211 100 280 -- 192 --
===================================================================================
2,971 99% $265 377 758 1,842
===================================================================================
Managed Communities
Countryside Brooksville, FL 73 100% $134 -- 38 --
Edgewater Seminole, FL 130 100 163 -- -- --
Golden Crest Dunedin, FL 176 99 332 -- -- --
Lakewood Vero Beach, FL 329 98 284 -- 47 --
Windward Spring Hill, FL 192 100 232 -- 62 --
===================================================================================
900 99% $252 -- 147 --
===================================================================================
<FN>
(1) Excludes recreational vehicle sites, which are leased on a seasonal basis.
(2) The Company holds a note receivable secured by the communities. The note
earns interest and participates in profits from the communities.
(3) The Company has convertible notes receivable secured by the communities. The
investment is accounted for as a joint venture.
</FN>
</TABLE>
Taxation of the Company
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), and the Company intends to operate in such a
manner. The Company's current qualification as a REIT depends on its ability to
meet the various requirements imposed by the Code, through actual operating
results, distribution levels and diversity of stock ownership. As indicated
above (see "REIT Status"), the Company was not in compliance with one of the
technical requirements for maintaining its status as a REIT as a result of a
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<PAGE>
transaction that was incorrectly documented in November 1997, and the Company
has applied to the Internal Revenue Service for relief.
If the Company qualifies for taxation as a REIT, it will generally not be
subject to federal corporate income tax on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
investment in a corporation. If the Company fails to qualify as a REIT in any
taxable year, its taxable income will be subject to federal income tax at
regular corporate rates (including any applicable alternative minimum tax). The
Company has a NOL carryover of approximately $95 million that could be used in
the event that the Company fails to qualify as a REIT. Even if the Company
qualifies as a REIT, it may be subject to certain state and local income and
other taxes and to federal income and excise taxes on its undistributed income.
If in any taxable year the Company fails to qualify as a REIT and incurs a tax
liability, the Company might need to borrow funds or liquidate certain
investments in order to pay the applicable tax and the Company would not be
compelled under the Code to make distributions. Unless entitled to relief under
certain statutory provisions, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. Although the Company currently intends to operate in a
manner designed to qualify as a REIT, it is possible that future economic,
market, legal, tax or other considerations may cause the Company to fail to
qualify as a REIT or may cause the Board of Directors to revoke the REIT
election.
The Company and its stockholders may be subject to state or local taxation in
various jurisdictions, including those in which it or they transact business or
reside. The state and local tax treatment of the Company and its stockholders
may not conform to the federal income tax treatment.
NOL and Capital Loss Carryovers
At March 31, 1998, the Company's NOL carryover was approximately $95,000,000 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
stockholders 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.
Dividend Distributions
In February 1998, the Company announced that it was changing the date on which
its quarterly dividends are declared from the last month of the quarter to the
first month of the subsequent quarter. This change was made to allow the
dividend to be based on actual results instead of estimated results.
Accordingly, no dividend was declared during the first quarter of 1998. In April
1998, the Company declared a $0.25 per share dividend on its Common Stock for
the first quarter of 1998. During the three months ended March 31, 1997, the
Company declared and paid a $0.475 per share dividend on its Common Stock
totaling $2,360,000.
Acquisition of Manager
Prior to November 1997, the Company's daily activities were performed by
Financial Asset Management LLC, (the "Manager" or "FAM") pursuant to an annual
management agreement (the "AIC Management Agreement"). In addition, the Manager
provided similar services to CAX pursuant to a separate agreement (the "CAX
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<PAGE>
Management Agreement") (collectively, the "Management Agreements"). In November
1997, the Company's stockholders approved the acquisition of the Manager's
assets and operations also for a purchase price of $11,692,000, which was paid
by issuing 676,696 OP Units. In addition, FAM will be entitled to an additional
240,000 OP Units if the Company achieves certain performance goals, including
investment and share price targets, by June 1999. FAM is owned by an investor
group led by Terry Considine, Thomas L. Rhodes and Bruce D. Benson. Mr.
Considine is Chairman of the Board of Directors and Chief Executive Officer of
both the Company and CAX. Mr. Rhodes is Vice Chairman and Mr.
Benson is a director of both companies.
Prior to the acquisition, the Manager received various fees for the advisory and
other services performed in connection with the AIC Management Agreement. The
Manager provided all personnel and related overhead necessary to conduct the
regular business of the Company. When the Manager was acquired by the Company,
the AIC Management Agreement was cancelled and the fees formerly payable by the
Company to the Manager pursuant to the AIC Management Agreement ceased. Fees
payable by CAX pursuant to the CAX Management Agreement, are paid to the
Company. The employees of the Manager employed to perform the services under the
AIC Management Agreement and the CAX Management Agreement are now employed by
the Company. Certain officers and directors of the Company also serve as
officers, directors or both of CAX.
As a result of the purchase of the CAX Management Agreement, the Company manages
CAX's daily activities. The CAX Management Agreement has been extended through
December 31, 1998 and CAX is required to pay the Company the following fees: (i)
Acquisition Fees equal to 1/2 of 1% of the cost of each asset acquired by CAX;
(ii) Base Fees equal to 1% per annum of CAX's "average invested assets," and
(iii) Incentive Fees equal to 20% of the amount by which CAX's REIT income
exceeds the amount calculated by multiplying CAX's "average net worth" by the
"Ten Year United States Treasury rate" plus 1%. The Company does not expect to
receive material fees from the CAX Management Agreement until CAX begins to
invest its resources in marinas. Although there can be no assurance of when CAX
will make such investments or the amount thereof, the Company believes that CAX
will begin making such investments in 1998.
RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1998
Comparison of quarter ended March 31, 1998 to quarter ended March 31, 1997
Due to the change in the Company's business from investing in non-agency MBS
bonds to owning and managing manufactured home communities, the results of
operations for the first quarter of 1998 are not comparable to the first quarter
of 1997.
Rental Property and Service Operations
During the first quarter of 1998, the Company earned $1,744,000 of rental and
other property revenues and $783,000 of interest on participating mortgages and
incurred $759,000 of property operating expenses, $34,000 of owned property
management expense and $393,000 of depreciation related to the acquired
communities. In addition, during the same period, the Company earned $77,000 of
property management fees and other income, including $5,000 of fees earned under
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<PAGE>
the CAX Management Agreement, less $24,000 of expenses and $827,000 of
amortization related to the management contracts acquired.
CAX
Income from the Company's 27% ownership interest in CAX for first quarter of
1998 and 1997 was $268,000 and $464,000, respectively. CAX reported to the
Company that the decrease in income is primarily because of the restructuring of
its portfolio of CMBS bonds. The proceeds from the restructuring of CAX's CMBS
bond portfolio were invested in highly-liquid, short-term investments during the
first quarter of 1998 which earned lower returns than the CMBS bonds. In April
1998, CAX announced that it intends to acquire marinas, and in connection with
this acquisition strategy, CAX acquired a 12% interest in Westrec Marina
Management, Inc. ("Westrec").
Non-agency MBS Bonds
Through March 1997, the Company owned a portfolio of unrated credit support debt
interests in non-conforming residential mortgage loan securitizations known as
"non-agency MBS bonds." In February 1997, the Company adopted a strategy to
restructure its asset base in order to reduce risk associated with the Company's
non-agency MBS bond portfolio and attempt to maximize long-term, risk-adjusted
returns to stockholders. In March 1997, the Company contributed its portfolio of
non-agency MBS bonds into an owner trust in a structured transaction in which
the Company received $67.7 million in cash and retained a small equity interest
in the trust.
Income from the Company's non-agency MBS bonds decreased to $50,000 during the
first quarter of 1998 compared with $2,000,000 for the same period in 1997
primarily due to the resecuritization of the bonds in March 1997. The revenues
of from the non-agency MBS bonds in 1998 represent income from the retained
equity interest.
Management Fees
The Company incurred $277,000 of management fees to the Manager during the first
quarter of 1997. There were no management fees in 1998 due to the acquisition
and cancellation of the AIC Management Agreement in November 1997.
General and Administrative Expenses
General and administrative expenses decreased slightly during the first quarter
of 1998 compared with the same period in 1997. Salary, rent and other general
and administrative expenses incurred by the Company as a result of the
acquisition of the Manager were offset by elimination of expenses related to the
non-agency MBS bonds and timing of costs associated with stockholder relations.
Interest and Other Income
Interest and other income increased significantly during the first quarter of
1998 compared with the first quarter of 1997 because of higher cash balances
subsequent to the resecuritization of the non-agency MBS bonds. The average
interest rate on the Company's cash investments during the first quarter of 1998
was 5.4% per annum.
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<PAGE>
Interest Expense
Interest expense of $208,000 during the first quarter of 1998 represents
interest on the secured notes payable assumed with the acquisition of four
manufactured home communities. Interest expense of $26,000 during the first
quarter of 1997 was on the $3,000,000 of short-term borrowings outstanding at
December 31, 1996 which were repaid in the first quarter of 1997.
Gain on Restructuring of Bonds
In connection with the resecuritization of the non-agency MBS bonds, the Company
realized net proceeds of $69,743,000 before related management fees. A gain of
$7,359,000 was recognized during the first quarter of 1997, along with
$1,472,000 of Incentive Fees related to the gain and an additional fee of
$600,000 in exchange for the Manager agreeing to continue as a loss mitigation
advisor on the non-agency MBS bonds. This arrangement allowed the Company to
realize more proceeds and a higher gain from the resecuritization. The
additional fee paid to the Manager was approved by the independent directors and
represents a portion of the increased proceeds and higher gain.
Comparison of quarter ended March 31, 1998 to quarter ended December 31, 1997
Rental Property and Service Operations
Income from rental property operations was $1,341,000 during the first quarter
of 1998 compared to $797,000 during the fourth quarter of 1997. The increase in
income from rental property operations was due to properties acquired in the
first quarter of 1998 and a full quarter of earnings on properties acquired
during the fourth quarter of 1997. The Company recognized a loss from service
operations of $774,000 during the first quarter of 1998 compared to a loss
during the fourth quarter of 1997 of $676,000. The increased loss was primarily
due to increased amortization of the CAX Management Agreement which was acquired
in November 1997 and the write off of the remaining cost of management contracts
on manufactured home communities which were acquired during the first quarter of
1998.
CAX
Income from the Company's 27% ownership interest in CAX for first quarter of
1998 and fourth quarter of 1997 was $268,000 and $2,051,000, respectively. CAX
reported to the Company that the decrease in income is primarily because of
gains from the restructuring of its portfolio of CMBS bonds recognized during
the fourth quarter of 1997. In addition, the proceeds from the restructuring of
CAX's CMBS bond portfolio were invested in highly-liquid, short-term investments
during the first quarter of 1998 which earned lower returns than the CMBS bonds.
Non-agency MBS Bonds
Income from the Company's non-agency MBS bonds decreased to $50,000 during the
first quarter of 1998 compared with $240,000 for fourth quarter of 1997. The
revenues of from the non-agency MBS bonds represent income from the retained
equity interest. Credit losses on the underlying collateral will likely continue
to reduce earnings from the retained equity interest in the future.
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<PAGE>
Management Fees
During the fourth quarter of 1997, the Company incurred $85,000 of expense
relating to management fees to the Manager prior to the acquisition of the AIC
Management Agreement. Because of the Company's acquisition of the Manager, there
were no management fees during the first quarter of 1998.
General and Administrative Expenses
General and administrative expenses decreased during the first quarter of 1998
compared with the fourth quarter of 1997 primarily due to non-recurring costs of
approximately $100,000 incurred in the fourth quarter of 1997 related to the
Company's one-for-five reverse stock split.
Interest and Other Income
Interest and other income remained stable during the first quarter of 1998
compared with the fourth quarter of 1997 because of higher other income offset
by lower interest due to cash balances used to acquire manufactured home
communities during these quarters. As the remaining proceeds from the
resecuritization are invested into manufactured home communities, interest
income is expected to continue to decline.
Interest Expense
Interest expense increased to $208,000 during the first quarter of 1998 compared
to $186,000 during the fourth quarter of 1997 due to incurring a full quarter of
expense in 1998 on secured notes payable that were assumed in connection with
the acquisition of manufactured home communities in the fourth quarter of 1997.
Costs Incurred to Acquire Management Contract
During the fourth quarter of 1997, the Company recognized a $6,553,000
nonrecurring expense related to the Company's purchase of its management
contract. The total nonrecurring expense included $6,105,000 of non-cash expense
from the issuance of OP Units to the owners of the former manager.
Gain on Restructuring of Bonds
During the fourth quarter of 1997, the Company entered into a transaction for
the sale of interests in other bonds that had no carrying value on the Company's
books. As a result of this transaction, a net gain of $1,197,000 was recognized
in the fourth quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company has cash and cash equivalents of $19,417,000.
The Company's principal demands for liquidity include normal operating
activities, payments of principal and interest on outstanding debt, acquisitions
of or additional investments in properties, dividends paid to stockholders and
distributions made to minority limited partners in the Operating Partnership.
Net cash provided by operating activities was $833,000 during the three months
ended March 31, 1998, compared to $2,655,000 during the three months ended March
31, 1997. The decrease was primarily a result of lower net income excluding the
gain on the restructuring of bonds.
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<PAGE>
Net cash used in investing activities was $3,124,000 during the first quarter of
1998 primarily related to the acquisition of manufactured home communities.
During the first quarter of 1997, net cash provided by investing activities of
$70,759,000 included $69,743,000 from the restructuring of the bonds.
Net cash used in financing activities decreased to $94,000 in 1998 compared to
$5,354,000 in 1997, primarily due to unsecured short-term borrowings that were
repaid in 1997 and the timing of the payment of dividends on Common Stock as
discussed above.
Secured notes payable at March 31, 1998, consist of $4,735,000 of notes, which
bear interest at 8.25% and mature in October 2000 and $5,832,000 of notes which
bear interest at 7.5% and also mature in October 2000. The notes are secured by
four manufactured home communities, and were assumed by the Company at the time
the related communities were acquired. The secured notes payable require escrow
payments for the payment of property taxes.
At March 31, 1998, $125,000 was held in such escrow accounts.
The Company has a $1,000,000 unsecured line of credit with a bank through July
31, 1998. Advances under this line bear interest at the prime rate. At March 31,
1998 and December 31, 1997, no advances were outstanding on this line of credit.
The Company expects to meet its long-term liquidity requirements through
long-term, secured borrowings, the issuance of OP Units and equity securities
and cash generated by operations.
YEAR 2000 COMPLIANCE
The Company utilizes numerous accounting and reporting software packages and
computer hardware to conduct its business, the majority of which already comply
with year 2000 requirements. Management believes that the cost of modification
or replacement of non-compliant accounting and reporting software and hardware
will not be material to the Company's financial position or results of
operations.
- 22 -
<PAGE>
PART II
OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
27 Financial Data Schedule.
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed by the
Registrant during the period covered by this Quarterly Report
on Form 10-Q:
Form 8-K dated January 31, 1998, reporting the formation of
AIC Holdings, Inc.
Form 8-K dated February 27, 1998, reporting the acquisition of
manufactured housing community assets.
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: August 14, 1998 By /s/David M. Becker
--------------------------
David M. Becker
Chief Financial Officer
- 23 -
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