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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 1999
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)
Delaware 84-1500244
(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. [ ]
As of March 17, 2000, 5,632,569 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 $59,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the Registrant's 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Annual Report.
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<PAGE>
ASSET INVESTORS CORPORATION
Table of Contents
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 1999
Item Page
PART I
1. Business................................................................ 1
Company Background................................................. 1
Proposed Merger with Commercial Assets............................. 2
Industry Background................................................ 2
Financial Information about Industry Segments...................... 3
Growth and Operating Strategies.................................... 3
Competition........................................................ 6
Taxation of the Company............................................ 6
Regulations........................................................ 7
Insurance.......................................................... 8
Capital Resources.................................................. 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..................... 12
PART II
5. Market For Registrant's Common Equity and Related Stockholder Matters... 12
6. Selected Financial Data................................................. 13
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 14
Results of Operations.............................................. 14
Liquidity and Capital Resources.................................... 18
Funds From Operations.............................................. 20
Year 2000 Compliance............................................... 22
7a. Quantitative and Qualitative Disclosures About Market Risk.............. 22
8. Financial Statements and Supplementary Data............................. 23
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................. 23
PART III
10. Directors and Executive Officers of the Registrant...................... 24
11. Executive Compensation.................................................. 27
12. Security Ownership of Certain Beneficial Owners and Management.......... 32
13. Certain Relationships and Related Transactions.......................... 33
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........ 35
(i)
<PAGE>
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, our Annual Report to Stockholders and our filings with
the Securities and Exchange Commission 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, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements may include
projections of our cash flow, dividends and anticipated returns on real estate
investments. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by the forward-looking statements. Such
factors include: general economic and business conditions; interest rate
changes; financing and refinancing risks; risks inherent in owning real estate
or debt secured by real estate; future development rate of homesites;
competition; the availability of real estate assets at prices which meet our
investment criteria; our ability to reduce expense levels, implement rent
increases, use leverage and other risks set forth in our SEC filings.
In this report, the words "the Company," "we," "our" and "us" refer to Asset
Investors Corporation, a Delaware corporation, our predecessor, Asset Investors
Corporation, a Maryland corporation and, where appropriate, our subsidiaries.
Item 1. Business.
Company Background
We have been a Delaware corporation since May 25, 1999. Prior to this, we were a
Maryland corporation that was formed in 1986. We have elected to be treated for
United States federal income tax purposes as a real estate investment trust or
"REIT." We are a self-administered and self-managed company in the business of
owning, acquiring, developing and managing manufactured home communities. As of
December 31, 1999, we held interests as owner, ground lessee or mortgage lender
(including participating mortgages) in 22 manufactured home communities and two
recreational vehicle parks with a total of 4,520 developed homesites (sites with
homes in place), 2,510 undeveloped homesites and 180 recreational vehicle sites.
In addition, we manage 16 communities for affiliates and third-party owners. Our
shares of common stock are listed on the New York Stock Exchange ("NYSE") under
the symbol "AIC."
We primarily conduct our business through our subsidiary Asset Investors
Operating Partnership and where appropriate its other subsidiary companies
(which we collectively refer to as the Operating Partnership). As of December
31, 1999, we owned 85% of the Operating Partnership. The Operating Partnership
also owns 27% of the common stock of Commercial Assets, Inc., a publicly-traded
REIT that is listed on the American Stock Exchange under the symbol "CAX."
Commercial Assets is also engaged in the ownership, acquisition and development
of manufactured home communities. In addition to acquiring and managing
manufactured home communities for our own account, we also perform these
services for Commercial Assets, for which we are paid a management fee by
Commercial Assets.
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Our principal executive offices are located at 3410 S. Galena Street, Suite 210,
Denver, Colorado 80231 and our telephone number is (303) 614-9400.
Proposed Merger with Commercial Assets
In August 1999, we agreed to merge with Commercial Assets. We agreed to issue
0.4075 shares of our common stock for each share of Commercial Assets common
stock. Alternatively, Commercial Assets stockholders may elect to receive $5.75
per share in cash for up to 3,549,868 shares of Commercial Assets common stock
with any remaining shares of Commercial Assets common stock receiving 0.4075
shares of our common stock. The merger requires the approval by a majority of
our outstanding shares of common stock and two-thirds of the outstanding shares
of Commercial Assets common stock. We own 27% of the outstanding shares of
Commercial Assets common stock and have agreed to vote these shares in favor of
the merger. Commercial Assets' officers and directors and our officers and
directors have agreed to elect to receive Asset Investors common stock for all
shares of Commercial Assets common stock that they own. The stockholders
meetings to vote on the merger are expected to occur during the second quarter
of 2000.
Industry Background
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 by or arranged for by the owner of the community. Community lifestyles,
primarily promoted by resident managers, include a wide variety of social
activities that 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. Manufactured home communities are primarily
characterized as "all age" communities and "adult" communities. In adult
communities, as least 80% of the tenants must be at least 55 years old, and in
all age communities there is no age restriction on tenants.
The owner of a home in our communities leases from us the site on which the home
is located. Typically, the leases are on a month-to-month or year-to-year basis,
renewable upon the consent of both parties or, in some instances, as provided by
statute. In some circumstances, we offer a 99-year lease to tenants in order to
enable the tenant to have some benefits of an owner of real property, including
creditor protection laws in some states. These leases can be cancelled,
depending on state law, for non-payment of rent, violation of community rules
and regulations or other specified defaults. Generally, rental rate increases
are made on an annual basis. The size of these rental rate increases depends
upon the policies that are in place at each community. Rental increases may be
based on fixed dollar amounts, percentage amounts, inflation indexes, or they
may depend entirely on local market conditions. We own interests in the
underlying land, utility connections, streets, lighting, driveways, common area
amenities and other capital improvements and are responsible for enforcement of
community guidelines and maintenance. Each homeowner within the manufactured
home communities is responsible for the maintenance of his or her home and
leased site, including lawn care in some communities.
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The ownership of manufactured home communities, once fully occupied, tends to be
a stable, predictable asset class. The cost and effort involved in relocating a
home to another manufactured home community generally encourages the owner of
the home to resell it within the community.
Financial Information about Industry Segments
We operate in one industry segment, the ownership and management of real estate.
See the consolidated financial statements including their notes in Item 8 of
this report on Form 10-K.
Growth and Operating Strategies
We measure our economic profitability based on Funds From Operations ("FFO"),
less an annual capital replacement reserve of at least $50 per developed
homesite. This reserve is management's estimate based on its experience in
owning, operating and managing manufactured home communities. We believe that
the presentation of FFO, when considered with the financial data determined in
accordance with generally accepted accounting principles, provides a useful
measure of our performance. However, FFO does not represent cash flow and is not
necessarily indicative of cash flow or liquidity available to us, nor should it
be considered as an alternative to net income as an indicator of operating
performance. The Board of Governors of the National Association of Real Estate
Investment Trusts (also known as NAREIT) defines FFO as net income (loss),
computed in accordance with generally accepted accounting principles, 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. We calculate FFO beginning with the NAREIT definition and include
adjustments for:
o the minority interest in the Operating Partnership owned by persons other
than us,
o costs we incurred in order to become self-managed,
o amortization of property and investment management contracts, and
o nonrecurring income, net.
We believe that the presentation of FFO provides investors with measurements
which help facilitate an understanding of our ability to make required dividend
payments, capital expenditures and principal payments on our debt. Since FFO
excludes unusual and nonrecurring expenses as well as depreciation and other
real estate related expenses, FFO may be materially different from net income.
Therefore, FFO should not be considered as an alternative to net income or net
cash flows from operating activities, as calculated in accordance with generally
accepted accounting principles, as an indication of our operating performance or
liquidity.
FFO is not necessarily indicative of cash available to fund our cash needs,
including our ability to make distributions. We use FFO in measuring our
operating performance because we believe that the items that result in a
difference between FFO and net income do not impact the ongoing operating
performance of a real estate company. Also, we believe that other real estate
companies, analysts and investors utilize FFO in analyzing the results of real
estate companies. Our basis of computing FFO is not necessarily comparable with
that of other REITs.
Our primary objective is to maximize stockholder value by increasing the amount
and predictability of FFO on a per share basis, less a reserve for capital
replacements. We seek to achieve this objective primarily by:
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o improving net operating income from our existing portfolio of manufactured
home communities;
o acquiring additional communities at values that are accretive on a per
share basis;
o earning increased management fees as Commercial Assets invests in more
manufactured home communities; and
o as Commercial Assets' FFO increases, our share of their FFO similarly
increases.
Company Policies
Management has adopted specific policies to accomplish our objective of
increasing the amount and predictability of our FFO on a per share basis, less a
reserve for capital replacements. These policies include:
o selectively acquiring manufactured home communities that have potential
long-term appreciation of value through, among other things, rent
increases, expense efficiencies and in-park homesite development;
o developing and maintaining resident satisfaction and a reputation for
quality communities through maintenance of the physical condition of our
communities and providing activities that improve the community lifestyle;
o improving the profitability of our communities through aggressive
management of occupancy, community development and maintenance and expense
controls;
o using debt leverage to increase our financial returns;
o reducing our exposure to interest rate fluctuations by utilizing
long-term, fixed-rate, fully-amortizing debt to pay off higher cost, short
term debt;
o ensuring the continued maintenance of our communities by providing a
minimum $50 per homesite per year for capital replacements;
o seeking to reduce our exposure to downturns in regional real estate
markets by diversifying our portfolio of communities since currently 71%
of our properties are in Florida and 17% are in Arizona; and;
o recruiting and retaining capable community management personnel.
Future Acquisitions
Our acquisition of interests in manufactured home communities takes many forms.
In many cases we acquire fee title to the community. When a community has a
significant number of unleased homesites, we seek a stable return from the
community during the development and lease-up phase while also seeking to
participate in future increased earnings after development is completed and the
sites are leased. We seek to accomplish this goal by making loans to development
companies in return for participating mortgages that are non-recourse to the
borrowers and secured by the property. In general, our participating mortgages
earn interest at fixed rates and, in addition, participate in a profits or
revenues from the community. This profit participation right generally entitles
us to 50% of the net income and cash flow generated by the community.
We believe that acquisition opportunities for manufactured home communities are
attractive at this time because of:
o the increasing acceptability of and demand for manufactured homes, as
shown by the growth in the number of individuals living in manufactured
homes; and
o the continued constraints on development of new manufactured home
communities.
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We are actively seeking to acquire additional communities on our own behalf and
on behalf of Commercial Assets, and we are currently engaged in various stages
of negotiations relating to the possible acquisition of a number of communities.
The acquisition of interests in additional communities could also result in our
becoming increasingly leveraged as we incur debt in connection with these
transactions.
When evaluating potential acquisitions, we consider such factors as:
o the location and type of property;
o the value of the homes located on the leased land;
o the improvements, such as golf courses and swimming pools, at the
property;
o the current and projected cash flow of the property and our ability to
increase cash flow;
o the potential for capital appreciation of the property;
o the terms of tenant leases, including the potential for rent increases;
o the tax and regulatory environment of the community in which the property
is located;
o the potential for expansion of the physical layout of the property and the
number of sites;
o the occupancy and demand by residents for properties of a similar type in
the vicinity;
o the credit of the residents in a community;
o the prospects for liquidity through sale, financing or refinancing of the
property;
o the competition from existing manufactured home communities;
o the potential for the construction of new communities in the area; and
o the replacement cost of the property.
In order to allocate investments between us and Commercial Assets, the companies
have agreed that Commercial Assets will invest at least $50 million of its cash
resources in the acquisition of communities before we invest any further cash in
the acquisition of communities. Thereafter, the companies will make a
determination with respect to each acquisition on a case-by-case basis. As of
December 31, 1999, Commercial Assets had invested $70 million in communities
(including participating mortgages and real estate joint ventures). Accordingly,
the companies are determining acquisitions on a case-by-case basis.
Fees and Earnings from Commercial Assets
We manage Commercial Assets and own 27% of Commercial Assets' common stock.
Under the terms of our management agreement with Commercial Assets, we receive
the following fees:
o Acquisition Fees equal to 0.5% of the cost of each real estate-related
asset acquired by Commercial Assets;
o Base Fees equal to 1% per year of the net book value of Commercial Assets'
real estate-related assets;
o Incentive Fees equal to 20% of the amount by which Commercial Assets' FFO,
less an annual capital replacement reserve of at least $50 per developed
homesite, exceeds (a) Commercial Assets' average net worth, multiplied by
(b) 1% over the ten year United States Treasury rate.
In the third quarter of 1998, Commercial Assets entered the manufactured home
community business and began acquiring interests in manufactured home
communities identified by us. As of December 31, 1999, Commercial Assets had
acquired interests in 12 communities at a cost of $70 million (including
participating mortgages and real estate joint ventures). Commercial Assets paid
us $565,000 in Base Fees and $205,000 in Acquisition Fees during 1999 and
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$87,000 in Base Fees and $124,000 in Acquisition Fees in 1998. No Incentive Fees
were paid by Commercial Assets during 1999 or 1998.
The management agreement has a term of one-year, subject to annual renewal. The
management agreement was amended for 1999 to provide that Incentive Fees were
based upon Commercial Assets' FFO, less an annual capital replacement reserve of
at least $50 per developed homesite, instead of its REIT income. Both your
management and Commercial Assets believe that this amendment causes our
Incentive Fees to be tied more closely to the economic profitability of
Commercial Assets as Commercial Assets is now engaged in the manufactured home
community business. Commercial Assets has renewed the management agreement for
2000 with the same terms as those used in 1999. If our merger with Commercial
Assets is approved then the management agreement will terminate.
Expansion of Existing Communities
We will seek to increase the number of homesites and the amount of earnings
generated from our existing portfolio of manufactured home communities through
marketing campaigns aimed at increasing occupancy. We will also seek expansion
through future acquisitions and expansion of 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 December 31, 1999, we held interests in
11 communities with approximately 2,510 undeveloped homesites.
Competition
There are numerous housing alternatives that compete with our manufactured home
communities in attracting residents. Our properties compete for residents with
other manufactured home communities, multifamily rental apartments, single
family homes and condominiums. The number of competitors in a particular area
could have a material effect on our ability to attract and maintain residents
and on the rents we are able to charge for homesites. In acquiring assets, we
compete with other REITs, pension funds, insurance companies, and other
investors, many of which have greater financial resources than we do. In
addition, Commercial Assets is also involved in acquiring manufactured home
communities.
Taxation of the Company
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986,
as amended (the "Code"), and we intend to operate in a manner which will allow
us to avail ourselves of the beneficial tax provisions applicable to REIT's. Our
qualification as a REIT depends on our ability to meet the various requirements
imposed by the Code, such as specifications relating to actual operating
results, distribution levels and diversity of stock ownership. In addition, our
ability to qualify as a REIT depends in part upon the actions of third parties
over which we have no control, or only limited influence. For instance, our
qualification depends upon the conduct of certain entities with which we have a
direct or indirect relationship, in our capacity as a lender, lessor, or holder
of non-controlling equity interests. Our qualification also depends upon
Commercial Assets' continued qualification as a REIT.
If we qualify for taxation as a REIT, we will generally not be subject to
Federal corporate income tax on our 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 we fail to qualify as a REIT in any taxable year, we will be
subject to Federal income tax at regular corporate rates on our taxable income
(including any applicable alternative minimum tax). We have a net operating loss
("NOL") carryover of approximately $95 million which may, subject to some
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restrictions and limitations, be used to offset taxable income in the event that
we fail to qualify as a REIT. Additionally, even if we qualify as a REIT, we may
be subject to certain state and local income and other taxes, and to Federal
income and excise taxes on our undistributed income.
If in any taxable year we fail to qualify as a REIT and as a result, incur a tax
liability, we might need to borrow funds or liquidate certain investments in
order to pay the applicable tax. In this situation, we would not be compelled to
make distributions as required for entities claiming REIT status under the Code.
Moreover, unless we would be entitled to relief under certain statutory
provisions, we would be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification is lost. Although we
currently intend 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 us to fail to qualify as a REIT, or may cause the Board of Directors to
revoke the REIT election.
We and our stockholders may be subject to state or local taxation in various
state or local jurisdictions, including those in which we or they transact
business or reside. The state and local tax treatment conferred upon us and our
stockholders may not conform to the Federal income tax treatment.
Regulations
General
Manufactured home communities, like other housing alternatives, are subject to
various laws, ordinances and regulations, including regulations relating to
recreational facilities such as swimming pools, clubhouses and other common
areas. We believe that we have obtained the necessary permits and approvals to
operate each of our properties in conformity with these laws.
Americans with Disabilities Act
Our current properties and any newly acquired communities must comply with the
Americans with Disabilities Act (the "ADA"). The ADA generally requires that
public facilities, such as clubhouses, swimming pools and recreation areas be
made accessible to people with disabilities. Many of our communities have public
facilities. In order to comply with the ADA requirements, we have made
improvements at our communities in order to remove barriers to access. If we
should ever fail to comply with ADA regulations we could be fined or we could be
forced to pay damages to private litigants. We have made those changes required
by the ADA which we believe are appropriate, and we believe that our properties
are in compliance with the requirements of the ADA. We believe that any further
costs related to ADA compliance can be recovered by cash flow from the
individual properties without causing any material adverse effect. If ongoing
changes involve a greater expenditure than we currently anticipate, or if the
changes must be made on a more accelerated basis than we anticipate, our ability
to make expected distributions could be adversely affected.
Rent Control Legislation
State and local laws, principally in Florida, might limit our ability to
increase rents on some of our properties, and thereby, limit our ability to
recover increases in operating expenses and the costs of capital improvements.
Enactment of rent control laws has been considered from time to time in
jurisdictions in which we operate. We presently expect to maintain manufactured
home communities and may purchase additional properties in markets that are
either subject to rent control laws or in which such legislation may be enacted.
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Insurance
We believe that our properties are covered by adequate fire, flood and property
insurance policies. It is our policy to purchase insurance policies which
contain commercially reasonable deductibles and limits from reputable insurers.
We also believe that we have obtained adequate title insurance policies insuring
fee title to properties we have acquired.
Capital Resources
We have used our available cash balances, our FFO and our long-term and
short-term financing arrangements to provide working capital to support our
operations, to pay dividends and to acquire assets. Future acquisitions will be
financed by the most appropriate sources of capital, perhaps including our
available cash balances; undistributed FFO; long-term, secured debt; short-term,
secured debt; or the issuance of additional equity securities, including
interests in the Operating Partnership. This flexibility allows us to offer more
choices of "acquisition currency" to potential sellers of manufactured home
communities including the ability to defer some or all of the tax consequences
of a sale. We believe that this flexibility may offer sellers an incentive to
enter into transactions with us on favorable terms.
Without further stockholder approval, we are authorized to issue up to
50,000,000 shares of common stock. As of March 17, 2000, 5,632,569 shares of
common stock were outstanding. The Board of Directors is authorized to issue
additional classes of stock (including preferred 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 adversely affect existing stockholders. Future offerings of stock may
result in the reduction of the net tangible book value per outstanding share and
a reduction in the market price of the stock. We are unable to estimate the
amount, timing or nature of such future offerings as any such offerings will
depend on general market conditions or other factors. As of March 17, 2000, we
have not authorized or issued additional classes of stock.
Restrictions on and Redemptions of Common Stock
To qualify to be taxed as a REIT, we must comply with certain ownership
limitations with respect to shares of our common stock. Our Certificate of
Incorporation provides that shares of common stock generally may not be owned by
a person if the ownership of shares by such person would exceed 9.8% of our
outstanding shares or would result in the imposition of a tax on us.
Our Certificate of Incorporation empowers the Board of Directors, at its option,
to redeem shares of common stock or to restrict transfers of shares to comply
with the requirements described above. The redemption price we would pay if the
Board of Directors exercises this option to redeem shares would be the fair
market value of the common stock as reflected in the latest quotations on the
New York Stock Exchange. Our Certificate of Incorporation also provides that if
anyone acquires shares of our common stock in a manner or in a volume that would
result in our disqualification as a REIT under the Code, that acquisition is
deemed void to the fullest extent permitted under the law and the acquirer will
be deemed never to have had an interest in the shares. Furthermore, if a
transaction is determined to be void or invalid, the acquirer may be deemed to
have acted as agent on our behalf in acquiring such shares and may be deemed to
hold such shares on our behalf.
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Each stockholder is required, upon demand, to disclose to the Board of Directors
in writing any information with respect to the direct and indirect ownership of
shares of our common stock as the Board of Directors deems necessary or prudent
in order to protect our tax status.
Employees
Our employees perform various acquisition and management functions. Brandywine
Financial Services Corporation and its affiliates provide our properties with
employees that perform property management, maintenance and sales services. Mr.
Bruce Moore was the founder and Chief Executive Officer of Brandywine prior to
becoming our President and Chief Operating Officer in February 1998. In addition
to our 11 employees, approximately 260 Brandywine employees devote their
full-time attention to our communities. We reimburse Brandywine for the costs of
these employees. None of these employees are represented by a union, and we have
never experienced a work stoppage. We believe that we maintain satisfactory
relations with our employees. As of January 1, 2000, we acquired Brandywine's
interests in the companies which provide property management, maintenance and
sales services to our properties. Accordingly, we now have approximately 270
employees.
Item 2. Properties.
The manufactured home communities in which we have interests are primarily
located in Florida and Arizona and are concentrated in or around four
metropolitan areas. We hold interests in these communities as owner, ground
lessee or mortgage lender (including participating mortgages). The following
table sets forth the states in which the communities in which we held an
interest on December 31, 1999 are located:
<TABLE>
<CAPTION>
Number of Sites
------------------------------------------------------------
Number of Recreational
Communities Developed Undeveloped Vehicles
----------------- --------------- ---------------- ----------------
<S> <C> <C> <C>
Florida 17 3,606 2,401 --
Arizona 4 800 108 122
New Jersey 1 90 -- --
Pennsylvania 1 28 -- --
California 1 -- -- 65
--- ------ ------ ----
Total 24 4,524 2,509 187
=== ====== ====== ====
</TABLE>
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The following table sets forth information as of January 1, 2000 regarding each
manufactured home community in which we held an interest and those manufactured
home communities which we manage for others:
<TABLE>
<CAPTION>
Average
Developed Monthly RV Undeveloped Year(s)
Community Location Homesites Occupancy(1) Rent Sites Homesites Developed
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Owned Communities
<S> <C> <C> <C> <C> <C> <C> <C>
Blue Heron Pines (3) Punta Gorda, FL 133 98% $250 -- 311 1983/1999
Blue Star Apache Junction, AZ 31 94 227 122 -- 1955
Brentwood (3) Hudson, FL 75 89 202 -- 148 1984
Brentwood West Mesa, AZ 350 99 306 -- -- 1972/1987
Cardinal Court Largo, FL 138 96 264 -- -- 1959/1965
Caribbean Cove Orlando, FL 259 99 283 -- 27 1984
Forest View Homosassa, FL 191 100 235 -- 120 (3) 1987/1997
Gulfstream Harbor Orlando, FL 381 99 326 -- 172 1980
Gulfstream Harbor II Orlando, FL 289 100 318 -- 19 1988
Lost Dutchman Apache Junction, AZ 152 100 246 -- 108 1971/1979/1999
Marina Dunes Marina, CA -- -- -- 65 -- 1979
Mullica Woods Egg Harbor City, NJ 90 100 462 -- -- 1985
Park Royale Pinellas Park, FL 258 93 351 -- 51 (3) 1971
Pinewood St. Petersburg, FL 220 96 289 -- -- 1976
Pleasant Living Riverview, FL 245 100 278 -- -- 1979
Salem Farm Bensalem, PA 28 100 415 -- -- 1988
Savanna Club (3) Port St. Lucie, FL 65 100 147 -- 1,281 1999
Serendipity Ft. Myers, FL 338 98 277 -- -- 1971/1974
Stonebrook Homosassa, FL 124 99 249 -- 94 (3) 1987/1997
Sun Lake (3) Grand Island, FL 245 94 258 -- 178 1980
Sun Valley Tarpon Springs, FL 261 100 340 -- -- 1972
Sun Valley Apache Junction, AZ 267 99 247 -- -- 1984
Westwind I (2) Dunedin, FL 195 97 338 -- -- 1970
Westwind II (2) Dunedin, FL 189 100 342 -- -- 1972
-------------------------------------------------------
Total Communities 4,524 98% $294 187 2,509
=======================================================
Communities Managed for Commercial Assets
Cannery Village Newport Beach, CA -- --% $ -- -- 30
Casa Encanta Mesa, AZ 106 97 345 -- --
Cypress Greens Lakeland, FL 88 98 188 -- 19
Desert Harbor Apache Junction, AZ 103 100 203 -- 104
Fiesta Village Mesa, AZ 170 94 274 -- 206
La Casa Blanca Apache Junction, AZ 198 100 150 -- --
Lakeshore Villas Tampa, FL 290 96 323 -- --
Rancho Mirage Apache Junction, AZ 312 100 174 -- --
Riverside Ruskin, FL 223 99 397 -- 767
Royal Palm Haines City, FL 233 98 216 -- 217
Savanna Club Port St. Lucie, FL 20 100 154 -- 23
Southern Palms Mesa, AZ 36 100 208 26 --
Sunlake Grand Island, FL -- -- -- -- 5
White Sands Apache Junction, AZ 57 96 208 12 --
-------------------------------------------------------
Subtotal 1,836 98 250 38 1,371
-------------------------------------------------------
Communities Managed for Others 588 98 224 -- 83
-------------------------------------------------------
Total Communities 2,424 98% $243 38 1,454
=======================================================
<FN>
1 Excludes recreational vehicle sites, which are leased on a seasonal basis.
2 We are the ground lessee of these communities.
3 At December 31, 1999, we held notes receivable secured by mortgages on these
communities and sites. We acquired these communities and sites in January
2000.
</FN>
</TABLE>
- 10 -
<PAGE>
Owned Properties. At December 31, 1999, we owned 18 manufactured home
communities and two recreational vehicle parks containing approximately 3,990
developed homesites and 180 recreational vehicle sites. These properties
contain, on average, 220 homesites, with the largest property containing 380
homesites. These properties offer residents a range of amenities, including
swimming pools, clubhouses and tennis courts.
At December 31, 1999, 15 of these properties are encumbered by mortgage
indebtedness totaling $53,994,000. These properties represent approximately 87%
of our developed homesites. The 15 properties securing our mortgage indebtedness
have a combined net book value of $96,184,000 and the indebtedness has a
weighted average interest rate of 7.4% and a weighted average maturity of 9.2
years. As of December 31, 1999, 95% of our outstanding debt was long-term and 5%
was short-term debt. See the financial statements included elsewhere in this
report on Form 10-K for additional information about our indebtedness.
Properties Involving Participating Mortgages. At December 31, 1999, we held
$22,475,000 in a participating mortgage involving seven manufactured home
communities containing 535 developed homesites and 2,183 undeveloped homesites.
The participating mortgage bears interest ranging from 10% to 13% and matures in
2018. Through 2002, interest is payable based on the net cash flow of the
secured properties. As additional compensation, we receive 50% of both (a) any
profits and net cash flows from the properties in excess of the stated interest
rate and (b) any net sales proceeds from the properties in excess of the amount
of the mortgage. The mortgage may be prepaid at any time; however, our 50% share
of profits and net cash flows continues until the properties are sold. Effective
January 1, 2000, we purchased six of the properties securing the mortgage in
exchange for the cancellation of $24,851,000 of the participating mortgage and
other loans, the payment of $765,000, the issuance of 44,572 units of limited
partnership interests in our Operating Partnership valued at $496,000 and the
assumption of $10,704,000 of third-party debt.
Item 3. Legal Proceedings.
In September 1999, four Commercial Assets stockholders, individually and as
purported representatives of all Commercial Assets stockholders, except us and
our affiliates, filed three purported class action lawsuits in the Court of
Chancery in the State of Delaware against Commercial Assets, the members of the
board of directors and specified officers of us and Commercial Assets. These
lawsuits alleged that the defendants breached their fiduciary duties to the
Commercial Assets stockholders in connection with our proposed merger with
Commercial Assets on the terms then proposed and the recent reincorporation of
Commercial Assets from Maryland to Delaware. In October 1999, the plaintiffs
filed an amended complaint. In November 1999, the Court of Chancery approved
consolidation of these lawsuits as a single lawsuit.
In March 2000, the parties entered into a settlement agreement which will amend
the merger agreement in the following respects:
o Commercial Assets stockholders, other than us and the officers and
directors of Asset Investors and Commercial Assets, may elect to receive
$5.75 per share in cash, subject to proration, for up to 3,549,868 shares
of Commercial Assets common stock as opposed to 0.4075 shares of Asset
Investors common stock; and
o the percentage of votes of the Commercial Assets common stock necessary to
approve the merger was increased from a simple majority to two-thirds.
- 11 -
<PAGE>
The settlement agreement is subject to the approval of the Court of Chancery. If
approved by the Court of Chancery, the settlement agreement will release the
defendants from further liability relating to the merger.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of our stockholders during the fourth
quarter of 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock is listed on the NYSE under the symbol "AIC." The high and low
closing sales prices of the shares of common stock as reported on the NYSE
Composite Tape and certain dividend information for the periods indicated were
as follows:
<TABLE>
<CAPTION>
High Low Dividends
--------------- ------------- -------------
1999
<S> <C> <C> <C>
First Quarter $ 15-1/16 $ 12 $ .25
Second Quarter 15-5/16 12-1/16 .25
Third Quarter 14-15/16 12-1/2 .25
Fourth Quarter 13-5/16 10-11/16 .25
1998
First Quarter $ 20-7/8 $ 16 $ --
Second Quarter 19-5/16 15-7/8 .25
Third Quarter 17-5/16 13-5/16 .25
Fourth Quarter 14-15/16 12-1/8 .25
</TABLE>
As of March 17, 2000, 5,632,569 shares of common stock were issued and
outstanding and were held by 2,198 stockholders of record. We estimate there
were an additional 10,000 beneficial owners on that date whose shares were held
by banks, brokers or other nominees.
We, as a REIT, are required to distribute annually to stockholders at least 95%
of our "REIT taxable income," which, as defined by the Code and Treasury
regulations, is generally equivalent to net taxable ordinary income. We measure
economic profitability and intend to pay regular dividends to our stockholders
based on FFO, less an annual reserve for capital replacements of at least $50
per developed homesite, during the relevant period. The future payment of
dividends, however, will be at the discretion of the Board of Directors and will
depend on numerous factors including, our financial condition, 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.
On April 20, 1999, 11,500 shares of common stock were issued to non-executive
directors in lieu of annual director fees as a private placement of our
securities. The $13-1/16 per share value was equal to the closing stock price on
April 20, 1999.
- 12 -
<PAGE>
Item 6. Selected Financial Data.
Our selected financial data set forth below has been derived from and should be
read in conjunction with our audited consolidated financial statements including
their notes. Financial data as of December 31, 1999 and 1998, and for each of
the three years in the period ended December 31, 1999, is included elsewhere in
this report on Form 10-K.
Operating and Balance Sheet Data (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ---------- ---------- ----------
RENTAL PROPERTY OPERATIONS
<S> <C> <C> <C> <C> <C>
Rental and other property revenues $ 14,987 $ 10,479 $ 3,104 $ -- $ --
Interest on participating mortgages 2,976 3,174 -- -- --
Equity in earnings of rental property joint ventures -- -- 466 -- --
Property operating expenses (5,262) (4,039) (1,398) -- --
Depreciation (3,870) (2,685) (693) -- --
----------- ----------- ---------- ---------- ----------
8,831 6,929 1,479 -- --
----------- ----------- ---------- ---------- ----------
SERVICE OPERATIONS
Property management income, net 207 156 69 -- --
Commercial Assets management fees 564 155 -- -- --
Amortization of management contracts (2,757) (2,894) (744) -- --
----------- ----------- ---------- ---------- ----------
(1,986) (2,583) (675) -- --
----------- ----------- ---------- ---------- ----------
Equity in earnings of Commercial Assets 872 975 3,663 1,875 1,742
General and administrative expenses (1,530) (1,393) (1,612) (2,938) (2,875)
Interest and other income 241 871 1,808 136 630
Interest expense (3,846) (2,485) (368) (88) (63)
Non-agency MBS bonds revenues 65 50 2,966 11,513 8,499
Income tax benefit 400 -- -- -- --
Loss from early extinguishment of debt (75) -- -- -- --
Reincorporation expenses (120) -- -- -- --
Costs incurred to acquire management contract -- (2,092) (6,553) -- --
Earnings from liquidating operations -- -- -- -- 6,507
Elimination of dividend equivalent rights -- -- -- (825) --
Gain on sale of bonds -- 6,484 -- --
----------- ----------- ---------- ---------- ----------
INCOME BEFORE MINORITY INTEREST IN OPERATING
PARTNERSHIP 2,852 272 7,192 9,673 14,440
Minority interest in Operating Partnership (446) (60) 62 -- --
----------- ----------- ---------- ---------- ----------
NET INCOME $ 2,406 $ 212 $ 7,254 $ 9,673 $ 14,440
=========== =========== ========== ========== ==========
Per Share Amounts:
Basic earnings $ 0.43 $ 0.04 $ 1.44 $ 1.97 $ 2.97
Diluted earnings $ 0.43 $ 0.04 $ 1.43 $ 1.95 $ 2.96
Dividends $ 1.00 $ 0.75 $ 1.45 $ 1.85 $ 1.70
Weighted-average common shares outstanding 5,538 5,094 5,022 4,919 4,856
Weighted-average common shares and common share
equivalents outstanding 5,544 5,113 5,061 4,966 4,883
</TABLE>
- 13 -
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Real estate, before accumulated depreciation $115,993 $101,941 $ 41,419 $ -- $ --
Investments in participating mortgages and
joint ventures 22,475 27,604 25,415 -- --
Investment in Commercial Assets 19,486 20,706 20,866 19,361 19,225
Total assets 159,093 158,226 119,161 90,344 79,653
Secured long-term notes payable 53,994 40,506 10,677 -- --
Secured short-term financing 2,610 10,500 -- -- --
Minority interest in Operating Partnership 15,236 25,649 22,362 -- --
Stockholders' equity 83,852 78,636 83,515 86,365 78,759
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The following discussion and analysis of consolidated results of operations and
financial condition should be read in conjunction with our consolidated
financial statements included elsewhere in this report. In 1997, we decided to
change our business from the ownership of high-risk, residential collateralized
mortgage-backed securities to the ownership, acquisition, development and
management of manufactured home communities. This decision helped us to avoid
the volatility incurred by other owners of these securities following the
capital market crisis in the third quarter of 1998. Since May 1997, we have been
focused on the investment of our capital in the acquisition of manufactured home
communities. We have also been focused on the investment of Commercial Assets'
capital in the acquisition of manufactured home communities since August 1998.
As of December 31, 1999, Commercial Assets has not yet substantially invested
its capital in manufactured home communities.
Inflation
We do not believe that changes in inflation rates would have a material adverse
effect on our business. In fact, we believe that inflation may positively impact
our business, in light of the fact that manufactured home communities represent
a more affordable housing choice for many people than other alternatives
available, increased inflation rates may allow us to demand increased rents
without losing tenants.
Comparison of 1999 to 1998
Rental Property Operations
Rental and other property revenues from our owned properties totaled $14,987,000
in 1999 compared to $10,479,000 in 1998, an increase of $4,508,000, or 43.0%.
The increase consisted of:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
(in thousands)
<S> <C> <C>
1998 acquisitions $ 7,079 $ 3,477
1999 acquisitions 542 --
"Same store" properties 7,366 7,002
------------- -------------
Total $ 14,987 $ 10,479
============= =============
</TABLE>
- 14 -
<PAGE>
Property operating expenses from our owned properties totaled $5,262,000 in 1999
compared to $4,039,000 in 1998, an increase of $1,223,000, or 30.3%. The
increase consisted of:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
(in thousands)
<S> <C> <C>
1998 acquisitions $ 2,028 $ 941
1999 acquisitions 98 --
"Same store" properties 3,136 3,098
------------- -------------
Total $ 5,262 $ 4,039
============= =============
</TABLE>
We refer to properties which we owned throughout both 1998 and 1999 as "same
store" properties.
Interest income on participating mortgages was $2,976,000 in 1999 compared to
$3,174,000 in 1998. The $198,000 decrease was primarily due to a decrease in the
amount invested in these mortgages during 1999.
Depreciation expense increased from $2,685,000 in 1998 to $3,870,000 in 1999 due
to acquisitions of manufactured home communities during 1998 and 1999.
Service Operations
During 1999, we earned $207,000 in property management income as compared to
$156,000 during 1998. The $51,000 increase is primarily due to an increase in
the number of properties that we manage for Commercial Assets.
Fee revenue from managing Commercial Assets was $564,000 in 1999 and $155,000 in
1998. The $409,000 increase is due to Commercial Assets' investments in
communities beginning in August 1998. We do not earn fees on cash and short-term
investments held by Commercial Assets which is what Commercial Assets primarily
held in 1998.
Amortization of management contracts decreased from $2,894,000 for 1998 to
$2,757,000 for 1999 due to our acquisition in February 1998 of two communities
which we previously managed.
Equity in Earnings of Commercial Assets
Income from our 27% interest in Commercial Assets was $872,000 for 1999 and
$975,000 for 1998. Commercial Assets reported to us that its 1999 net income
decreased by $917,000 from 1998 primarily due to: (1) $1,229,000 increase in
depreciation on acquired manufactured home communities, (2) $559,000 increase in
management fees paid to us and (3) $500,000 of nonrecurring expenses in 1998
related to its decision to not invest in marinas; partially offset by $120,000
of nonrecurring expenses in 1999 related to its reincorporation. Due to our 27%
interest in Commercial Assets, however, during 1999 and 1998, $205,000 and
$56,000, respectively, of the management fees paid by Commercial Assets to us
have been reported by us as equity in earnings of Commercial Assets in
accordance with generally accepted accounting principles.
- 15 -
<PAGE>
General and Administrative Expenses
Our general and administrative expenses were $1,530,000 in 1999 and $1,393,000
in 1998. The $137,000 increase is primarily due to increases in the number of
personnel.
Interest and Other Income
Interest and other income was $241,000 in 1999 and $871,000 in 1998. The
$630,000 decrease occurred primarily because prior to June 1998, we had $20
million in cash which we had invested in manufactured home communities by June
30, 1998.
Interest Expense
Interest expense was $3,846,000 during 1999 and $2,485,000 during 1998. The
$1,361,000 increase is primarily due to borrowings used to acquire manufactured
home communities after June 1998.
Income Tax Benefit
A subsidiary recorded a loss for income tax purposes in 1999. As a result, it
can carry back the tax loss for a refund of income taxes paid by the subsidiary
in 1997.
Loss from Early Extinguishment of Debt
In 1999, we prepaid a $2.2 million note payable and paid a $75,000 prepayment
penalty.
Reincorporation Expenses
In 1999, we incurred $120,000 of nonrecurring expenses related to our
reincorporation in Delaware.
Cost Incurred to Acquire Management Contract
In 1998, we issued 120,000 OP Units to our former manager because we achieved
certain returns from our investments in manufactured home communities. We
expensed in 1998 the $2,092,000 value assigned to the OP Units. We did not have
these costs in 1999.
Comparison of 1998 to 1997
Rental Property
Income from rental properties totaled $6,929,000 during 1998 and $1,479,000
during 1997. The $5,450,000 increase between 1997 and 1998 was due to our
acquisition of communities during those years. Our first acquisition of
manufactured home communities occurred in May 1997, and as of December 31, 1997,
we had invested $69 million in 19 communities. During 1998, we had invested an
additional $60 million in seven communities.
Service Operations
During 1998, we earned $156,000 in property management income versus $69,000
during 1997. Property management income increased by $87,000 because property
management contracts were not acquired until May 1997. Amortization of
- 16 -
<PAGE>
management contracts increased from $744,000 in 1997 to $2,894,000 in 1998 due
to our acquisition of property management contracts in May 1997 and our
acquisition of the Commercial Assets management agreement in November 1997.
Similarly, fee revenue from managing Commercial Assets was $155,000 in 1998 and
$0 in 1997.
Equity in Earnings of Commercial Assets
Income from our 27% interest in Commercial Assets for 1998 was $975,000 compared
to $3,663,000 for 1997. Prior to November 1997, Commercial Assets received
income from a portfolio of collateralized mortgage backed securities. It
resecuritized its portfolio in November 1997 and temporarily invested the
proceeds in short-term investments while considering alternative investments.
Commercial Assets announced that it intended to invest in manufactured home
communities in the third quarter of 1998, and as of December 31, 1998, it had
invested $23 million in communities. Commercial Assets reported to us that the
$10,265,000 decrease in Commercial Assets' net income during 1998 as compared to
1997 was due to: (1) a $3,954,000 decrease as a result of lower yields during
1998 on short-term investments and interests in manufactured home communities
compared to yields on collateralized mortgage backed securities during 1997, (2)
a $5,786,000 nonrecurring gain on the sale of the bonds recognized in 1997, and
(3) a non-recurring $500,000 expense in 1998 related to the cost of
investigating marina investments.
Non-agency MBS Bonds
In March 1997, we sold our portfolio of unrated credit support debt interests in
non-conforming residential mortgage loan securitizations known as "non-agency
MBS bonds" in order to reduce risk associated with this type of investment and
to maximize long-term, risk-adjusted returns to stockholders. Consequently,
income from non-agency MBS bonds decreased to $50,000 for 1998 compared with
$2,966,000 for 1997. Revenues from non-agency MBS bonds subsequent to March 1997
represent income from a residual interest retained from the sale.
General and Administrative Expenses
Our general and administrative expenses were $1,393,000 for 1998 compared to
$1,612,000 for 1997. Expenses decreased in 1998 by $219,000 primarily because of
(1) $570,000 of management fees to our former manager during 1997 and (2)
$100,000 of nonrecurring costs in 1997 related to our reverse stock split. The
cost decrease was partially offset by $500,000 in personnel and related expenses
incurred in 1998 as a result of our becoming self-administered and self-managed
in November 1997.
Interest and Other Income
Interest and other income for 1998 was $871,000 compared to $1,808,000 for 1997.
The $937,000 decrease occurred because the proceeds we received in 1997 from the
sale of our non-agency MBS bonds were temporarily invested until they were used
to acquire manufactured home communities. By June 1998, we had used
substantially all of the proceeds to acquire communities.
Interest Expense
Interest expense increased in 1998 by $2,117,000 as compared to 1997 due to
borrowings used to acquire manufactured home communities as follows: (1)
$479,000 on approximately $11 million of debt assumed in connection with the
1997 acquisitions of four manufactured home communities, (2) $1,288,000 on
- 17 -
<PAGE>
approximately $40 million borrowed in mid-1998 in connection with the
acquisition of four additional communities and (3) $382,000 of amortized loan
costs related to the 1998 borrowings.
Costs Incurred to Acquire Management Contract
During 1998, we achieved annualized returns before depreciation on certain of
our real estate investments in excess of 9% for a period of six months. Pursuant
to the November 1997 acquisition of our management contract, we issued 120,000
OP Units to the former manager and recognized a $2,092,000 expense for
additional consideration paid to the former manager. During 1997, we recognized
$6,553,000 of expense related to the purchase of our management contract.
Gain on Sale of Bonds
In connection with the 1997 resecuritization of our non-agency MBS bonds, a
$7,359,000 gain was recognized, reduced by both $1,472,000 of incentive fees
paid to our former manager related to the gain and an additional fee of $600,000
incurred in exchange for the former manager agreeing to continue as a loss
mitigation advisor on the non-agency MBS bonds. In addition, during the fourth
quarter of 1997, we entered into a transaction for the sale of interests in
other bonds that had no carrying value on our books. As a result of this
transaction, a gain of $1,197,000 was recognized in 1997. We had no gains in
1998.
NOL and Capital Loss Carryovers
At December 31, 1999, our NOL carryover for income tax purposes was
approximately $95,000,000 and our capital loss carryover for income tax purposes
was approximately $20,000,000. Subject to some limitations, the NOL carryover
may be used to offset all or a portion of our REIT taxable income, and as a
result, to reduce the amount of income that we must distribute to stockholders
to maintain our status as a REIT. The NOL carryover is scheduled to expire
between 2007 and 2009 and the capital loss carryover is scheduled to expire in
2000 and 2001.
Dividend Distributions
During 1999, we distributed $6,591,000 ($1.00 per share) to holders of common
stock and OP Units compared to 1998 distributions of $4,916,000 ($0.75 per
share) and 1997 distributions of $7,749,000 ($1.45 per share). Sixty-eighty
percent of 1999 dividends, eighty percent of 1998 dividends and seventy-five
percent of 1997 dividends constituted return of capital distributions for
federal income tax purposes and are not taxable to the stockholders to the
extent of their tax basis in their stock.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, we had cash and cash equivalents of $570,000. Our
principal activities that demand liquidity include our normal operating
activities, payments of principal and interest on outstanding debt, acquisitions
of or additional investments in properties, payments of dividends to
stockholders and distributions made to limited partners in the Operating
Partnership.
Our net cash provided by operating activities was $5,764,000 during 1999
compared to $6,841,000 during 1998. The $1,077,000 decrease was primarily a
result of a $1.6 million increase in other assets and a $0.6 million increase in
accrued interest on participating mortgages; partially offset by a $1.3 million
increase in income before depreciation, amortization, minority interest and
non-cash costs incurred to acquire management contracts.
- 18 -
<PAGE>
In 1999, the net cash used in investing activities was $5,410,000, compared with
$58,897,000 in 1998. In 1998, we purchased $57,832,000 of manufactured home
communities. During 1999, we used only $858,000 to purchase manufactured home
communities; however, we invested $5,500,000 in participating mortgages.
Net cash used by financing activities was $1,210,000 in 1999 compared with 1998
in which $31,680,000 was provided by financing activities. In 1998, we borrowed
funds in connection with our acquisition of manufactured home communities. In
1999, we did not have significant acquisitions of manufactured home communities.
Rather, we borrowed $11 million of long-term debt to refinance short-term and
long-term debt and fund $5.5 million of investments in participating mortgages.
Also in 1999, we paid dividends and distributions of $1.00 per share and OP
Unit. In 1998, we paid $0.75 per share and OP Unit.
We have a line of credit with a bank which matures in September 2000. The line
of credit is secured by 1,015,674 shares of our Commercial Assets common stock.
Advances under this line of credit bear interest at the 30-day LIBOR rate plus
1.75%. The line of credit is limited to the lesser of (1) $5,000,000, (2) 65% of
the product of the trading price of Commercial Assets common stock times
1,015,674 or (3) 65% of the purchase price of certain unpledged real estate. As
of December 31, 1999, the limit was $3,053,000 and $2,610,000 was outstanding on
this line of credit.
As of December 31, 1999, 88% of our real estate and 65% of our total assets was
encumbered by debt. We had total outstanding indebtedness of $56.6 million, all
of which was secured by various manufactured home communities or shares of
Commercial Assets common stock. Of our indebtedness, $54.0 million, or 95.4%,
was secured long-term notes payable and $2.6 million, or 4.6%, was secured
short-term financing. As of December 31, 1999, $6.1 million of the secured
long-term notes payable and all of the secured short-term financing bears
interest at variable rates based on the 30-day London Interbank Offered Rate.
The weighted-average interest rate on our secured long-term notes payable was
7.4% at December 31, 1999. The weighted-average interest rate on our secured
short-term financing was 7.6% at December 31, 1999. Our secured long-term notes
payable had a weighted average maturity of 9.2 years at December 31, 1999.
We expect to meet our long-term liquidity requirements in excess of 12 months
through long-term, secured borrowings, the issuance of OP Units and other equity
securities and cash generated by operations.
Proposed Merger with Commercial Assets. In August 1999, we agreed to merge with
Commercial Assets. We agreed to issue 0.4075 shares of our common stock for each
share of Commercial Assets common stock. Alternatively, Commercial Assets
stockholders may elect to receive $5.75 per share in cash for up to 3,549,868
shares of Commercial Assets common stock with any remaining shares of Commercial
Assets common stock receiving 0.4075 shares of our common stock. Based on the
7,606,903 shares of Commercial Assets common stock not already held by us, we
will issue approximately 3,100,000 shares of our common stock if all Commercial
Assets stockholders elect to receive shares of our common stock in the merger.
If Commercial Assets stockholders elect to receive the maximum amount of cash,
then we will issue approximately 1,653,000 shares of our common stock and pay
$20,412,000 cash to Commercial Assets stockholders in the merger.
The merger must be approved by a majority of the outstanding shares of our
common stock and two-thirds of the outstanding shares of Commercial Assets
common stock. We own 27% of the outstanding shares of Commercial Assets common
- 19 -
<PAGE>
stock and have agreed to vote these shares in favor of the merger. The
stockholders meetings to vote on the merger are expected to occur in the second
quarter of 2000.
At December 31, 1999, we had an investment in Commercial Assets with a recorded
amount of $19,486,000. Based on the $13.625 share price of our common stock on
August 31, 1999 (the last trading day before the public announcement of the
merger), our summary pro forma balance sheet at December 31, 1999 would have
been as follows under the two alternatives available to Commercial Assets
stockholders. The column titled "All Shares" assumes all Commercial Assets
stockholders elect to receive shares of our common stock. The column titled
"Shares and Cash" assumes Commercial Assets stockholders elect to receive the
maximum amount of cash. All amounts are in thousands.
<TABLE>
<CAPTION>
Pro Forma
Asset -----------------------------
Investors All Shares
Historical Shares and Cash
---------- ------ --------
Real estate, net (including participating mortgages and
<S> <C> <C> <C>
joint ventures) $ 131,220 $ 190,670 $ 190,670
Cash and short-term investments 570 14,736 4,424
Investment in Commercial Assets 19,486 -- --
Other assets 7,817 13,780 13,780
---------- ----------- -----------
Total assets $ 159,093 $ 219,186 $ 208,874
========== =========== ===========
Secured notes payable $ 56,604 $ 77,046 $ 87,146
Other liabilities 3,401 5,148 5,148
Minority interest in Operating Partnership 15,236 15,759 15,759
Stockholders' equity 83,852 121,233 100,821
---------- ----------- -----------
Total liabilities and stockholders' equity $ 159,093 $ 219,186 $ 208,874
========== =========== ===========
</TABLE>
The source of the funds to be paid to Commercial Assets stockholders who elect
to receive cash in the merger (up to a maximum of $20,412,000) is Commercial
Assets' $17.2 million of cash and short-term investments at December 31, 1999
and $10.1 million in additional non-recourse, secured long-term notes payable
borrowed by Commercial Assets in January 2000. Additional pro forma information
at December 31, 1999 would be as follows:
<TABLE>
<CAPTION>
Pro Forma
Asset -----------------------------
Investors All Shares
Historical Shares and Cash
---------- ------ --------
(dollar amounts in thousands)
<S> <C> <C> <C>
Debt to equity ratio 0.57:1.00 0.56:1.00 0.75:1.00
Secured long-term notes payable $ 53,994 $ 74,436 $ 84,536
Secured short-term financing $ 2,610 $ 2,610 $ 2,610
Long-term debt as a percent of total debt 95% 97% 97%
Fixed rate debt $ 47,923 $ 68,365 $ 78,465
Variable rate debt $ 8,681 $ 8,681 $ 8,681
Fixed rate debt as a percent of total debt 85% 89% 90%
</TABLE>
FUNDS FROM OPERATIONS
We measure our economic profitability based on FFO, less an annual capital
replacement reserve of at least $50 per developed homesite. We believe that the
presentation of FFO, when considered with the financial data determined in
- 20 -
<PAGE>
accordance with generally accepted accounting principles, provides a useful
measure of our performance. However, FFO does not represent cash flow and is not
necessarily indicative of cash flow or liquidity available to us, nor should it
be considered as an alternative to net income as an indicator of operating
performance. The Board of Governors of NAREIT defines FFO as net income (loss),
computed in accordance with generally accepted accounting principles, 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. We calculate FFO beginning with the NAREIT definition and include
adjustments for:
o the minority interest in the Operating Partnership owned by persons other
than us,
o costs we incurred in order to become self-managed,
o amortization of property and investment management contracts, and
o nonrecurring income, net.
We believe that the presentation of FFO provides investors with measurements
which help facilitate an understanding of our ability to make required dividend
payments, capital expenditures and principal payments on our debt. Since FFO
excludes unusual and nonrecurring expenses as well as depreciation and other
real estate related expenses, FFO may be materially different from net income.
Therefore, FFO should not be considered as an alternative to net income or net
cash flows from operating activities, as calculated in accordance with generally
accepted accounting principles, as an indication of our operating performance or
liquidity.
FFO is not necessarily indicative of cash available to fund our cash needs,
including our ability to make distributions. We use FFO in measuring our
operating performance because we believe that the items that result in a
difference between FFO and net income do not impact the ongoing operating
performance of a real estate company. Also, we believe other real estate
companies, analysts and investors utilize FFO in analyzing the results of real
estate companies. Our basis of computing FFO is not necessarily comparable with
that of other REITs.
For 1999, 1998 and 1997, our FFO was as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income before minority interest in Operating Partnership $ 2,852 $ 272 $ 7,192
Real estate depreciation, including joint ventures 3,870 2,685 848
Amortization of management contracts 2,757 2,894 744
Costs incurred to acquire management contract -- 2,092 6,553
Nonrecurring income, net (63) -- --
Equity in Commercial Assets' adjustments for FFO 340 146 (1,546)
Gain on sale of bonds -- -- (6,484)
-------- -------- --------
Funds From Operations (FFO) $ 9,756 $ 8,089 $ 7,307
======== ======== ========
Weighted average common shares and OP Units outstanding 6,565 6,540 5,254
======== ======== ========
</TABLE>
- 21 -
<PAGE>
For 1999, 1998 and 1997, our net cash flows were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Cash provided by operating activities $ 5,764 $ 6,841 $ 3,931
Cash provided by (used in) investing activities (5,410) (58,897) 27,479
Cash provided by (used in) financing activities (1,210) 31,680 (10,025)
</TABLE>
YEAR 2000 COMPLIANCE
Year 2000 issues have arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19". If not corrected, many computer applications could
fail or create erroneous results. The following disclosure provides information
regarding the current status of our Year 2000 compliance program.
Our hardware and software systems are currently Year 2000 compliant. Upon
failure of any system, data included in critical software (such as rent-rolls
and certain record-keeping systems) could be transferred to alternative
commercially available software at a reasonable cost and within a reasonable
time period. Consequently, we would be able to continue our business operations
without any material interruption or material effect on our business, results of
operations or financial condition. We have not experienced any Year 2000
problems through March 17, 2000.
Disruptions in the economy generally resulting from Year 2000 issues could also
materially adversely affect us. Moreover, because a large number of our tenants
may be dependent on social security payments to pay their rents, a failure of
the Social Security Administration to cause their systems to be Year 2000
compliant may result in a material adverse effect on our operations. The Social
Security Administration has announced that they will have their systems Year
2000 compliant before January 1, 2000. We have received oral representations
from our third party vendors indicating that they are substantially Year 2000
compliant. We have not experienced any Year 2000 problems through March 17,
2000.
We believe that the cost of modification or replacement of our less essential
accounting and reporting software and hardware that is not currently compliant
with Year 2000 requirements, if any, will not be material to our financial
position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our principal exposure to market risk is through our various debt instruments
and borrowings. The following is a list of these debt instruments and borrowing
arrangements.
We have $37.8 million of fixed rate, fully amortizing, non-recourse, secured
long-term notes payable. We do not have significant exposure to changing
interest rates on these notes as the rates are fixed and the notes are fully
amortizing.
We have $7.6 million of fixed rate, non-recourse, secured long-term notes
payable that mature in October 2000. The rates on these notes range from 7.5% to
8.25% with a weighted average rate of 7.7%. We intend to refinance the notes
during 2000 with long-term, fully amortizing, fixed rate debt. Therefore,
changes in interest rates would affect the cost of funds borrowed in the future
to refinance the existing debt. If the interest rate on the refinanced debt was
1.0% greater than the weighted average rate on the existing debt, our annual net
- 22 -
<PAGE>
income and cash flows would decrease by $76,000 due to an increase in interest
expense on these notes, based on the outstanding balances at December 31, 1999.
We believe that the effect, if any, of near-term changes in interest rates on
our financial position, results of operations or cash flows for 2000 would not
be material as the existing debt is fixed rate through September 2000.
We have a $2.5 million fixed rate, partially amortizing, non-recourse, secured
long-term note payable that matures in April 2009. We do not have significant
exposure to changes in interest rates since the interest rate is fixed and the
balance due at maturity is $2 million.
We have a $6.1 million of recourse, secured long-term note payable that bears
interest at the 30-day London Interbank Offered Rate ("LIBOR") plus 2.5%. If
LIBOR increased immediately by 1%, our annual net income and cash flows would
decrease by $61,000 due to an increase in interest expense on this note payable,
based on the outstanding balance at December 31, 1999.
We have a recourse, secured line of credit that bears interest at LIBOR plus
1.75%. As of December 31, 1999, the outstanding balance was $2.6 million. If
LIBOR increased immediately by 1%, then our annual net income and cash flows
would decrease by $26,000 due to an increase in interest expense on this line of
credit, based on the outstanding balance at December 31, 1999.
Item 8. Financial Statements and Supplementary Data.
The report of independent auditors, 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.
We have had no changes in nor any disagreements with our accountants relating to
accounting or financial disclosure.
- 23 -
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information with respect to our directors and executive officers appears below
and was furnished in part by each such person.
Each of our executive officers serves for a term of one year and until his or
her successor is elected and qualified or until his or her earlier resignation
or removal by the Board of Directors. Each of our directors serves for a term of
three years. There are no family relationships among any of our directors and
executive officers.
<TABLE>
<CAPTION>
Name Age First Elected Position(s) Held with the Company
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Terry Considine 52 September 1996 Chairman of the Board of Directors (Class II)
and Chief Executive Officer
Thomas L. Rhodes 60 September 1996 Vice Chairman of the Board of Directors (Class III)
Bruce E. Moore 57 February 1998 Director (Class I), President and Chief Operating Officer
Bruce D. Benson 61 October 1996 Independent Director (Class II) and Chairman of the
Compensation Committee
Elliot H. Kline 59 September 1988 Independent Director (Class III), Member of the Compensation
Committee and Chairman of the Audit Committee
Richard L. Robinson 70 January 1990 Independent Director (Class I) and Member of the Audit and
Compensation Committees
Tim Schultz 51 July 1994 Independent Director (Class I) and Member of the Audit and
Compensation Committees
William J. White 61 December 1996 Independent Director (Class II) and Member of the Audit and
Compensation Committees
Robert G. Blatz 38 February 1999 Executive Vice President-Operations
Joseph W. Gaynor 54 January 2000 Vice President-Development
David M. Becker 40 December 1997 Chief Financial Officer, Treasurer and Secretary
</TABLE>
Terry Considine has been our Chairman of the Board of Directors and Chief
Executive Officer since April 1998. From September 1996 to April 1998, Mr.
Considine served as Co-Chairman of the Board of Directors and Co-Chief Executive
Officer of the Company. Mr. Considine also serves as Chairman of the Board of
Directors and Chief Executive Officer of Commercial Assets, Inc. ("CAX"). 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
Thomas L. Rhodes has been our Vice Chairman of the Board of Directors of the
Company since April 1998. From September 1996 to April 1998, Mr. Rhodes served
as Co-Chairman of the Board of Directors and Co-Chief Executive Officer of the
Company. Mr. Rhodes also serves as Vice Chairman of the Board of Directors of
CAX. 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
Trustee of The Heritage Foundation.
- 24 -
<PAGE>
Bruce E. Moore was appointed our President and Chief Operating Officer in
February 1998. He also serves as President and Chief Operating Officer of
Commercial Assets. Mr. Moore is the founder and was the Chief Executive Officer
of Brandywine Financial Services Corporation and its affiliates ("Brandywine"),
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, Mr. Moore is a member of the National
Association of Real Estate Investment Trusts and the International Council of
Shopping Centers.
Robert G. Blatz has functioned as our Executive Vice President since February
1999 and was appointed to this position in September 1999. From June 1998 until
joining the Company he served as a Senior Associate for Coopers & Lybrand
(predecessor to PricewaterhouseCoopers) as a consultant for management and
financial systems. From May 1993 to June 1998, he was with the Heritage
Foundation, a public policy organization, most recently as its Vice President
and Chief Financial Officer. From May 1983 to May 1993, he served as an officer
in the United States Army, in a variety of positions and assignments. Mr. Blatz
received a BS from the United States Military Academy and an MBA from The George
Washington University.
Joseph W. Gaynor joined the Company as Vice President of Development in January
2000. From January 1986 through December 1999, Mr. Gaynor served as General
Counsel to Brandywine Corporation and its affiliates ("Brandywine"), a private
real estate firm specializing in various aspects of the real estate industry,
including development and property management of retail centers and manufactured
home communities. In 1995, Mr. Gaynor became the President of an affiliate of
Brandywine in charge of new development. In May 1997, Mr. Gaynor became
President of Community Acquisition and Development Corporation, the managing
member of several limited liability companies which owned, leased and operated
manufactured home communities in which either the Company or Commercial Assets
had interests in. Prior to 1995, Mr. Gaynor was a senior partner in the law firm
of Gaynor, Decker & Young, P.A. and specialized in the development of retail
shopping centers, hotels, marinas and manufactured home communities. Mr. Gaynor
received his B.S. with honors from Rutgers University, earned his J.D. from
Stetson University College of Law and was admitted to the Florida Bar in 1971.
He is a past Chairman of St. Petersburg Downtown Redevelopment Committee and
Port Authority, a past Chairman of the Board of Operation PAR, Inc. (Parental
Awareness and Responsibility), a past Chairman of the Tampa Bay Area Partnership
for a Drug Free Florida, and a past Chairman of the Pinellas Partnership for a
Drug-Fee Workplace.
David M. Becker has functioned as our Chief Financial Officer, Treasurer and
Secretary since December 1997 and was appointed to such positions in February
1998. Since December 1997, Mr. Becker has also served as Chief Financial
Officer, Secretary and Treasurer of Commercial Assets and was appointed to such
positions in April 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
- 25 -
<PAGE>
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.
Bruce D. Benson has served as a Director of the Company and CAX since October
1996 and previously served as a Director of the Company from February 1992
through November 1993. In February 1998, Mr. Benson became the Chairman of the
Company's compensation committee. For the past 32 years, he has been President
and owner of Benson Mineral Group, Inc., a domestic oil and gas production
company located in Denver, Colorado. He is also Chairman, Chief Executive
Officer and President of United States Exploration, Inc., an oil and gas
exploration company listed on the American Stock Exchange. He serves on numerous
Boards of Trustees and Boards of Directors, including Chairman, Denver
Zoological Foundation; Past Chairman and Past President, Boy Scouts of America,
Denver Area Council; Trustee and Past President of the Board of Trustees,
Berkshire School, Sheffield, Massachusetts; Past Trustee, Smith College,
Northampton, Massachusetts; Past Chairman, Colorado Commission on Higher
Education; and past member, Board of Directors, University of Colorado
Foundation; and Chairman of the Total Learning Environmental Capital Campaign of
the University of Colorado. In 1994, he was the Republican nominee for the
Governor of Colorado.
Elliot H. Kline has served as a Director of the Company since September 1988, as
a member of its compensation committee since February 1998, as a member of its
audit committee since December 1988 and as Chairman of the audit committee since
November 1990. Dr. Kline has served as Executive-in-Residence at Arizona State
University-West since August 1993. Dr. Kline served as President of In The
Interim Management Consulting, a firm specializing in consulting to
universities, from 1989 to 1993. Dr. Kline served as the Dean of the College of
Business Administration at the University of Denver from 1987 to 1989; as the
Dean and a Professor of the School of Business and Public Administration at the
University of the Pacific from 1977 to 1987; and as the Director and an
Associate Professor of the Institute of Public Affairs and Administration at
Drake University from 1970 to 1977.
Richard L. Robinson has served as a Director of the Company since January 1990,
as a member of its audit committee since August 1993 and as a member of its
compensation committee since February 1998. Mr. Robinson has served as Chairman
of the Board of Directors and Chief Executive Officer of Robinson Dairy, Inc., a
Denver-based institutional dairy products manufacturer and distributor, since
1975 and prior thereto served in various executive positions with that company
for 20 years. Mr. Robinson also serves as a Director of US Exploration. He is
active in numerous civic and charitable organizations, is past Chairman of the
Greater Denver Chamber of Commerce and a past President of the State Board of
Agriculture, the governing body for the Colorado State University System.
Tim Schultz has served as Director of the Company and as a member of its audit
committee since July 1994. In February 1998, Mr. Schultz became a member of the
Company's compensation committee. He is President and Executive Director of the
Boettcher Foundation, a Colorado not-for-profit, charitable corporation, and
from August 1994 until November 1995, he was Chairman and President of Colorado
Open Lands, a Colorado not-for-profit corporation. From 1990 until August 1994,
he was employed by the law firm of Arnold & Porter as a
Consultant-Corporate/Government Relations with responsibilities ranging from
serving as Chairman of a large land trust to representing clients' needs in
connection with state and local government issues. From May 1987 to July 1990,
Mr. Schultz served as Executive Director of the State of Colorado Department of
Local Affairs and from November 1983 to May 1987, as Commissioner of Agriculture
for the State of Colorado Department of Agriculture, both cabinet level
positions. From 1987 to 1991, he served as Chairman of the Colorado Economic
Development Commission.
- 26 -
<PAGE>
William J. White has served as Director of the Company and member of its audit
committee since December 1996, and became a member of its compensation committee
in February 1998. Mr. White has served as Chairman of Bigelow and Co., an
investment-banking firm located in Denver, Colorado that specializes in
municipal and corporate finance, since 1995. From 1992 through 1995, Mr. White
was President and owner of First Denver Financial Corporation and in 1991 and
1992, was President of Affiliated Capital Markets, a division of Affiliated
National Bank. Prior to these positions, Mr. White served in various positions
culminating as Chairman of Kirchner Moore and Company, an investment-banking
firm. Mr. White serves on the Board of Directors of Guaranty Bank and Trust
Company.
There are no arrangements or understandings pursuant to which any of our
directors or executive officers were selected as directors or officers. Except
as described above, none of our directors or executive officers 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.
Compliance With Section 16(a) of the Exchange
Our executive officers and directors, and persons who own more than 10% of the
Company's common stock, are required under the Securities Exchange Act of 1934
to file reports of ownership and changes in ownership of securities of the
Company with the Securities and Exchange Commission and the New York Stock
Exchange, Inc. Copies of those reports also must be furnished to us. Based
solely upon a review of the copies of reports furnished to us, we believe that
for the year ended December 31, 1999, all filing requirements were timely met by
our executive officers, directors and beneficial owners of more than ten percent
of our stock except as follows: Mr. Blatz was late filing his report on Form 3
relating to ownership of equity interests. Mr. White was late filing one report
on Form 4 relating to a change in beneficial ownership.
11. Executive Compensation.
In 1999, none of Messrs. Considine, Rhodes or Moore received any compensation in
his capacity as Chief Executive Officer, Vice Chairman and President and Chief
Operating Officer, respectively. Mr. Blatz received total salary and bonus in
1999 of $101,000 as the Executive Vice President-Operations. Mr. Becker received
total salary and bonus in 1999 of $150,000 as the Chief Financial Officer,
Treasurer and Secretary.
In their capacity as executive officers, each of Messrs. Moore, Blatz and Becker
received options to acquire shares of our common stock. Neither Messrs.
Considine nor Rhodes, each of whom is a stockholder of the Company and
Commercial Assets, was at any time on or prior to December 31, 1999 granted
options to acquire shares of our common stock other than in his capacity as an
executive officer. Mr. Moore, a stockholder in the Company, was not at any time
on or prior to December 31, 1999 granted options to acquire shares of our common
stock other than in his capacity as an executive officer.
The following table sets forth, in summary form, the compensation paid by the
Company to each individual who served as its Chief Executive Officer, President
and two executive officers of the Company during 1999 whose salary exceeded
$100,000 (the "Named Executive Officers"):
- 27 -
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
Awards
--------------------- ---------------------
Securities
Underlying
Name and Principal Positions Year Salary ($) Options (#)
- --------------------------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
Terry Considine 1999 - -
Chief Executive Officer 1998 - 300,000
1997 - -
Bruce E. Moore 1999 - 25,000
President and Chief Operating Officer 1998 - 250,000
1997 - -
Robert G. Blatz 1999 101,000 80,000
Executive Vice President - Operations 1998 - -
1997 - -
David M. Becker 1999 150,000 10,000
Chief Financial Officer 1998 150,000 40,000
1997 - -
</TABLE>
The following tables set forth certain information regarding stock options
granted to the Named Executive Officers during 1999:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
--------------------------------------------------------------- Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options Granted Price Appreciation for
Underlying Granted to Option Term
Options Employees in Exercise Expiration --------------------------
Name Granted(#) Fiscal Year (%) Price ($/sh)(3) Date 5% ($) 10% ($)
---- ---------- --------------- --------------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Terry Considine -- --% -- -- -- --
Bruce E. Moore 25,000 (1) 21.7% 15.0625 1/18/09 237,000 600,000
Robert G. Blatz 80,000 (2) 69.6% 13.4375 9/12/09 676,000 1,713,000
David M. Becker 10,000 (1) 8.7% 15.0625 1/18/09 95,000 240,000
- ----------
<FN>
(1) During 1999, each of Messrs. Moore and Becker received options
constituting nonqualified stock options to purchase shares of common stock
under the 1998 Stock Incentive Plan. Their options are subject to a
five-year vesting period such that no options vest until the third
anniversary after the date of grant. Sixty percent of the options vest on
the third anniversary and an additional 20% vest on each of the fourth and
fifth anniversaries.
(2) During 1999, Mr. Blatz received options constituting nonqualified stock
options to purchase 40,000 shares of common stock under the 1998 Stock
Incentive Plan. Options are subject to a four-year vesting period such
that 25% of such options vest on each of the first three anniversaries
after the respective date of grant. Options for an additional 40,000
shares vested on the date of grant and Asset Investors lent $538,000 to
Mr. Blatz which he used to exercise these options. The loan bears interest
at 7.5% and matures September 12, 2009.
(3) The exercise price is equal to the fair market value of the common stock
on the date of grant.
</FN>
</TABLE>
- 28 -
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Value of
Number of Securities Unexercised In-
Underlying Unexercised the-Money
Options at Fiscal Options at Fiscal
Shares Value Year-end (#) Year-end ($)
Acquired Realized Exercisable/ Exercisable/
Name On Exercise (#) ($)(1) Unexercisable Unexercisable (2)
---- --------------- ------ ------------- -----------------
<S> <C> <C> <C> <C>
Terry Considine -- -- 100,000/200,000 0/0
Thomas L. Rhodes -- -- 33,334/66,666 0/0
Bruce E. Moore -- -- 83,334/191,666 0/0
Robert G. Blatz 40,000 -- 0/40,000 0/0
David M. Becker -- -- 20,000/30,000 0/0
- ----------
<FN>
(1) Represents the product of (A) the difference between (i) the closing
price of the common stock on the NYSE on the exercise date and (ii) the
option exercise price and (B) the number of securities underlying such
options.
(2) The value of unexercised in-the-money options is calculated by
multiplying (A) the number of securities underlying such options by (B)
the difference between (i) the closing price of the common stock at
December 31, 1999 and (ii) the option exercise price.
</FN>
</TABLE>
Director Compensation
During 1999, each of our non-employee directors received 2,300 shares of our
common stock, plus an additional $300 for each meeting of the Board of Directors
or committee thereof attended. In addition, all directors are reimbursed for
expenses related to their attendance at Board of Directors and committee
meetings.
Under the existing 1998 Stock Incentive Plan, on the date of the 1999 annual
stockholders meeting, all of our non-employee directors received an automatic
grant of options to acquire 2,800 shares of the Company's common stock with an
exercise price equal to the closing price of the Company's common stock on such
date. Such options were immediately exercisable and have a term of 10 years.
Under the 1998 Stock Incentive Plan, all of our non-employee directors will
automatically receive annual grants of market-price options to acquire 2,800
shares of the Company's common stock on the date of each annual stockholders
meeting. These options will be immediately exercisable upon grant and have a
term of ten years.
Compensation Committee Interlocks and Insider Participation
During 1999, Messrs. Benson, Kline, Robinson, Schultz and White served on the
compensation committee. Mr. Considine served as Chairman of the Board and Chief
Executive Officer of the Company and Commercial Assets, and Mr. Rhodes served as
Vice Chairman of the Board of the Company and Commercial Assets. Mr. Considine
is Chairman of the Board and Chief Executive Officer of Apartment Investment and
Management Company ("AIMCO") and Mr. Rhodes serves on the compensation committee
of AIMCO.
- 29 -
<PAGE>
Compensation Committee Report on Executive Compensation
The five directors who are not members of management constitute the compensation
committee. The compensation committee:
o determines the compensation of the Chief Executive Officer and the Vice
Chairman;
o reviews and approves the compensation of other corporate officers holding
executive positions;
o reviews the general compensation and benefit practices of the Company; and
o administers our compensation and stock incentive plans.
The compensation committee considers various factors including:
o recruitment, motivation and retention of our management team;
o alignment of management financial rewards with stockholder objectives for
total return (dividend income plus share price appreciation); and
o reasonability in consideration of all the facts, including total return,
the size and complexity of the Company and the practices of other real
estate investment trusts.
Compensation of senior management is comprised of Base Compensation,
Discretionary Compensation and Incentive Compensation. The policy of the
compensation committee is to set Base Compensation at or below the median paid
by comparable companies to executive officers with comparable responsibilities,
to utilize Discretionary Compensation, generally cash and not more than Base
Compensation, to reward specific achievements, and to make the chief financial
reward Incentive Compensation which is tied directly to the creation of
stockholder value.
BASE COMPENSATION. The compensation committee determined 1999 Base Compensation
for the Chief Executive Officer and the Vice Chairman, reviewed and approved
1999 Base Compensation for other senior management based upon the recommendation
of the Chief Executive Officer and Vice Chairman and considered such 1999 Base
Compensation reasonable. Base Compensation for the Chief Executive Officer and
Vice Chairman for 1998-2000 consists of options to purchase 300,000 and 100,000
shares, respectively, of the Company's common stock at $19.375 per share.
DISCRETIONARY COMPENSATION. For 1999, the compensation committee considered,
among other things:
o the achievement of the 1999 objective for per share Adjusted Funds From
Operations;
o our growth in size and complexity during 1999;
o the number and size of 1999 acquisitions by Commercial Assets and their
financings;
o the achievement of a proposed merger agreement with Commercial Assets; and
o our total return for 1999 as compared to the Morgan Stanley REIT Index.
No Discretionary Compensation was awarded to senior management.
INCENTIVE COMPENSATION. The compensation committee bases Incentive Compensation
primarily by reference to "Excess Value Added," calculated as the amount, if
any, by which our total return exceeds total returns achieved by other real
estate investment trusts (as measured by Morgan Stanley REIT Index) multiplied
by the weighted average market value of our stock and OP Units outstanding
during the measurement period.
- 30 -
<PAGE>
In 1999, our total return was a negative 6% which was less than the negative 5%
Total Return of the Morgan Stanley REIT Index. The compensation committee
awarded no Incentive Compensation in 1999 to either the Chief Executive Officer
or Vice Chairman and approved no awards to other senior management.
CHIEF EXECUTIVE OFFICER AND VICE CHAIRMAN. In determining the compensation for
the Chief Executive Officer and Vice Chairman, the compensation committee
considered, among other things, our 1999 financial performance:
o Total Return for 1999 of a negative 6%;
o investment of $47 million by Commercial Assets in manufactured home
communities in 1999;
o agreement to merge with Commercial Assets; and
o increase in leasing of previously unleased homesites from 44 in 1998 to
147 in 1999.
EQUITY TRANSACTIONS IN SUPPORT OF COMPENSATION OBJECTIVES
The compensation committee has determined that we are well served by the
alignment of interest that occurs when senior management has the same financial
interests as do other stockholders. To promote this end, the compensation
committee and the Board of Directors have:
o structured Board annual compensation to be paid in stock options and
annual director's fees paid in stock with meeting fees paid in cash;
o structured Base Compensation of Chief Executive Officer, Vice Chairman and
President for 1998-2000 entirely in options to acquire stock at 100% of
then current value; and
o granted to other senior management options to acquire stock at 100% of
then current value which are fully vested only after three or five years.
Date: March 14, 2000 BRUCE D. BENSON (Chairman)
ELLIOT H. KLINE
RICHARD L. ROBINSON
TIM SCHULTZ
WILLIAM J. WHITE
- 31 -
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The table below sets forth, as of March 17, 2000, the number of shares of our
common stock beneficially owned by (1) each person known by us to be a
beneficial owner of more than 5% of our common stock; (2) all directors,
individually, and each executive officer that holds our common stock,
individually; and (3) all of our directors and executive officers as a group,
which information was furnished in part by each such person.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent of
Name of Beneficial Owner (1) Ownership Class (2)
---------------------------- ------------ ---------
<S> <C> <C>
Terry Considine (3) 753,903 12.3%
Thomas L. Rhodes (4) 289,190 4.9%
Bruce E. Moore (5) 229,813 3.9%
Bruce D. Benson (6) 148,492 2.6%
Elliot H. Kline (7) 52,318 *
Richard L. Robinson (8) 55,502 1.0%
Tim Schultz (9) 32,536 *
William J. White (10) 18,500 *
Robert G. Blatz 40,000 *
Joseph W. Gaynor (11) 8,414 *
David M. Becker (12) 28,110 *
The Wilder Corporation of Delaware (13) 601,891 10.6%
All directors and executive officers as a group (11 persons) 1,656,778 24.5%
- -----------
<FN>
* Denotes ownership of less than 1% of the outstanding shares of the
Company's common stock.
(1) Includes, where applicable, shares owned by such person's minor children
and spouse and by other related individuals and entities. Unless
otherwise indicated, such person has sole voting and investment power as
to the shares listed and such person's address is 3410 South Galena
Street, Suite 210, Denver, Colorado 80231. Excludes units of limited
partnership of Asset Investors Operating Partnership ("OP Units") that
are not redeemable within 60 days.
(2) All shares which a person had the right to acquire within 60 days after
March 17, 2000 were deemed to be outstanding for the purpose of computing
the "Percent of Class" owned by such person but were not deemed to be
outstanding for the purpose of computing the "Percent of Class" owned by
any other person. At March 17,2000, 5,632,569 shares were outstanding.
(3) Includes 178,354 shares held by Titahotwo Ltd. and Titahothree Ltd., in
which Mr. Considine serves as a general partner. Includes 226,919 options
exercisable and 266,130 OP Units redeemable within 60 days.
(4) Includes 78,022 options exercisable and 168,037 OP Units redeemable
within 60 days.
(5) Includes 8,721 shares held by Brandywine Real Estate Management Services
Corporation, an entity in which Mr. Moore owns a 50% interest, and
166,667 options exercisable and 25,355 OP Units redeemable within 60
days.
(6) Includes 30,823 options exercisable and 75,160 OP Units redeemable within
60 days.
(7) Includes 17,600 options exercisable within 60 days.
(8) Includes 17,600 options exercisable within 60 days.
(9) Includes 17,600 options exercisable within 60 days.
(10) Includes 12,100 options exercisable within 60 days.
(11) Includes 2,600 shares held by the Joseph William Gaynor Family Trust
dated 10-28-83 of which Mr. Gaynor is the sole trustee.
(12) Includes 20,000 options exercisable within 60 days.
(13) Includes 56,960 OP Units redeemable within 60 days.
</FN>
</TABLE>
- 32 -
<PAGE>
Item 13. Certain Relationships and Related Transactions.
Transactions involving former manager. Prior to November 1997, our daily
activities were performed by Financial Asset Management LLC ("FAM"), pursuant to
a management agreement (the "AIC Management Agreement"). FAM provided similar
services to Commercial Assets pursuant to a separate agreement (the "CAX
Management Agreement," and collectively with the AIC Management Agreement, the
"Management Agreements"). Messrs. Considine, Rhodes and Benson are principal
owners of FAM.
In November 1997, our stockholders approved the purchase of FAM's assets and
operations, including the Management Agreements, in exchange for (i) 676,696 OP
Units and (ii) the issuance of up to 240,000 additional OP Units if we achieve
certain performance goals. In 1998, FAM distributed the 676,696 OP Units to its
owners. Messrs. Considine, Rhodes and Benson received 204,286, 138,458, and
63,839 OP Units, respectively, from this distribution.
In August 1998, we issued 120,000 of the above described 240,000 OP Units to FAM
as a result of the achievements of investment and return goals. FAM distributed
these OP Units and Messrs. Considine, Rhodes and Benson received 36,227, 29,433,
and 11,321 OP Units, respectively, from this distribution.
If the average share price of our common stock exceeded $20.00 for a 90-day
period prior to June 17, 1999, then we were required to issue to FAM the
remaining 120,000 OP Units described above. The average share price of our
common stock did not exceed $20.00 for the required time period and this
obligation to issue OP Units has expired.
Transactions involving Messrs. Moore and Gaynor. During 1999, two property
management companies (collectively, "AIC Property Management") received property
management and accounting fees of $672,000 from communities in which we own an
interest and $172,000 from communities in which Commercial Assets owns an
interest. We own 50% of AIC Property Management and Community Management
Investors Corporation ("CMIC") owns 50% of AIC Property Management. Mr. Moore
owns 35% and Mr. Gaynor owns 20% of CMIC. In order for AIC Property Management
to provide the above services, AIC Property Management utilized staff and
resources of Brandywine Financial Services Corporation and its affiliates
("Brandywine"). Mr. Moore is the founder and was the Chief Executive Officer of
Brandywine prior to his appointment as our President and Chief Operating
Officer. Effective January 1, 2000, we purchased CMIC's 50% interest in AIC
Property Management for a $2,120,000 promissory note that matures March 31,
2000. The note bears interest at 8.5%.
Brandywine Commercial Services Corporation ("Services Corp."), an affiliate of
Brandywine, provides maintenance services to both our communities and Commercial
Assets communities. Mr. Moore owned 50% of Services Corp. during 1999. Services
Corp. received fees of $1,725,000 from our communities and $658,000 from
Commercial Assets communities for maintenance services provided during 1999.
Effective January 1, 2000, we purchased 100% of Services Corp.'s assets and
operations for $30,000 and the assumption of leases on equipment used by
Services Corp.
- 33 -
<PAGE>
Brandywine Home Sales Corporation ("Sales Corp."), an affiliate of Brandywine,
provides real estate brokerage services in both our communities and Commercial
Assets communities. Sales Corp. receives commissions from us, Commercial Assets
or the homeowner depending on the circumstances. Mr. Moore owned 50% of Sales
Corp. during 1999. Sales Corp. received sales commissions during 1999 as
follows:
From our communities $ 45,000
From Commercial Assets communities $ 46,000
From homeowners $293,000
Effective January 1, 2000, we purchased 100% of Sales Corp.'s activities and its
inventory of homes located at our communities for (a) $100,000 cash, (b) the
assumption of $487,000 in the third-party debt, and (c) the cancellation of
$64,000 in loans from us.
Effective January 1, 2000, we purchased four communities and undeveloped
homesites at three other communities from entities in which Mr. Gaynor owns 31%
(the "CADC Properties"). During 1999, we held participating mortgages secured by
the CADC properties. The purchase price for the CADC Properties was $36,816,000
and was paid as follows:
o Issuance of 44,572 OP Units at an assigned value of $496,000,
o Cancellation of $24,851,000 in loans from us involving the CADC
Properties,
o Assumption of $10,704,000 in third-party debt, and
o $765,000 cash.
Other Transactions. Asset Investors Equity, Inc. ("AIE") and AIC Manufactured
Housing Corp. ("AICMHC" and collectively with AIE, the "Service Subsidiaries")
engage in activities and receive fees that would not otherwise be permitted
under the tax rules governing REITs. In order to allow us to maintain our REIT
status for federal income tax purposes, Messrs. Considine and Rhodes, directly
or indirectly, equally own some or all of the outstanding voting common stock of
the Service Subsidiaries. We own all of the outstanding non-voting common stock
of each of the Service Subsidiaries.
Messrs. Considine and Rhodes acquired all of the outstanding voting common stock
of AICMHC in 1997 for $27,000. This represents 5% of the outstanding capital
stock of AICMHC. We acquired the remaining 95%, in the form of non-voting common
stock, for $509,485. Messrs. Considine and Rhodes each acquired their shares of
AICMHC's voting common stock in exchange for a $13,500 promissory note bearing
7% interest. Messrs. Considine and Rhodes have paid interest through December
31, 1999 and paid $5,000 in interest during 1999.
Messrs. Considine and Rhodes owned 70% of the outstanding voting common stock of
AIE through June 1999. This represented 3.5% of the outstanding capital stock of
AIE. AICMHC owned the remaining outstanding shares of voting common stock which
represented 1.5% of the outstanding capital stock of AIE. We own the remaining
95% of AIE's capital stock in the form of non-voting common stock. In June 1999,
Messrs. Considine and Rhodes sold all of their shares of AIE's voting common
stock to AICMHC in exchange for AICMHC's assumption of the outstanding balances
on their promissory notes to AIE totaling $168,000. The promissory notes were
originally issued in connection with Messrs. Considine's and Rhodes's purchase
of AIE voting common stock. All distributions by AIE to Messrs. Considine and
Rhodes prior to the June 1999 sale were used by them to pay interest and
principal on these notes.
- 34 -
<PAGE>
We lease a recreational vehicle park which we would not otherwise be permitted
to operate under the tax rules governing REITs to AIC RV Management Corp. ("AIC
RV Management"), an entity that is owned equally by Messrs. Considine and
Rhodes. During 1999, AIC RV Management paid aggregate lease payments of $366,000
to us. As of December 31, 1999, AIC RV Management has $80,000 in loans from us
which bear interest at a rate of 10% per annum.
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 schedules listed in the Index to Financial
Statements on Page F-1 of this report are 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 36 of this report.
(b) Reports on Form 8-K for the quarter ended December 31, 1999:
No current reports on Form 8-K were filed by the Company during the
fourth quarter of 1999.
- 35 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ASSET INVESTORS CORPORATION Page
Financial Statements:
Report of Independent Auditors.................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998...... F-3
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997................................ F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997.......................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997................................ F-6
Notes to Consolidated Financial Statements........................ F-7
Financial Statement Schedules:
Schedule III -- Real Estate and Accumulated Depreciation.......... F-22
Schedule IV -- Mortgage Loans on Real Estate...................... F-24
COMMERCIAL ASSETS, INC. (a significant unconsolidated subsidiary of the Company)
Financial Statements:
Report of Independent Auditors.................................... F-26
Consolidated Balance Sheets as of December 31, 1999 and 1998...... F-27
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.............................. F-28
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997.................. F-29
Consolidated Statements of Cash Flows for the
years ended December 31, 1999, 1998 and 1997.................. F-30
Notes to Consolidated Financial Statements........................ F-37
Financial Statement Schedules:
Schedule III -- Real Estate and Accumulated Depreciation.......... F-44
Schedule IV -- Mortgage Loans on Real Estate...................... F-46
F - 1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Asset Investors Corporation
We have audited the accompanying consolidated balance sheets of Asset
Investors Corporation and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. Our audits
also included the consolidated financial statement schedules listed in the
accompanying index. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1999 and 1998,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules, 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.
/s/Ernst & Young LLP
Denver, Colorado
January 21, 2000, except for
Note I, as to which the date
is March 7, 2000
F - 2
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
ASSETS
<S> <C> <C>
Real estate, net of accumulated depreciation of $7,248 and $3,378 $ 108,745 $ 98,563
Investments in participating mortgages 22,475 27,604
Cash and cash equivalents 570 1,426
Investment in Commercial Assets 19,486 20,706
Other assets, net 7,817 9,927
---------- ----------
Total Assets $ 159,093 $ 158,226
========== ==========
LIABILITIES
Secured long-term notes payable $ 53,994 $ 40,506
Secured short-term financing 2,610 10,500
Accounts payable and accrued liabilities 3,401 2,935
---------- ----------
60,005 53,941
---------- ----------
COMMITMENTS AND CONTINGENCIES -- --
MINORITY INTEREST IN OPERATING PARTNERSHIP 15,236 25,649
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share, 15,000 and 0 shares
authorized, respectively; no shares issued or outstanding -- --
Common stock, par value $.01 per share, 35,000 shares authorized;
5,633 and 5,016 shares issued, 5,603 and 5,016 shares
outstanding, respectively 56 50
Additional paid-in capital 239,381 229,948
Notes receivable on common stock purchases (588) --
Dividends in excess of accumulated earnings (154,547) (151,362)
Treasury stock, 30 and 0 shares at cost (450) --
---------- ----------
83,852 78,636
---------- ----------
Total Liabilities and Stockholders' Equity $ 159,093 $ 158,226
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F - 3
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
RENTAL PROPERTY OPERATIONS
<S> <C> <C> <C>
Rental and other property revenues $ 14,987 $ 10,479 $ 3,104
Interest on participating mortgages 2,976 3,174 --
Equity in earnings of real estate joint ventures -- -- 466
Property operating expenses (5,262) (4,039) (1,398)
Depreciation (3,870) (2,685) (693)
--------- --------- ---------
Income from rental property operations 8,831 6,929 1,479
--------- --------- ---------
SERVICE OPERATIONS
Property management income, net 207 156 69
Commercial Assets management fees 564 155 --
Amortization of management contracts (2,757) (2,894) (744)
--------- --------- ---------
Loss from service operations (1,986) (2,583) (675)
--------- --------- ---------
Equity in earnings of Commercial Assets 872 975 3,663
General and administrative expenses (1,530) (1,393) (1,612)
Interest and other income 241 871 1,808
Non-agency MBS bonds revenues 65 50 2,966
Interest expense (3,846) (2,485) (368)
Costs incurred to acquire management contract -- (2,092) (6,553)
Income tax benefit 400 -- --
Reincorporation expenses (120) -- --
Loss from early extinguishment of debt (75) -- --
Gain on sale of bonds -- -- 6,484
--------- --------- ---------
Income before minority interest 2,852 272 7,192
Minority interest in Operating Partnership (446) (60) 62
--------- --------- ---------
Net income $ 2,406 $ 212 $ 7,254
========= ========= =========
Basic earnings per share $ 0.43 $ 0.04 $ 1.44
========= ========= =========
Diluted earnings per share $ 0.43 $ 0.04 $ 1.43
========= ========= =========
Weighted average common shares outstanding 5,538 5,094 5,022
Weighted average common shares and common share equivalents
outstanding 5,544 5,113 5,061
Dividends paid per share $ 1.00 $ 0.75 $ 1.45
========= ========= =========
</TABLE>
F - 4
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(in thousands)
<TABLE>
<CAPTION>
Notes Dividends In Accumulated
Common Stock Additional Receivable on Excess of Other Total
------------------- Paid-In Common Stock Accumulated Treasury Comprehensive Stockholders'
Shares(a) Amount(a) Earnings(a) Purchases Earnings Stock Income Equity
--------- --------- ----------- --------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES - DECEMBER 31, 1996 5,016 $ 50 $ 228,951 $ -- $ (147,729) $ -- $ 5,093 $ 86,365
Comprehensive Income
Net income -- -- -- -- 7,254 -- -- 7,254
Reversal of unrealized holding
gains upon restructuring
of bonds -- -- -- -- -- -- (5,093) (5,093)
------- ---- --------- ------- ----------- ------- ------- --------
Comprehensive Income -- -- -- -- 7,254 -- (5,093) 2,161
------- ---- --------- ------- ----------- ------- ------- --------
Issuance of Common Stock 92 1 2,270 -- -- -- -- 2,271
Dividends -- -- -- -- (7,282) -- -- (7,282)
------- ---- --------- ------- ----------- ------- ------- --------
BALANCES - DECEMBER 31, 1997 5,108 51 231,221 -- (147,757) -- -- 83,515
Issuance of Common Stock 29 -- 434 -- -- -- -- 434
Repurchase of Common Stock (121) (1) (1,707) -- -- -- -- (1,708)
Net income -- -- -- -- 212 -- -- 212
Dividends -- -- -- -- (3,817) -- -- (3,817)
------- ---- --------- ------- ----------- ------- ------- --------
BALANCES - DECEMBER 31, 1998 5,016 50 229,948 -- (151,362) -- -- 78,636
Net proceeds from issuance of
Common Stock 617 6 9,433 (588) -- -- -- 8,851
Purchases of treasury stock -- -- -- -- -- (450) -- (450)
Net income -- -- -- -- 2,406 -- -- 2,406
Dividends -- -- -- -- (5,591) -- -- (5,591)
------- ---- --------- ------- ----------- ------- ------- --------
BALANCES - DECEMBER 31, 1999 5,633 $ 56 $ 239,381 $ (588) $ (154,547) $ (450) $ -- $ 83,852
======= ==== ========= ======= =========== ======= ======= ========
<FN>
(a) Amounts have been restated to reflect the impact of the one-for-five
reverse stock split, which was approved by the Company's stockholders in
November 1997.
</FN>
</TABLE>
See Notes to Consolidated Financial Statements.
F - 5
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 2,406 $ 212 $ 7,254
Adjustments to reconcile net income to net cash flows provided
by operating activities:
Depreciation and amortization 6,792 5,962 1,437
Minority interest in Operating Partnership 446 60 (62)
Equity in earnings of Commercial Assets (666) (917) (3,663)
Costs incurred to acquire management contract -- 2,073 6,105
Accrued interest on participating mortgages (1,179) (566) --
Amortization of non-agency MBS bonds -- -- 469
Equity in earnings of real estate joint ventures -- -- (466)
Increase in other assets (1,732) (83) (647)
Increase (decrease) in accounts payable and accrued liabilities (303) 100 (12)
Gain on sale of assets -- -- (6,484)
------- ------- -------
Net cash provided by operating activities 5,764 6,841 3,931
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of real estate (858) (57,832) (31,502)
Investments in participating mortgages, net (5,500) (1,611) --
Investments in and advances to real estate joint ventures -- -- (14,842)
Capital replacements and improvements (488) (531) (55)
Dividends from Commercial Assets 1,436 1,077 3,065
Principal collections and indemnifications on non-agency MBS
bonds -- -- 547
Distributions from real estate joint ventures -- -- 459
Proceeds from the sale of assets -- -- 69,807
-------- ------- -------
Net cash provided by (used in) investing activities (5,410) (58,897) 27,479
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Common Stock dividends (5,591) (3,817) (7,282)
Payment of distributions to minority interest in Operating
Partnership (1,000) (1,099) (467)
Proceeds from secured short-term financing -- 10,500 --
Principal paydowns on secured short-term financing (1,690) -- (3,000)
Proceeds from secured long-term notes payable borrowings 10,925 30,280 --
Collections of notes receivable 134 -- --
Payment of loan costs, including costs from interest rate hedges (385) (2,060) --
Principal paydowns on secured long-term notes payable (3,637) (451) (196)
Repurchase of Common Stock -- (1,708) --
Proceeds from the issuance of Common Stock 104 35 920
Stock issuance costs (70) -- --
-------- ------- -------
Net cash provided by (used in) financing activities (1,210) 31,680 (10,025)
-------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (856) (20,376) 21,385
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,426 21,802 417
--------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 570 $ 1,426 $21,802
========= ======= =======
</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 ("AIC" and, together with its subsidiaries, the
"Company") is a Delaware corporation that owns and operates manufactured home
communities and has elected to be taxed as a real estate investment trust
("REIT"). Prior to May 25, 1999, AIC was a Maryland corporation. Effective May
25, 1999, AIC's stockholders approved its reincorporation in Delaware. AIC's
Common Stock, par value $.01 per share ("Common Stock"), is listed on the New
York Stock Exchange under the symbol "AIC." In May 1997, AIC 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 and substantially all of the Operating Partnership's initial
capital. AIC owns 85% of the Operating Partnership as of December 31, 1999. The
Company also owns 27% of the common stock of Commercial Assets, Inc.
("Commercial Assets") and the non-voting stock of both AIC Manufactured Housing
Corp. ("AICMHC") and Asset Investors Equity, Inc. ("AIE"). Commercial Assets is
a publicly-traded REIT (American Stock Exchange, Inc.: CAX) formed by the
Company in August 1993. AICMHC owns interests in manufactured home community
management contracts and AIE manages Commercial Assets.
Prior to 1997, the Company owned debt interests in residential mortgage loan
securitizations collateralized by pools of non-conforming (non-agency
guaranteed) single-family mortgage loans ("non-agency MBS bonds"). In February
1997, the Company decided to resecuritize 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 1997, the Company received $67,671,000 cash proceeds from the
resecuritization of the non-agency MBS bonds and has invested these proceeds in
manufactured home communities.
Prior to November 1997, the Company and Commercial Assets were managed by
Financial Asset Management LLC ("FAM"). An investor group led by Terry
Considine, Thomas L. Rhodes and Bruce D. Benson acquired FAM in September 1996.
Mr. Considine is the Chairman and Chief Executive Officer of both the Company
and Commercial Assets. Mr. Rhodes is Vice Chairman and Mr. Benson is a director
of both the Company and Commercial Assets. In November 1997, the Company's
stockholders approved the acquisition of the assets and operations of FAM in
order to become a 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, were
achieved by the Company within a specified time period. During the third quarter
of 1998, the Company achieved the first set of performance goals by realizing
annualized returns before depreciation in excess of 9% on its real estate
investments for a period of six months. As a result of achieving these goals,
the Company issued 120,000 OP Units and expensed $2,092,000 as additional cost
of acquiring the management contract. The issuance of the remaining 120,000 OP
Units was contingent upon the Company having a 90-day average per share price in
excess of $20.00 by June 1999. The Company's average share price did not meet
this requirement and the Company's commitment to issue these additional OP Units
has expired.
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 majority owned subsidiaries. The minority interest
in the Operating Partnership represents the OP Units which are redeemable at the
option of the holder. When a holder elects to redeem OP Units, the Company
determines whether such OP Units will be redeemed for 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 receive in dividends. As of
December 31, 1999, 1,000,000 OP Units were outstanding. All significant
intercompany balances and transactions have been eliminated in consolidation.
The Company's investment in Commercial Assets is recorded under the equity
method.
Rental Properties and Depreciation
Rental properties are recorded at cost less accumulated depreciation, unless
considered impaired. If events or circumstances indicate that the carrying
amount of a property may be impaired, the Company will make an assessment of its
recoverability by estimating the future undiscounted cash flows, excluding
interest charges, of the property. If the carrying amount exceeds the aggregate
future cash flows, the Company would recognize an impairment loss to the extent
the carrying amount exceeds the fair value of the property. As of December 31,
1999, management believes that no impairments exist based on periodic reviews.
No impairment losses were recognized for 1999, 1998 and 1997.
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 or extend the useful life of the asset, are capitalized and depreciated
over the remaining estimated life. In addition, the Company capitalizes direct
and indirect costs (including interest, taxes and other costs) in connection
with the development of additional homesites within its manufactured home
communities. Maintenance, repairs and minor improvements are expensed as
incurred.
Investments in Participating Mortgages
The Company has loans secured by real estate which provide for an interest rate
return plus up to 50% of net profits, cash flows and sales proceeds from the
secured real estate. The Company accounts for these investments as loans when
(a) the Company does not have an interest in the borrower and either (b) the
borrower has a substantial equity investment in the real estate collateral or
(c) the Company has recourse to other substantial tangible assets of the
borrower. As such, the Company records interest income based on the rate
provided for in the loan and records its share of any net profits or gains from
the sale of the underlying real estate when realized. If the above requirements
are not met, then the loan is accounted for as an equity investment in real
estate under the equity method of accounting.
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.
F - 8
<PAGE>
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 revenues for services
provided to communities not owned by the Company are recognized when earned.
Interest on participating mortgages is recorded based upon outstanding balances
and interest rates per the terms of the mortgages. In addition, the Company
evaluates the collectibility of any unpaid interest and provides reserves as
necessary. As of December 31, 1999 and 1998, the reserve for uncollected
interest on the participating mortgages was $0 and $149,000, respectively.
Deferred Financing Costs
Fees and costs incurred in obtaining financing are capitalized. Such costs are
amortized over the terms of the related loan agreements and are charged to
interest expense.
Interest Rate Lock Agreements
Interest rate lock agreements related to planned refinancings of identified
variable rate indebtedness are accounted for as anticipatory hedges. Upon the
refinancing of such indebtedness, any gain or loss associated with the
termination of the interest rate lock agreement is deferred and recognized over
the life of the refinanced indebtedness.
Income Taxes
AIC has elected to be taxed as a REIT as defined under the Internal Revenue Code
of 1986, as amended (the "Code"). In order for AIC to qualify as a REIT, at
least 95% of its gross income in any year must be derived from qualifying
sources. The activities of AICMHC and AIE are not qualifying sources.
As a REIT, AIC 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 AIC fails to qualify as a REIT in any taxable year,
its taxable income will be subject to federal income tax at regular corporate
rates (including any applicable alternative minimum tax). Even if AIC qualifies
as a REIT, it may be subject to certain state and local income taxes and to
federal income and excise taxes on its undistributed income.
At December 31, 1999, AIC's net operating loss ("NOL") carryover was
approximately $95,000,000 and its capital loss carryover was approximately
$20,000,000. The NOL carryover may be used to offset all or a portion of AIC's
REIT income, and as a result, to reduce the amount that AIC 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 in 2000 and 2001.
Earnings Per Share
Basic earnings per share are based upon the weighted-average number of shares of
Common Stock outstanding during each year. Diluted earnings per share reflect
the effect of dilutive, unexercised stock options of 6,000, 19,000 and 39,000
for 1999, 1998 and 1997, respectively. Stock options and shares issued for
non-recourse notes receivable of 339,000, 108,000 and 0 for 1999, 1998 and 1997,
respectively, have been excluded from diluted earnings per share as their effect
would be anti-dilutive. In November 1997, the Company's stockholders approved a
F - 9
<PAGE>
one-for-five reverse split of the Common Stock. Accordingly, all historical
weighted-average share and per share amounts have been restated to reflect the
reverse stock split.
Capitalized Interest
Interest is capitalized on development projects during periods of construction
or development. During 1999, 1998 and 1997, capitalized interest was $94,000,
$32,000 and $0, respectively.
Treasury Stock
The Company owns 27% of Commercial Assets' common stock. During 1999, Commercial
Assets purchased 114,000 shares of the Company's Common Stock. Consequently, the
Company has an interest in 30,000 shares of its Common Stock and has recorded
this as treasury stock.
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 $3,631,000, $1,975,000 and $349,000 for 1999, 1998 and
1997, respectively.
Non-cash operating, investing and financing activities for 1999, 1998 and 1997
were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Issuance of Common Stock for:
<S> <C> <C> <C>
Conversion of OP Units $ 8,668 $ -- $ --
Services 150 120 101
Notes receivable 588 278 --
Investments in participating mortgages:
For other assets 165 -- --
By issuance of OP Units -- 17 --
Real estate acquired:
By cancellation of participating mortgages and assumption of
payables 12,734 -- --
From earn-out agreements -- 52 --
For issuance of OP Units -- 2,145 10,922
By issuance of Common Stock -- -- 1,250
By assumption of secured notes payable -- -- 10,873
Receivables from minority interest in subsidiaries -- 319 --
Purchase of minority interest in subsidiaries by cancellation of
receivables 351 -- --
Reclassification of investment in Commercial Assets to treasury
stock 450 -- --
Short-term financing extended to long-term debt 6,200 -- --
Unrealized holding gains and losses on debit securities -- -- 5,093
Acquisition of former manager by issuance of OP Units -- -- 11,692
</TABLE>
F - 10
<PAGE>
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States 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 1998 and 1997 consolidated
financial statements to conform to the classifications used in the current year.
Such reclassifications have no material effect on the amounts as originally
presented.
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
were excluded from earnings and reported as a net amount in stockholders' equity
until realized.
C. Proposed Merger with Commercial Assets
The Company and Commercial Assets have agreed to merge, subject to approval by
both (a) a majority of the Company's outstanding shares and (b) two-thirds of
the outstanding shares of Commercial Assets. The Company has agreed to vote its
shares of Commercial Assets common stock in favor of the merger. The Company
owns approximately 27% of the outstanding shares of Commercial Assets common
stock. The Company will issue 0.4075 shares of its Common Stock for each
outstanding share of Commercial Assets common stock. Alternatively, Commercial
Assets stockholders may elect to receive $5.75 per share in cash for up to
3,549,868 shares of Commercial Assets common stock with any remaining shares of
Commercial Assets common stock receiving 0.4075 shares of the Company's Common
Stock. Commercial Assets' and the Company's officers and directors have agreed
to elect to receive shares of the Company's Common Stock for all shares of
Commercial Assets common stock that they own. The stockholder meetings to vote
on the merger are expected to occur in the second quarter of 2000.
D. Real Estate
Real estate at December 31, 1999 and 1998 is as follows (in thousands):
1999 1998
----------- ----------
Land $ 13,260 $ 11,226
Land improvements and buildings 102,291 90,268
Furniture and other equipment 442 447
---------- ---------
115,993 101,941
Less accumulated depreciation (7,248) (3,378)
---------- ---------
Real estate, net $ 108,745 $ 98,563
========== =========
F - 11
<PAGE>
Land improvements and buildings consist primarily of infrastructure, roads,
landscaping, clubhouses, maintenance buildings and common amenities.
During 1999, the Company purchased two manufactured home communities and one
recreational vehicle park with 450 developed homesites, 100 undeveloped
homesites and 120 recreational vehicle sites. Total investment was $13,592,000
consisting of $11,973,000 by the cancellation of participating mortgages,
$858,000 cash and $761,000 of assumed liabilities and other costs. During 1998,
the Company acquired seven manufactured home communities with approximately
1,730 developed sites and 230 undeveloped homesites. Total investment was
$59,977,000 consisting of $57,832,000 cash and $2,145,000 of OP Units.
E. Investments in Participating Mortgages
As of December 31, 1997, the Company had non-recourse notes receivable of
$15,872,000 from joint ventures in which the Company owned a 50% joint venture
interest. Effective January 1, 1998, the Company sold its interest in the
various joint ventures to the other venturer and consolidated the various notes
into a single note secured by a number of manufactured home communities. The
note bears 10% interest and matures in 20 years. In addition, the Company
receives additional interest up to 50% of the borrower's profit from such
communities. As of December 31, 1999, the outstanding balance of these
participating mortgages was $22,475,000. In January 2000, the Company purchased
the manufactured home communities by canceling the mortgages and paying
additional consideration. See Note T.
The following table presents unaudited summary financial information of the
borrower with respect to the above participating mortgage as of and for the
years ended December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------- ----------
(unaudited)
<S> <C> <C>
Rental and other property revenues $ 1,757 $ 1,783
Property operation expenses (1,200) (1,018)
Depreciation (373) (419)
----------- ----------
Income from rental property operations 184 346
----------- ----------
Net loss (2,096) (1,069)
Real estate, net of accumulated depreciation 24,708 20,421
Total assets 33,873 26,921
Secured notes payable 31,466 26,757
Partners' deficit (2,729) (1,334)
Total liabilities and partners' deficit 33,873 26,921
</TABLE>
In addition, the Company had non-recourse mortgage loans secured by two
manufactured home communities and one recreational vehicle park in Arizona. The
mortgage loans bore interest rates ranging from 10% to 15%. The Company received
additional interest of 3% of gross revenues, increasing to 11% of gross revenues
in the event of a refinancing of the debt on the communities, and 50% of net
proceeds from a sale or refinancing of the communities. In August 1999, the
Company purchased the manufactured home communities and the recreational vehicle
park in exchange for the payment of $858,000, the cancellation of the three
loans with a carrying amount of $11,973,000 and $761,000 of assumed liabilities
and other costs.
F - 12
<PAGE>
During 1999 and 1998, the Company had earnings of $2,976,000 and $3,174,000 from
the participating mortgages.
F. Investment in Commercial Assets
On December 31, 1999 and 1998, the Company owned 2,761,126 shares (approximately
27%) of the common stock of Commercial Assets. In November 1997, Commercial
Assets sold or resecuritized its entire portfolio of commercial mortgage loan
securitizations of multi-family real estate ("CMBS bonds") and temporarily
invested the proceeds until it determined which type of real estate assets to
invest in. During the third quarter of 1998, Commercial Assets began investing
in manufactured home communities, and through 1999, it had invested
approximately $70,000,000 for interests in 12 communities, including investments
in both participating mortgages and real estate joint ventures.
Summarized financial information of Commercial Assets as reported by Commercial
Assets is (in thousands):
<TABLE>
<CAPTION>
Balance Sheets December 31,
----------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash and cash equivalents $ 4,664 $ 3,292
Short-term investments 12,502 45,066
Real estate, net (including joint ventures) 66,205 13,908
Investments in participating mortgages 2,148 9,328
Investment in Asset Investors 1,396 --
Other assets 10,168 6,640
----------- -----------
Total assets $ 97,083 $ 78,234
=========== ===========
Secured long-term notes payable $ 20,442 $ --
Other liabilities 1,945 980
Minority interest in subsidiaries 615 --
Stockholders' equity 74,081 77,254
----------- -----------
Total liabilities and stockholders' equity $ 97,083 $ 78,234
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Statements of Income Year Ended December 31,
-------------------------------------------
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Rental and other property revenues $ 2,538 $ -- $ --
Income from participating mortgages and leases 1,971 587 --
Property operating expenses (1,114) -- --
Depreciation (1,279) (50) --
-------- -------- ---------
Income from rental property operations 2,116 537 --
-------- -------- ---------
Interest and other income 1,913 3,874 945
CMBS bonds revenue 154 161 9,172
Equity in earnings of Asset Investors 23 -- --
General and administrative expenses (519) (420) (519)
Related-party management fees (565) (87) (1,678)
Interest expense (273) -- --
Related-party acquisition fees (205) (124) --
Reincorporation expenses (120) -- --
Costs related to previously considered investments -- (500) --
Gain on sale of bonds -- -- 5,786
-------- -------- ---------
Net income $ 2,524 $ 3,441 $ 13,706
======== ======== =========
</TABLE>
F - 13
<PAGE>
G. Secured Long-Term Notes Payable
The following table summarizes the Company's secured long-term notes payable (in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
------------- ------------
Fixed rate, ranging from 7.1% to 7.5%, fully amortizing, non-recourse notes maturing
<S> <C> <C>
at various dates from December 2018 through June 2019 $ 37,790 $ 30,280
Fixed rate, ranging from 7.5% to 8.3%, partially amortizing, non-recourse notes
maturing at October 2000 7,605 10,226
8.1% fixed rate partially amortizing, non-recourse note maturing at April 2009 2,528 --
Floating rate equal to LIBOR plus 2.5% (8.3% at December 31, 1999), partially
amortizing, recourse note maturing at April 2001 6,071 --
--------- ---------
$ 53,994 $ 40,506
========= =========
</TABLE>
In 1998, the Company entered into an interest rate lock agreement in connection
with expected debt financing. The agreement had an aggregate notional value of
$32,200,000, fixed the interest rate on the expected debt at 6.8% and was
settled in September 1998. The Company realized a loss on the hedge of $802,000
which was deferred and is being amortized over the terms of the related notes
payable as a charge to interest expense.
During 1999, the Company repaid a $2,230,000 long-term note payable and paid a
prepayment penalty of $75,000. The penalty is recorded as loss from early
extinguishment of debt in the consolidated statements of income.
Real estate assets which secure the long-term notes payable had a net book value
of $96,184,000 at December 31, 1999. The Company had $16,000 in escrow for real
estate taxes on the long-term notes payable at December 31, 1999.
Scheduled principal payments after December 31, 1999 for the secured long-term
notes payable are (in thousands):
2000 $ 8,990
2001 6,895
2002 1,212
2003 1,295
2004 1,383
Thereafter 34,219
---------
$ 53,994
=========
H. Secured Short-Term Financing
The Company has a revolving line of credit with a bank that bears interest at
the 30-day London Interbank Offered Rate ("LIBOR") plus 1.75% per annum (7.58%
at December 31, 1999). The line of credit is secured by 1,015,674 shares of the
common stock of Commercial Assets held by the Company and matures in September
2000. The line of credit is limited to the lesser of (1) $5,000,000, (2) 65% of
the product of the trading price of Commercial Assets common stock times
1,015,674 or (3) 65% of the purchase price of certain unpledged real estate. As
of December 31, 1999, the limit was $3,053,000 and $2,610,000 was outstanding on
this line of credit.
F - 14
<PAGE>
I. Commitments and Contingencies
In connection with a participating mortgage on a manufactured home community,
the Company entered into an earn-out agreement with respect to 142 unoccupied
homesites. The Company advances an additional $17,000 pursuant to the
participating mortgage for each newly occupied homesite either in the form of
cash or 946 OP Units, as determined by the borrower. At December 31, 1999, there
were 113 unoccupied homesites subject to the earnout. The Company advanced the
following in cash and OP Units for newly occupied homesites (in thousands):
Year Ended December 31,
-------------------------------------------
1999 1998 1997
----------- ---------- ----------
Cash $ 265 $ 116 $ --
OP Units -- 17 17
------ ----- -----
$ 265 $ 133 $ 17
====== ===== =====
In connection with the acquisition of the assets and operations of its former
manager in November 1997, the Company entered in an agreement to issue
additional OP Units upon the achievement of certain performance goals by the
Company. Per the terms of the agreement, the Company was required to issue an
additional 120,000 OP Units if the Company's average stock price exceeded $20.00
per share for any 90-day period prior to June 17, 1999. The $20.00 average stock
price was not achieved and the commitment to issue additional OP Units expired.
At December 31, 1999, there were 2,510 undeveloped homesites in properties which
the Company has an interest in. In connection with efforts to lease such sites,
a sales corporation markets an inventory of homes located in the various
properties to potential tenants. The Company's President owns 50% of the sales
corporation. A portion of the cost of this home inventory was financed by the
sales corporation with a line of credit guaranteed by the Company. As of
December 31, 1999, $5,459,000 was outstanding under the line of credit. The
terms of the line of credit require monthly payments of interest and payment of
principal upon sale of the inventory. If the inventory is not sold within one
year, monthly payments of principal are also required. In January 2000, the
Company acquired the assets and operations of the sales corporation. See Note T.
In September 1999, four Commercial Assets stockholders, individually and as
purported representatives of all Commercial Assets stockholders, except Asset
Investors and its affiliates, filed three purported class action lawsuits in
Delaware against Commercial Assets, the members of the board of directors and
certain officers of the Company and Commercial Assets. These lawsuits alleged
that the defendants breached their fiduciary duties to the Commercial Assets
stockholders in connection with the proposed merger of Asset Investors and
Commercial Assets and Commercial Assets' recent reincorporation in Delaware. In
November 1999, these lawsuits were consolidated into a single lawsuit. On March
7, 2000, the parties entered into a settlement agreement, subject to the court's
approval, which amended the merger agreement as follows:
o Commercial Assets stockholders, other than Asset Investors and the
officers and directors of Asset Investors and Commercial Assets, may
elect to receive $5.75 per share in cash for up to 3,549,868 shares of
Commercial Assets common stock with any remaining shares receiving
0.4075 shares of the Company's Common Stock; and
o the percentage of votes of Commercial Assets common stock needed to
approve the merger was increased from a majority to two-thirds.
F - 15
<PAGE>
J. Operating Segments
Investments in manufactured home communities constitute substantially all of the
Company's portfolio, and as such, management of the Company assesses the
performance of the Company as one operating segment.
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.
o Cash and cash equivalents, accounts payable and accrued liabilities, and
secured short-term financing - the carrying amounts approximate fair value
because of the short maturity of these instruments.
o Investment in Commercial Assets - the fair value was determined based upon
the closing price of Commercial Assets common stock on the American Stock
Exchange, Inc. as of the end of each year.
o Secured long-term notes payable - based upon borrowing rates currently
available to the Company, the carrying value of secured long-term notes
payable approximates their fair value.
The carrying values and fair values of the Company's investment in Commercial
Assets at December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------- --------------------------------
Carrying Value Fair Value Carrying Value Fair Value
-------------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
Investment in Commercial Assets $ 19,486 $ 12,770 $ 20,706 $ 16,739
======== ======== ======== ========
</TABLE>
L. Common Stock and Dividends
The Company paid dividends to stockholders and distributions to holders of OP
Units as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividends $ 5,591 $ 3,817 $ 7,282
Distributions 1,000 1,099 467
-------- -------- --------
Total $ 6,591 $ 4,916 $ 7,749
======== ======== ========
Percentage of dividends constituting return of capital for
income tax purposes 68% 80% 75%
</TABLE>
The Company's Certificate of Incorporation permits the Board of Directors to
issue classes of preferred and common stock without further stockholder
approval. As of December 31, 1999, the Company has not issued any classes of
stock other than Common Stock.
M. Non-agency MBS Bonds
In March 1997, the Company resecuritized its portfolio of retained interests in
prior securitizations that are in the form of non-agency MBS bonds by
transferring them to a trust in which it retained the residual interest and
having the trust sell non-recourse debt securities representing senior interests
in the trust's assets. The Company realized net proceeds of $67,671,000 and
F - 16
<PAGE>
recorded a net gain of $5,287,000 from the sale. The Company's retained residual
interest in the trust represents the first-loss class of the portfolio and,
accordingly, no carrying value was assigned to it because it was not practical
to estimate its fair value given the high risk and unpredictable nature of the
future cash flow expected to be attributed to the retained residual interests.
During 1997, the Company recognized $2,966,000 of interest income from the
non-agency MBS bonds of which $966,000 was from the retained residual interest.
As of December 31, 1998 and 1997, the Company did not believe that it would
receive any incremental, material cash flows. Given that circumstance, the
Company estimated the fair value of its retained residual interests at zero at
those subsequent reporting dates. Consistent with those estimates, the Company
has not received any material cash flows from the resecuritized assets. The
trustee has notified the Company that its retained residual interest has been
eliminated because of the extent of allocated realized losses on the underlying
assets of the trust (non-agency MBS bonds). Therefore, the value of the retained
residual interest was determined to be zero at December 31, 1999.
N. Income Tax Benefit
In connection with the Company's resecuritization of its former bond portfolio
in 1997, a consolidated corporate subsidiary incurred income taxes from the
resecuritization. These taxes were netted against the gain from sale in 1997.
The subsidiary recorded a loss for tax purposes during 1999 and can carryback
the tax loss for a refund of taxes incurred in 1997. Accordingly, the Company
has recorded an income tax benefit of $400,000 in 1999.
O. Stock Option Plan
The Company has a Stock Incentive Plan (the "Stock Plan") for the issuance of up
to 3,000,000 qualified and non-qualified stock options and shares of Common
Stock to its directors, officers, employees and consultants. As of December 31,
1999 and 1998, 902,000 and 833,000, 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. Stock
options granted through December 31, 1997 have 5-year terms and stock options
granted after 1997 have 10-year terms. All outstanding stock options are
non-qualified stock options.
Presented below is a summary of the changes in stock options for the three years
ended December 31, 1999.
<TABLE>
<CAPTION>
Weighted Average
Exercise Price Shares
-------------- ---------
<S> <C> <C>
Outstanding-December 31, 1996 $ 12.86 207,000
Granted 18.12 21,000
Exercised 14.93 (62,000)
Expired 16.67 (14,000)
-------- --------
Outstanding-December 31, 1997 14.44 152,000
Granted 19.31 704,000
Exercised 13.85 (23,000)
-------- --------
Outstanding-December 31, 1998 18.57 833,000
-------- --------
Granted 14.02 129,000
Exercised 11.43 (60,000)
-------- --------
Outstanding-December 31, 1999 $ 18.40 902,000
======== ========
</TABLE>
As of December 31, 1999, outstanding options have the following ranges of
exercise prices and weighted average remaining lives:
F - 17
<PAGE>
<TABLE>
<CAPTION>
Ranges of Exercise Prices
-----------------------------------------------------
$11.87 to $13.44 $14.75 to $16.87 $18.12 to $19.37 All Ranges
---------------- ---------------- ---------------- ----------
Outstanding stock options:
<S> <C> <C> <C> <C>
Number of options 58,000 133,000 711,000 902,000
Weighted average exercise price $12.94 $15.76 $19.34 $18.40
Weighted average remaining life 6.75 years 5.02 years 8.05 years 7.52 years
Exercisable stock options:
Number of options 19,000 98,000 257,000 374,000
Weighted average exercise price $11.87 $16.00 $19.29 $18.06
Weighted average remaining life 0.37 years 3.58 years 7.75 years 6.29 years
</TABLE>
Options granted to date vest over various periods up to five years. As of
December 31, 1999, 1998 and 1997, 374,000, 151,000 and 138,000, respectively, of
the outstanding options were exercisable. As of December 31, 1999, 1998 and
1997, the weighted average exercise price of exercisable options was $18.06,
$14.95 and $14.16, respectively.
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 with the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Range of risk free interest rates 6.0% to 6.5% 5.7% to 6.0% 5.8% to 6.0%
Expected dividend yield 7.4% 6.3% 7.9%
Volatility factor of the expected market price of the Company's
common stock 0.309 0.309 0.309
Weighted average expected life of options 10.0 years 10.0 years 4.5 years
</TABLE>
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 1999, 1998 and 1997, the estimated weighted-average grant-date fair value
of options granted was $2.08 per option, $3.59 per option and $2.76 per option,
respectively. The Company assumed lives of five to ten years and risk-free
interest rates equal to the Five- or Ten-Year U.S. Treasury rates on the date
the options were granted depending on option term. In addition, the expected
F - 18
<PAGE>
stock price volatility and dividends rates were estimated based upon historical
experience over the three years ended December 31, 1999.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for per share data):
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Pro forma net income $1,506 $ 147 $7,203
Pro forma earnings per share:
Basic $ 0.27 $ 0.03 $ 1.43
Diluted $ 0.27 $ 0.03 $ 1.43
</TABLE>
P. Savings Plan
The Company has 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 1999 and 1998, the Company
matched $19,000 and $17,000, respectively, of employee contributions. The
Company did not match any portion of employee contributions during 1997.
Q. Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133. Accounting for Derivative Instruments
and Hedging Activities ("Statement 133"). Statement 133 requires recording all
derivative instruments as assets or liabilities, measured at fair value.
Statement 133 is effective beginning after 2000. The Company has elected not to
early adopt the provisions of Statement 133 as of December 31, 1999 and when
Statement 133 is adopted, the Company does not expect Statement 133 to have a
significant impact on its financial position and results of operations.
R. Other Matters
Prior to November 1997, FAM (the former manager) provided all personnel and
related overhead necessary to conduct the Company's activities in exchange for
various fees provided for in a management agreement (the "AIC Management
Agreement"). In November 1997, the Company's stockholders approved the purchase
of FAM's assets and operations for $11,692,000 in connection with the Company
becoming a self-managed and self-administered REIT. The initial purchase price
and related costs were allocated $6,553,000 to the AIC Management Agreement and
$5,936,000 to a management agreement pursuant to which the Company manages
Commercial Assets (the "Commercial Assets Management Agreement"). The Company
expensed the amount allocated to the AIC Management Agreement in 1997 and is
amortizing the cost of the Commercial Assets Management Agreement over three
years. In addition to the initial purchase price, FAM received 120,000
additional OP Units in August 1998 because the Company had annualized returns
before depreciation in excess of 9% on certain of its real estate investments.
These OP Units were valued at $2,073,000 and were expensed in 1998.
F - 19
<PAGE>
During 1999 and 1998, the Company earned the following management fees under the
Commercial Assets Management Agreement (net of elimination for the Company's 27%
ownership of Commercial Assets) (in thousands):
1999 1998
----------- -----------
Base fees $ 414 $ 64
Acquisition fees 150 91
Incentive fees -- --
------ ------
$ 564 $ 155
====== ======
As of December 31, 1999, the net book value of the Commercial Assets Management
Agreement was $1,764,000 and is included in other assets.
S. Selected Quarterly Financial Data (Unaudited)
Presented below is selected quarterly financial data for 1999 and 1998 (in
thousands, except per share data).
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------
1999 December 31, September 30, June 30, March 31,
- ----------------------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Income from rental property operations $ 2,272 $ 2,186 $ 2,244 $ 2,129
Net income 584 593 687 542
Basic and diluted earnings per share 0.10 0.11 0.12 0.10
Weighted average common shares outstanding 5,572 5,559 5,567 5,453
Weighted average common shares and common
shares equivalents outstanding 5,573 5,563 5,573 5,464
Three Months Ended
---------------------------------------------------------------------
1998 December 31, September 30, June 30, March 31,
- ----------------------------------------------- ----------------- ---------------- ----------------- ----------------
Income from rental property operations $ 2,023 $ 1,995 $ 1,570 $ 1,341
Net income (loss) 408 (1,368) 627 545
Basic and diluted earnings (loss) per share 0.08 (0.27) 0.12 0.11
Weighted average common shares outstanding 5,030 5,123 5,115 5,109
Weighted average common shares and common
shares equivalents outstanding 5,041 5,123 5,142 5,143
</TABLE>
F - 20
<PAGE>
T. Subsequent Events
In January 2000, the Company purchased for $36,816,000 the four manufactured
home communities and the undeveloped homesites at three additional manufactured
home communities which secured the Company's participating mortgage. The
purchase price was paid as follows:
(in thousands)
Cancellation of participating mortgages and loans $ 24,851
Assumption of debt 10,704
Issuance of 44,572 OP Units 496
Cash 765
---------
$ 36,816
=========
In January 2000, the Company purchased for $2,120,000 the 50% interest that it
did not already own in the property management companies that manage the
Company's and Commercial Assets' properties. Mr. Bruce E. Moore, the Company's
President and Chief Operating Officer, owned a 17.5% interest in these
companies.
In January 2000, the Company purchased for $657,000 the assets, primarily
manufactured home inventory, and activities of a real estate brokerage company
that provides brokerage services at the Company's and Commercial Assets'
properties. Mr. Moore, the Company's President and Chief Operating Officer,
owned 50% of this company. The purchase price was equal to the historical cost
of the inventory held by this company.
In January 2000, the Company purchased for $30,000 the assets of the company
which provides maintenance services to the Company's and Commercial Assets'
properties. Mr. Moore, the Company's President and Chief Operating Officer,
owned 50% of this company.
F - 21
<PAGE>
ASSET INVESTORS CORPORATION
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(In Thousands Except Site Data)
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------
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>
Blue Star 1999 Apache Junction, AZ 1955 153 $ 453 $ 1,029 $ -- $ 453 $ 1,029 $ 1,482 $ 15 $ 1,467 $ 662
Brentwood West 1998 Mesa, AZ 1972/1987 350 1,050 12,768 139 1,050 12,907 13,957 811 13,146 7,214
Caribbean Cove 1998 Orlando, FL 1984 286 858 7,952 234 858 8,186 9,044 476 8,568 4,963
Cardinal Court 1997 Largo, FL 1959/1965 138 414 1,829 1 414 1,830 2,244 214 2,030 --
Forest View 1997 Homosassa, FL 1987/1997 180 927 1,950 144 927 2,094 3,021 231 2,790 1,924
Gulfstream 1998 Orlando, FL 1980 553 1,740 11,793 34 1,740 11,827 13,567 686 12,881 7,461
Gulfstream II 1998 Orlando, FL 1988 308 924 9,183 31 924 9,214 10,138 535 9,603 5,563
Lost Dutchman 1999 Apache Junction, AZ 1971/1979/
1999 260 777 4,885 34 777 4,919 5,696 74 5,622 2,537
Marina Dunes 1997 Marina, CA 1979 65 195 3,572 5 195 3,577 3,772 320 3,452 --
Mullica Woods 1998 Egg Harbor City, NJ 1985 90 270 3,399 66 270 3,465 3,735 252 3,483 2,528
Park Royale 1997 Pinellas Park, FL 1971 258 927 5,221 2 927 5,223 6,150 571 5,579 2,059
Pinewood 1997 St. Petersburg, FL 1976 220 660 4,534 52 660 4,586 5,246 394 4,852 2,618
Pleasant Living1997 Riverview, FL 1979 245 726 5,079 155 726 5,234 5,960 450 5,510 2,928
Salem Farm 1998 Bensalem, PA 1988 28 84 1,307 -- 84 1,307 1,391 96 1,295 --
Serendipity 1998 Ft. Myers, FL 1971/1974 338 1,014 7,635 91 1,014 7,726 8,740 488 8,252 4,767
Stonebrook 1997 Homosassa, FL 1987/1997 118 654 1,483 17 654 1,500 2,154 178 1,976 1,233
Sun Valley 1999 Apache Junction, AZ 1984 267 804 5,644 -- 804 5,644 6,448 85 6,363 2,872
Sun Valley 1997 Tarpon Springs, FL 1972 261 783 5,957 -- 783 5,957 6,740 648 6,092 4,665
Westwind I 1997 Dunedin, FL 1970 195 -- 3,226 31 -- 3,257 3,257 363 2,894 --
Westwind II 1997 Dunedin, FL 1972 189 -- 3,210 41 -- 3,251 3,251 361 2,890 --
------------------------------------------------------------------------------------
Total 4,502 $13,260 $101,656 $1,077 $13,260 $102,733 $115,993 $7,248 $108,745 $53,994
====================================================================================
</TABLE>
F - 22
<PAGE>
ASSET INVESTORS CORPORATION
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ------
Real Estate
<S> <C> <C> <C>
Balance at beginning of year $ 101,941 $ 41,419 $ --
Additions during the year:
Real estate acquisitions 13,592 59,977 41,347
Additions 487 583 72
Dispositions (27) (38) --
---------- ---------- ---------
Balance at end of year $ 115,993 $ 101,941 $ 41,419
========== ========== =========
Accumulated Depreciation
Balance at beginning of year $ (3,378) $ (693) $ --
Additions during the year:
Depreciation (3,870) (2,685) (693)
Dispositions -- -- --
---------- ---------- ---------
Balance at end of year $ (7,248) $ (3,378) $ (693)
========== ========== =========
</TABLE>
F - 23
<PAGE>
ASSET INVESTORS CORPORATION
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Principal
Amount of
Loans
Subject to
Final Periodic Face Amount Carrying Deliquent
Interest Maturity Payment Prior Amount of Amount of Principal or
Description Rate Date Terms Liens Mortgages Mortgages Interest
- --------------------- ------------ ---------- ---------- --------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
CADC (1) 10% 2/2018 (1) $2,607 $ 21,312 $ 22,475 $ --
========= ============== =============== ===============
<FN>
(1) The loan is secured by Brentwood, Blue Heron Pines, Savanna Club and Sun
Lake communities and the undeveloped sites in Forest View, Park Royale and
Stonebrook communities. Interest is paid from any cash flows from the
properties.
</FN>
</TABLE>
F - 24
<PAGE>
ASSET INVESTORS CORPORATION
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ------
<S> <C> <C> <C>
Balance at beginning of period $ 27,604 $ -- $ --
Additions during period:
Investments in participating mortgages 6,295 5,072 --
Accrued interest 2,842 3,204 --
Restructure of investment in and notes receivable from real
estate joint ventures -- 25,415 --
Deductions during period:
Collections of principal (630) (3,450) --
Collections of interest (1,784) (2,458) --
Amortization of loan costs (28) (30) --
Reserve for uncollected interest 149 (149) --
Cancellation of debt in connection with purchase of property (11,973) -- --
---------- ---------- ---------
Balance at close of period $ 22,475 $ 27,604 $ --
========== ========== =========
</TABLE>
F - 25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Commercial Assets, Inc.
We have audited the accompanying consolidated balance sheets of Commercial
Assets, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. Our audits also
included the consolidated financial statement schedules listed in the
accompanying index. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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. and subsidiaries as of December 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules, 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.
/s/ERNST & YOUNG LLP
Denver, Colorado
January 21, 2000, except for
Note O, as to which the date
is March 7, 2000
F - 26
<PAGE>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
ASSETS
<S> <C> <C>
Real estate, net of accumulated depreciation of $1,329 and $50 $ 64,273 $ 12,628
Investments in participating mortgages 2,148 9,328
Investment in real estate joint ventures 1,932 1,280
Short-term investments 12,502 45,066
Cash and cash equivalents 4,664 3,292
Investment in and note receivable from Westrec 3,563 4,011
Investment in Asset Investors 1,396 --
CMBS bonds 1,753 1,739
Other assets, net 4,852 890
---------- ----------
Total Assets $ 97,083 $ 78,234
========== ==========
LIABILITIES
Secured long-term notes payable $ 20,442 $ --
Accounts payable and accrued liabilities 1,747 872
Related-party management fees payable 198 108
---------- ----------
22,387 980
---------- ----------
COMMITMENTS AND CONTINGENCIES -- --
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 615 --
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; 10,393 and
10,364 shares issued; and 10,320 and 10,364 shares outstanding, respectively 104 104
Additional paid-in capital 77,018 76,874
Retained earnings (dividends in excess of accumulated earnings) (2,600) 276
Treasury stock, 73 and 0 shares at cost (441) --
---------- ----------
74,081 77,254
---------- ----------
Total Liabilities and Stockholders' Equity $ 97,083 $ 78,234
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F -27
<PAGE>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Rental property operations
<S> <C> <C> <C>
Rental and other property revenues $ 2,538 $ -- $ --
Income from participating mortgages and leases 1,971 587 --
Property operating expenses (1,114) -- --
Depreciation (1,279) (50) --
--------- --------- --------
Income from rental property operations 2,116 537 --
--------- --------- --------
Interest and other income 1,913 3,874 945
CMBS bonds revenue 154 161 9,172
Equity in earnings of Asset Investors 23 -- --
General and administrative expenses (519) (420) (519)
Related-party management fees (565) (87) (1,678)
Interest expense (273) -- --
Related-party acquisition fees (205) (124) --
Reincorporation expenses (120) -- --
Costs related to abandonment of potential marina investments -- (500) --
Gain on sale of bonds -- -- 5,786
--------- --------- --------
Net income $ 2,524 $ 3,441 $ 13,706
========= ========= ========
Basic and diluted earnings per share $ .24 $ .33 $ 1.32
========= ========= ========
Weighted average common shares outstanding 10,342 10,357 10,332
Weighted average common shares and common share equivalents outstanding 10,342 10,372 10,371
Dividends paid per share:
Regular dividends $ .52 $ .39 $ .68
Special dividends -- -- .26
Capital gain dividends -- -- .17
--------- --------- --------
$ .52 $ .39 $ 1.11
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F -28
<PAGE>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Retained
Earnings
(Dividends In Accumulated
Common Stock Additional Excess of Other Total
------------------------- Paid-In Accumulated Treasury Comprehensive Stockholders'
Shares Amount Capital Earnings) Stock Income Equity
---------- ----------- ----------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES - DECEMBER 31, 1996 10,316 $ 103 $ 76,559 $ (1,354) $ -- $(3,389) $ 71,919
Comprehensive Income
Net income -- -- -- 13,706 -- -- 13,706
Reversal of unrealized holding
losses upon restructuring of
bonds -- -- -- -- -- 3,389 3,389
------- ------ --------- -------- ------- ------- ---------
Comprehensive Income -- -- -- 13,706 -- 3,389 17,095
------- ------ --------- -------- ------- ------- ---------
Issuance of common stock 26 1 165 -- -- -- 166
Dividends -- -- -- (11,475) -- -- (11,475)
------- ------ --------- ------- ------- ------- ---------
BALANCES - DECEMBER 31, 1997 10,342 104 76,724 877 -- -- 77,705
Issuance of common stock 22 -- 150 -- -- -- 150
Net income -- -- -- 3,441 -- -- 3,441
Dividends -- -- -- (4,042) -- -- (4,042)
------- ------ --------- -------- ------- ------- ---------
BALANCES - DECEMBER 31, 1998 10,364 104 76,874 276 -- -- 77,254
Issuance of common stock 29 -- 144 -- -- -- 144
Purchase of treasury stock -- -- -- -- (441) -- (441)
Net income -- -- -- 2,524 -- -- 2,524
Dividends -- -- -- (5,400) -- -- (5,400)
------- ------ --------- -------- ------- ------- ---------
BALANCES - DECEMBER 31, 1999 10,393 $ 104 $ 77,018 $ (2,600) $ (441) $ -- $ 74,081
======= ====== ========= ======== ======= ======= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F -29
<PAGE>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 2,524 $ 3,441 $ 13,706
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization 1,289 50 --
Amortization of premium on short-term investments 91 274 --
Amortization of discount on secured long-term notes payable 158 -- --
Amortization of discounts on CMBS bonds -- -- (2,381)
Accrued income on participating mortgages (418) (443) --
Accrued income on CMBS bonds (92) -- --
Equity in earnings of real estate joint ventures (9) -- --
Equity in earnings of Asset Investors (23) -- --
Gain on sale of bonds -- -- (5,786)
Increase in accounts payable and accrued liabilities 286 537 216
(Increase) decrease in other assets (1,135) 323 (1,327)
-------- -------- --------
Net cash provided by operating activities 2,671 4,182 4,428
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of real estate (34,292) (12,671) --
Purchases of Asset Investors' common stock (1,433) -- --
Collections on short-term investments 10,059 30,313 --
Notes receivable advances (1,339) (477) --
Proceeds from sale of short-term investments 22,411 16,085 --
Acquisitions of short-term investments -- (91,946) --
Investments in participating mortgages, net (1,380) (8,959) --
Investment in real estate joint ventures (648) (1,280) --
Capital replacements and improvements (1,178) (7) --
Investment in Westrec -- (2,301) --
Collections on note receivable from Westrec 448 -- --
Dividends from real estate joint ventures 5 -- --
Dividends from Asset Investors 60 -- --
Proceeds from sale of bonds -- -- 77,693
Acquisition of CMBS bonds -- -- (4,801)
Collections on CMBS bonds 78 242 --
-------- -------- --------
Net cash provided by (used in) investing activities (7,209) (71,001) 72,892
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from secured long-term notes payable 12,600 -- --
Dividends paid (5,400) (4,042) (11,475)
Payment of loan costs (541) -- --
Purchase of treasury stock (441) -- --
Principal paydowns on secured short-term financing (214) -- --
Principle paydowns on secured long-term notes payable (94) -- --
Proceeds from issuance of Common Stock -- -- 31
-------- -------- --------
Net cash provided by (used in) financing activities 5,910 (4,042) (11,444)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,372 (70,861) 65,876
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,292 74,153 8,277
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,664 $ 3,292 $ 74,153
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F - 30
<PAGE>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Organization
Commercial Assets, Inc. ("CAX" and, together with its subsidiaries, the
"Company") is a Delaware corporation that has interests in manufactured home
communities and has elected to be taxed as a real estate investment trust
("REIT"). Prior to June 10, 1999, the Company was a Maryland corporation.
Effective June 10, 1999, the Company's stockholders approved its reincorporation
in Delaware. The Company's common stock, par value $.01, (the "Common Stock") is
listed on the American Stock Exchange under the symbol "CAX."
Prior to 1998, the Company owned subordinate classes of Commercial Mortgage
Backed Securities ("CMBS bonds"). In November 1997, the Company resecuritized
its subordinate CMBS bond portfolio. This resulted in the Company receiving
$77,693,000 cash and retaining a residual interest in an owner trust arising
from the resecuritization. In the third quarter of 1998, the Company decided to
invest in manufactured home communities and as of December 31, 1999 has invested
approximately $70 million in 12 manufactured home communities (including
investments in participating mortgages and real estate joint ventures) with
1,840 developed homesites and 1,370 undeveloped homesites.
The Company's daily operations are performed by a manager pursuant to an
agreement currently in effect through December 2000 ("the Management
Agreement"). Since November 1997, Asset Investors Corporation (together with its
subsidiaries, "Asset Investors") has been the manager. Asset Investors owns 27%
of the Company's Common Stock. No change was made to the Management Agreement
during 1998. For 1999, the Incentive Fee was amended to provide that it is based
on Funds From Operations, less an annual capital replacement reserve of at least
$50 per developed homesite, instead of the Company's REIT income. In general,
FFO is net income plus depreciation, amortization and real estate acquisition
fees. The Management Agreement has been extended to December 31, 2000 with the
same terms as 1999 except that the Management Agreement will automatically
terminate if the Company merges with Asset Investors. 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, officers of Asset Investors are also
officers of the Company.
B. Proposed Merger with Asset Investors
The Company and Asset Investors have agreed to merge, subject to the approval by
both (a) a majority of Asset Investors' outstanding shares and (b) two-thirds of
the Company's outstanding shares. Asset Investors owns approximately 27% of the
Company's outstanding shares and has agreed to vote these shares in favor of the
merger. Asset Investors will issue 0.4075 shares of its common stock for each
outstanding share of the Company's Common Stock. Alternatively, the Company's
stockholders may elect to receive $5.75 per share in cash for up to 3,549,868
shares of the Company's Common Stock with any remaining shares receiving 0.4075
shares of Asset Investors common stock. Asset Investors and the officers and
directors of Asset Investors and the Company have agreed to elect to receive
shares of Asset Investors common stock for all shares of the Company's Common
Stock that they own. The stockholder meetings are expected to occur in the
second quarter of 2000.
F - 31
<PAGE>
C. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The Company's investment in
Asset Investors is recorded under the equity method.
Real Estate and Depreciation
Rental properties are recorded at cost less accumulated depreciation, unless
considered impaired. If events or circumstances indicate that the carrying
amount of a property may be impaired, the Company will make an assessment of its
recoverability by estimating the future undiscounted cash flows, excluding
interest charges, of the property. If the carrying amount exceeds the aggregate
future cash flows, the Company would recognize an impairment loss to the extent
the carrying amount exceeds the fair value of the property. As of December 31,
1999, management believes that no impairment losses exist based on periodic
reviews. No impairment losses were recognized in 1999 or 1998.
Depreciation is computed using the straight line method over an estimated useful
life of 25 years for land improvements and buildings. Significant renovations
and improvements, which improve 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.
Investments in Participating Mortgages
The Company has loans secured by real estate which provide for an interest rate
return plus up to 50% of net profits, cash flows and sales proceeds from the
underlying real estate. The Company accounts for these investments as loans when
(a) the Company does not have an interest in the borrower and either (b) the
borrower has a substantial equity investment in the real estate collateral or
(c) the Company has recourse to other substantial tangible assets of the
borrower. As such, the Company records interest income based on the rate
provided for in the loan and records its share of any net profits or gains from
the sale of the underlying real estate when realized. If the above requirements
are not met, then the loan is accounted for as an equity investment in real
estate under the equity method of accounting.
Investments in Real Estate Joint Ventures
Investments in real estate joint ventures in which the Company does not control
the joint venture's activities are accounted for under the equity method of
accounting.
Investment in and Note Receivable from Westrec
The Company classifies its investment in and note receivable from Westrec as
available-for-sale and carries this at estimated fair value in the financial
statements. The Company believes that the contractual amounts provided for in
the note receivable and the agreement under which the Company can sell its
shares of Westrec common stock approximates fair value at December 31, 1999.
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 associated rental revenues are recognized when earned and
due from residents.
F - 32
<PAGE>
Interest on participating mortgages is recorded based upon outstanding balances
and interest rates per the terms of the mortgages. In addition, the Company
evaluates the collectibility of any unpaid interest and provides reserves as
necessary. As of December 31, 1999, there is no reserve for uncollected interest
on the participating mortgages. Rent on ground leases is recognized when earned
and due from lessee.
Deferred Financing Costs
Fees and costs incurred in obtaining financing are capitalized. These costs are
amortized over the terms of the related loan and are charged to interest
expense.
Capitalized Interest
Interest is capitalized on development projects during periods of construction
or development. During 1999, capitalized interest was $417,000. There was no
capitalized interest in 1998 or 1997.
CMBS Bonds
Earnings from CMBS bonds was comprised of coupon interest and the amortization
of the purchase discount. Amortization of the purchase discount was recognized
by the interest method using a constant effective yield and assumed an estimated
rate of future prepayments, defaults and credit losses which was adjusted for
actual experience. The allowance for credit losses was equal to the undiscounted
total of future estimated credit losses. In the event the Company adjusted 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. 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 financial instruments generally approximate
their carrying basis or amortized cost.
Income Taxes
The Company intends to operate in a manner that will permit it to qualify for
the income tax treatment accorded to a REIT. If it so qualifies, the Company's
net 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.
Ninety percent of dividends paid in 1999 represented ordinary taxable income to
stockholders and 10% represented a return of capital for income tax purposes
(unaudited). Regular and special dividends paid in 1998 and 1997 represented
F - 33
<PAGE>
ordinary taxable income to the stockholders (unaudited). In addition, the
Company paid a capital gains dividend of $.17 per share in 1997 (unaudited).
Earnings Per Share
Basic earnings per share for 1999, 1998 and 1997 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 dilutive, unexercised
stock options of 0, 15,000 and 39,000 in 1999, 1998 and 1997, respectively.
Stock options of 62,000, 43,000 and 28,000 for 1999, 1998 and 1997,
respectively, have been excluded from diluted earnings per share as their effect
would be anti-dilutive.
Treasury Stock
Treasury stock is recorded at cost. In addition, the Company purchased 114,000
shares of Asset Investors' common stock during 1999. Because Asset Investors
owns 27% of the Company's Common Stock, the Company is deemed to have an
interest in 48,000 shares of the Company's Common Stock and has also recorded
this as treasury stock.
Statements of Cash Flows
For purposes of reporting cash flows, cash maintained in bank accounts, money
market funds and highly-liquid investments are considered to be cash and cash
equivalents. The Company paid $565,000 in interest during 1999. The Company paid
no interest in 1998 or 1997.
Non-cash operating, investing and financing activities for 1999, 1998 and 1997
were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Accrued initial capital expenditures on real estate purchases $ 400 $ -- $ --
Issuance of Common Stock for services 144 150 135
Escrow of long-term debt proceeds 300 -- --
Acquisitions of real estate by:
Issuance of note payable 4,519 -- --
Assumption of debt and minority interest in subsidiaries 4,068 -- --
Cancellation of participating mortgages 8,978 -- --
Principal collections on CMBS bonds transferred to restricted cash -- -- 6,227
Unrealized holding gains and losses on CMBS bonds -- -- 3,389
</TABLE>
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States 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 1998 and 1997 consolidated
financial statements to conform to the classifications currently used. The
effect of such reclassifications on amounts previously reported is immaterial.
F - 34
<PAGE>
D. Short-term Investments
The Company has short-term investments consisting of mortgage-backed bonds
guaranteed by Federal Home Loan Mortgage Corporation and Federal National
Mortgage Association. These investments are classified as available-for-sale,
and the fair market value at December 31, 1999 approximates the carrying value
of $12,502,000. During 1999 and 1998, the Company had no unrealized gains
(losses) on these investments. The Company had $22,411,000 and $16,085,000 in
proceeds from the sale of short-term investments during 1999 and 1998,
respectively, and realized no gains (losses) from such sales. The Company
determined its basis in these sold investments using the specific identification
method. At December 31, 1999, these investments had the following maturities:
Amount Maturity
------------------- ---------------
$3,395,000 2000
$9,107,000 2003
E. Investments in Manufactured Home Communities
During 1999, the Company acquired eight manufactured home communities with
approximately 1,450 developed homesites and 500 undeveloped homesites. The
Company had participating mortgages on three of these communities in 1998. The
total investment was $52,257,000 consisting of $34,292,000 cash, $8,587,000 of
assumed debt, $8,978,000 by canceling participating mortgages and $400,000 of
estimated initial capital expenditures. During 1998, the Company paid
$12,671,000 to acquire two manufactured home communities with approximately 310
developed homesites and 790 undeveloped homesites. These investments are
recorded as real estate.
The Company made $8,959,000 of participating mortgages in 1998 involving three
manufactured home communities and adjacent land involving approximately 310
developed homesites and 210 undeveloped homesites. These non-recourse mortgages
were secured by the three manufactured home communities, adjacent land,
commercial real estate, two additional manufactured home communities and one
recreational vehicle park. These investments are recorded as participating
mortgages. In 1999, the Company cancelled these participating mortgages in
connection with the purchase of these manufactured home communities and the
adjoining land.
The following unaudited pro-forma information has been prepared assuming the
acquisition of the manufactured home communities 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 1999 and 1998 are as follows
(in thousands, except per share data):
1999 1998
-------- --------
Revenues $ 6,927 $ 5,775
======== ========
Net income $ 1,252 $ 391
======== ========
Basic and diluted earnings per share $ .12 $ .04
======== ========
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
F - 35
<PAGE>
completion, which may include outstanding contracts to acquire certain
manufactured home communities, subject to satisfactory completion of the
Company's due diligence review.
F. Real Estate
Real estate at December 31, 1999 and 1998, is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land $ 15,290 $ 3,798
Land improvements and buildings 50,312 8,880
---------- ----------
65,602 12,678
Less accumulated depreciation (1,329) (50)
---------- ----------
Investment in real estate, net $ 64,273 $ 12,628
========== ==========
</TABLE>
Land improvements and buildings consist primarily of infrastructure, roads,
landscaping, clubhouses, maintenance buildings and common amenities.
Two manufactured home communities have been leased to a third party. The first
lease involves a community acquired by the Company at a cost of $1.4 million and
is for a term of 50 years. The Company receives initial annual lease payments
equal to 9% of its cost. The annual lease payments increase by 4% per annum over
the prior year's lease payments until the annual lease payment equals 13% of the
Company's cost. In addition, the Company receives additional rent equal to 50%
of the lessee's net cash flow from the property. In the event of a sale of the
property, the Company receives all proceeds until it has realized its total
purchase price of the property plus a 13% per annum rate of return. The Company
then receives 50% of any sales proceeds in excess of such amount. The Company
terminated the lease on January 1, 2000 by canceling $187,000 in loans to the
lessee.
The other leased community involves two phases and has been leased to the same
third party for 50 years. Annual lease payments on the first phase during 1999
was $890,000 and increases in later years by 4% per annum. There are no lease
payments on the second phase until the sites are developed, at which time, the
annual lease payments on the second phase will be equal to 10% times the costs
incurred in developing this phase. In addition, the lessee pays to the Company
additional rent equal to 50% of the lessee's net cash flow from the property. In
the event of a sale, the Company receives 50% of any sales proceeds in excess of
the Company's cost. The Company terminated the lease on January 1, 2000 by
canceling $186,000 in loans to the lessee.
G. Investments in Participating Mortgages
During 1998, the Company made investments in participating mortgages secured by
three manufactured home communities and adjoining land. The non-recourse notes
accrued interest at 15% per annum and paid interest at 9% per annum through
August 1999, with the pay rate increasing 1% each year thereafter to a maximum
of 12% per annum. The loans were scheduled to mature in September 2007. The
Company also received additional interest of 50% of the net profits and cash
flows from the properties. In August 1999, the Company purchased the three
communities and adjoining land by canceling the participating mortgages and
releasing additional collateral pledged on the mortgages.
F - 36
<PAGE>
The following table provides unaudited summary financial information of the
borrower with respect to these participating mortgages for the period from
August 1998 (date of participating mortgages) to December 31, 1998 and January
1999 to August 1999 (date the Company acquired the properties):
<TABLE>
<CAPTION>
January 1999 to August 1998 to
August 1999 December 1998
-------------------- --------------------
(in thousands)
(unaudited)
<S> <C> <C>
Rental and other property revenues $ 828 $ 458
Property operating expenses (369) (234)
Depreciation expense (52) (31)
------- -------
Income from rental property operations 407 193
------- -------
Net loss (384) (108)
</TABLE>
The Company also has investments in participating mortgages secured by
individual homes and homesites within two manufactured home communities. These
mortgages accrue interest at 10% and pay interest from the cash flows from the
homes and homesites. The Company also receives additional interest equal to 50%
of the net profits and cash flows from the homes and homesites.
As of December 31, 1999, the Company had investments in participating mortgages
of $2,148,000. During 1999 and 1998, the Company had income of $920,000 and
$451,000, respectively, from participating mortgages.
H. Investments in Real Estate Joint Ventures
The Company has a $1,304,000 investment in a joint venture involving a
manufactured home community. The Company receives a priority return from the
venture until the Company has received an amount equal to 9% times $1,250,000
for 1999. The Company's subsequent annual priority return increases by 5% over
the prior year's amount. The other venturer then receives a similar percentage
return on its $300,000 investment in the venture. In the event the property is
sold, the Company receives all proceeds until it has received its investment
plus 20% per annum. The other venturer then receives all proceeds until it has
received its investment plus 20% per annum. Any excess sales proceeds are then
shared equally. The Company did not record any income from this real estate
joint venture in 1999 or 1998 as the property is under development.
In November 1999, the Company invested $624,000 in a joint venture involving a
manufactured home community. The Company receives a priority annual return from
the venture equal to 9% times $690,000 through 2000. After 2000, the Company's
priority return increases by 4% annually. Thereafter, the Company receives 20%
of any profits and cash flows of the venture in excess of the above priority
returns. During 1999, the Company recorded $10,000 in income from this joint
venture.
I. Investment in Asset Investors
During 1999, the Company purchased 114,000 shares (approximately 2%) of the
common stock of Asset Investors. The Company has recorded its investment in
Asset Investors under the equity method because Asset Investors manages the
Company and owns approximately 27% of the Company's Common Stock. In 1999, the
Company recorded $23,000 in equity in earnings of Asset Investors.
F - 37
<PAGE>
J. CMBS Bonds
In November 1997, the Company resecuritized its portfolio of retained interests
in prior securitizations that are in the form of CMBS bonds. Nine bonds were
sold, one bond was redeemed and the remaining two CMBS bonds were resecuritized
by transferring the bonds and related restricted cash to an owner trust in which
the Company retained a residual interest. In a private placement, the trust then
sold debt securities representing senior interests in the trust's assets. The
Company recorded the resecuritization of its portfolio as a sale. The Company
received $77,693,000 in cash proceeds and recorded a $5,786,000 gain from the
sale. The Company determined its basis in the CMBS bonds using the specific
identification method. The Company paid $426,000 in incentive fees to its
manager in connection with the sale. These incentive fees were netted against
the gain.
The estimated fair value of the residual interest retained by the Company was
$2,000,000. During 1999 and 1998, the Company received $141,000 and $403,000,
respectively, of which $78,000 and $242,000, respectively, was recorded as a
reduction in the net book value of the retained residual interest. The net book
value at December 31, 1999 was $1,753,000 which approximates fair value. The
Company had no unrealized gains (losses) on its CMBS bonds at December 31, 1999
and 1998. The maturity dates of the CMBS bonds range from 2001 to 2004 and the
Company had no sales of CMBS bonds during 1999 or 1998.
In 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.
K. Investment in and Note Receivable from Westrec
Prior to deciding to acquire manufactured home communities, the Company
evaluated acquiring interests in marinas and, in connection with this, acquired
a 12% interest in Westrec Marina Management Inc. ("Westrec") for approximately
$2,500,000 and made a loan to an affiliate of Westrec. In the third quarter of
1998, the Company decided to invest in manufactured home communities instead of
marinas. The Company has recorded its investment in and note receivable from
Westrec at the sum of the amount for which the Company can re-sell its interest
in Westrec plus the outstanding balance of the note receivable. In 1998, the
Company expensed $500,000 for due diligence, legal, and other costs incurred in
connection with investigating investments in marinas.
L. Secured Long-Term Notes Payable
The following table summarizes the Company's secured long-term notes payable (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
------------- ------------
Fixed rate, ranging from 6.70% to 7.77%, fully-amortizing, non-recourse notes
<S> <C> <C>
maturing at various dates in 2019 $ 12,815 $ --
7.67% fixed rate, partially-amortizing, non-recourse note maturing in 2007 2,950 --
Recourse, fully-amortizing note discounted at 7.00%, maturing in 2002 4,677 --
-------- ---------
$ 20,442 $ --
======== =========
</TABLE>
Real estate assets which secure the long-term notes payable had a net book value
of $35,326,000 at December 31, 1999. The Company had $522,000 in escrow for real
estate taxes and property improvements at December 31, 1999.
F - 38
<PAGE>
Scheduled principal payments after December 31, 1999 for the secured long-term
notes payable are (in thousands):
2000 $ 1,218
2001 2,098
2002 2,453
2003 419
2004 449
Thereafter 13,805
---------
$ 20,442
=========
M. Stock Option Plan
The Company has a Stock Incentive Plan for the issuance of non-qualified stock
options to its directors and officers, employees and consultants which as of
December 31, 1999, permitted the issuance of up to an aggregate of 3,000,000
shares of Common Stock, of which 331,000 and 454,000 related to outstanding
stock options as of December 31, 1999 and 1998, 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. The stock options have various
terms ranging up to 10 years.
Presented below is a summary of the changes in stock options for the three years
ended December 31, 1999. As of December 31, 1999, the outstanding options have
exercise prices ranging from $5.625 to $6.625 and have a remaining
weighted-average life of 3.0 years.
Weighted
Average
Exercise Price Shares
-------------- ------
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
Granted 6.62 38,000
Forfeited 7.50 (290,000)
Expired 7.25 (11,000)
------ ----------
Outstanding - December 31, 1998 6.23 454,000
Granted 6.50 38,000
Expired 6.32 (161,000)
------ ----------
Outstanding - December 31, 1999 $ 6.22 331,000
====== ==========
Options granted to date vest over various periods up to two years. As of
December 31, 1999, 1998 and 1997, 331,000, 445,000 and 660,000, respectively, of
the outstanding options were exercisable and the weighted average exercise price
of exercisable options was $6.22, $6.22 and $6.78, respectively.
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
F - 39
<PAGE>
value for these options was estimated at the date of grant using an
option-pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- ------------------
<S> <C> <C> <C>
Range of risk free interest rates 5.3% to 6.5% 5.8% to 6.1% 5.7% to 6.8%
Expected dividend yield 9.8% 8.3% 10.0%
Volatility factor of the expected market price of
the Company's common stock 0.200 0.200 0.200
Weighted average expected life of options 10.0 years 10.0 years 5.0 years
</TABLE>
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 1999, 1998 and 1997, the estimated weighted-average, grant-date fair
value of options granted was $.26, $.41 and $.47, respectively. The Company
assumed lives of five to ten years and risk-free interest rates equal to the
Five- or Ten-Year U.S. Treasury rate on the date the options were granted
depending on option term. In addition, the expected stock price volatility and
dividend growth rates were estimated based upon historical averages over the two
years ended December 31, 1999, adjusted for changes based upon the Company's
investment in manufactured home community assets.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for per share data):
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Pro forma net income $ 2,514 $3,426 $ 13,664
Pro forma basic earnings per share $ 0.24 $ 0.33 $ 1.32
Pro forma diluted earnings per share $ 0.24 $ 0.33 $ 1.31
</TABLE>
N. Management Fees
The Company operates under a management agreement, pursuant to which the manager
advises the Company on its business and oversees its daily operations, subject
to the supervision of the Company's Board of Directors. Asset Investors has been
the manager since November 1997. The Management Agreement provides that the
manager receives a "Base Fee," an "Acquisition Fee" and an "Incentive Fee." The
Base Fee is payable quarterly in an amount equal to 1% per annum of the
Company's average net book value of real estate-related assets. The Acquisition
Fee equals 0.5% of the cost of each real estate-related asset acquired. For 1997
and 1998, the Incentive Fee equals 20% of the amount by which the Company's REIT
taxable income exceeds the amount calculated by multiplying the Company's
"average net worth" by the "Ten-Year United States Treasury rate" plus 1%.
During 1999, the Incentive Fee was amended to provide that this fee was based on
the Company's Funds From Operations, less an annual capital replacement reserve
of at least $50 per developed homesite, instead of REIT income. In general,
Funds From Operations is equal to net income plus depreciation, amortization and
acquisition fees. In 1997, the manager also received "Administrative Fees" on
each CMBS bond outstanding. Administrative Fees were terminated in connection
with the November 1997 restructuring of the CMBS bond portfolio. The Management
Agreement has been extended through December 31, 2000. The terms are the same as
provided for in 1999.
F - 40
<PAGE>
Fees paid to the manager during 1999, 1998 and 1997 were (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- --------------
<S> <C> <C> <C>
Base Fees $ 565 $ 87 $ 598
Acquisition Fees 205 124 23
Incentive Fees -- -- 1,024
Administrative Fees -- -- 56
------ ------ --------
$ 770 $ 211 $ 1,701
====== ====== ========
</TABLE>
Acquisition Fees incurred in 1997 were capitalized as part of the cost of
acquiring CMBS bonds. In addition, the Company incurred $426,000 of Incentive
Fees in 1997 relating to the gain on the restructuring of the CMBS bonds.
Acquisition Fees incurred in 1999 and 1998 were expensed because such fees were
paid to Asset Investors, owner of 27% of the Company's Common Stock.
O. Commitments and Contingencies
In connection with the acquisition of a manufactured home community, the Company
entered into an earn-out agreement with respect to 154 unoccupied homesites. The
Company will pay $17,000 to the former owner for each newly occupied homesite.
During 1999 and 1998, the Company paid $17,000 and $0, respectively, for
homesites that became occupied.
The Company has agreed to acquire from time-to-time homesites subject to ground
leases. The purchase price for each homesite will be equal to the base annual
rent provided for in the ground lease divided by 9%. The Company is not required
to acquire these homesites in groups of less than 10. The maximum number of
homesites the Company might purchase is approximately 500 for total
consideration of approximately $20 million. The Company purchased no homesites
during 1999 or 1998.
The Company has agreed to invest up to an additional $680,000 in a real estate
joint venture in four equal, annual installments of $170,000 beginning in
November 2000.
In connection with the acquisition of a property, the Company entered into an
earn-out agreement whereby it will pay the former owner an amount equal to the
increase in the property's net operating income divided by 9.5% until the
Company pays a total of $2,160,000. No amount was paid during 1999.
In September 1999, four of the Company's stockholders, individually and as
purported representatives of the Company's stockholders, except Asset Investors
and its affiliates, filed three purported class action lawsuits in Delaware
against the Company, the members of the board of directors and certain officers
of Asset Investors and the Company. These lawsuits alleged that the defendants
breached their fiduciary duties to the Company's stockholders in connection with
the Company's proposed merger with Asset Investors and the Company's recent
reincorporation in Delaware. In November 1999, these lawsuits were consolidated
into a single lawsuit. On March 7, 2000, the parties entered into a settlement
agreement, subject to the court's approval which, amended the merger agreement
as follows:
o the Company's stockholders, other than Asset Investors and the officers and
directors of Asset Investors and the Company, may elect to receive $5.75 in
cash per share for up to 3,549,868 shares of the Company's Common Stock
with any remaining shares to receive 0.4075 shares of Asset Investors
common stock; and
o the percentage of votes of the Company's Common Stock needed to approve the
merger was increased from a majority to two-thirds.
P. Operating Segments
Investments in manufactured home communities constitute substantially all of the
Company's investments. Management assesses the performance of the Company as one
operating segment.
F - 41
<PAGE>
Q. 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.
o Cash and cash equivalents, accounts payable and accrued liabilities, and
secured short-term financing - the carrying amounts approximate fair value
because of the short maturity of these instruments.
o Investment in Asset Investors - the fair value was determined based upon
the closing price of Asset Investors common stock on the New York Stock
Exchange, Inc. as of the end of 1999.
o Secured long-term notes payable - based upon borrowing rates currently
available to the Company, the carrying value of its secured long-term notes
payable approximates their fair value.
The carrying values and fair values of the Company's investment in Asset
Investors at December 31, 1999 is as follows (in thousands):
1999
------------------------------
Carrying Value Fair Value
-------------- ----------
Investment in Asset Investors $ 1,396,000 $ 1,270,000
=========== ===========
R. Other Matters
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.
S. Selected Quarterly Financial Data (unaudited)
Presented below is selected quarterly financial data for the years ended
December 31, 1999 and 1998 (in thousands, except per share data).
<TABLE>
<CAPTION>
Three Months Ended,
-----------------------------------------------------------------
1999 December 31, September 30, June 30, March 31,
- --------------------------------------------------- -------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Rental and other property revenues $ 1,156 $ 945 $ 437 $ --
Income from participating mortgages and leases 326 455 603 587
Property operating expenses (512) (428) (174) --
Depreciation (493) (465) (232) (89)
------- -------- ------- --------
Income from rental property operations 477 507 634 498
--------- -------- ------- --------
Interest and other income 343 349 520 701
General and administrative expenses (115) (131) (140) (133)
Related-party management fees (190) (181) (114) (80)
Interest expense (154) (61) (58) --
Related-party acquisition fees (8) (3) (152) (42)
Net income 400 408 734 982
Basic and diluted earnings per share .04 .04 .07 .09
Weighted average common shares outstanding 10,320 10,325 10,362 10,364
Weighted average common shares and common share
equivalents outstanding 10,320 10,325 10,362 10,365
F - 42
<PAGE>
Three Months Ended,
-----------------------------------------------------------------
1998 December 31, September 30, June 30, March 31,
- --------------------------------------------------- -------------- ----------------- --------------- ----------------
Income from participating mortgages and leases $ 436 $ 151 $ -- $ --
Depreciation (46) (4) -- --
------- -------- ------- --------
Income from rental property operations 390 147 -- --
------- -------- ------- --------
Interest and other income 767 1,012 1,042 1,053
General and administrative expenses (117) (129) (88) (86)
Related-party management fees (47) (23) (12) (5)
Related-party acquisition fees (63) (61) -- --
Costs related to abandonment of potential marina
investments -- (500) -- --
Net income 967 486 986 1,002
Basic and diluted earnings per share .09 .05 .09 .10
Weighted average common shares outstanding 10,364 10,364 10,359 10,342
Weighted average common shares and common share
equivalents outstanding 10,366 10,373 10,387 10,378
</TABLE>
T. Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133. Accounting for Derivative Instruments
and Hedging Activities ("Statement 133"). Statement 133 requires recording all
derivative instruments as assets or liabilities, measured at fair value.
Statement 133 is effective beginning after 2000. The Company has elected not to
early adopt the provisions of Statement 133 as of December 31, 1999 and when
Statement 133 is adopted, the Company does not expect Statement 133 to have a
significant impact on its financial position and results of operations.
F - 43
<PAGE>
COMMERCIAL ASSETS, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(In Thousands Except Site Data)
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------
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>
Casa Encanta 1999 Mesa, AZ 1970 106 $ 315 $ 1,152 $ -- $ 315 $ 1,152 $ 1,467 $ 17 $ 1,450 $ --
Cypress Greens 1998 Lakeland, FL 1986 107 240 1,129 28 240 1,157 1,397 60 1,337 --
Desert Harbor 1999 Apache Junction, 1997 207 621 6,169 700 1,058 6,432 7,490 124 7,366 4,677
AZ
Fiesta Development 1999 Mesa, AZ -- 206 4,804 -- 136 4,804 136 4,940 -- 4,940 --
Fiesta Village 1999 Mesa, AZ 1962 170 498 4,029 -- 498 4,029 4,527 61 4,466 2,950
La Casa Blanca 1999 Apache Junction, 1993 198 594 6,698 91 594 6,789 7,383 133 7,250 --
AZ
La Casa Mini 1999 Apache Junction, -- -- 495 175 -- 495 175 670 1 669 --
Storage AZ
Lakeshore Utilities1999 Tampa, FL -- -- 50 100 -- 50 100 150 3 147 --
Lakeshore Villas 1999 Tampa, FL 1972 290 870 6,990 293 870 7,283 8,153 219 7,934 5,041
Marina Dunes 1999 Marina, CA -- -- 306 -- 13 306 13 319 -- 319 --
Rancho Mirage 1999 Apache Junction, 1994 312 930 10,879 108 930 10,987 11,917 290 11,627 --
AZ
Riverside 1998 Ruskin, FL 1984 990 3,558 7,744 122 3,558 7,866 11,424 344 11,080 5,478
Royal Palm 1999 Haines City, FL 1971 450 1,383 3,027 131 1,383 3,158 4,541 61 4,480 2,296
Southern Palms 1999 Mesa, AZ 1961 36 189 1,035 -- 189 1,035 1,224 16 1,208 --
-----------------------------------------------------------------------------------
Total 3,072 $14,853 $49,127 $ 1,622 $15,290 $50,312 $65,602 $1,329 $64,273 $20,442
===================================================================================
</TABLE>
F - 44
<PAGE>
COMMERCIAL ASSETS, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Real Estate
<S> <C> <C> <C>
Balance at beginning of year $ 12,678 $ -- $ --
Additions during the year:
Real estate acquisitions 51,309 12,671 --
Additions 1,615 7 --
Dispositions -- -- --
---------- ---------- ---------
Balance at end of year $ 65,602 $ 12,678 $ --
========== ========== =========
Accumulated Depreciation
Balance at beginning of year $ (50) $ -- $ --
Additions during the year:
Depreciation (1,279) (50) --
Dispositions -- -- --
---------- ---------- ---------
Balance at end of year $ (1,329) $ (50) $ --
========== ========== =========
</TABLE>
F - 45
<PAGE>
COMMERCIAL ASSETS, INC.
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Principal
Amount of
Loans
Subject to
Final Periodic Face Carrying Delinquent
Interest Maturity Payment Prior Amount of Amount of Principal or
Description Rate Date Terms Liens Mortgages Mortgages Interest
- --------------------- ------------ ---------- ---------- --------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Savanna Club 10% 9/2018 (1) $ -- $ 1,896 $ 1,913 $ --
Sun Lake 10% 9/2018 (1) -- 222 235 --
--------- -------------- --------------- ---------------
$ -- $ 2,118 $ 2,148 $ --
<FN>
========= ============== =============== ===============
(1) Interest is paid from any cash flows from the property.
</FN>
</TABLE>
F - 46
<PAGE>
COMMERCIAL ASSETS, INC.
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 9,328 $ -- $ --
Additions during period:
Investments in participating mortgages 1,866 8,913 --
Accrued interest 925 371 --
Loan costs -- 70 --
Deductions during period:
Collections of principal (486) (20) --
Collections of interest (503) (2) --
Amortization of loan costs (4) (4) --
Cancellation of debt in connection with purchase of property (8,978) -- --
---------- ---------- ---------
Balance at close of period $ 2,148 $ 9,328 $ --
========== ========== =========
</TABLE>
F - 47
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
2.1 Agreement and Plan of Merger, dated as of March 15, 1999,
between Asset Investors Corporation, a Maryland corporation
and Asset Investors Corporation, a Delaware corporation
(incorporated herein by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K, dated May 26, 1999,
Commission File No. 1-9360, filed on May 26, 1999).
2.2 Agreement and Plan of Merger, dated as of August 31, 1999, by
and between the Registrant and Commercial Assets, Inc.
(incorporated herein by reference to Exhibit 2.1 to the
Current Report on Form 8-K dated August 31, 1999, Commission
File No. 1-9360, filed on September 3, 1999).
2.3 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 home 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
- 36 -
<PAGE>
Form 8-K dated July 30, 1997, Commission File No. 1-9360,
filed on August 12, 1997).
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).
2.4 Contribution Agreement dated as of February 27, 1998, between
Asset Investors Operating Partnership, L.P. and Roth
Associates of New Jersey (incorporated herein by reference to
Exhibit 2.4 to the Current Report on Form 8-K dated February
27, 1998, Commission File No. 1-9360, filed on March 13,
1998).
2.4(a) Contribution Agreement dated as of February 27, 1998, between
Asset Investors Operating Partnership, L.P. and Salem Farm
Mobile Home Park, Inc. (incorporated herein by reference to
Exhibit 2.4(a) to the Current Report on Form 8-K dated
February 27, 1998, Commission File No.
1-9360, filed on March 13, 1998).
2.5 Agreement of Sale dated as of April 13, 1998, between
Community Acquisition Joint Venture and Serendipity
Properties, Inc., (incorporated herein by reference to Exhibit
2.5 to the Registrant's Current Report on Form 8-K dated May
29, 1998, Commission File No. 1-9360, filed on June 12, 1998).
2.5(a) Assignment of Agreement of Sale dated as of May 20, 1998,
between Community Acquisition Joint Venture and Asset
Investors Operating Partnership, L.P. (incorporated herein by
reference to Exhibit 2.5(a) to the Registrant's Current Report
on Form 8-K dated May 29, 1998, Commission File No. 1-9360,
filed on June 12, 1998).
2.6 Purchase Agreement with Escrow Instructions, as amended, dated
as of April 14, 1998 between Brentwood West Partners, LLP and
Parkbridge Capital Group, Inc. (incorporated herein by
reference to Exhibit 2.6 to the Registrant's Current Report on
Form 8-K dated May 29, 1998, Commission File No. 1-9360, filed
on June 12, 1998).
2.6(a) Conditional Assignment of Contract dated as of April 17, 1998,
between Parkbridge Capital Group, Inc. and Community
- 37 -
<PAGE>
Acquisition Development Corporation. (incorporated herein by
reference to Exhibit 2.6(a) to the Registrant's Current Report
on Form 8-K dated May 29, 1998, Commission File No. 1-9360,
filed on June 12, 1998).
2.6(b) Assignment of Agreement of Sale dated as of June 1, 1998,
between Community Acquisition Joint Venture and Asset
Investors Operating Partnership, L.P. (incorporated herein by
reference to Exhibit 2.6(b) to the Registrant's Current Report
on Form 8-K dated May 29, 1998, Commission File No. 1-9360,
filed on June 12, 1998).
2.7 Agreement of Sale dated as of May 13, 1998, between HFIC, INC.
and Gulfstream Harbor, Inc. and Gulfstream Harbor II Inc.
(incorporated herein by reference to Exhibit 2.7 to the
Registrant's Current Report on Form 8-K dated July 16, 1998,
Commission File No. 1-9360, filed on July 30, 1998).
2.7(a) Assignment of Agreement of Sale dated as of July 15, 1998,
between HFIC, INC. and AIOP Gulfstream Harbor, LLC., AIOP
Gulfstream Outlot I, L.L.C., AIOP Gulfstream Outlot II, L.L.C.
and AIOP Gulfstream Outlot III, L.L.C. (incorporated herein by
reference to Exhibit 2.7(a) to the Registrant's Current Report
on Form 8-K dated July 16, 1998, Commission File No. 1-9360,
filed on July 30, 1998).
2.8 Contribution Agreement dated effective as of January 1, 2000,
by and among Asset Investors Operating Partnership, L.P., CADC
Holding L.L.C. and Community Acquisition and Development
Corporation (incorporated herein by reference to Exhibit 2.8
to the Registrant's Current Report on Form 8-K dated January
31, 2000, Commission File No. 1-9360, filed on February 15,
2000).
2.8(a) Purchase and Sale Agreement dated effective as of January 1,
2000, by and between Asset Investors Operating Partnership,
L.P. and Community Acquisition and Development Corporation
(incorporated herein by reference to Exhibit 2.8(a) to the
Registrant's Current Report on Form 8-K dated January 31,
2000, Commission File No. 1-9360, filed on February 15, 2000).
2.8(b) Purchase and Sale Agreement dated effective as of January 1,
2000, by and between Prime Forest Partners and Community
Acquisition and Development Corporation (incorporated herein
by reference to Exhibit 2.8(b) to the Registrant's Current
Report on Form 8-K dated January 31, 2000, Commission File No.
1-9360, filed on February 15, 2000).
2.8(c) Purchase and Sale Agreement dated effective as of January 1,
2000, by and between Asset Investors Operating Partnership,
L.P. and Community Acquisition and Development Corporation
(incorporated herein by reference to Exhibit 2.8(c) to the
Registrant's Current Report on Form 8-K dated January 31,
2000, Commission File No. 1-9360, filed on February 15, 2000).
2.8(d) Asset Purchase Agreement dated effective as of January 1,
2000, by and between AIC Homesales Corp. and Community
Acquisition and Development Corporation (incorporated herein
by reference to Exhibit 2.8(d) to the Registrant's Current
Report on Form 8-K dated January 31, 2000, Commission File No.
1-9360, filed on February 15, 2000).
3.1 Amended and Restated Certificate of Incorporation of Asset
Investors Corporation (incorporated herein by reference to
Exhibit 3.1 to the Registrant's Current Report on Form 8-K,
dated May 26, 1999, Commission File No. 1-9360, filed on May
26, 1999).
3.2 Amended and Restated By-laws of Asset Investors Corporation
(incorporated herein by reference to Exhibit 3.2 to the
- 38 -
<PAGE>
Registrant's Current Report on Form 8-K, dated May 26, 1999,
Commission File No. 1-9360, filed on May 26, 1999).
10.1* 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).
10.2* 1998 Stock Incentive Plan of the Registrant (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,
1998, Commission File No. 1-9360, filed on August 14, 1998).
10.4 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).
10.4(a) 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).
10.4(b) 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).
10.4(c) 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).
10.4(d) 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).
10.5 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).
10.6 Loan Agreement dated as of July 16, 1998, by and among AIOP
Brentwood West, L.L.C.; AIOP Lost Dutchman Notes, L.L.C.; AIOP
Mullica, L.L.C.; AIOP Gulfstream Harbor, L.L.C.; AIOP
Gulfstream Outlot I, L.L.C.; AIOP Gulfstream Outlot II,
L.L.C.; AIOP Gulfstream Outlot III, L.L.C.; and AIOP
Serendipity, L.L.C., and Salomon Brothers Realty Corp. and
LaSalle National Bank (incorporated herein by reference to
Exhibit 10.7 to the Registrant's Current Report on Form 8-K
- 39 -
<PAGE>
dated July 16, 1998, Commission File No. 1-9360, filed on July
30, 1998).
10.6(a) Promissory Note dated as of July 16, 1998, between AIOP Lost
Dutchman Notes, L.L.C.; AIOP Brentwood West, L.L.C.; AIOP
Mullica, L.L.C.; AIOP Gulfstream Harbor, L.L.C.; AIOP
Gulfstream Outlot I, L.L.C.; AIOP Gulfstream Outlot II,
L.L.C.; AIOP Gulfstream Outlot III, L.L.C.; and AIOP
Serendipity, L.L.C., and Salomon Brothers Realty Corp.
(incorporated herein by reference to Exhibit 10.7(a) to the
Registrant's Current Report on Form 8-K dated July 16, 1998,
Commission File No.
1-9360, filed on July 30, 1998).
10.6(b) Pledge Agreement and Limited Recourse Guaranty dated as of
July 16, 1998 by and among the Registrant, Asset Investors
Operating Partnership, L.P. and Salomon Brothers Realty Corp.
(incorporated herein by reference to Exhibit 10.7(b) to the
Registrant's Current Report on Form 8-K dated July 16, 1998,
Commission File No. 1-9360, filed on July 30, 1998).
10.7 Credit Agreement dated as of September 1, 1998, between U.S.
Bank National Association and Asset Investors Operating
Partnership, L.P. and the Registrant (incorporated herein by
reference to Exhibit 10.7 to the Annual Report on Form 10-K of
the Registrant for the fiscal year ended December 31, 1998,
Commission File No. 1-9360, filed on March 24, 1999).
10.7(a) Promissory Note dated as of September 1, 1998, between U.S.
Bank National Association and Asset Investors Operating
Partnership, L.P. and the Registrant (incorporated herein by
reference to Exhibit 10.7 to the Annual Report on Form 10-K of
the Registrant for the fiscal year ended December 31, 1998,
Commission File No. 1-9360, filed on March 24, 1999).
10.8 Loan Agreement dated December 1, 1998, between AIOP Lost
Dutchman Notes, L.L.C., Asset Investors Operating Partnership,
L.P., the Registrant and U.S. Bank National Association
(incorporated herein by reference to Exhibit 10.8 to the
Annual Report on Form 10-K of the Registrant for the fiscal
year ended December 31, 1998, Commission File No. 1-9360,
filed on March 24, 1999).
10.8(a) Promissory Note dated December 30, 1998, between AIOP Lost
Dutchman Notes, L.L.C., Asset Investors Operating Partnership,
L.P., the Registrant and U.S. Bank National Association
(incorporated herein by reference to Exhibit 10.8(a) to the
Annual Report on Form 10-K of the Registrant for the fiscal
year ended December 31, 1998, Commission File No. 1-9360,
filed on March 24, 1999).
10.9 Form of Promissory Note to General Electric Capital Assurance
Company entered into in connection with the financing of
manufactured home communities (incorporated herein by
reference to Exhibit 10.9 to the Annual Report on Form 10-K of
the Registrant for the fiscal year ended December 31, 1998,
Commission File No. 1-9360, filed on March 24, 1999).
10.9(a) Schedule of Promissory Notes to General Electric Capital
Assurance Company entered into in connection with the
financing of eight manufactured home communities.
10.10 Amended and Restated Loan Agreement dated as of January 1,
1998, by and between Community Acquisition and Development
Corporation, Community Casa del Mar Joint Venture, Community
Sunlake Joint Venture, Community Brentwood Joint Venture,
Community Savanna Club Joint Venture, Community Blue Heron
- 40 -
<PAGE>
Pines Corporation, Community Sunlake Corporation, Community
Brentwood Corporation, Community Savanna Club Corporation,
Royal Palm Village, LLC and Asset Investors Operating
Partnership, L.P. (incorporated herein by reference to Exhibit
10.10 to the Annual Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1998, Commission File No.
1-9360, filed on March 24, 1999).
10.10(a) Revolving Credit Promissory Note dated as of January 1, 1998
between Community Acquisition and Development Corporation,
Community Casa del Mar Joint Venture, Community Sunlake Joint
Venture, Community Brentwood Joint Venture, Community Savanna
Club Joint Venture, Community Blue Heron Pines Corporation,
Community Sunlake Corporation, Community Brentwood
Corporation, Community Savanna Club Corporation, Royal Palm
Village, LLC and Asset Investors Operating Partnership, L.P.
(incorporated herein by reference to Exhibit 10.10(a) to the
Annual Report on Form 10-K of the Registrant for the fiscal
year ended December 31, 1998, Commission File No. 1-9360,
filed on March 24, 1999).
10.11* Secured Promissory Note dated September 13, 1999 between
Robert G. Blatz and Asset Investors Operating Partnership,
L.P.
10.12 Acquisition Agreement, dated effective as of January 1, 2000,
by and among AIC Community Management Holding Corp., AIC
Management Holdings, LLC and Community Management Investors
Corporation (incorporated herein by reference to Exhibit 10.0
to the Registrant's Current Report on Form 8-K dated January
19, 2000, Commission File No. 1-9360, filed on January 31,
2000).
10.12(a) Promissory Note, dated January 1, 2000, by and among AIC
Community Management Holding, LLC, Manufactured Housing Corp.
and Community Management Investors Corporation (incorporated
herein by reference to Exhibit 10.1(a) to the Registrant's
Current Report on Form 8-K dated January 19, 2000, Commission
File No. 1-9360, filed on January 31, 2000).
21.1 List of Subsidiaries
23.1 Consent of Independent Auditors - Ernst & Young LLP.
27.1 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
- 41 -
<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 28, 2000 By /s/Terry Considine
------------------------------------
Terry Considine
Chairman and Chief Executive Officer
Date: March 28, 2000 By /s/Thomas L. Rhodes
------------------------------------
Thomas L. Rhodes
Vice Chairman
Date: March 28, 2000 By /s/Bruce E. Moore
------ -----------------------------
Bruce E. Moore
President and Chief Operating Officer
Date: March 28, 2000 By /s/David M. Becker
------------------------------------
David M. Becker
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Capacity Date
/s/Terry Considine Director March 28, 2000
- -----------------------------
Terry Considine
/s/Thomas L. Rhodes Director March 28, 2000
- -----------------------------
Thomas L. Rhodes
/s/Bruce D. Benson Director March 25, 2000
- -----------------------------
Bruce D. Benson
/s/Bruce E. Moore Director March 28, 2000
- -----------------------------
Bruce E. Moore
/s/Elliot H. Kline Director March 26, 2000
- -----------------------------
Elliot H. Kline
/s/Richard L. Robinson Director March 24, 2000
- -----------------------------
Richard L. Robinson
/s/Tim Schultz Director March 28, 2000
- -----------------------------
Tim Schultz
/s/William J. White Director March 26, 2000
- -----------------------------
William J. White
- 42 -
<PAGE>
SCHEDULE OF OMITTED
PROMISSORY NOTE
The Company has also entered into five additional Promissory Notes which are
substantially identical to the Promissory Note previously filed as Exhibit 10.9
to the Annual Report on Form 10-K of the Registrant for the fiscal year ended
December 31, 1998, Commission File No. 1-9360, filed on March 24, 1999 in all
material respects except as to the Borrower, Principal Balance and Monthly
Payment. Listed below are the material details in which such documents differ
from the document filed as part of the Form of Promissory Note to General
Electric Capital Assurance Company.
Borrower Principal Balance Monthly Payment
- ------------------------------------------- ------------------- ----------------
AIOP Brentwood West, L.L.C. $ 7,400,000.00 $ 51,669.00
AIOP Serendipity, L.L.C. $ 4,900,000.00 $ 36,534.00
Prime-Forest Partners $ 1,955,000.00 $ 14,994.00
Asset Investors Operating Partnership, L.P. $ 1,250,000.00 $ 9,587.00
Asset Investors Operating Partnership, L.P. $ 4,700,000.00 $ 36,552.00
SECURED PROMISSORY NOTE
$ 537,500.00 Denver, Colorado
September 13, 1999
FOR VALUE RECEIVED, Robert G. Blatz (the "Borrower"), hereby
promises to pay to the order of Asset Investors Operating Partnership, L.P., a
Delaware limited partnership (the "Lender"), the principal sum of FIVE HUNDRED
THIRTY-SEVEN THOUSAND FIVE HUNDRED AND 00/100 DOLLARS ($537,500), in lawful
money of the United States of America, on September 12, 2009 (the "Repayment
Date"), together with accrued and unpaid interest thereon from the date hereof.
1. Interest Rate. The outstanding principal amount of this
Note, together with all accrued and unpaid interest thereon, shall bear interest
at a rate per annum equal to 7.50%.
2. Interest Payments. Interest payments on the Note shall be
payable quarterly on March 1, June 1, September 1 and December 1 of each year
through the Repayment Date. Interest shall be calculated on the basis of a year
comprised of twelve (12) thirty (30) day months. Each payment on this Note shall
be credited first to interest on past due interest, then to past due interest,
then to accrued interest and then to principal.
3. Method of Payment. All payments hereunder shall be made by
check at 3410 S. Galena Street, Suite 210, Denver, Colorado 80231, or at such
other place as the Lender shall designate to the Borrower in writing. If any
payment of principal or interest on this Note is due on a day which is not a
Business Day, such payment shall be due on the next succeeding Business Day, and
such extension of time shall be taken into account in calculating the amount of
interest payable under this Note. "Business Day" means any day other than a
Saturday, Sunday or legal holiday in the State of Colorado.
4. Prepayment. The Borrower shall have the right to prepay the
principal amount hereof in full or in part, together with all accrued interest
on the amount prepaid to the date of such prepayment, at any time without
penalty.
1
<PAGE>
5. Termination of Employment. Upon the occurrence of the
termination for any reason of the Borrower's employment with the Lender or its
affiliates (a "Termination Event"), the Lender shall, by notice in writing to
the Borrower, declare this Note and the principal of and accrued interest on
this Note and all other charges owing to the Lender to be, and the same shall
upon such notice forthwith become, due and payable on the thirtieth day
following such Termination Event; provided, however, that, if such Termination
Event occurs on or after a Change in Control (as defined herein), such amounts
shall not be due and payable prior to the last day of the twelve (12) month
period following such Termination Event.
6. Security. Pursuant to the Security and Pledge Agreement,
dated as of the date hereof (the "Security Agreement"), by and between the
Lender and the Borrower, the obligations of the Borrower hereunder are secured
by the Collateral (as defined in the Security Agreement), and the holder of this
Note is entitled to the benefits of the Collateral.
7. Limited Recourse. Except for recourse against the
Collateral as provided in the Security and Pledge Agreement, recourse for the
payment of the principal of or interest on this Note or for any claim based
hereon (including costs of collection) against the Borrower shall be limited to
an amount equal to (a) 25% of the original principal amount of this Note, less
(b) any prepayments of the principal amount of this Note, all liability in
excess of such amount being, by the acceptance hereof and as part of the
consideration for the issue hereof, expressly waived and released.
8. Events of Default. Each of the following events shall
constitute an "Event of Default" hereunder (whether it shall be voluntary or
involuntary or occur or be effected by operation of law or otherwise): (a) the
Borrower's failure to pay, within 15 days after the date when such payment is
due, any payment of principal or interest on this Note; (b) the Borrower's
failure to observe or perform any covenant or agreement contained in this Note
(other than that set forth in clause (a) above) or the Security Agreement; (c)
if any representa tion, warranty, certification or statement made by the
Borrower in this Note, the Security Agreement or in any certificate or other
document delivered pursuant to this Note or the Security Agreement shall prove
to have been incorrect in any material respect when made or deemed made; (d) the
insolvency of the Borrower; (e) the appointment of a receiver or a trustee of
all or part of the Borrower's property; (f) an assignment for the benefit of the
Borrower's creditors; (g) the
2
<PAGE>
filing of a petition in bankruptcy by or against the Borrower; (h) the commence
ment of any proceeding by or against the Borrower under any bankruptcy or
insolvency law or any law relating to the relief of debtors or readjustment of
indebtedness; (i) the appointment of a receiver, custodian, trustee or
liquidator for any part of the assets or property of the Borrower; (j) the
failure of the Borrower generally to pay his or her debts as they become due;
and (k) the failure of the Lender to have a first priority security interest in
the Collateral.
9. Remedies.
(a) Upon the occurrence of any Event of Default, the holder of
this Note may, by notice in writing to the Borrower, declare this Note and the
principal of and accrued interest on this Note and all other charges owing to
the Lender to be, and the same shall upon such notice forthwith become, due and
payable. Upon the occurrence of an Event of Default, the holder of this Note
may, in addition to all rights and remedies available to it at law, exercise any
or all of its rights under the Security Agreement.
(b) No failure or delay by the holder of this Note in
exercising any remedy, right, power or privilege under this Note or the Security
Agreement shall operate as a waiver of such remedy, right, power or privilege,
nor shall any single or partial exercise of such remedy, right, power or
privilege preclude any other or further exercise of such remedy, right, power or
privilege. No remedy, right, power or privilege conferred upon or reserved to
the holder of this Note by this Note or the Security Agreement is intended to be
exclusive of any other remedy, right, power or privilege provided or permitted
by this Note, the Security Agreement or by law, but each shall be cumulative and
in addition to every other remedy, right, power or privilege so provided or
permitted and each may be exer cised concurrently or independently from time to
time and as often as may be deemed expedient by the holder of this Note. Any
provision of this Note which is prohibited or unenforceable shall be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions of this Note.
(c) The holder of this Note shall have the right, at its
option, to declare the entire unpaid principal balance of this Note,
irrespective of the maturity date of this Note, immediately due and payable,
together with accrued interest, if the Borrower (or any affiliate of the
Borrower) sells, transfers or disposes of any portion of the Collateral
identified in the Security Agreement.
3
<PAGE>
Notwithstanding the above, if an Event of Default first occurs
on or prior to the end of the twelve (12) month period following a Change in
Control, the holder of this Note may not cause the Note or the principal of or
the accrued interest on this Note to become due and payable prior to the second
anniversary of such Change in Control or the Repayment Date, if earlier.
10. Costs of Collection. Upon the failure of the Borrower to
pay any amount due hereunder as and when due, the Borrower shall pay on demand
any and all costs and expenses (including, without limitation, all court costs
and attorneys' fees) incurred by the holder hereof in connection with the
collection of any outstanding principal balance and interest accrued hereunder
(whether or not suit is filed to enforce the terms hereof), and in connection
with the enforcement of any rights or remedies provided for pursuant to this
Note and the Security Agree ment. If not paid on demand, all such costs and
expenses automatically shall be added to the remaining principal balance
hereunder as of the date immediately following the date of such demand.
11. Change In Control. For purposes of this Note, "Change in
Control" shall mean the occurrence of any of the following events:
(a) an acquisition (other than directly from the Lender) of
any voting securities of the Lender (the "Voting Securities) by any "person" (as
the term "person" is used for purposes of Section 13(d) or Section 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) immediately
after which such person has "beneficial ownership" (within the meaning of Rule
13d-3 promulgated under the Exchange Act) ("Beneficial Ownership") of 20% or
more of the combined voting power of the Lender's then outstanding Voting
Securities; provided, however, in determining whether a Change in Control has oc
curred, Voting Securities that are acquired in a Non-Control Acquisition (as
hereinafter defined) shall not constitute an acquisition that would cause a
Change in Control. "Non-Control Acquisition" shall mean an acquisition by (A) an
employee benefit plan (or a trust forming a part thereof) maintained by (1) the
Lender or (2) any corporation, partnership or other person of which a majority
of its voting power or its equity securities or equity interest is owned
directly or indirectly by the Lender or in which the Lender serves as a general
partner or manager (a "Subsidiary"), (B) the Lender or any Subsidiary, or (C)
any person in connection with a Non-Control Transaction (as hereinafter
defined);
(b) the individuals who constitute the Board of Directors of
the Lender as of the date hereof (the "Incumbent Board") cease for any reason to
constitute at least two-thirds (2/3) of the Board of Directors; provided,
however, that if the election, or nomination for election by the Lender's
stockholders, of any new director was approved by a vote of at least two-thirds
(2/3) of the Incumbent
4
<PAGE>
Board, such new director shall be considered as a member of the Incumbent Board;
provided, further, that no individual shall be considered a member of the Incum
bent Board if such individual initially assumed office as a result of either an
actual or threatened "election contest" (as described in Rule 14a-11 promulgated
under the Exchange Act) (an "Election Contest") or other actual or threatened
solicitation of proxies or consents by or on behalf of a person other than the
Board of Direc tors (a "Proxy Contest") including by reason of any agreement
intended to avoid or settle any Election Contest or Proxy Contest; or
(c) approval by stockholders of the Lender of: (A) a merger,
consolidation, share exchange or reorganization involving the Lender, unless (1)
the stockholders of the Lender, immediately before such merger, consolidation,
share exchange or reorganization, own, directly or indirectly immediately follow
ing such merger, consolidation, share exchange or reorganization, at least 80%
of the combined voting power of the outstanding voting securities of the
corporation that is the successor in such merger, consolidation, share exchange
or reorganiza tion (the "Surviving Company") in substantially the same
proportion as their ownership of the Voting Securities immediately before such
merger, consolidation, share exchange or reorganization, (2) the individuals who
were members of the Incumbent Board immediately prior to the execution of the
agreement providing for such merger, consolidation, share exchange or
reorganization constitute at least two-thirds (2/3) of the members of the board
of directors of the Surviving Com pany, and (3) no persons (other than the
Lender or any Subsidiary, any employee benefit plan (or any trust forming a part
thereof) maintained by the Lender, the Surviving Company or any Subsidiary, or
any person who, immediately prior to such merger, consolidation, share exchange
or reorganization had Beneficial Ownership of 15% or more of the then
outstanding Voting Securities has Beneficial Ownership of 15% or more of the
combined voting power of the Surviving Company's then outstanding voting
securities (a transaction described in clauses (1) through (3) is referred to
herein as "Non-Control Transaction"); (B) a complete liquidation or dissolution
of the Lender; or (C) an agreement for the sale or other disposition of all or
substantially all of the assets of the Lender to any person (other than a
transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not
be deemed to occur solely because any person (a "Subject Person") acquired
Benefi cial Ownership of more than the permitted amount of the outstanding
Voting Securities as a result of the acquisition of Voting Securities by the
Lender that, by reducing the number of Voting Securities outstanding, increases
the proportional number of shares Beneficially Owned by such Subject Person,
provided that if a Change in Control would occur (but for the operation of this
sentence) as a result of the acquisition of Voting Securities by the Lender, and
after such share acquisi tion by the Lender, such Subject Person becomes the
Beneficial Owner of any
5
<PAGE>
additional Voting Securities that increases the percentage of the then
outstanding Voting Securities Beneficially Owned by such Subject Person, then a
Change in Control shall occur.
12. Waiver. The Borrower hereby waives any right it might
otherwise have to require notice or acceptance by any other person of its obliga
tions or liabilities under this Note which are unconditional and absolute and
waives diligence, presentment, demand of payment, protest and notice with
respect to all of the obligations of the Borrower under this Note and with
respect to any action under this Note and all other notices and demands
whatsoever, except as specif ically provided for in this Note. This Note may be
amended, and the observance of any term of this Note may be waived, with (and
only with) the written consent of the Lender.
13. Governing Law. This Note shall be governed by and
construed in accordance with the laws of the State of Colorado.
14. Assignment or Pledge of Note. The Lender shall promptly
notify the Borrower of any endorsement, assignment, pledge or hypothecation of
this Note to a person not affiliated with the Lender.
15. Loss, Mutilation, Etc. Upon notice from the holder of this
Note to the Borrower of the loss, theft, destruction or mutilation of this Note,
and upon receipt of an indemnity reasonably satisfactory to the Borrower from
the holder of this Note or, in the case of mutilation hereof, upon surrender of
the mutilated Note, the Borrower will make and deliver a new note of like tenor
in lieu of this Note.
16. Notices. All notices and other communications required or
permitted under this Note shall be in writing and shall be personally delivered
or sent by certified first class United States mail, postage prepaid, return
receipt requested, and if mailed and shall be deemed to have been received on
the third business day after deposit in the mail, addressed to the Lender, Asset
Investors Operating Partnership, L.P., 3410 S. Galena Street, Suite 210, Denver,
Colorado 80231, Attention: Chief Financial Officer, or to the Borrower at the
address set forth below the Borrower's signature. Notice of any change of either
party's ad dress shall be given by written notice in the manner set forth in
this paragraph.
(the next page is the signature page)
6
<PAGE>
IN WITNESS WHEREOF, the Borrower has executed this Note on the
date first above written.
BORROWER:
/s/Robert G. Blatz
------------------
(Signature of Borrower)
Robert G. Blatz
2637 McCormick Drive
Clearwater, FL 34619-1041
(727) 669-4791
7
Asset Investors Corporation
Subsidiaries as of March 17, 2000
AIC Home Sales Corp.
AIC Management Corporation
AIC Management Holdings, L.L.C.
AIC Manufactured Housing Corp.
AIC Property Management Company, L.L.C.
AIOP Brentwood West, L.L.C.
AIOP Florida Properties I, L.L.C.
AIOP Florida Properties II, L.L.C.
AIOP Gulfstream Harbor, L.L.C.
AIOP Gulfstream Outlot I, L.L.C.
AIOP Gulfstream Outlot II, L.L.C.
AIOP Gulfstream Outlot III, L.L.C.
AIOP Lost Dutchman Notes, L.L.C.
AIOP Mullica, L.L.C.
AIOP Serendipity, L.L.C.
Asset Investors Acceptance, Inc.
Asset Investors Equity, Inc.
Asset Investors Finance Corporation
Asset Investors Funding Corporation
Asset Investors Mortgage Funding Corporation
Asset Investors Operating Partnership, L.P.
Asset Investors Secured Finance Corporation
Prime Forest Partners
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
January 21, 2000, except for Note I, as to which the date is March 7, 2000, with
respect to the financial statements and schedules of Asset Investors Corporation
and (b) dated January 21, 2000, except for Note O, as to which the date is March
7, 2000, with respect to the financial statements and schedules of Commercial
Assets, Inc., both of which are included in this Annual Report (Form 10-K) for
the year ended December 31, 1999.
Denver, Colorado
March 24, 2000 /s/Ernst & Young LLP
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<NAME> ASSET INVESTORS CORPORATION
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<PERIOD-END> DEC-31-1999
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0
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