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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
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.)
3410 South Galena Street, Suite 210 80231
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (303) 614-9400
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, New York Stock Exchange, Inc.
par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[X]
As of February 27, 1998, 5,109,503 shares of Common Stock were
outstanding, and the aggregate market value of the shares (based upon the
closing price of the Common Stock on that date as reported on the New York Stock
Exchange, Inc.) held by non-affiliates was approximately $81,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the Registrant's 1998 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report.
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ASSET INVESTORS CORPORATION
Table of Contents
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 1997
Item Page
PART I
1. Business
REIT Status................................................... 2
Recent Developments............................................ 2
Financial Information about Industry Segments................. 4
Growth and Operating Strategies............................... 4
Competition................................................... 6
Taxation of the Company....................................... 6
Regulations................................................... 7
Insurance..................................................... 8
Capital Resources............................................. 8
Dividend Reinvestment Plan.................................... 8
Restrictions on and Redemptions of Common Stock............... 8
Employees..................................................... 9
2. Properties......................................................... 9
3. Legal Proceedings.................................................. 11
4. Submission of Matters to a Vote of Security Holders................ 11
PART II
5. Market For Registrant's Common Equity and Related
Stockholder Matters.............................................. 11
6. Selected Financial Data............................................ 12
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 13
8. Financial Statements and Supplementary Data........................ 20
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 20
PART III
10. Directors and Executive Officers of the Registrant................. 20
11. Executive Compensation............................................. 21
12. Security Ownership of Certain Beneficial Owners and Management..... 21
13. Certain Relationships and Related Transactions..................... 22
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 22
Signatures......................................................... 28
(i)
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PART I
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.
Item 1. 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. As of February 28, 1998, AIC had interests in 20 manufactured home
communities and a recreational vehicle park with a total of 2,964 developed
homesites, 764 sites ready for homes, 1,842 sites available for future
development and 377 recreational vehicle sites. In addition, the Company had an
interest in a golf course adjacent to one of the manufactured home communities,
and it managed five communities for third party owners. 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). The Company's
shares of Common Stock ("Common Stock") are listed on the New York Stock
Exchange ("NYSE") under the symbol "AIC." 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 February 28, 1998, the Company had a 78% investment in the
Operating Partnership.
The Company's principal executive offices are located at 3410 S. Galena Street,
Suite 210, Denver, Colorado 80231 and its telephone number is (303) 614-9400.
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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 1997, the Company initiated its strategy to transform itself from a
holder of "first loss" positions of non-conforming residential mortgage loan
securitizations ("non-agency MBS bonds") to the owner and operator of
manufactured home communities. From May 1997 through February 1998, AIC acquired
interests in 20 adult manufactured home communities, one recreational vehicle
park and one golf course adjacent to one of the Company's communities. As of
February 29, 1998, the communities consisted of 2,964 developed homesites, 764
sites ready for homes, 1,842 sites available for future development and 377
recreational vehicle sites. The total consideration paid by the Company of $74.4
million consisted of $49.2 million in cash, shares of Common Stock with a total
recorded value of $1.3 million, units of limited partnership interests in the
Operating Partnership ("OP Units") with a total recorded value of $13.0 million
and the assumption of $10.9 million of secured, non-recourse, long-term
indebtedness. Of the properties where the Company has an interest, 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.
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
activities and recreation and other amenities, which may include golf courses,
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,
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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.
Restructuring of 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. During the remainder of 1997, the Company began to redeploy the
cash proceeds by acquiring interests in manufactured home communities.
The Company's non-agency MBS bonds were collateralized by mortgage loans that
did not meet government agency guarantee standards, typically because the
mortgage loans either exceeded agency size limits or the borrower did not meet
other agency credit underwriting criteria (a "non-conforming mortgage loan").
Because of credit risk, a securitization of non-conforming mortgage loans
requires some form of credit enhancement. One type of credit enhancement
provided is through a "senior-subordinate" structure, where the subordinate
classes of the non-conforming residential mortgage loan securitization provide
credit protection to the senior classes by absorbing the first losses from loan
defaults or foreclosures. The Company acquired the subordinate bond classes
which, while offering the potential of a higher yield than the more senior
classes, had the greatest credit risk. Such bond classes were considered to be
speculative and were subject to special risks, including a substantially greater
risk of loss of principal and non-payment of interest than the more senior,
rated classes.
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.
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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
Management Agreement") (collectively, the "Management Agreements"). In September
1996, the Manager was purchased by a group led by Messrs. Terry Considine and
Thomas L. Rhodes (Co-Chairmen and Co-Chief Executive Officers of both AIC and
CAX) and Mr. Bruce D. Benson (a director of both AIC and CAX) for a purchase
price of $11,692,000. 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.
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
March 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%. During December 1997, no fees
were earned since substantially all of CAX's assets were invested in short-term
government securities and other cash equivalents. The Company does not expect to
receive any fees from the CAX Management Agreement until CAX begins to invest
its resources in real estate assets. 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.
Reverse Stock Split
In November 1997, the Company's stockholders approved a one-for-five reverse
stock split. Unless otherwise stated, all share and per share amounts included
herein have been retroactively adjusted for the effect of the one-for-five
reverse stock split.
Financial Information about Industry Segments
The Company operates in one industry segment, the ownership and management of
real estate. See the consolidated financial statements and notes thereto
included in Item 8 of this Report on Form 10-K for financial information
relating to the Company.
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 management company goodwill. FFO should not be
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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
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.
The Company believes that acquisition opportunities for manufactured home
communities are attractive at this time because of increasing acceptability of
and demand for manufactured homes, the increasing need for affordable housing
alternatives, and the continued constraints on development of new manufactured
home communities. The Company is actively seeking to acquire additional
communities and currently is engaged in various stages of negotiations relating
to the possible acquisition of a number of communities.
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.
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Properties Subject to Letter of Intent or Contract
In the ordinary course of the Company's business, the Company is engaged in
discussions and negotiations with manufactured home community owners regarding
the purchase of communities or interests in communities. The Company enters into
letters of intent from time to time, which may be binding or nonbinding, and
contracts with respect to the purchase of real property which are subject to
certain conditions and which permit the Company to terminate the contract in its
sole and absolute discretion if it is not satisfied with the results of its due
diligence investigation of the properties under contract. Management believes
that such contracts essentially result in the creation of an option on the
community subject to the contract and give the Company greater flexibility in
seeking to acquire properties.
Expansion of Existing Communities
The Company will also seek 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 February 28, 1998, the Company had an interest in
eight communities with 764 sites ready for homes and 1,842 sites available for
future development.
Competition
There are numerous housing alternatives that compete with the Company's
manufactured home communities in attracting residents. The Company's properties
compete for residents with other manufactured home communities, multifamily
rental apartments and single family homes and condominiums. The number of
competitors in a particular area could have a material effect on the Company's
ability to lease homesites and on the rents charged. In acquiring assets, the
Company competes with other REITs, pension funds, insurance companies, and other
investors, many of which have greater financial resources than the Company.
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
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 on its taxable income (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
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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 to make distributions under the Code. 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 state or local 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.
Regulations
General
Manufactured home communities are subject to various laws, ordinances and
regulations, including regulations relating to recreational facilities such as
swimming pools, clubhouses and other common areas. The Company believes that
each property has the necessary permits and approvals to operate.
Americans with Disabilities Act ("ADA")
The properties and any newly acquired manufactured home communities must comply
with the ADA. The ADA has separate compliance requirements for "public
accommodations" and "commercial facilities," but generally requires that public
facilities such as clubhouses, pools and recreation areas be made accessible to
people with disabilities. Compliance with the ADA requirements has required
removal of access barriers and other capital improvements at the properties.
Noncompliance could result in imposition of fines or an award of damages to
private litigants. The Company has taken into account an estimate of funds
required to make any changes required by the ADA in determining the appropriate
level of reserves and the expected level of distributions and believes that such
costs can be covered by funds from the operations of the properties or
established reserves without any material adverse effect on the Company's
financial condition or results of operations. If ongoing changes involve a
greater expenditure than the Company currently anticipates, or if the changes
must be made on a more accelerated basis than it anticipates, the Company's
ability to make expected distributions could be adversely affected.
Rent Control Legislation
State and local rent control laws, principally in Florida, limit the Company's
ability to increase rents and to recover increases in operating expenses and the
costs of capital improvements. Enactment of such laws has been considered from
time to time in other jurisdictions. The Company presently expects to continue
to maintain manufactured home communities, and may purchase additional
properties, in markets that are either subject to rent control or in which
rent-limiting legislation exists or may be enacted. For example, Florida has
enacted a law, which generally provides that rental increases must be
reasonable.
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Insurance
Management believes that its properties are covered by adequate fire, flood and
property insurance provided by reputable companies and with commercially
reasonable deductibles and limits. The Company believes it has obtained adequate
title insurance insuring fee title when it has acquired manufactured home
communities.
Capital Resources
The Company has used its cash balances, AFFO and short-term credit facilities to
provide working capital to support its operations, for the payment of dividends
and for the acquisition of assets. Future acquisitions will be financed by the
most appropriate sources of capital, which may include the Company's cash
balances; undistributed AFFO; long-term, secured, fixed-rate, fully-amortizing
debt; short-term, secured debt; and the issuance of additional equity
securities, including OP Units of the Operating Partnership. The Company
believes that the issuance of OP Units in exchange for new communities may
permit the Company to acquire additional manufactured home communities in
transactions that may defer all or a portion of the sellers' tax consequences.
Without further stockholder approval, the Company is authorized to issue up to
50,000,000 shares of Common Stock, of which 5,109,503 shares were issued and
outstanding as of February 27, 1998. The Board of Directors is authorized to
issue additional classes of stock without stockholder approval. Depending upon
the terms set by the Board of Directors, the authorization and issuance of
preferred stock or other new classes of stock could affect adversely existing
stockholders. The effects on stockholders could include, among other things,
dilution of ownership interests of existing stockholders, restrictions on
dividends on Common Stock and preferences to holders of a new class of stock in
the distribution of assets upon liquidation. As of February 27, 1998, the
Company has not authorized or issued additional classes of stock.
Dividend Reinvestment Plan
The Company has an Automatic Dividend Reinvestment Plan administered by Norwest
Stockholder Services. The plan provides the Company's stockholders a method of
investing cash dividends paid by the Company in additional shares of Common
Stock purchased in the open market. The plan also permits participants to
purchase Common Stock in the open market with voluntary cash payments.
Restrictions on and Redemptions of Common Stock
To qualify as a REIT, the Company must meet certain ownership tests with respect
to its shares of Common Stock. In addition, the Company's Certificate of
Incorporation provides that shares of Common Stock may not be owned by a person
if the ownership of shares by such person would result in the imposition of a
tax on the Company or on any other holder (nominee or otherwise) of shares of
Common Stock. Provisions of the Code would impose such a tax if shares of Common
Stock were owned, directly or indirectly, by the United States, any state or
political subdivision thereof, any foreign government, any international
organization, a rural electric or telephone cooperative described in Section
1381(a)(2)(C) of the Code, any agency or instrumentality of any of the
foregoing, or any organization exempt from tax under the Code that is not
subject to tax on its unrelated business taxable income.
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The Company's Certificate of Incorporation empowers the Board of Directors, at
its option, to redeem shares of Common Stock or to restrict transfers of shares
to conform ownership of the Common Stock with the requirements described above.
The redemption price to be paid is the fair market value as reflected in the
latest quotations on any exchange on which the shares of Common Stock are listed
or, if the Common Stock is not listed on any exchange, on the over-the-counter
market or, if no quotations are available, the net asset value of the shares of
Common Stock as determined by the Board of Directors. The Company's Certificate
of Incorporation also provides that any acquisition of shares of Common Stock
that would result in the disqualification of the Company as a REIT under the
Code shall be void to the fullest extent permitted under applicable law and the
intended transferee of such shares shall be deemed never to have had an interest
therein. Furthermore, if such provision is determined to be void or invalid,
then the transferee of such shares shall be deemed, at the option of the
Company, to have acted as agent on behalf of the Company in acquiring such
shares and to hold such shares on behalf of the Company.
Each stockholder is required, upon demand, to disclose to the Board of Directors
in writing such information with respect to direct and indirect ownership of
shares of Common Stock as the Board of Directors deems prudent in protecting the
tax status of the Company.
Employees
The Company's employees perform various acquisition, development and management
functions. Brandywine Financial Services Corporation and affiliates
("Brandywine") provide employees that perform property management and sales
services for the Company's communities. Mr. Bruce Moore was the founder and
Chief Executive Officer of Brandywine prior to becoming the President and Chief
Operating Officer of the Company in February 1998. In addition to the Company's
eight employees, approximately 80 Brandywine employees are devoted full time to
the Company's communities. None of the employees are represented by a union, and
the Company has never experienced a work stoppage. The Company believes it
maintains satisfactory relations with its employees.
Item 2. 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 February 28, 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 2,398 764 1,789 --
Arizona 4 448 -- 53 312
New Jersey 1 90 -- -- --
Pennsylvania 1 28 -- -- --
California 1 -- -- -- 65
--- ------ ---- ------ ----
Total 21 2,964 764 1,842 377
=== ===== ==== ====== ====
</TABLE>
The Company's developed homesites were 99% occupied with average monthly rents
of $263.
- 9 -
<PAGE>
<TABLE>
<CAPTION>
Average
Monthly Sites Available
Developed Rent Recreational Sites Ready for
Community Location Homesites Occupancy(2) per Site Vehicle Sites for Homes Development
- ----------------------------------------------------------------------------------------------------------------------------------
Owned Communities
<S> <C> <C> <C> <C> <C> <C>
Cardinal Court Largo, FL 138 99% $252 -- -- --
Forest View Homosassa, FL 180 100 207 -- 131 --
Marina Dunes Marina, CA -- -- -- 65 -- --
Park Royale Pinellas Park, FL 258 96 331 -- 51 --
Pinewood St. Petersburg, FL 220 98 277 -- -- --
Pleasant Living Riverview, FL 243 100 247 -- -- --
Stonebrook Homosassa, FL 118 99 227 -- 100 --
Sun Valley Tarpon Springs, FL 261 100 327 -- -- --
Westwind I Dunedin, FL 195 99 345 -- -- --
Westwind II Dunedin, FL 189 99 369 -- -- --
Mullica Woods Egg Harbor City, NJ 90 100 421 -- -- --
Salem Farm Bensalem, PA 28 100 392 -- -- --
----------------------------------------------------------------------------------
Subtotal 1,920 99 290 65 282 --
----------------------------------------------------------------------------------
Joint Venture Communities
Apache Acres Apache Junction, AZ (1) 34 88 180 97 -- --
Blue Star Apache Junction, AZ (1) 28 93 198 108 -- --
Lost Dutchman Apache Junction, AZ (1) 122 100 234 107 -- 53
Sun Valley Apache Junction, AZ (1) 264 100 216 -- -- --
Brentwood Hudson, FL 67 84 191 -- 79 74
Casa del Mar Punta Gorda, FL 103 100 217 -- 140 212
Royal Palm Haines City, FL 218 99 200 -- 68 175
Savanna Club Port St. Lucie, FL -- -- -- -- -- 1,328
Sun Lake Grand Island, FL 208 100 280 -- 195 --
----------------------------------------------------------------------------------
Subtotal 1,044 98 223 312 482 1,842
----------------------------------------------------------------------------------
Total Owned and Joint Venture Communities 2,964 99% $263 377 764 1,842
==================================================================================
Managed Communities
Countryside Brooksville, FL 73 100% $134 -- 38 --
Edgewater Seminole, FL 130 100 163 -- -- --
Golden Crest Dunedin, FL 176 99 329 -- -- --
Lakewood Vero Beach, FL 329 99 284 -- 47 --
Windward Spring Hill, FL 192 100 231 -- 62 --
----------------------------------------------------------------------------------
Total Managed Communities 900 100% $252 -- 147 --
==================================================================================
<FN>
(1)The Company holds two mortgage loans secured by the four communities in
Apache Junction, Arizona. As a provision of the mortgages, the Company has
the right to purchase the properties at fair value and has an interest in the
operating revenues from the properties and proceeds from a sale or
refinancing of the properties. Due to these rights, the mortgages are
accounted for as an equity investment in real estate and reflected as joint
venture communities above.
(2)Excludes recreational vehicle sites, which are leased on a seasonal basis.
</FN>
</TABLE>
- 10 -
<PAGE>
Item 3. Legal Proceedings.
At February 28, 1998, there were no material legal proceedings, pending or
threatened, to which the Company or any of its subsidiaries was a party or to
which any of their respective properties were subject.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's 1997 Annual Meeting of Stockholders was held on November 21, 1997.
At the meeting, stockholders approved the acquisition of the assets and
operations of the Manager. Of the votes cast, 2,625,468 were cast "for" the
acquisition and 206,915 were cast "against" the acquisition with 57,571 votes
cast "abstain." In addition, Messrs. Terry Considine, Bruce D. Benson and
William J. White were elected as Class II Directors to terms expiring in 2000
and Thomas L. Rhodes was elected as a Class III Director to a term expiring in
1998. There were 4,410,383, 4,407,166, 4,403,579 and 4,409,973 votes cast "for"
Messrs. Considine, Benson, White and Rhodes, respectively and 144,315, 147,532,
151,119 and 144,725 votes, respectively, were "withheld." At the meeting,
stockholders also approved an amendment to the Articles of Incorporation to
effect a one-for-five reverse stock split of the Company's issued and
outstanding shares of Common Stock. Of the votes cast, 3,927,492 were cast "for"
the amendment, 483,141 were cast "against" the amendment, and 71,500 votes were
cast "abstain."
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is listed on the NYSE under the symbol "AIC." The
high and low closing sales prices of the shares of Common Stock as reported on
the NYSE Composite Tape and certain dividend information for the periods
indicated were as follows:
High Low Dividends
---- --- ---------
1997
First Quarter $ 21-1/4 $ 16-1/4 $ .475
Second Quarter 18-1/8 16-1/4 .300
Third Quarter 21-7/8 16-7/8 .325
Fourth Quarter 22-1/2 17 .350
1996
First Quarter $ 16-7/8 $ 13-3/4 $ .450
Second Quarter 18-3/4 15-5/8 .450
Third Quarter 18-3/4 16-7/8 .475
Fourth Quarter 20 17-1/2 .475
As of February 27, 1998, 5,109,503 shares of Common Stock were issued and
outstanding and were held by 3,107 stockholders of record. The Company estimates
there were an additional 11,000 beneficial owners on that date whose shares were
held by banks, brokers or other nominees.
The Company, as a REIT, is required to distribute annually to holders of Common
Stock at least 95% of its "real estate investment trust taxable income," which,
as defined by the Code and Treasury regulations, is generally equivalent to net
taxable ordinary income. The Company measures its economic profitability and
intends to pay regular income to its stockholders based on AFFO during the
relevant period. However, the future payment of dividends by the Company will be
at the discretion of the Board of Directors and will depend on numerous factors
including the Company's financial condition, its capital requirements, the
annual distribution requirements under the provisions of the Code applicable to
REITs and such other factors as the Board of Directors deems relevant.
- 11 -
<PAGE>
Item 6. Selected Financial Data.
The selected financial data of the Company, set forth below, has been derived
from and should be read in conjunction with the Company's audited consolidated
financial statements and the notes thereto. Financial data as of December 31,
1997 and 1996, and for each of the three years in the period ended December 31,
1997, is included elsewhere in this Report on Form 10-K (in thousands, except
per share data).
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
RENTAL PROPERTY OPERATIONS
<S> <C> <C> <C> <C> <C>
Rental and other property revenues $ 3,104 $ -- $ -- $ -- $ --
Equity in earnings of real estate joint
ventures 466 -- -- -- --
Property operating expenses (1,311) -- -- -- --
Owned property management expenses (87) -- -- -- --
---------- ---------- ---------- ---------- ---------
2,172 -- -- -- --
Depreciation (693) -- -- -- --
---------- ---------- ---------- ---------- ---------
1,479 -- -- -- --
---------- ---------- ---------- ---------- ---------
SERVICE OPERATIONS
Property management fees and other
income 128 -- -- -- --
Property management and other expenses
(59) -- -- -- --
Amortization of management contracts (744) -- -- -- --
---------- ---------- ---------- ---------- ---------
(675) -- -- -- --
---------- ---------- ---------- ---------- ---------
OTHER ACTIVITIES
Non-agency MBS bonds revenues 2,966 11,513 8,499 1,531 --
Equity in earnings of CAX 3,663 1,875 1,742 1,354 187
Management fees to former manager (570) (1,793) (980) (253) --
Earnings from liquidating operations -- -- 6,507 11,897 (47,913)
---------- ---------- ---------- ---------- ---------
6,059 11,595 15,768 14,529 (47,726)
---------- ---------- ---------- ---------- ---------
General and administrative expenses (1,042) (1,145) (1,895) (1,586) (4,231)
Interest and other income 1,808 136 630 563 939
Interest expense (368) (88) (63) (148) --
Costs incurred to acquire management
contract (6,553) -- -- -- --
Elimination of DERs -- (825) -- -- --
---------- ---------- ---------- ---------- ---------
INCOME BEFORE GAIN ON RESTRUCTURING OF
BONDS AND MINORITY INTEREST 708 9,673 14,440 13,358 (51,018)
Gain on restructuring of bonds 6,484 -- -- -- --
---------- ---------- ---------- ---------- ---------
</TABLE>
- 12 -
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME BEFORE MINORITY INTEREST 7,192 9,673 14,440 13,358 (51,018)
Minority interest in Operating Partnership 62 -- -- -- --
---------- ---------- ---------- ---------- ---------
NET INCOME $ 7,254 $ 9,673 $ 14,440 $ 13,358 $ (51,018)
========== ========== ========== ========== =========
BASIC EARNINGS PER SHARE $ 1.44 $ 1.97 $ 2.97 $ 4.59 $ (18.19)
========== ========== ========== ========== =========
DILUTED EARNINGS PER SHARE $ 1.43 $ 1.95 $ 2.96 $ 4.58 $ (18.19)
========== ========== ========== ========== =========
DIVIDENDS DECLARED PER SHARE $ 1.45 $ 1.85 $ 1.70 $ 1.65 $ 19.95
========== ========== ========== ========== =========
Weighted-Average Common Shares
Outstanding 5,022 4,919 4,856 2,910 2,805
Weighted-Average Common Shares And
Common Share Equivalents Outstanding 5,061 4,966 4,883 2,914 2,805
Balance Sheet Data:
December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Real estate, before accumulated
depreciation $ 41,419 $ -- $ -- $ -- $ --
Investments in and notes receivable
from real estate joint ventures 25,415 -- -- -- --
Total assets 119,161 90,344 79,653 109,539 94,250
Secured notes payable 10,677 -- -- 30,592 42,000
Minority interest in Operating
Partnership 22,362 -- -- -- --
Stockholders' equity 83,515 86,365 78,759 72,965 47,187
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The following discussion and analysis of consolidated results of operations and
financial condition should be read in conjunction with the consolidated
financial statements of the Company included elsewhere herein. 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 year
ended December 31, 1997 are not comparable to prior periods.
- 13 -
<PAGE>
Comparison of year ended December 31, 1997 to year ended December 31, 1996
Rental Property and Service Operations
From May 1997 to December 31, 1997, the Company invested $69,389,000 in
manufactured home communities and related assets consisting of $46,344,000 of
cash, the assumption of $10,873,000 of existing debt, the issuance of $1,250,000
of Common Stock, and the issuance of $10,922,000 of OP Units. As of December 31,
1997, the Company had interests in 18 manufactured home communities and one
recreational vehicle park. In addition, the Company managed six communities for
third parties.
From May 1997 to December 31, 1997, the Company earned $3,104,000 of rental and
other property revenues and $466,000 of equity in earnings of real estate joint
ventures and incurred $1,311,000 of property operating expenses, $87,000 of
owned property management expense and $693,000 of depreciation related to the
acquired communities. In addition, during the same period, the Company earned
$128,000 of property management fees and other income less $59,000 of expenses
and $744,000 of amortization related to the management contracts acquired.
CAX
Income from the Company's 27% ownership interest in CAX for 1997 and 1996 was
$3,663,000 and $1,875,000, respectively. CAX reported to the Company that the
increase in income is primarily because of gains from the restructuring of its
portfolio of CMBS bonds, prepayments on one of its CMBS bonds in the third
quarter of 1997 and the non-recurring charge in 1996 for the elimination of
dividend equivalent rights under CAX's stock option plan. The increase was
partially offset by higher management fees in 1997 and revenues from redemption
of two CMBS bonds and other prepayments in 1996.
During the fourth quarter of 1997, CAX sold, redeemed or resecuritized its
entire portfolio of CMBS bonds generating $77,693,000 of cash and resulting in a
net gain of $5,786,000. CAX has not yet identified what it will reinvest the
proceeds in. CAX has also reported that future profitability and related
dividends will likely decline as a result of the restructuring of its portfolio
until such proceeds are reinvested.
Non-agency MBS Bonds
Income from the Company's non-agency MBS bonds decreased to $2,966,000 during
1997 compared with $11,513,000 for 1996 primarily due to the resecuritization of
the bonds in March 1997. Revenues of $966,000 from the non-agency MBS bonds,
since the resecuritization, 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.
Management Fees
At the Company's annual meeting in November 1997, stockholders approved a
proposal to acquire the Manager in order to become a self-managed and
self-administered REIT. In connection with such acquisition, the Company
acquired the CAX Management Agreement and now provides management services to
CAX. The CAX Management Agreement has been extended to March 31, 1998. The
Manager was acquired from an investment group that includes Terry Considine and
Thomas L. Rhodes, Co-Chairmen of the Board of Directors and Co-Chief Executive
- 14 -
<PAGE>
Officers of both the Company and CAX, and Bruce D. Benson, a director of the
Company and CAX. This investment group acquired the Manager in September 1996 at
a cost of $11,692,000.
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 in the future, pursuant to the CAX Management Agreement, will be
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.
The Company incurred management fees payable to the Manager prior to the
acquisition of the Manager in November 1997. In 1996, 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 year. The Incentive Fee was equal to 20%
of the amount the Company's net book income, calculated in accordance with GAAP,
which is in excess of a return on the Company's "average net worth" equal to the
"Ten-Year U.S. Treasury Rate" plus one percent. 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 assets, the independent directors
approved an amendment to the AIC Management Agreement, effective April 1, 1997,
that: (i) increased the Base Fee from 3/8 of 1% to 1% per annum of "average
invested assets;" (ii) provided for an acquisition fee (the "Acquisition Fee")
of 1/2 of 1% of the cost of real estate investments; and (iii) changed the
Incentive Fee to be calculated from AFFO rather than net book income. The
Administrative Fee was substantially eliminated as a result of the
resecuritization of the non-agency MBS bonds.
Included in Management Fee expense is Incentive Fees incurred by the Company
along with Base Fees and Administrative Fees applicable to the non-agency MBS
bonds prior to the resecuritization. Management Fees decreased to $570,000
during the year ended December 31, 1997 compared with $1,793,000 for the year
ended December 31, 1996 primarily due to the resecuritization of the non-agency
MBS bonds in March 1997 which eliminated Administrative Fees and resulted in
lower Base Fees and lower income for purposes of calculating Incentive Fees. In
addition, all fees were discontinued upon the acquisition of the Manager in
November 1997.
The Company incurred $322,000 of Acquisition Fees during 1997, relating to the
acquisition of manufactured home communities and management contracts. These
Acquisition Fees are capitalized and will be amortized over the estimated life
of the related assets. No Acquisition Fees were incurred in 1996.
General and Administrative Expenses
General and administrative expenses decreased during 1997 compared with 1996 due
primarily to the elimination of dividend equivalent right ("DER") expense in the
second quarter of 1996, reductions in accounting and consulting fees, and lower
costs associated with stockholder relations.
- 15 -
<PAGE>
Interest and Other Income
Interest and other income increased significantly during 1997 compared with 1996
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 1997 was 5.37% per annum. As the remaining proceeds from the
resecuritization are invested into manufactured home communities, interest
income is expected to decline.
Interest Expense
Interest expense during 1997 includes $342,000 on the secured notes payable
assumed with the acquisition of four manufactured home communities and $26,000
of interest on the $3,000,000 of short-term borrowings outstanding at December
31, 1996. The $88,000 of interest expense during 1996 was on short-term
borrowings.
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. The costs
related to the CAX Management Agreement have been capitalized and are included
in amortization of management contracts discussed above.
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. The portfolio of
non-agency MBS bonds was classified as available-for-sale and included
$6,000,000 of unrealized holding gains at December 31, 1996.
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.
Comparison of year ended December 31, 1996 to year ended December 31, 1995
CAX
Income from the Company's 27% ownership interest in CAX for the years ended
December 31, 1996 and 1995 was $1,875,000 and $1,742,000, respectively. CAX
reported to the Company that the increase in income for 1996 over 1995 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 CAX
common stock for the elimination of dividend equivalent rights under its stock
option plan.
- 16 -
<PAGE>
At December 31, 1996, CAX's CMBS bonds had an outstanding principal balance of
$89,297,000 with a weighted-average coupon of 8.15%. Also at December 31, 1996,
unamortized purchase discounts, acquisition costs and allowance for credit
losses totaled $24,448,000 and CAX had recorded $3,389,000 of unrealized holding
losses on its CMBS bonds. The Company's share of these unrealized holding
losses, $907,000 as of December 31, 1996, was recorded as a reduction in the
carrying value of its investment in CAX and as a component of stockholders'
equity.
Non-agency MBS Bonds
Income from the Company's non-agency MBS bonds increased significantly during
1996 compared with 1995 primarily due to the acquisition of non-agency MBS bonds
during 1996 and 1995 with outstanding principal balances of $60,478,000 and
$99,398,000, respectively, and weighted-average coupons of 7.4% and 6.9%,
respectively.
For the years ended December 31, 1996 and 1995, the principal amount of credit
losses on the Company's non-agency MBS bonds was $13,295,000 and $3,056,000,
respectively. The significant increase in credit losses allocated to the Company
is due to: (i) the acquisition of bonds during the years ended December 31, 1996
and 1995; and (ii) as mortgages mature, in particular during their first five
years, the defaults and the resulting credit losses are expected to increase.
Management Fees
Management Fees increased during 1996 compared with 1995 due to: (i) higher
Administrative and Base Fees as a result of acquisitions of non-agency MBS bonds
during 1995 and 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; (iii) a decrease in the average Ten-Year U.S. Treasury Rate to 6.44%
during 1996, from 6.58% during 1995, which had the effect of lowering the
threshold above which the Incentive Fees are paid; and (iv) higher book income
in 1996 compared to 1995.
Liquidating Operations
In 1995, the Company completed its liquidation of its CMO Ownership Interests.
Accordingly, the Company classified as liquidating operations its revenues from
CMO Ownership Interests along with expenses directly allocable to the CMO
Ownership Interests. Earnings from liquidating operations during the year ended
December 31, 1995, were comprised of the following (in thousands):
Revenues
CMO Ownership Interests $ 1,734
Interest income 225
Net gain on sale of CMO Ownership Interests 5,369
-------
Total revenues 7,328
-------
Expenses
Management fees 234
General and administrative 23
Interest 564
-------
Total expenses 821
-------
Earnings from liquidating operations $ 6,507
=======
- 17 -
<PAGE>
General and Administrative Expenses
General and administrative expenses decreased during 1996 compared with 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.
Interest and Other Income
Other income and expenses from ongoing operations decreased during 1996 compared
to 1995 due to a decrease in income from other sources and lower interest income
from cash and cash equivalents, because the Company used substantially all of
its available cash to acquire non-agency MBS bonds.
Interest Expense
Interest expense on the Company's borrowing facilities increased during 1996
compared to 1995 reflecting higher interest rates and the increase in the
average daily balance to $1,058,000 from $813,000. The effective interest rate
under the Company's short-term borrowing facilities during 1996 and 1995 was
8.18% and 7.21% per annum, respectively.
Elimination of DERs
Prior to May 1996, options holders received shares of Common Stock equal to the
value of dividends received as if the options were fully exercised. At their
annual meeting in May 1996, the Company's stockholders approved an amendment to
the Company's 1986 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.
NOL and Capital Loss Carryovers
At December 31, 1997, 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
During 1997, the Company distributed $7,749,000 ($1.45 per share) to holders of
Common Stock and OP Units compared to 1996 dividends of $9,128,000 ($1.85 per
share) and 1995 dividends of $8,255,000 ($1.70 per share). Seventy-five percent
of 1997 dividends and twenty percent of the 1995 dividends constituted return of
capital distributions, generally not taxable to the stockholders to the extent
of their basis in their stock. Return of capital distributions were not made in
1996.
- 18 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company has cash and cash equivalents of
$21,802,000. 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 $3,931,000 during the year ended
December 31, 1997, compared to $11,670,000 during the year ended December 31,
1996. The decrease was primarily a result of lower net income excluding the gain
on the restructuring of bonds.
Net cash provided by investing activities was $27,479,000 during 1997 compared
to net cash used by investing activities of $10,754,000 in 1996. Investing
activities in 1997 included $69,807,000 of net cash provided from the
restructuring of the bonds net of $46,344,000 used to acquire interests in real
estate and real estate joint ventures.
Net cash used in financing activities increased to $10,025,000 in 1997 compared
to $5,827,000 in 1996, primarily due to unsecured short-term borrowings in 1996
that were repaid in 1997.
Secured notes payable at December 31, 1997, consist of $4,805,000 of notes,
which bear interest at 8.25% and mature in October 2000 and $5,872,000 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 December 31, 1997, $34,000 was held in such escrow accounts.
In 1996, the Company had a $10,000,000 revolving credit and term loan agreement
with a bank. The loan was collateralized by certain of the Company's non-agency
MBS bonds with a net carrying value of $19,461,000 at December 31, 1996. At
December 31, 1996, $3,000,000 was borrowed under this credit facility at an
average effective interest rate of 8.25%. The loan was repaid and agreement
canceled in March 1997, as a result of the resecuritization of the non-agency
MBS bonds.
The Company also 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
December 31, 1997 and 1996, 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.
- 19 -
<PAGE>
Item 8. Financial Statements and Supplementary Data.
The independent auditor's reports, consolidated financial statements and
schedules listed in the accompanying index are filed as part of this report and
incorporated herein by reference. See "Index to Financial Statements" on page
F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information set forth under the caption "Board of Directors and Officers" in
the Proxy Statement in connection with the Company's 1998 Annual Meeting of
Stockholders which is to be filed by the Company after the date this Report on
Form 10-K is filed (the "Proxy Statement") is hereby incorporated herein by
reference.
Executive Officers of the Registrant
The Executive Officers of the Company as of February 28, 1998 are:
Name Age Position with the Company
- --------------------------------------------------------------------------------
Terry Considine 50 Co-Chairman of the Board of Directors and Co-Chief
Executive Officer
Thomas L. Rhodes 58 Co-Chairman of the Board of Directors and Co-Chief
Executive Officer
Bruce E. Moore 55 President and Chief Operating Officer
David M. Becker 38 Chief Financial Officer
Terry Considine has been Co-Chairman of the Board of Directors and Co-Chief
Executive Officer of the Company and CAX since September 1996. He is the sole
owner of Considine Investment Co. and has also been the Chairman of the Board of
Directors and Chief Executive Officer of Apartment Investment and Management
Company ("AIMCO"), one of the largest apartment REITs in the United States since
July 1994. Mr. Considine has been and remains involved as a principal in a
variety of real estate activities, including the acquisition, renovation,
development and disposition of properties. Mr. Considine has also controlled
entities engaged in other businesses such as television broadcasting, gasoline
distribution and environmental laboratories. Mr. Considine received a B.A. from
Harvard College and a J.D. from Harvard Law School and is admitted as a member
of the Massachusetts Bar.
Mr. Considine has had substantial real estate experience. From 1975 through July
1994, partnerships or other entities in which Mr. Considine had controlling
interests invested in approximately 35 multifamily apartment properties and
commercial real estate properties. Six of these real estate assets (four of
which were multifamily apartment properties and two of which were office
properties) did not generate sufficient cash flow to service their related
indebtedness and were foreclosed upon by their lenders, causing pre-tax losses
of approximately $11.9 million to investors and losses of approximately $2.7
million to Mr. Considine.
- 20 -
<PAGE>
Thomas L. Rhodes has been Co-Chairman of the Board of Directors and Co-Chief
Executive Officer of the Company and CAX since September 1996. Mr. Rhodes has
also been a Director of AIMCO since July 1994. Mr. Rhodes has served as the
President and a Director of National Review magazine since 1992. From 1976 to
1992, he held various positions at Goldman, Sachs & Co. and was elected a
General Partner in 1986. He currently serves as a Director of Delphi Financial
Group, Inc. and its subsidiaries, Delphi International, Ltd., Oracle Reinsurance
and The Lynde and Harry Bradley Foundation. Mr. Rhodes is Chairman of the Empire
Foundation for Policy Research, a Trustee of The Heritage Foundation and a
Trustee of The Manhattan Institute.
Bruce E. Moore was appointed as President and Chief Operations Officer in
February 1998. Mr. Moore is the founder and was the Chief Executive Officer of
Brandywine Financial Services Corporation, a private real estate firm
specializing in various aspects of the real estate industry including asset
management, consulting, development, property management, brokerage and capital
formation. He is a certified public accountant, holds a Masters in Accounting
and a Bachelor of Science in Economics from the Wharton School of the University
of Pennsylvania. Mr. Moore is a director and past president of the Media Youth
Center, and a past advisory-board member for the Department of Recreation and
Intercollegiate Athletics for the University of Pennsylvania. In addition, Moore
is a member of the National Association of Real Estate Investment Trusts and the
International Council of Shopping Centers.
David M. Becker has functioned as the Company's Chief Financial Officer since
December 1997 and was appointed to such position in February 1998. From
September 1995 until joining the Company, he was both the Chief Financial
Officer of Westfield Development Company, Inc. and Vice President-Finance of The
Frederick Ross Co., related companies involved in commercial real estate
development, brokerage and management. Prior to September 1995, he held various
executive positions with CONCORD Services, Inc., a privately-held company
involved in multiple businesses including trading, manufacturing and finance.
CONCORD Services, Inc. declared bankruptcy in February 1995. In addition, Mr.
Becker was Chief Financial Officer and General Counsel of Ramtron International
Corporation, a publicly-held semiconductor manufacturer, from October 1989 until
July 1994. Mr. Becker is an attorney and certified public accountant. He
received a B.A. from the University of Northern Iowa and a J.D.
from the University of Denver.
There are no family relationships between any of the executive officers,
directors or persons nominated or chosen by the Company to become a director or
executive officer and there are no arrangements or understandings pursuant to
which any of them were selected as directors or officers. None of the directors
persons nominated to become directors or executive officers of the Company have
been involved in any legal proceedings during the past five years that are
material to an evaluation of the ability or integrity of such persons.
Item 11. Executive Compensation.
The information set forth under the captions "Summary Compensation Table",
"Options/SAR Grants in Last Fiscal Year" and "Aggregate Option/SAR Exercises in
Last Fiscal Year and Fiscal Year-end Options/SAR Values" in the Proxy Statement
is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is hereby incorporated
by reference.
- 21 -
<PAGE>
Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement is hereby incorporated by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) The financial statements listed in the Index to Financial Statements on
Page F-1 of this report are filed as part of this report.
(a)(2) The financial statement schedule listed in the Index to Financial
Statements on Page F-1 of this report is filed as part of this report.
All other schedules are omitted since they are not applicable, not
required, or the information required to be set forth therein is
included in the financial statements, or in notes thereto.
(a)(3) The Exhibit Index is included on page 23 of this report.
(b) Reports on Form 8-K for the quarter ended December 31, 1997:
Current Report on Form 8-K, dated October 22, 1997
Current Report on Form 8-K, dated October 30, 1997
- 22 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ASSET INVESTORS CORPORATION Page
Financial Statements:
Report of Independent Auditors................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996..... F-3
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and
1995......................................................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31,
1997, 1996 and 1995.......................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996
and 1995..................................................... F-6
Notes to Consolidated Financial Statements....................... F-7
Financial Statement Schedule:
Schedule III -- Real Estate and Accumulated Depreciation......... F-20
COMMERCIAL ASSETS, INC. (a significant unconsolidated subsidiary of the Company)
Financial Statements:
Report of Independent Auditors................................... F-21
Consolidated Balance Sheets as of December 31, 1997 and 1996..... F-22
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995............................. F-23
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995................. F-24
Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995................. F-25
Notes to Consolidated Financial Statements....................... F-26
Financial Statement Schedule:
All schedules are omitted since they are not applicable, not required
or the information required to be set forth therein is included in
the financial statements or in the notes thereto.
F - 1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Asset Investors Corporation
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Asset
Investors Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. Our audits
also included the consolidated financial statement schedule listed in the
accompanying index. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Asset Investors Corporation and subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Denver, Colorado
February 6, 1998
F - 2
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
1997 1996
---- ----
ASSETS
<S> <C> <C>
Real estate, net of accumulated depreciation of $693 $ 40,726 $ --
Investments in and notes receivable from real estate joint ventures 25,415 --
Cash and cash equivalents 21,802 417
Investment in CAX 20,866 19,361
Non-agency MBS bonds -- 68,079
Other assets, net 10,352 2,487
---------- ----------
Total Assets $ 119,161 $ 90,344
========== ==========
LIABILITIES
Secured notes payable $ 10,677 $ --
Unsecured short-term financing -- 3,000
Accounts payable and accrued liabilities 2,607 979
---------- ----------
13,284 3,979
---------- ----------
MINORITY INTEREST IN OPERATING PARTNERSHIP 22,362 --
STOCKHOLDERS' EQUITY
Common Stock, par value $.01 per share, 50,000 shares authorized 5,108 and
24,840 shares issued and outstanding, respectively 51 248
Additional paid-in capital 231,221 228,753
Dividends in excess of accumulated earnings (147,757) (147,729)
Unrealized holding gains on investments -- 5,093
---------- ----------
83,515 86,365
---------- ----------
Total Liabilities and Stockholders' Equity $ 119,161 $ 90,344
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F - 3
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
RENTAL PROPERTY OPERATIONS
<S> <C> <C> <C>
Rental and other property revenues $ 3,104 $ -- $ --
Equity in earnings of real estate joint ventures 466 -- --
Property operating expenses (1,311) -- --
Owned property management expenses (87) -- --
--------- --------- ---------
Income from property operations before depreciation 2,172 -- --
Depreciation (693) -- --
--------- --------- ---------
Income from rental property operations 1,479 -- --
--------- --------- ---------
SERVICE OPERATIONS
Property management fees and other income 128 -- --
Property management costs and other expenses (59) -- --
Amortization of management contracts (744) -- --
--------- --------- ---------
Loss from service operations (675) -- --
--------- --------- ---------
OTHER ACTIVITIES
Non-agency MBS bonds revenues 2,966 11,513 8,499
Equity in earnings of CAX 3,663 1,875 1,742
Management fees to former manager (570) (1,793) (980)
Earnings from liquidating operations -- -- 6,507
--------- --------- ---------
Income from other activities 6,059 11,595 15,768
--------- --------- ---------
General and administrative expenses (1,042) (1,145) (1,895)
Interest and other income 1,808 136 630
Interest expense (368) (88) (63)
Costs incurred to acquire management contract (6,553) -- --
Elimination of DERs -- (825) --
--------- ---------- ---------
INCOME BEFORE GAIN ON RESTRUCTURING OF BONDS AND MINORITY
INTEREST 708 9,673 14,440
Gain on restructuring of bonds 6,484 -- --
--------- --------- ---------
INCOME BEFORE MINORITY INTEREST 7,192 9,673 14,440
Minority interest in Operating Partnership 62 -- --
--------- --------- ---------
NET INCOME $ 7,254 $ 9,673 $ 14,440
========= ========= =========
BASIC EARNINGS PER SHARE $ 1.44 $ 1.97 $ 2.97
========= ======== ========
DILUTED EARNINGS PER SHARE $ 1.43 $ 1.95 $ 2.96
========= ======== ========
DIVIDENDS DECLARED PER SHARE $ 1.45 $ 1.85 $ 1.70
========= ======== ========
Weighted-Average Common Shares Outstanding 5,022 4,919 4,856
Weighted-Average Common Shares And Common Share Equivalents
Outstanding 5,061 4,966 4,883
</TABLE>
See Notes to Consolidated Financial Statements.
F - 4
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In thousands)
Dividends In Unrealized
Additional Excess of Holding Gains Total
Common Stock Paid-In Accumulated (Losses) on Stockholders'
Shares Amount Capital Earnings Investments Equity
------ ------ ------- -------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCES - DECEMBER 31, 1994 24,212 $ 242 $ 227,182 $ (154,459) $ -- $ 72,965
Issuance of Common Stock 144 2 364 -- -- 366
Net income -- -- -- 14,440 -- 14,440
Dividends -- -- -- (8,255) -- (8,255)
Unrealized depreciation of CMBS bonds net of
appreciation of non-agency MBS bonds -- -- -- -- (757) (757)
------ ----- ---------- ----------- ------- --------
BALANCES - DECEMBER 31, 1995 24,356 244 227,546 (148,274) (757) 78,759
Issuance of Common Stock 484 4 1,207 -- -- 1,211
Net income -- -- -- 9,673 -- 9,673
Dividends -- -- -- (9,128) -- (9,128)
Unrealized appreciation of CMBS bonds and
non-agency MBS bonds -- -- -- -- 5,850 5,850
------ ----- ---------- ----------- ------- --------
BALANCES - DECEMBER 31, 1996 24,840 248 228,753 (147,729) 5,093 86,365
Issuance of Common Stock 459 5 2,266 -- -- 2,271
Net income -- -- -- 7,254 -- 7,254
Dividends -- -- -- (7,282) -- (7,282)
One-for-five reverse stock split (20,191) (202) 202 -- -- --
Reversal of unrealized holding gains upon
restructuring of bonds -- -- -- -- (5,093) (5,093)
------ ----- ---------- ----------- ------- --------
BALANCES - DECEMBER 31, 1997 5,108 $ 51 $ 231,221 $ (147,757) $ -- $ 83,515
====== ===== ========== =========== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F - 5
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 7,254 $ 9,673 $ 14,440
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization 1,437 -- --
Minority interest in Operating Partnership (62) -- --
Amortization of non-agency MBS bonds and CMO Ownership
Interests 469 2,998 2,254
Equity in earnings of CAX (3,663) (1,875) (1,742)
Equity in earnings of real estate joint ventures (466) -- --
Elimination of DERs -- 825 --
Costs incurred to acquire management contract 6,105 -- --
(Increase) decrease in other assets (647) (148) (138)
Increase (decrease) in accounts payable and accrued
liabilities (12) 197 (1,022)
Gain on restructuring of assets (6,484) -- (5,369)
------- ------- ---------
Net cash provided by operating activities 3,931 11,670 8,423
------- ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of real estate (31,502) -- --
Investments in and advances to real estate joint ventures (14,842) -- --
Improvements of real estate (55) -- --
Acquisition of non-agency MBS bonds -- (15,893) (23,965)
Principal collections and indemnifications on non-agency MBS
bonds and CMO Ownership Interests 547 3,151 4,910
Dividends from CAX 3,065 1,988 2,430
Distributions from real estate joint ventures 459 -- --
Proceeds from the restructuring of assets 69,807 -- 25,038
Release of restricted cash -- -- 15,862
--------- --------- ---------
Net cash provided by (used in) investing activities 27,479 (10,754) 24,275
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Common Stock dividends (7,282) (9,128) (8,981)
Payment of distributions to minority interest in Operating
Partnership (467) -- --
Increase (decrease) in unsecured short-term financings (3,000) 3,000 (2,758)
Principal repayments on secured notes payable (196) -- (30,592)
Proceeds from the issuance of Common Stock 920 301 --
---------- ---------- ---------
Net cash used in financing activities (10,025) (5,827) (42,331)
---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 21,385 (4,911) (9,633)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 417 5,328 14,961
---------- ---------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 21,802 $ 417 $ 5,328
========== ========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F - 6
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 AIC Manufactured Housing Corp. ("AICMHC") and
approximately 27% of the Common Stock of Commercial Assets, Inc. ("CAX"). AICMHC
owns interests in manufactured home community management contracts. 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 adopted a multi-step plan 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, under the first step of such plan, 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.
During the remainder of 1997, the Company used $46,344,000 of the proceeds from
the structured transaction to acquire interests in 18 manufactured home
communities and a recreational vehicle park with approximately 2,800 developed
homesites, 400 recreational vehicle sites, 800 sites ready for homes and 1,800
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 reduce the Company's return on assets from 1996 levels,
shift its strategic emphasis to the ownership and management of income producing
real estate with the potential of achieving capital appreciation, and also
reduce the risk borne by the Company in its portfolio.
In November 1997, the Company's stockholders approved the acquisition of the
assets and operations of Financial Asset Management LLC (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. The Company's stockholders also approved a one-for-five
reverse stock split of its Common Stock. All per share amounts in the
accompanying consolidated financial statements have been adjusted for the effect
of such reverse stock split.
F - 7
<PAGE>
B. 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 December 31, 1997, 1,300,600 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 December 31, 1997, there has been no impairment of the Company's
investment in rental properties.
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.
Non-agency MBS Bonds
The Company's non-agency MBS bonds were acquired at a significant discount to
par value. The amortized cost of the non-agency MBS bonds was equal to the
outstanding principal amount net of unamortized discount and allowances for
credit losses. Earnings from non-agency MBS bonds were recognized based upon the
relationship of cash flows received during the period and estimates of future
cash flows to be received over the life of the bonds. The Company classified its
non-agency MBS bonds as available-for-sale, carried at fair value in the
financial statements. Unrealized holding gains on available-for-sale securities
are excluded from earnings and reported as a net amount in stockholders' equity
until realized.
F - 8
<PAGE>
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 as well as AIC RV
Management Corporation 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 on its taxable income (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.
For income tax purposes, distributions paid to stockholders consist of ordinary
income, capital gains, return of capital or a combination thereof. Earnings and
profits which determine the taxability of dividends to stockholders differ from
net income reported for financial reporting purposes due to: (i) the method of
accounting for the retained equity interest from the resecuritization of the
non-agency MBS bonds; (ii) differences in methods and estimated lives for the
calculation of depreciation on rental properties and amortization of goodwill on
management contracts; (iii) gains on the sales of assets recorded for book
income purposes that were treated as financings for REIT taxable income purposes
or that resulted in either capital losses or capital gains that are reduced to
zero by the Company's capital loss carryover; and (iv) recognition of income
from CAX, which for REIT income purposes is based upon dividends received and
which for financial reporting purposes is based on the Company's pro rata share
of CAX's book income.
At December 31, 1997, 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. Due
to the Company's NOL carryover, its failure to maintain its status as a REIT is
immaterial to its financial position as of December 31, 1997, and its statement
of operations for the year then ended.
Statements of Operations
In 1995, the Company completed liquidation of a class of assets referred to as
CMO Ownership Interests. Accordingly, the Company classified as liquidating
operations its revenues from CMO Ownership Interests along with expenses
directly allocable to the CMO Ownership Interests, including interest expense on
borrowings collateralized by CMO Ownership Interests.
F - 9
<PAGE>
Earnings Per Share
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share." Basic earnings per share for 1997, 1996
and 1995 are based upon the weighted-average number of shares of Common Stock
outstanding during each such year. Diluted earnings per share reflect the effect
of any dilutive, unexercised stock options in each such year. 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.
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 $349,000, $72,000 and $903,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
Non-cash investing and financing activities for 1997, 1996 and 1995 were as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- ------
<S> <C> <C> <C>
Unrealized holding gains and losses on debt securities $ 5,093 $ 5,850 $ (757)
Distributions of Common Stock 101 87 366
Distributions of Common Stock as consideration for the
elimination of DERs -- 825 --
Consideration for the acquisition of real estate and joint
ventures:
Issuance of Common Stock 1,250 -- --
Issuance of OP Units 10,922 -- --
Assumption of secured notes payable 10,873 -- --
Issuance of OP Units as consideration for the acquisition of the
Manager 11,692 -- --
</TABLE>
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made in the 1996 and 1995 consolidated
financial statements to conform to the classifications used in the current year.
Such reclassifications have no effect on the operations as originally presented.
Accounting Standards Not Yet Adopted by the Company
The Financial Accounting Standards Board ("FASB") has issued several new
pronouncements that are not yet adopted by the Company.
F - 10
<PAGE>
In June 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive Income," to
establish standards for reporting and display of comprehensive income (all
changes in equity during a period except those resulting from investments by and
distributions to owners) and its components in financial statements. This new
standard, which will be effective for the Company for the year ending December
31, 1998, is not currently anticipated to have a significant impact on the
Company's consolidated financial statements based on the current financial
structure and operations of the Company.
In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," to establish standards for reporting
information about operating segments in annual financial statements, selected
information about operating segments in interim financial reports and
disclosures about products and services, geographic areas and major customers.
This new standard, which will be effective for the Company for the year ending
December 31, 1998, will require the Company to report financial information on
the basis that is used internally for evaluating segment performance and
deciding how to allocate resources to segments and is currently not anticipated
to result in significantly more detailed information in the notes to the
Company's consolidated financial statements than is currently required and
provided.
C. Acquisitions of Manufactured Home Communities
During 1997, the Company acquired interests in 18 manufactured home communities
and one recreational vehicle park with approximately 2,800 developed sites, 400
recreational vehicle sites, 800 sites ready for homes, and 1,800 sites available
for future development. Total consideration paid for the communities and related
manufactured home community management contracts including advances to real
estate joint ventures was $69,389,000, consisting of $46,344,000 of cash,
$10,922,000 of OP Units, $10,873,000 of assumed debt, and $1,250,000 of Common
Stock. Fourteen of the acquired manufactured home communities are located in
Florida; the remaining four communities are located in Arizona. The recreational
vehicle park is located in California.
The acquisitions of interests in manufactured home communities and management
contracts have been accounted for as purchases, and the results of operations of
such manufactured home communities and management contracts have been included
in the Company's results of operations since the date of acquisition. The
following unaudited pro-forma information has been prepared assuming the
resecuritization of the non-agency MBS bonds, the acquisition of the
manufactured home communities and management contracts, the acquisition of the
Manager and CAX's restructuring of its CMBS bonds had been completed at the
beginning of the periods presented. The unaudited pro-forma information is
presented for informational purposes only and is not necessarily indicative of
what would have occurred if the restructurings and the acquisitions had been
completed as of those dates. In addition, the pro-forma information is not
intended to be a projection of future results. The unaudited, pro-forma results
of operations for the years ended December 31, 1997 and 1996 are as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revenues $ 13,651 $ 13,243
========== ==========
Loss before gain on restructuring of bonds and minority interest $ (3,449) $ (4,786)
Gain on restructuring of bonds 8,855 7,359
Minority interest in Operating Partnership (985) (338)
---------- ----------
Net income $ 4,421 $ 2,235
========== ==========
Net income per share $ .88 $ .45
========== ==========
</TABLE>
F - 11
<PAGE>
The Company is actively seeking to acquire additional communities and currently
is engaged in negotiations relating to the possible acquisition of a number of
communities. At any time, these negotiations are at various stages of
completion, which may include outstanding contracts to acquire certain
manufactured home communities, subject to satisfactory completion of the
Company's due diligence review.
D. Real Estate
Real estate at December 31, 1997, is as follows (in thousands):
Land $ 5,286
Land improvements and buildings 35,689
Furniture and other equipment 444
----------
41,419
Less accumulated depreciation (693)
----------
Investment in real estate, net $ 40,726
==========
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 and Notes Receivable from Real Estate Joint Ventures
As of December 31, 1997, the Company had a net investment of $9,543,000 in four
contiguous manufactured home communities with 760 developed homesites and 53
homesites available for future development in the Phoenix, Arizona metropolitan
area. The investment consists of a first mortgage loan bearing interest at 10%
per annum, due in April 2001 and a second mortgage loan convertible into a 50%
ownership interest in the properties. At December 31, 1997, the Company has
withheld $425,000 of the second mortgage loan for future property improvements.
The second mortgage loan accrues interest at 15% per annum and pays interest at
9% per annum, increasing 1% each year to a maximum of 12% per annum. The Company
receives additional interest of 3% of gross revenues, increasing to 11% of gross
revenues in the event of a refinancing of the properties, and 50% of net
proceeds from a sale or refinancing of the properties. The Company also has the
right to purchase the properties at fair value in ten years, or earlier, based
on certain events. Due to the conversion features, participation in gross
revenues, and the right to acquire the properties, the mortgage loans are
accounted for as an equity investment in real estate. During 1997, the Company
had equity in earnings of these four manufactured home communities of $297,000.
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. These notes accrue interest at 10% payable based upon the cash flow of
the ventures. During 1997, a portion of these notes were accounted for as an
equity investment in real estate and during 1997, the Company recognized
earnings from these notes of $169,000. Effective January 1, 1998, the Company
consolidated the various notes and sold its interest in the various ventures to
the other partner in such ventures.
F - 12
<PAGE>
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. In 1997, the Company
recognized $2,000,000 of interest income, net of discount amortization, prior to
the resecuritization. The Company also recorded revenues of $966,000 from the
retained equity interest during 1997.
The outstanding principal balance of the 214 non-agency MBS bonds owned by the
Company at December 31, 1996 was $224,579,000, less total unamortized discounts
and allowance for credit losses of $162,500,000, resulting in a net amortized
cost of $62,079,000. The portfolio was classified as available-for-sale and
included $6,000,000 of unrealized holding gains at December 31, 1996.
G. Investment in CAX
On December 31, 1997 and 1996, the Company owned 2,761,126 shares (approximately
27%) of the Common Stock of CAX, a REIT which held ownership interests in
commercial mortgage loan securitizations of multi-family real estate ("CMBS
bonds"). In November 1997, CAX sold or resecuritized its entire portfolio of
CMBS bonds for $77,693,000 of cash and an equity interest in an owner trust
arising from a resecuritization transaction, which resulted in a net gain of
$5,786,000. Presented below is the summarized financial information of CAX as
reported by CAX (in thousands):
<TABLE>
<CAPTION>
Balance Sheets December 31,
----------------------
1997 1996
--------- ------
<S> <C> <C>
Cash and cash equivalents $ 74,153 $ 8,277
CMBS bonds 1,981 61,460
Other assets 2,014 2,669
--------- ---------
Total assets 78,148 72,406
Total liabilities 443 487
--------- ---------
Stockholders' equity $ 77,705 $ 71,919
========= =========
</TABLE>
F - 13
<PAGE>
<TABLE>
<CAPTION>
Statements of Income Year Ended December 31,
-----------------------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
CMBS bonds $ 9,172 $ 9,838 $ 8,980
Interest 945 319 189
--------- ------- -------
Total revenues 10,117 10,157 9,169
--------- ------- -------
Management fees 1,678 1,425 1,151
General and administrative 519 805 1,393
Elimination of dividend equivalent rights -- 966 --
Interest -- 2 249
--------- ------- -------
Total expenses 2,197 3,198 2,793
--------- ------- -------
Gain on restructuring of bonds 5,786 -- --
--------- ------- -------
Net income $ 13,706 $ 6,959 $ 6,376
========= ======= =======
</TABLE>
CAX reported $3,389,000 of unrealized holding losses on its CMBS bonds as of
December 31, 1996. The Company's $907,000 share of these unrealized holding
losses was recorded as a reduction in the carrying value of its investment in
CAX and as a component of stockholders' equity as of December 31, 1996.
H. Liquidating Operations
The Company, as of December 31, 1995, had substantially liquidated its
investment in CMO Ownership Interests. The earnings from liquidating operations
for 1995 are as follows:
Revenues
CMO Ownership Interests $ 1,734
Interest income 225
Net gain on sale of CMO Ownership Interests 5,369
--------
Total revenues 7,328
Expenses --------
Management fees 234
General and administrative 23
Interest 564
--------
Total expenses 821
--------
Earnings from liquidating operations $ 6,507
========
I. Secured Notes Payable and Unsecured Short-Term Financing
Secured notes payable at December 31, 1997 consist of $4,805,000 of notes
payable, which bear interest at 8.25%, and $5,872,000 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 a net carrying value
of $23,517,000 at December 31, 1997. The scheduled payments of principal on the
secured notes payable subsequent to December 31, 1997 are as follows: 1998 -
$437,000, 1999 - $487,000, and 2000 - $9,753,000. The secured notes payable
require escrow payments for the payment of property taxes. At December 31, 1997,
$34,000 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 December 31, 1997
and 1996, no advances were outstanding.
F - 14
<PAGE>
In 1996, the Company had a $10,000,000 revolving credit and term loan agreement
with a bank. The loan was collateralized by certain of the Company's non-agency
MBS bonds with a net carrying value of $19,461,000 at December 31, 1996. At
December 31, 1996, $3,000,000 was borrowed under this credit facility at an
average effective interest rate of 8.25%. The loan was repaid and canceled in
March 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.
J. 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. Any fees paid
will be capitalized as part of the cost of the acquired community.
K. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each type of financial instrument. The estimates of fair value have been
determined by the Company using available market information and valuation
methodologies. Considerable judgment was required to interpret the market
information and develop the estimates of fair value.
Cash and cash equivalents, accounts payable and accrued liabilities, and
unsecured, short-term financing - the carrying amounts approximate fair
value because of the short maturity of these instruments.
Non-agency MBS bonds - there is no exchange or other active market from
which to obtain a quoted market price for these financial instruments. At
December 31, 1996, the estimated fair value of the non-agency MBS bonds
was based upon the anticipated proceeds, net of transaction costs, from
the resecuritization of the portfolio that occurred in March 1997.
Investment in CAX - the fair value was determined based upon the closing
price of CAX Common Stock on the American Stock Exchange, Inc. as of the
end of each year.
Secured notes payable - based upon borrowing rates currently available to
the Company, the carrying value of mortgage notes payable approximates
their fair value.
The amortized cost and fair values of the Company's non-agency MBS bonds and
investment in CAX at December 31, 1997 and 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------------- ------------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
<S> <C> <C> <C> <C>
Non-agency MBS bonds $ -- $ -- $ 62,079 $ 68,079
======== ======== ======== ========
Investment in CAX $ 20,866 $ 18,465 $ 19,361 $ 18,638
======== ======== ======== ========
</TABLE>
F - 15
<PAGE>
L. 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.
During 1997, 1996 and 1995, the Company declared dividends totaling $7,282,000,
$9,128,000 and $8,255,000, respectively. In addition, holders of OP Units
received distributions totaling $467,000 from the Operating Partnership during
1997.
The Company's Certificate of Incorporation permits the Board of Directors to
issue additional classes of stock without further stockholder approval. As of
December 31, 1997, the Company has not issued any classes of stock other than
Common Stock.
During 1997 and 1995, 75% and 20%, respectively, of the dividends distributed
constituted return of capital distributions. There were no return of capital
distributions in 1996.
M. Stock Option Plan
The Company has a Stock Option and Incentive Compensation Plan, as amended (the
"Stock Option Plan") for the issuance of non-qualified stock options and shares
of Common Stock to its directors and officers. As of January 1, 1998 and 1997,
the Stock Option Plan permitted the issuance of up to an aggregate of 218,000
and 247,000 shares of Common Stock, respectively, of which 152,000 and 207,000,
respectively, related to outstanding stock options. The exercise price for stock
options may not be less than 100% of the fair market value of the shares of
Common Stock at the date of grant. Each of the stock options granted through
December 31, 1997, expire five years from the date of grant.
Prior to May 1996, stock options granted under the Stock Option Plan
automatically accrued Dividend Equivalent Rights ("DERs") based on: (i) the
number of shares underlying the unexercised portion of the option; (ii)
dividends declared on the outstanding shares of the Company between the option
grant date and the option exercise date; and (iii) the market price of the
shares on the dividend record date. DERs were paid in shares of Common Stock (or
in other property that constituted the dividend) at the time of each dividend
distribution. During 1996 and 1995, the Company incurred $87,000 and $337,000,
respectively, of general and administrative expenses from DERs covering 5,000
and 26,000, respectively, of shares of Common Stock which were subject to
issuance pursuant to options granted under the Stock Option Plan.
In May 1996, the Company's stockholders approved an amendment to the Stock
Option Plan, which permitted the Company to issue shares of Common Stock to the
option holders 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 1996 earnings of
$825,000 and the issuance of 49,000 shares of Common Stock.
Presented below is a summary of the changes in stock options for the three years
ended December 31, 1997. As of December 31, 1997, the outstanding options have
exercise prices ranging from $5.85 to $18.44 and have a remaining
weighted-average life of 2.8 years.
F - 16
<PAGE>
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Price Shares
----- ------
<S> <C> <C>
Outstanding-December 31, 1994 $ 22.11 188,000
Granted 11.87 33,000
Expired 20.48 (26,000)
Forfeited 8.41 (1,000)
-------- ---------
Outstanding-December 31, 1995 19.00 194,000
Granted 16.32 126,000
Exercised 7.05 (43,000)
Expired 39.74 (70,000)
-------- ---------
Outstanding-December 31, 1996 12.86 207,000
Granted 18.12 21,000
Exercised 14.93 (62,000)
Forfeited 16.67 (14,000)
-------- ---------
Outstanding-December 31, 1997 $ 14.44 152,000
======== =========
</TABLE>
Certain options granted to date vest over a two-year period. As of December 31,
1997, 1996 and 1995, 138,000, 145,000 and 161,000, respectively, of the
outstanding options were exercisable.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options rather than the alternative fair
value accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using an
option-pricing model.
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
During 1997, 1996 and 1995, the estimated weighted-average grant-date fair value
of options granted was $1.72 per option, $.65 per option and $.85 per option,
respectively, and the estimated total fair value of options granted was $35,000,
$84,000 and $22,000, respectively. The pro forma net income of the Company
reflecting the fair value of options granted was $7,219,000 ($1.44 per share),
$9,589,000 ($1.95 per share) and $14,418,000 ($2.97 per share) for 1997, 1996
and 1995, respectively. The Company assumed a life of five years and risk-free
interest rate equal to the Five-Year U.S. Treasury rate on the date the options
F - 17
<PAGE>
were granted. In addition, the expected stock price volatility and dividends
rates were estimated based upon historical experience over the three years ended
December 31, 1997.
N. Savings Plan
In connection with the acquisition of the Manager, the Company assumed a 401(k)
defined-contribution employee savings plan, which provides substantially all
employees the opportunity to accumulate funds for retirement. The Company may,
at its discretion, match a portion of the contributions from participating
employees. During 1997, the Company did not match any portion of employee
contributions.
O. Other Matters
In November 1997, the stockholders approved a proposal to acquire the Manager,
which allowed the Company to become a self-managed and self-administered REIT.
As a result of such acquisition, the Company also now provides management
services to CAX through a management agreement (the "CAX Management Agreement")
in effect through March 31, 1998. The Manager was acquired from an investment
group that includes Terry Considine and Thomas L. Rhodes, the Co-Chairmen and
Co-Chief Executive Officers of both the Company and CAX, and Bruce D. Benson, a
director of the Company and CAX. This investment group acquired the Manager in
September 1996 at a cost of $11,692,000.
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 1997, the Company expensed the
$6,553,000 portion of the acquisition price allocated to the AIC Management
Agreement. Any fees payable by CAX in the future, pursuant to the CAX Management
Agreement, will be paid to the Company. 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
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.
F - 18
<PAGE>
During 1997, 1996 and 1995, the Company incurred fees under the AIC Management
Agreement of $892,000, $1,793,000 and $1,645,000, respectively, including: (i)
Base Fees of $272,000, $230,000 and $214,000, respectively; (ii) Incentive Fees
of $37,000, $831,000 and $517,000, respectively; (iii) Administrative Fees of
$261,000, $732,000 and $914,000, respectively; and (iv) Acquisition Fees of
$322,000, $0 and $0, respectively. Acquisition Fees are capitalized as part of
the cost of the acquired real estate. The Company also incurred $1,771,000 of
Incentive Fees during 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.
P. Selected Quarterly Financial Data (Unaudited)
Presented below is selected quarterly financial data for the years
ended December 31, 1997 and 1996. All data has been adjusted for the Company's
one-for-five reverse stock split (in thousands, except per share data).
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------
1997 December 31, September 30, June 30, March 31,
- ------------------------------------- ------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues $ 4,431 $ 2,868 $ 2,320 $ 2,516
Gain on restructuring of bonds 1,197 -- -- 5,287
Net income (loss) (3,249) 1,665 1,674 7,164
Basic earnings per share (.65) .33 .32 1.44
Diluted earnings per share (.65) .33 .32 1.43
Dividends per share .350 .325 .300 .475
Closing stock prices (1)
High 22-1/2 21-7/8 18-1/8 21-1/4
Low 17 16-7/8 16-1/4 16-1/4
Weighted-average common shares
outstanding 5,057 5,048 5,012 4,968
Weighted-average common shares and
common shares equivalents
outstanding 5,057 5,093 5,035 5,003
Three Months Ended
----------------------------------------------------------------------------
1996 December 31, September 30, June 30, March 31,
- ------------------------------------- ------------------ ------------------- ------------------ ------------------
Revenues $ 3,427 $ 3,327 $ 3,417 $ 3,353
Net income 2,609 2,576 2,085 2,403
Basic earnings per share .53 .52 .43 .49
Diluted earnings per share .52 .52 .42 .49
Dividends per share .475 .475 .450 .450
Closing stock prices (1)
High 20 18-3/4 18-3/4 16-7/8
Low 17-1/2 16-7/8 15-5/8 13-3/4
Weighted-average common shares
outstanding 4,954 4,948 4,900 4,873
Weighted-average common shares and
common shares equivalents
outstanding 5,007 4,997 4,952 4,916
- ------------------------
<FN>
(1) As reported on the NYSE Composite Tape.
</FN>
</TABLE>
F - 19
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION
SCHEDULE III
Real Estate and Accumulated Depreciation
December 31, 1997
(In Thousands Except Site Data)
December 31, 1997
-----------------------------------------------
Cost Total
Capital- Cost
Initial Cost ized Total Cost Net of
---------------- Subsequ- ---------------------- Accumu- Accumu-
Number Buildings uent Buildings lated lated
Date Year of and to and Depreci- Depreci- Encum-
Property Name Acquired Location Developed Sites Land Improvements Acquis. Land Improvements Total ation ation brances
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cardinal Court 1997 Largo, FL 1959/1965 138 $ 414 $ 1,829 $ -- $414 $ 1,829 $2,243 $ 51 $ 2,192 $ --
Forest View 1997 Homosassa, FL 1987/1997 311 927 1,950 25 927 1,975 2,902 55 2,847 --
Marina Dunes 1997 Marina, CA 1979 65 195 3,572 -- 195 3,572 3,767 12 3,755 --
Park Royale 1997 Pinellas Park, FL 1971 309 927 5,221 -- 927 5,221 6,148 137 6,011 2,350
Pinewood 1997 St. Petersburg, FL 1976 220 660 4,534 -- 660 4,534 5,194 31 5,163 2,772
Pleasant Living 1997 Riverview, FL 1979 243 726 5,079 -- 726 5,079 5,805 35 5,770 3,100
Stonebrook 1997 Homosassa, FL 1987/1997 218 654 1,483 15 654 1,498 2,152 43 2,109 --
Sun Valley 1997 Tarpon Springs, FL 1972 261 783 5,974 -- 783 5,974 6,757 155 6,602 2,455
Westwind I 1997 Dunedin, FL 1970 195 -- 3,226 6 -- 3,232 3,232 87 3,145 --
Westwind II 1997 Dunedin, FL 1972 189 -- 3,210 9 -- 3,219 3,219 87 3,132 --
---------------------------------------------------------------------------------
Total 2,149 $5,286 $36,078 $55 $5,286 $36,133 $41,419 $693 $40,726 $10,677
=================================================================================
</TABLE>
F - 20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Commercial Assets, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Commercial
Assets, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Commercial Assets, Inc. as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
February 6, 1998
F - 21
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
1997 1996
---- ----
ASSETS
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 74,153 $ 8,277
RESTRICTED CASH -- 1,982
CMBS BONDS 1,981 61,460
OTHER ASSETS, NET 2,014 687
---------- ----------
$ 78,148 $ 72,406
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 368 $ 189
MANAGEMENT FEES PAYABLE 75 298
NOTES PAYABLE TO BANKS -- --
---------- ----------
443 487
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share, 25,000 shares authorized; no shares
issued or outstanding -- --
Common stock, par value $.01 per share, 75,000 shares authorized; 10,342 and
10,316 shares issued and outstanding, respectively 104 103
Additional paid-in capital 76,724 76,559
Retained earnings (dividends in excess of accumulated earnings) 877 (1,354)
Net unrealized holding losses on CMBS bonds -- (3,389)
---------- ----------
77,705 71,919
---------- ----------
$ 78,148 $ 72,406
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F - 22
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended December 31,
1997 1996 1995
---- ---- ----
REVENUES
<S> <C> <C> <C>
CMBS bonds $ 9,172 $ 9,838 $ 8,980
Interest 945 319 189
--------- --------- ---------
10,117 10,157 9,169
--------- --------- ---------
EXPENSES
Management fees 1,678 1,425 1,151
General and administrative 519 805 1,393
Elimination of DERs -- 966 --
Interest -- 2 249
--------- --------- ---------
2,197 3,198 2,793
--------- --------- ---------
INCOME BEFORE GAIN ON RESTRUCTURING OF BONDS 7,920 6,959 6,376
Gain on restructuring of bonds 5,786 -- --
--------- --------- ---------
NET INCOME $ 13,706 $ 6,959 $ 6,376
========= ========= =========
BASIC EARNINGS PER SHARE $ 1.32 $ .68 $ .63
DILUTED EARNINGS PER SHARE $ 1.32 $ .68 $ .63
DIVIDENDS DECLARED PER SHARE
Regular dividends $ .68 $ .68 $ .68
Special dividends .26 .04 --
Capital gain dividends .17 -- --
--------- --------- ---------
$ 1.11 $ .72 $ .68
========= ========= =========
Weighted-Average Common Shares Outstanding 10,332 10,247 10,104
Weighted-Average Common Shares and Common Share
Equivalents Outstanding 10,371 10,254 10,108
</TABLE>
See Notes to Consolidated Financial Statements.
F - 23
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
(In thousands)
Retained Net
Earnings Unrealized
(Dividends In Holding
Additional Excess of Losses Total
Common Stock Paid-In Accumulated on Stockholders'
Shares Amount Capital Earnings) CMBS Bonds Equity
------ ------ ------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCES - DECEMBER 31, 1994 10,053 $ 101 $ 74,994 $ (423) $ -- $ 74,672
Issuance of common stock 89 1 529 -- -- 530
Net income -- -- -- 6,376 -- 6,376
Dividends -- -- -- (6,868) -- (6,868)
Unrealized depreciation of CMBS bonds -- -- -- -- (4,245) (4,245)
------- ------ --------- -------- ------- ---------
BALANCES - DECEMBER 31, 1995 10,142 102 75,523 (915) (4,245) 70,465
Issuance of common stock 174 1 1,036 -- -- 1,037
Net income -- -- -- 6,959 -- 6,959
Dividends -- -- -- (7,398) -- (7,398)
Unrealized appreciation of CMBS bonds -- -- -- -- 856 856
------- ------ --------- -------- ------- ---------
BALANCES - DECEMBER 31, 1996 10,316 103 76,559 (1,354) (3,389) 71,919
Issuance of common stock 26 1 165 -- -- 166
Net income -- -- -- 13,706 -- 13,706
Dividends -- -- -- (11,475) -- (11,475)
Reversal of unrealized holding losses
upon restructuring of bonds -- -- -- -- 3,389 3,389
------- ------ --------- -------- ------- ---------
BALANCES - DECEMBER 31, 1997 10,342 $ 104 $ 76,724 $ 877 $ -- $ 77,705
======= ====== ========= ======== ======= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F - 24
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 13,706 $ 6,959 $ 6,376
Adjustments to reconcile net income to net cash flows
from operating activities:
Amortization of discount on CMBS bonds and other
assets (2,381) (2,155) (638)
Issuance of common stock for elimination of DERs -- 941 --
Increase in accounts payable and accrued liabilities 216 157 329
(Increase) decrease in other assets (1,327) 18 84
Gain on restructuring of bonds (5,786) -- --
-------- -------- --------
Net cash provided by operating activities 4,428 5,920 6,151
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collections from CMBS bonds -- 9,857 554
Acquisitions of CMBS bonds (4,801) -- --
Proceeds from restructuring of bonds 77,693 -- --
-------- -------- --------
Net cash provided by investing activities 72,892 9,857 554
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (11,475) (7,398) (8,879)
Repayments of short-term notes payable -- (700) (9,595)
Proceeds from the issuance of common stock 31 -- --
-------- -------- --------
Net cash used in financing activities (11,444) (8,098) (18,474)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 65,876 7,679 (11,769)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,277 598 12,367
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 74,153 $ 8,277 $ 598
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F - 25
<PAGE>
COMMERCIAL ASSETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Organization
Commercial Assets, Inc. (the "Company") is a Maryland corporation which
commenced operations in 1993 when Asset Investors Corporation ("Asset
Investors") contributed $75,000,000 to the Company and distributed approximately
70% of the Company's Common Stock to Asset Investors' stockholders. The Common
Stock is listed on the American Stock Exchange under the symbol "CAX."
The Company's day-to-day operations are performed by a manager (the "Manager")
pursuant to a year-to-year management agreement currently in effect through
March 1998 ("the Management Agreement"). Prior to October 1996, the Company was
managed by subsidiaries of MDC Holdings, Inc. ("MDC"). In September 1996, MDC
sold Financial Asset Management LLC ("FAM"), the Manager at such time, to an
investor group led by Terry Considine, Thomas L. Rhodes and Bruce D. Benson. In
November 1997, the assets of FAM, including the Management Agreement, were
acquired by Asset Investors, who is now the current Manager. Mr. Considine and
Mr. Rhodes are Co-Chairmen of the Board of Directors and Co-Chief Executive
Officers of both the Company and Asset Investors. Mr. Benson is a director of
both companies. No change has been made to the Management Agreement other than
an extension.
The Management Agreement is subject to the approval of a majority of the
Company's independent directors and can be terminated by either party, without
cause, with 60 days' notice. Since the Company has no employees, certain
employees of the Manager have been designated as officers of the Company.
Historically, the Company owned subordinate classes of Commercial Mortgage
Backed Securities ("CMBS bonds"). The CMBS bonds were issued in commercial
mortgage loan securitizations involving multi-class issuances of debt securities
which were secured and funded as to the payment of principal and interest by a
specific group of mortgage loans on multi-family or other commercial real
estate. In 1997, the Company decided to restructure its asset base and cease to
invest in subordinate CMBS bonds. In November 1997, the Company restructured its
subordinate CMBS bond portfolio by selling, redeeming or resecuritizing its
various CMBS bonds. The restructuring resulted in the Company receiving
$77,693,000 cash and retaining an equity interest in an owner trust arising from
a resecuritization transaction (see Note C). The Company has temporarily
invested the proceeds from such restructuring in government securities and other
cash equivalents until the Company decides what class of assets it will reinvest
such funds in.
B. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
F - 26
<PAGE>
CMBS Bonds
Earnings from CMBS bonds are comprised of coupon interest and the amortization
of the purchase discount. Amortization of the purchase discount is recognized by
the interest method using a constant effective yield and assumes an estimated
rate of future prepayments, defaults and credit losses which is adjusted for
actual experience. The allowance for credit losses is equal to the undiscounted
total of future estimated credit losses. In the event the Company adjusts the
estimate of future credit losses, such adjustments would be included in current
period earnings.
The Company classifies its CMBS bonds as available-for-sale. Accordingly, the
CMBS bonds are carried at fair value in the financial statements. Unrealized
holding gains and losses on available-for-sale securities are excluded from
earnings and reported as a net amount in stockholders' equity until realized. If
the fair value of a CMBS bond declines below its amortized cost basis and the
decline is considered to be "other than temporary," the amount of the write-down
would be included in the Company's income (i.e., accounted for as a realized
loss). The decline in fair value is considered to be other than temporary if the
cost basis exceeds the related projected cash flow from the CMBS bond discounted
at a risk-free rate of return.
Fair Value of Financial Instruments
The fair value of the Company's CMBS bonds is discussed in Note C. The fair
value of all other financial instruments of the Company generally approximate
their carrying basis or amortized cost.
Income Taxes
The Company intends to operate in a manner that will permit it to qualify for
the income tax treatment accorded to a real estate investment trust ("REIT"). If
it so qualifies, the Company's REIT income, with certain limited exceptions,
will not be subject to federal or state income tax at the corporate level.
Accordingly, no provision for taxes has been made in the financial statements.
In order to maintain its status as a REIT, the Company is required, among other
things, to distribute annually to its stockholders at least 95% of its REIT
income and to meet certain asset, income and stock ownership tests. Regular and
special dividends declared in 1997, 1996 and 1995 represented ordinary taxable
income to the stockholders. In addition, the Company declared a capital gains
dividend of $.17 per share in 1997.
Earnings Per Share
Basic earnings per share for 1997, 1996 and 1995 are based upon the
weighted-average number of shares of Common Stock outstanding during each such
year. Diluted earnings per share reflect the effect of any dilutive, unexercised
stock options in 1997, 1996 and 1995.
Statements of Cash Flows
For purposes of reporting cash flows, cash maintained in bank accounts, money
market funds and overnight cash investments are considered to be cash and cash
equivalents. The Company paid interest expense in cash of $0, $8,000 and
$290,000 for 1997, 1996 and 1995, respectively.
Non-cash investing and financing activities for 1997, 1996 and 1995 were as
follows (in thousands):
F - 27
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ------
Principal collections on CMBS bonds transferred to
<S> <C> <C> <C>
restricted cash $ 6,227 $ 1,214 $ 397
Unrealized holding gains and losses on CMBS bonds 3,389 856 (4,245)
Distributions of Common Stock pursuant to DERs -- 96 376
Distributions of Common Stock as consideration for the
elimination of DERs -- 941 --
Distributions of Common Stock 135 -- --
</TABLE>
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Accounting Standards Not Yet Adopted by the Company
The Financial Accounting Standards Board ("FASB") has issued several new
pronouncements that are not yet adopted by the Company.
In June 1997 the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," to establish standards for
reporting and display of comprehensive income (all changes in equity during a
period except those resulting from investments by and distributions to owners)
and its components in financial statements. This new standard, which will be
effective for the Company for the year ending December 31, 1998, is not
currently anticipated to have a significant impact on the Company's consolidated
financial statements based on the current financial structure and operations of
the Company.
In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," to establish standards for reporting
information about operating segments in annual financial statements, selected
information about operating segments in interim financial reports and
disclosures about products and services, geographic areas and major customers.
This new standard, which will be effective for the Company for the year ending
December 31, 1998, will require the Company to report financial information on
the basis that is used internally for evaluating segment performance and
deciding how to allocate resources to segments and is currently not anticipated
to result in significantly more detailed information in the notes to the
Company's consolidated financial statements than is currently required and
provided.
C. CMBS Bonds
As of December 31, 1996, the outstanding balance of the Company's CMBS bonds was
$89,297,000 while unamortized purchase discounts, acquisition costs and
allowance for credit losses totaled $24,448,000. Additionally, the Company
recorded unrealized holding losses of $3,389,000 on the CMBS bonds as of
December 31, 1996.
The estimated fair value of the Company's CMBS bonds of $61,460,000 at December
31, 1996, was determined by discounting the future cash flows before estimates
of credit losses of the CMBS bonds at interest rates equal to a spread over U.S.
Treasury rates with comparable terms to maturity. The discount rates range from
10% to 27%. The interest rate spread over the U.S. Treasury rate was based upon
then current market information of CMBS bonds with similar characteristics. The
fair value of CMBS bonds fluctuated over time due to, among other things,
F - 28
<PAGE>
changes in prevailing interest rates, liquidity in the CMBS bonds market,
paydowns on the mortgage loans collateralizing the CMBS bonds and changes in
real estate values of the related commercial properties.
The Company provided an allowance for credit losses of $12,720,000 at December
31, 1996 on certain of its CMBS bonds. During 1997, 1996 and 1995, there were no
credit losses charged to operations or write-downs charged against the allowance
for credit losses.
Pursuant to the provisions of certain of the Company's CMBS bonds, cash
collections which would otherwise be attributable to the Company's interests are
required to be set aside in reserve accounts to support the eventual payment of
more senior classes of CMBS bonds. At December 31, 1996, $1,982,000 was set
aside and is shown as restricted cash on the balance sheet.
In May 1996, two CMBS bonds with an outstanding principal balance of $9,664,000
and net carrying value of $8,723,000 were redeemed earlier than anticipated. The
bonds were acquired in March 1994, for $9,088,000, or 84.25% of their
outstanding principal balance. Since the bonds were redeemed at par, $1,426,000
of discount amortization was included in earnings during 1996.
In March 1997, the Company contributed its ownership interest in two CMBS bonds
(Lehman Capital Corporation Trust Certificate, Series 1994-2 and Series 1994-3)
into a newly created trust (Blaylock Mortgage Capital Corporation Multifamily
Trust). Interests in bond classes within the same CMBS issuance which were owned
by another party were also contributed into the trust. The trust then issued
seven classes of CMBS bonds collateralized by the CMBS bond classes contributed
into the trust. The Company received an interest in five of the new bond
classes, which corresponded to the Company's ownership interests in the two
bonds contributed to the trust. The Company also acquired the remaining
$5,737,000 principal balance of two of the new bond classes rated "BB" and "B"
at a cost of $4,801,000, which resulted in the Company having 100% ownership in
the five new subordinate classes.
In August 1997, three mortgages underlying one of the Company's CMBS bonds were
prepaid. As a result of the prepayment, the Company recognized $482,000 of
income from a prepayment penalty received and $2,305,000 of income from
accelerated discount amortization. The $5,853,000 of principal collections from
the repaid mortgages was transferred to restricted cash pursuant to the terms of
the indenture.
In November 1997, the Company restructured its portfolio of CMBS bonds. Nine
bonds were sold for $28,472,000 in cash. One bond which had an outstanding
principal balance of $10,000,000 and net carrying value prior to unrealized
holding gains of $9,244,000 was redeemed by the bond issuer at par. The
remaining two CMBS bonds were resecuritized by contributing the bonds and
related restricted cash to an owner trust in which the Company retained an
equity interest. In a private placement, the trust then sold for $39,952,000 in
cash, debt securities representing senior interests in the trust's assets. The
principal balance of the equity interest retained by the Company is $5,000,000.
However, since the equity interest represents the first-loss class of the
portfolio and provides credit support for the senior debt securities, the
Company established an allowance for credit losses of $3,000,000 and valued the
equity interest at its estimated fair value of $2,000,000. As a result of the
sale and resecuritization transactions, the Company recognized a $5,786,000
gain, net of related costs and management fees, in the fourth quarter of 1997.
In addition, since the one bond was redeemed at par, $756,000 of discount
amortization was included in earnings during the fourth quarter of 1997.
The following unaudited pro-forma information has been prepared assuming the
restructuring of the CMBS bonds had been completed at the beginning of the
periods presented. The pro-forma information is presented for information
purposes only and is not necessarily indicative of what would have occurred if
F - 29
<PAGE>
the restructuring had been completed as of those dates. In addition, the
pro-forma information is not intended to be a projection of future results. The
unaudited, pro-forma results of operations for the years ended December 31, 1997
and 1996 are as follows (in thousands, except per share data):
1997 1996
---------- ----------
Revenues $ 5,615 $ 6,788
========== ==========
Net income before gain on restructuring of bonds $ 5,133 $ 4,940
Gain on restructuring of bonds 6,069 5,786
---------- ----------
Net income $ 11,202 $ 10,726
========== ==========
Net income per share $ 1.08 $ 1.05
========== ==========
Prior to the restructuring, certain of the Company's CMBS bonds were pledged as
collateral for the Company's short-term notes payable (see Note D).
D. Short-Term Notes Payable
The Company had a Loan and Security Agreement, collateralized by four CMBS
bonds, that was cancelled in November 1997 upon the sale and resecuritization of
the bonds. No borrowings were outstanding on this line at December 31, 1996.
The Company has an unsecured line of credit with a bank for $1,000,000 that
expires on July 31, 1998. Advances under this line bear interest at prime. Two
of the Company's independent directors are members of the Advisory Board of the
bank. No advances were outstanding on this line of credit at December 31, 1997
or 1996.
E. Stock Option Plan
The Company has a Stock Option Plan for the issuance of non-qualified stock
options to its directors and officers which as of January 1, 1998 and 1997,
permitted the issuance of up to an aggregate of 1,025,000 and 948,000 shares of
Common Stock, respectively, of which 717,000 and 648,000 related to outstanding
stock options, respectively. The exercise price for stock options may not be
less than 100% of the fair market value of the shares of Common Stock at the
date of the grant. Each of the stock options granted to date has a five-year
term.
Prior to May 30, 1996, stock options granted under the Stock Option Plan
automatically accrued dividend equivalent rights ("DERs") based on: (i) the
number of shares underlying the unexercised portion of the option; (ii)
dividends declared on the outstanding shares of the Company between the option
grant date and the option exercise date; and (iii) the market price of the
shares on the dividend record date. DERs were paid in shares of Common Stock (or
in other property that constituted the dividend) at the time of each dividend
distribution. During 1996 and 1995, the Company incurred $96,000 and $376,000,
respectively, of general and administrative expenses from DERs covering 16,000
and 64,000, respectively, shares of Common Stock which were subject to issuance
pursuant to options granted under the plan.
On May 30, 1996, the Company's stockholders approved an amendment to the Stock
Option Plan which provided for the issuance of Common Stock in exchange for the
elimination of the accrual of DERs for options granted under the Stock Option
Plan. As a result of the amendment, the Company incurred a $966,000 charge
during 1996.
F - 30
<PAGE>
Presented below is a summary of the changes in stock options for the three years
ended December 31, 1997. As of December 31, 1997, the outstanding options have
exercise prices ranging from $5.62 to $7.50 and have a remaining
weighted-average life of 1.8 years.
Weighted
Average
Exercise Price Shares
-------------- ------
Outstanding - December 31, 1994 $ 7.09 481,000
Granted 6.15 93,000
------ --------
Outstanding - December 31, 1995 6.94 574,000
Granted 5.86 83,000
Forfeited 6.68 (9,000)
------ --------
Outstanding - December 31, 1996 6.80 648,000
Granted 6.30 87,000
Forfeited 7.30 (13,000)
Exercised 6.12 (5,000)
------ --------
Outstanding - December 31, 1997 $ 6.74 717,000
====== ========
As of December 31, 1997, no options have expired. Options granted to date vest
over a two-year period. As of December 31, 1997, 1996 and 1995, 660,000, 454,000
and 485,000, respectively, of the outstanding options were exercisable.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options rather than the alternative fair
value accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using an
option-pricing model.
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
During 1997, 1996 and 1995, the estimated weighted-average, grant-date fair
value of options granted was $.42, $.45 and $.23, respectively, and the
estimated total fair value of options granted was $36,000, $27,000 and $30,000,
respectively. The pro forma net income of the Company reflecting the fair value
of options granted was $13,670,000 ($1.32 per share), $6,932,000 ($.68 per
share) and $6,346,000 ($.63 per share) for 1997, 1996 and 1995, respectively.
The Company assumed a life of five years and risk-free interest rate equal to
the Five-Year U.S. Treasury rate on the date the options were granted. In
addition, the expected stock price volatility and dividends growth rates were
estimated based upon historical averages over the three years ended December 31,
1997.
F - 31
<PAGE>
F. Other Matters
The Company operates under a Management Agreement with the Manager, pursuant to
which the Manager advises the Company on its business and oversees its
day-to-day operations, subject to the supervision of the Company's Board of
Directors.
During 1997, 1996 and 1995, the Company's management fees were $1,701,000,
$1,425,000 and $1,151,000, respectively, consisting of: (i) Base Fees of
$598,000, $654,000 and $751,000, respectively; (ii) Administrative Fees of
$56,000, $58,000 and $65,000, respectively; (iii) Incentive Fees of $1,024,000,
$713,000 and $335,000, respectively; and (iv) Acquisition Fees of $23,000, $0
and $0, respectively. Acquisition Fees were capitalized as part of the cost of
acquiring CMBS bonds. In addition, the Company incurred $426,000 of Incentive
Fees during 1997 relating to the gain on the restructuring of the CMBS bonds.
The Company's Charter authorizes the Board of Directors to issue 25,000,000
shares, par value $.01 per share, of Preferred Stock. The Board of Directors is
authorized to fix the terms of the Preferred Stock, including preferences,
powers and rights (including voting rights) senior to the Common Stock. To date,
the Company has not issued any shares of Preferred Stock.
G. Selected Quarterly Financial Data (unaudited)
Presented below is selected quarterly financial data for the years ended
December 31, 1997 and 1996 (in thousands, except per share data).
F - 32
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended,
-------------------
December 31, September 30, June 30, March 31,
1997
- -------------------------------------------- ----------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Revenues $ 2,246 $ 3,474 $ 2,242 $ 2,155
Gain on restructuring of bonds 5,786 -- -- --
Net income 7,677 2,484 1,810 1,735
Basic earnings per share .74 .24 .17 .17
Diluted earnings per share .74 .24 .17 .17
Regular dividends declared per share .17 .17 .17 .17
Special dividends declared per share .26 -- -- --
Capital gains dividends declared per share .17 -- -- --
Stock prices (1)
High 7-11/16 7-3/16 6-11/16 7
Low 6-9/16 6-5/8 6-3/16 6-3/8
Weighted-average common shares outstanding 10,342 10,342 10,326 10,316
Weighted-average common shares and common
share equivalents outstanding 10,408 10,381 10,348 10,351
1996
- -------------------------------------------- ----------------- ------------------ --------------- ------------------
Revenues $2,146 $2,167 $3,526 $2,318
Net income 1,595 1,765 1,992 1,607
Basic earnings per share .16 .17 .19 .16
Diluted earnings per share .15 .17 .19 .16
Regular dividends declared per share .17 .17 .17 .17
Special dividends declared per share -- .04 -- --
Stock prices (1)
High 6-3/4 6-1/2 6-1/4 6-1/8
Low 6-3/16 5-7/8 5-3/4 5-3/4
Weighted-average common shares outstanding 10,316 10,316 10,214 10,142
Weighted-average common shares and common
share equivalents outstanding 10,331 10,325 10,219 10,146
<FN>
- ---------------
(1) Daily closing prices as reported on the AMEX Composite Tape.
</FN>
</TABLE>
F - 33
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
2.1 Form of Mobile Home Park Purchase and Sale
Agreement dated as of May 13, 1997,
entered into in connection with the
acquisition of six manufactured housing
communities (incorporated herein by
reference to Exhibit 2.1 to the Current
Report on Form 8-K dated May 14, 1997,
Commission File No. 1-9360, filed on May
28, 1997).
2.1(a) Royal Palm Joint Venture Agreement dated
as of May 13, 1997, by and between Royal
Palm Village, LLC and Asset Investors
Operating Partnership, LP (incorporated
herein by reference to Exhibit 2.1(a) to
the Current Report on Form 8-K dated May
14, 1997, Commission File No. 1-9360,
filed on May 28, 1997).
2.1(b) Form of Assignment and Assumption
Agreement dated as of May 13, 1997,
entered into in connection with the
acquisition of Prime-Forest Partners
(incorporated herein by reference to
Exhibit 2.1(b) to the Current Report on
Form 8-K dated May 14, 1997, Commission
File No. 1-9360, filed on May 28, 1997).
2.2 Promissory Note dated as of July 30, 1997,
by and between the Registrant and Lost
Dutchman Parks, LLC (incorporated herein
by reference to Exhibit 2.2 to the Current
Report on Form 8-K dated July 30, 1997,
Commission File No.
1-9360, filed on August 12, 1997).
2.2(a) Combination Deed of Trust, Assignment of
Rents, Security Agreement and Fixture
Financing Statement dated as of July 30,
1997, by and between the Registrant and
Lost Dutchman Parks, LLC (incorporated
herein by reference to Exhibit 2.2(a) to
the Current Report on Form 8-K dated July
30, 1997, Commission File No. 1-9360,
filed on August 12, 1997).
2.2(b) Assumption Agreement and Note Modification
dated as of July 30, 1997, by and between
the Registrant and Lost Dutchman Parks,
LLC (incorporated herein by reference to
Exhibit 2.2(b) to the Current Report on
Form 8-K dated July 30, 1997, Commission
File No. 1-9360, filed on August 12,
1997).
2.2(c) Commitment Letter dated as of July 10,
1997, by and between the Registrant and
Lost Dutchman Parks, LLC (incorporated
herein by reference to Exhibit 2.2(c) to
the Current Report on Form 8-K dated July
30, 1997, Commission File No. 1-9360,
filed on August 12, 1997).
- 23 -
<PAGE>
2.3 Form of Joint Venture Agreement dated as
of September 30, 1997, between Asset
Investors Operating Partnership, L.P. and
Community Acquisition and Development
Corporation (incorporated herein by
reference to Exhibit 2.3 to the Current
Report on Form 8-K dated October 30, 1997,
Commission File No.
1-9360, filed on November 13, 1997).
2.3(a) Earn-Out Agreement dated October 30, 1997,
between Community Casa del Mar Joint
Venture, Wilder Corporation of Delaware
and AIC Community Management Partnership
(incorporated herein by reference to
Exhibit 2.3(a) to the Current Report on
Form 8-K dated October 30, 1997,
Commission File No. 1-9360, filed on
November 13, 1997).
2.3(b) Form of Agreement of Sale dated as of
August 22, 1997, between Community
Acquisition and Development Partnership
and Wilder Corporation of Delaware
(incorporated herein by reference to
Exhibit 2.3(b) to the Current Report on
Form 8-K dated October 30, 1997,
Commission File No. 1-9360, filed on
November 13, 1997).
3.1 Certificate of Incorporation of Asset
Investors Corporation (the "Registrant"),
as amended (incorporated herein by
reference to Exhibit 3.1(b) to the
Quarterly Report on Form 10-Q of the
Registrant for the quarter ended June 30,
1989, Commission File No. 1-9360, filed on
August 14, 1989).
3.2 By-laws of the Registrant, as amended and
restated (incorporated herein by reference
to Exhibit 3.3 to the Annual Report on
Form 10-K of the Registrant for the fiscal
year ended December 31, 1993, Commission
File No. 1-9360 filed March 31, 1994).
3.2(a) June 21, 1994 Amendment to the By-laws of
the Registrant (incorporated herein by
reference to Exhibit 3.3(b) to the Annual
Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1994,
Commission File No.
1-9360 filed March 30, 1995).
3.2(b) March 15, 1995 Amendment to the By-laws of
the Registrant (incorporated herein by
reference to Exhibit 3.3(c) to the Annual
Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1994,
Commission File No. 1-9360 filed March 30,
1995).
3.2(c) January 14, 1997, Amendment to the By-laws
of the Registrant (incorporated herein by
reference to Exhibit 3.2(c) to the Annual
Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1996,
Commission File No. 1-9360, filed on March
24, 1997).
- 24 -
<PAGE>
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 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).
4.2 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).
4.2(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 March 31, 1995, Commission
File No. 1-9360, filed on May 15, 1995).
10.1(a)* Amendment to Management Agreement dated as
of January 1, 1996, between the Registrant
and Financial Asset Management Corporation
(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).
10.1(c)* Amendment to the Management Agreement
dated as of January 1, 1997, between the
Registrant and Financial Asset Management
LLC (incorporated herein by reference to
Exhibit 10.1(c) to the Annual Report on
Form 10-K of the Registrant for the fiscal
year ended December 31, 1996, Commission
File No.1-9360, filed on March 24, 1997).
- 25 -
<PAGE>
10.1(d)* Amendment to the Management Agreement
dated as of April 1, 1997 between the
Registrant and Financial Asset Management,
LLC (incorporated herein by reference to
Exhibit 10.1(d) to the Quarterly Report on
Form 10-Q of the Registrant for the
quarter ended June 30, 1997, Commission
file No. 1-9360, filed on August 13,
1997).
10.2* Form of Indemnification Agreement between
the Registrant and each Director of the
Registrant (incorporated herein by
reference to Appendix A to the Proxy
Statement of the Registrant, Commission
File No. 1-9360, dated May 18, 1987).
10.3* Stock Option and Incentive Compensation
Plan of the Registrant as amended and
restated May 20, 1997 (incorporated herein
by reference to Exhibit 10.3 to the
Quarterly Report on Form 10-Q of the
Registrant for the quarter ended June 30,
1997, Commission File No. 1-9360, filed on
August 13, 1997).
10.4 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).
10.5(a) Trust Agreement dated as of March 26,
1997, among the Registrant, as depositor,
Asset Investors Secured Financing
Corporation and Wilmington Trust Company,
as Owner Trustee (incorporated herein by
reference to Exhibit 10.5(a) to the
Quarterly Report on Form 10-Q of the
Registrant for the quarter ended March 31,
1997, Commission File No. 1-9360, filed on
May 14, 1997).
10.5(b) Pooled Certificate Transfer Agreement
between the Registrant and Asset Investors
Secured Financing Corporation dated as of
March 26, 1997 (incorporated herein by
reference to Exhibit 10.5(b) to the
Quarterly Report on Form 10-Q of the
Registrant for the quarter ended March 31,
1997, Commission File No. 1-9360, filed on
May 14, 1997).
10.5(c) Indenture, dated as of March 27, 1997,
between Structured Mortgage Trust 1997-1
and State Street Bank and Trust Company
(incorporated herein by reference to
Exhibit 10.5(c) to the Quarterly Report on
Form 10-Q of the Registrant for the
quarter ended March 31, 1997, Commission
File No. 1-9360, filed on May 14, 1997).
10.5(d) Note Purchase Agreement, dated as of March
26, 1997, among Structured Mortgage Trust
1997-1, Asset Investors Secured Financing
Corporation and Bear, Stearns & Co. Inc.
(incorporated herein by reference to
Exhibit 10.5(d) to the Quarterly Report on
Form 10-Q of the Registrant for the
quarter ended March 31, 1997, Commission
File No. 1-9360, filed on May 14, 1997).
- 26 -
<PAGE>
10.5(e) Trust Certificate issued to Asset
Investors Secured Financing Corporation
evidencing its ownership of the Structured
Mortgage Trust 1997-1 (incorporated herein
by reference to Exhibit 10.5(e) to the
Quarterly Report on Form 10-Q of the
Registrant for the quarter ended March 31,
1997, Commission File No. 1-9360, filed on
May 14, 1997).
10.6 Asset Contribution Agreement dated as of
September 8, 1997 between the Registrant,
Asset Investors Operating Partnership,
L.P., and Financial Asset Management, LLC
(incorporated herein by reference to
Exhibit 10.6 to the Quarterly Report on
Form 10-Q of the Registrant for the
quarter ended September 30, 1997,
Commission File No. 1-9360, filed on
November 12, 1997).
23 Independent Auditors' Consent - Ernst &
Young LLP.
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
- 27 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ASSET INVESTORS CORPORATION
(Registrant)
Date: March 30, 1998 By /s/Terry Considine
------------------
Terry Considine
Co-Chief Executive Officer
Date: March 30, 1998 By /s/Thomas L. Rhodes
-------------------
Thomas L. Rhodes
Co-Chief Executive Officer
Date: March 30, 1998 By /s/Bruce E. Moore
-----------------
Bruce E. Moore
President and Chief Operating Officer
Date: March 30, 1998 By /s/David M. Becker
------------------
David M. Becker
Chief Financial Officer
Date: March 30, 1998 By /s/Diane Schott Armstrong
-------------------------
Diane Schott Armstrong
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Capacity Date
---- -------- ----
/s/Terry Considine Director March 30, 1998
- -------------------------
Terry Considine
/s/Thomas L. Rhodes Director March 30, 1998
- -------------------------
Thomas L. Rhodes
/s/Bruce D. Benson Director March 30, 1998
- -------------------------
Bruce D. Benson
/s/Bruce E. Moore Director March 30, 1998
- -------------------------
Bruce E. Moore
/s/Elliot H. Kline Director March 30, 1998
- -------------------------
Elliot H. Kline
Director March 30, 1998
- -------------------------
Richard L. Robinson
/s/Tim Schultz Director March 30, 1998
- -------------------------
Tim Schultz
Director March 30, 1998
- -------------------------
William J. White
- 28 -
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-42605) of Asset Investors Corporation of our reports (a) dated
February 6, 1998, with respect to the consolidated financial statements and
schedule of Asset Investors Corporation and (b) dated February 6, 1998 with
respect to the financial statements of Commercial Assets, Inc., both of which
are included in this Annual Report (Form 10-K) for the year ended December 31,
1997.
Ernst & Young LLP
Phoenix, Arizona
March 30, 1998
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 21,802
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,802
<PP&E> 41,419
<DEPRECIATION> (693)
<TOTAL-ASSETS> 119,161
<CURRENT-LIABILITIES> 2,607
<BONDS> 0
0
0
<COMMON> 51
<OTHER-SE> 83,464
<TOTAL-LIABILITY-AND-EQUITY> 119,161
<SALES> 3,698
<TOTAL-REVENUES> 12,135
<CGS> 1,457
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,602
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 368
<INCOME-PRETAX> 7,254
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,254
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 7,254
<EPS-PRIMARY> 1.44
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