SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1993 Commission file number: 1-9646
----------------- ------
ASR INVESTMENTS CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 86-0587826
- ---------------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
335 North Wilmot
Suite 250, Tucson, Arizona 85711
- ---------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 748-2111
--------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share American Stock Exchange
- ---------------------------------------- ---------------------------------
Title of each class Name of each exchange on
which registered
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of March 28, 1994, 15,499,993 shares of ASR Investments Corporation common
stock were outstanding, and the aggregate market value of the 15,233,275
shares held by non-affiliates (based upon the closing price of the shares on
the American Stock Exchange) was approximately $24,754,071. Shares of Common
Stock held by each officer and director of the Company and the Manager have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily conclusive.
Documents incorporated by reference:
Portions of the Definitive Proxy Statement to be filed pursuant to Regulation
14A on or before April 30, 1994, are incorporated by reference into Part III.
<PAGE>
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 36
Item 3. Legal Proceedings 36
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 37
Item 6. Selected Financial Data 38
Item 7. Management's Discussion and Analysis of Financial
Item 7. Condition and Results of Operations 38
Item 8. Financial Statements and Supplementary Data 43
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 43
PART III
Item 10. Directors and Executive Officers of the Registrant 43
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial Owners
and Management 43
Item 13. Certain Relationships and Related Transactions 43
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 43
SIGNATURES 45
FINANCIAL STATEMENTS F-1
<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
ASR Investments Corporation (the "Company") owns income-producing
properties and Mortgage Assets as described herein. In early 1993, the Company
determined to shift its focus to the ownership of income-producing properties
from the ownership of Mortgage Assets commonly called residual interests.
As the initial step for the Company's plan to invest in income-producing
properties, the Company in January 1994 completed the purchase of 17
multifamily residential properties containing 2,461 apartment units located in
Tucson, Arizona, Houston, Texas and Albuquerque, New Mexico. The total
acquisition costs, including closing expenses, were approximately $61.6
million. The purchase was financed by the assumption of two existing first
mortgage loans totalling $7.1 million, 15 new first mortgage loans totalling
$38.6 million, seller carryback notes of $6.5 million, and $9.4 million of
cash from working capital. Each of the properties is owned by a newly formed,
special purpose subsidiary which is wholly owned by the Company or one of its
subsidiaries. The first mortgage loans generally are non-recourse obligations
of the subsidiary or the Company.
The Company does not currently plan to acquire additional Mortgage Assets.
Instead, the Company plans to utilize its available funds to acquire
additional income-producing properties. The Company may continue to hold its
Mortgage Assets and to invest the cash flow generated thereby in income-
producing properties or to sell such Mortgage Assets and reinvest the proceeds
thereof in additional income-producing properties.
Pima Mortgage Limited Partnership (the "Manager") (the name of which was
changed from ASMA Mortgage Advisors L.P. in 1993) manages the day-to-day
operations of the Company, subject to the supervision of the Company's Board
of Directors, pursuant to the terms of a management agreement. The Company
also has entered into a property management agreement with Pima Realty
Advisors, Inc. (the "Property Manager"), an affiliate of the Manager, for each
of its current properties.
The Company has elected to be taxed as a real estate investment trust
("REIT") pursuant to sections 856 through 860 of the Code. The Company
generally will not be subject to tax on its income to the extent that it
distributes its taxable income to its stockholders and it maintains its
qualification as a REIT. See "Business -- Federal Income Tax Considerations."
The Internal Revenue Service (the "IRS") has proposed an adjustment to the
Company's 1989, 1990 and 1991 tax returns which would result in an aggregate
of $13,834,000 in taxes for those years. The IRS contends that the Company did
not meet a technical provision of its regulations and, thus, failed to qualify
as a real estate investment trust for those years. The IRS has made similar
assessments against a number of REITs over the same issue. The Company
believes it has met the requirements under the Internal Revenue Code and that
the IRS's position is without merit and intends to vigorously defend its
position.
The Company was incorporated in the State of Maryland on June 18, 1987 and
commenced its operations on August 26, 1987. The Company changed its name from
American Southwest Mortgage Investments Corporation to ASR Investments
Corporation in June 1992. The Company's Common Stock is listed on the American
Stock Exchange under the symbol "ASR."
The principal executive offices of the Company and the Manager are located
at 335 North Wilmot, Suite 250, Tucson, Arizona 85711, telephone number (602)
748-2111. Unless the context otherwise requires, the term Company means ASR
Investments Corporation and its subsidiaries.
OPERATING POLICIES AND STRATEGIES
REAL ESTATE ACTIVITIES
Introduction
The Company has developed various business objectives and operating,
acquisition, financing and investment strategies and policies relative to its
real estate activities. These policies and strategies have been determined by
the directors of the Company and may be amended or revised from time to time
at the discretion of the directors without a vote of the shareholders of the
Company.
Business Objectives
The Company's business objectives are to increase the cash flow and value
of its existing portfolio of income-producing properties and to acquire
additional real estate properties.
Investment Policies
The Company's current portfolio of properties consists solely of
multifamily properties in the Southwestern region of the United States. The
Company intends to continue to focus on multifamily properties in this region.
However, future investments, including the activities described below, are not
limited (as to percentage of assets or otherwise) to any geographic area or
any specific type of property. In this regard, the Company may expand its
current geographic focus and may acquire other types of income-producing
properties including hotels, motels, shopping centers and office buildings.
The Company believes that attractive opportunities continue to be
available to acquire income-producing properties without the risks of
development. The Company may enter into agreements to acquire newly developed
properties upon completion or upon achievement of certain specified occupancy
rates, in those cases where the Company does not believe that the risks
associated with such acquisitions will be substantially greater than the risks
associated with the acquisition of more mature properties.
The Company may purchase or lease income-producing properties for long-
term investment and improve its properties, or sell such properties, in whole
or in part, when circumstances warrant. The Company also may participate with
other entities in property ownership, through joint ventures or other types of
co-ownership. Equity investments may be subject to existing mortgage financing
and other indebtedness or such financing or indebtedness may be incurred in
connection with acquiring investments. Any such financing or indebtedness will
have a priority over the equity interest of the Company.
While the Company will emphasize equity real estate investments in
properties, it may, in its discretion, invest in mortgages and other real
estate interests. The Company does not presently intend to invest to a
significant extent in mortgages or deeds of trust. Its investments in
mortgages may include participating or convertible mortgages if the Company
concludes that it may benefit from the cash flow and/or any appreciation
potential in the value of the property. Such mortgages may be similar to
equity participations.
Subject to the percentage of ownership limitations and gross income tests
necessary for REIT qualification (see "Federal Income Tax Considerations"),
the Company also may invest in securities of concerns engaged in real estate
activities or securities of other issuers. The Company in the future may
acquire all or substantially all of the securities or assets of other REITs or
similar entities when it believes such investments would be consistent with
the Company's investment policies. In any event, the Company does not intend
that its investments in securities will require the Company to register as an
"investment company" under the Investment Company Act of 1940, and the Company
intends to divest securities before any such registration would be required.
Future Acquisitions
The Company believes that significant opportunities continue to exist to
purchase additional income-producing properties. The Company believes the
reduced availability of financing for real estate and the liquidity problems
experienced by a significant number of real estate owners and developers has
led to favorable pricing for buyers of income-producing properties. The
Company will attempt to take advantage of this favorable buying climate by
continuing to acquire income-producing properties at attractive prices.
In connection with future acquisitions, the Company will consider such
factors as: (i) the geographic location and type of property; (ii) the age,
construction quality. condition and design of the property; (iii) the current
and projected cash flow of the property and the potential to increase cash
flow; (iv) the potential for capital appreciation of the property; (v) the
terms of tenant leases, including the potential for rent increases; (vi) the
potential for economic growth and the tax and regulatory environment of the
community in which the property is located; (vii) the occupancy and demand by
tenants for properties of similar type in the vicinity; and (viii) the
prospects for liquidity through sale, financing or refinancing of the
property.
In making future acquisitions of income-producing properties, the Company
generally will seek income-producing properties that are (a) available at
prices below estimated replacement cost after initial renovations and
improvements, (b) well-located in their markets, (c) capable of enhanced
performance through intensive asset management and cosmetic improvements, and
(d) produce a high component of anticipated total return derived from current
income.
Operating Strategies
The Company's operating strategies are to (i) maintain high occupancy and
increase rental rates through effective leasing, reducing turnover rates and
providing quality maintenance and services to maximize tenant satisfaction;
(ii) manage operating expenses and achieve cost reductions through operating
efficiencies and economies of scale generally inherent in the management of a
large property portfolio in a specific region; and (iii) emphasize regular
programs of repairs and capital improvements to enhance the properties'
competitive advantages in their respective markets.
Financing Policies
The Company intends to finance acquisitions with the most appropriate
sources of capital, which may include undistributed funds from operations, the
issuance of equity securities, the sale of assets, bank and other
institutional borrowings and the issuance of debt securities. Future
borrowings by the Company for acquisitions may be either on a secured or
unsecured basis.
The Company also may incur indebtedness for purposes other than the
acquisition of properties when, in the opinion of the directors, it is
advisable to do so. For short-term purposes, the Company, from time to time,
may arrange for short-term borrowings from banks or in the commercial paper
market or otherwise. The Company also may arrange for long-term borrowings
from institutional lenders or through public or private offerings or other
means. The Company has no commitments from anyone with respect to any such
borrowings, and there is no assurance that any such borrowings will be
available.
In addition, the Company may incur debt secured by equity investments held
in its portfolio. The Company may invest in properties subject to existing
loans secured by mortgages, deeds of trust or similar liens on the properties,
or such financing and other indebtedness may be incurred in connection with
acquiring investments. The Company also may obtain other mortgage financing
for unleveraged or underleveraged properties or may refinance properties
acquired on a leveraged basis. The mortgage financings may be recourse, non-
recourse or cross-collateralized. The Company does not have a policy limiting
the number or amount of mortgages that may be placed on any particular
property, but mortgage financing instruments usually limit additional
indebtedness on such properties. The Company also may determine to finance
acquisitions through the exchange of properties or issuance of stock or other
securities.
Policies with Respect to Other Activities
The Company may, but does not presently intend to, make investments other
than as previously described. The Company has authority to offer its Common
Shares or other equity or debt securities in exchange for property and to
repurchase or otherwise reacquire its Common Shares or any other securities
and may engage in such activities in the future. The Company also may in the
future make loans to joint ventures in which it participates. The Company will
not engage in trading, underwriting or the agency distribution or sale of
securities of other issuers. At all times, the Company intends to make
investments in such a manner as to be consistent with the requirements of the
Code to qualify as a REIT unless, because of circumstances or changes in the
Code (or in the regulations promulgated thereunder), the Company determines
that it is no longer in the best interests of the Company to qualify as a
REIT. The Company's policies with respect to such activities may be reviewed
and modified from time to time by the Company without the vote of the
shareholders.
Property Management
The Company has entered into a property management agreement with Pima
Realty Advisors, Inc. (the "Property Manager") for each of its current
properties. The Property Manager is an affiliate of the Manager. Each property
management agreement, which has a current term through December 31, 1994, was
approved by the Unaffiliated Directors. Under the agreement, the Property
Manager provides the customary property management services at its cost
without profit or distributions to its owners, subject to the limitation of
the prevailing management fee rates for similar properties in the market. The
Property Manager currently manages over 6,000 apartment units, including those
owned by the Company.
The Property Manager has developed computer, accounting, management,
reporting and control systems to monitor property operations. Detailed annual
budgets are prepared for each property. Monthly, quarterly and annual reports
are prepared addressing occupancy rates, turnover ratios, budget variances,
delinquencies and other operating information. Weekly reports are provided for
each property detailing leasing and occupancy activities. The Property Manager
also maintains and analyzes demographic resident data. Prior to entering into
a lease, the Property Manager generally reviews the credit of the prospective
tenant to attempt to minimize bad credit risks and identify tenants having a
poor rental history. This information is intended to enable the Property
Manager to identify and act quickly on specific conditions affecting
individual properties.
Each of the current properties is operated by a staff including a resident
manager and a maintenance and apartment preparation staff. Policies and
procedures utilized at the property sites follow established federal and state
laws and regulations, including lease contracts, on-site marketing procedures,
credit collection and eviction standards. As a result of active onsite
management and strict prospective tenant qualification standards, the Company
expects to experience low rent loss to delinquencies or early lease
terminations.
Individual property lease programs are structured to respond to local
market conditions. The Company attempts to balance rent increases with high
occupancy and stabilized turnover costs. None of the current properties is
currently subject to rent control or rent stabilization regulations. Standard
lease terms stipulate due dates for rent payments, late charges, no offset or
withholding provisions, security deposits and damage reimbursement clauses and
other provisions considered favorable to the Company.
Current Properties
The following tables set forth certain information regarding the Company's
existing properties. The tables reflect certain information provided by the
seller of the properties which the Company has no reason to believe incorrect.
The operating data are not indicative of the operating level that will be
achieved by the Company.
FIRST MORTGAGE LOAN
YEAR ALLOCATED ---------------------------------
PROPERTY BUILT COST AMOUNT INTEREST MATURITY
- -------------- ----- ------------ ------------ -------- ---------
TUCSON, AZ
- ----------
Acacia Hills 1986 $ 1,344,000 $ 1,035,000 8.5% 01-Feb-04
Casa Del Norte 1984 1,839,000 1,386,000 8.5% 01-Feb-04
Desert Springs 1985 5,869,000 4,644,000 8.5% 01-Feb-04
Landmark 1986 4,547,000 3,065,000 8.5% 01-Feb-04
Park Terrace 1986 3,507,000 2,719,000 8.5% 01-Feb-04
Park Village 1985 764,000 593,000 8.5% 01-Feb-04
Posada Del Rio 1980 3,556,000 1,721,000 10.1% 31-Dec-97
South Point 1984 2,426,000 1,875,000 8.5% 01-Feb-04
HOUSTON, TX
- -----------
Clear Lake Falls 1982 4,128,000 3,150,000 8.5% 01-Feb-04
Gallery 1970 1,928,000 1,654,000 8.5% 01-Feb-04
Memorial Bend 1967 2,474,000 1,937,000 8.5% 01-Feb-04
Nantucket Square 1978 3,611,000 2,775,000 8.5% 01-Feb-04
Prestonwood 1984 3,457,000 2,487,000 8.5% 01-Feb-04
Riviera Pines 1979 4,098,000 3,293,000 8.5% 01-Feb-04
ALBUQUERQUE, NM
- ---------------
Dorado Terrace 1986 6,924,000 5,250,000 8.5% 01-Feb-04
Villa Serena 1986 3,530,000 2,700,000 8.5% 01-Feb-04
Whispering Sands 1986 7,591,000 5,394,000 9.4% 01-Nov-07
------------ ------------ -------
Total $61,593,000 $45,678,000 8.7%
============ ============ =======
<TABLE>
<CAPTION>
MONTHLY RENTAL AVERAGE
INCOME PER SQ. FT. OCCUPANCY
NO. OF TOTAL SQ. FT./ ------------------------------- -------------------------
PROPERTY UNITS SQ. FT. UNIT 1993 1992 1991 1993 1992 1991
- ------------------------------- --------- ------------- ------------ --------- --------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TUCSON,AZ
Acacia Hills 64 34,577 540 $0.59 $0.55 $0.48 95% 96% 92%
Casa Del Norte 84 44,120 525 0.60 0.55 0.50 94% 93% 87%
Desert Springs 248 146,240 590 0.55 0.52 0.48 95% 94% 95%
Landmark 176 112,749 641 0.51 0.45 0.44 92% 88% 90%
Park Terrace 176 101,944 579 0.52 0.49 0.46 93% 91% 92%
Park Village 60 32,388 540 0.55 0.52 0.48 95% 94% 95%
Posada Del Rio 160 99,280 621 0.55 0.48 0.46 97% 93% 94%
South Point 144 76,082 528 0.53 0.48 0.45 95% 93% 93%
HOUSTON, TX
Clear Lake Falls 90 105,208 1,169 0.62 0.60 0.56 95% 94% 95%
Gallery 101 77,037 763 0.56 0.55 0.50 92% 92% 89%
Memorial Bend 124 116,804 942 0.46 0.46 0.44 88% 88% 90%
Nantucket Square 106 151,406 1,428 0.42 0.45 0.42 85% 84% 88%
Prestonwood 156 149,204 956 0.42 0.41 0.36 91% 89% 90%
Riviera Pines 224 160,608 717 0.55 0.54 0.49 93% 96% 91%
ALBUQUERQUE, NM
Dorado Terrace 216 129,200 598 0.68 0.60 0.53 94% 93% 90%
Villa Serena 104 69,816 671 0.66 0.58 0.50 92% 94% 89%
Whispering Sands 228 179,880 789 0.52 0.46 0.41 92% 93% 91%
--------- ------------- ----------- --------- --------- ---------
Total/Average 2,461 1,786,543 726 $0.53 $0.50 $0.46
========= ============= =========== ========= ========= =========
INFORMATION RESPECTING MORTGAGE ASSETS
Introduction
The Company owns Mortgage Assets consisting of Mortgage Interests and
Mortgage Instruments as described herein. Mortgage Interests entitle the
Company to receive cash flow on Mortgage Instruments. Mortgage Instruments
include residential mortgage loans ("Mortgage Loans") and mortgage
certificates representing interests in pools of mortgage loans. Substantially
all of the Company's Mortgage Instruments and the Mortgage Instruments
underlying the Company's Mortgage Interests currently secure or underlie
mortgage-collateralized bonds ("Bonds" or "CMOs"), mortgage pass-through
certificates ("Pass-Through Certificates" or "MPCs"), long-term structured
obligations ("LSOs") or other mortgage securities (collectively "Structured
Financings") including Structured Financings issued by the Company, by
subsidiaries of the Company or by other entities ("Issuers").
The Company's Mortgage Assets generate net cash flows ("Net Cash Flows")
which result primarily from (a) the favorable spread between the interest
rates on the Mortgage Instruments securing or underlying the Structured
Financings and the interest rates of the Structured Financings classes;
(b) reinvestment income in excess of the assumptions used in pricing the
Structured Financings; and (c) any amounts available from prepayments on the
Mortgage Instruments that are not necessary for the payments on the Structured
Financings. The revenues received by the Company are derived from the Net Cash
Flows received directly by the Company, the Net Cash Flows received by
subsidiaries of the Company and paid to the Company as dividends and the Net
Cash Flows received by partnerships and trusts in which the Company has an
interest to the extent of distributions to the Company as owner of such
interest.
Mortgage Loans consist of Conforming Mortgage Loans and Nonconforming
Mortgage Loans. Conforming Mortgage Loans consist of conventional mortgage
loans (i.e. not guaranteed or insured by the United States Government or any
agency or instrumentality thereof), mortgage loans ("FHA Loans") insured by
the Federal Housing Administration ("FHA") and mortgage loans ("VA Loans")
partially guaranteed by the Department of Veterans Affairs ("VA"), all of
which are secured by first mortgages or deeds of trust on single-family (one
to four units) residences. FHA Loans and VA Loans comply with requirements for
inclusion in a pool of mortgage loans guaranteed by the Government National
Mortgage Association ("GNMA"), and conventional Conforming Mortgage Loans
comply with requirements for inclusion in certain programs sponsored by the
Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National
Mortgage Association ("FNMA"). Nonconforming Mortgage Loans generally would
comply with the requirements for participation in FHLMC and FNMA programs
except that Nonconforming Mortgage Loans generally have original principal
balances which exceed the requirements for such programs and may vary in
certain other respects from the requirements of such programs.
Mortgage Certificates consist of fully-modified pass-through mortgage-
backed certificates guaranteed by GNMA ("GNMA Certificates"), mortgage
participation certificates issued by FHLMC ("FHLMC Certificates"), guaranteed
mortgage pass-through certificates issued by FNMA ("FNMA Certificates") and
certain other types of mortgage certificates and mortgage-collateralized
obligations ("Other Mortgage Certificates").
Mortgage Interests entitle the Company to receive Net Cash Flows on
Mortgage Instruments securing or underlying Structured Financings. Mortgage
Interests are created through the purchase of interests in or from entities
("Mortgage Finance Companies") which own or finance such Mortgage Instruments.
Mortgage Interests include interests which are treated for federal income tax
purposes as interests in real estate mortgage investment conduits ("REMICs")
under the Code.
Structured Financings consisting of CMOs and MPCs typically are issued in
series. Each such series generally consists of several serially maturing
classes secured by or representing interests in Mortgage Instruments.
Generally, payments of principal and interest received on the Mortgage
Instruments (including prepayments on such Mortgage Instruments) are applied
to principal and interest payments on one or more classes of the CMOs or MPCS.
Scheduled payments of principal and interest on the Mortgage Instruments and
other collateral are intended to be sufficient to make timely payments of
interest on such CMOs or MPCs and to retire each class of such CMOs or MPCs by
its stated maturity or final payment date. The Company also finances its
Mortgage Assets in long-term structured obligations or LSOS. LSOs generally
involve borrowings or other credit arrangements secured by Mortgage
Instruments or Mortgage Interests owned by the Company.
Pima Mortgage Limited Partnership (the "Manager") manages the day-to-day
operations of the Company, subject to the supervision of the Company's Board
of Directors pursuant to the terms of a management agreement. The Manager has
entered into a subcontract (the "Subcontract Agreement") with American
Southwest Financial Services, Inc. ("ASFS") pursuant to which ASFS performs
certain services for the Manager in connection with the structuring, issuance
and administration of Structured Financings issued by the Company or by any
Issuer affiliated with ASFS with respect to which the Company acquires
Mortgage Interests or owns the underlying Mortgage Instruments. See "Business
Management Agreement."
ASFS is affiliated with American Southwest Financial Corporation, American
Southwest Finance Co., Inc. and Westam Mortgage Financial Corporation
(together with their affiliates sometimes referred to as the "ASW Companies").
The Company has no affiliations, agreements or relationships with the ASW
Companies or ASFS, except for (i) the Subcontract Agreement with ASFS,
(ii) the indemnification granted by the Company to the ASW Companies and ASFS
and their officers and directors against certain liabilities, (iii) one common
director and officer, and (iv) the indirect ownership by a general partner of
the Manager of less than 5% of the voting stock of the ASW Companies and ASFS.
See "Business -- Special Considerations -- Potential Conflicts of Interest,"
and "Business -- Management Agreement -- The Subcontract Agreement."
Current Mortgage Assets
The following table sets forth certain general information relating to the
ownership of the Mortgage Assets by the Company as of December 31, 1993:
</TABLE>
<TABLE>
<CAPTION>
ASR
Issue Acquisition Ownership
Issuer Series REMIC Date Date Percentage
- ------ ---------- --------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
American Southwest Financial Corporation 45 No 02/27/87 08/26/87 99.00%(a)
American Southwest Financial Corporation 48 Yes 06/25/87 08/26/87 99.00%(a)
American Southwest Financial Corporation 50 No 06/30/87 08/26/87 99.00%(a)
American Southwest Financial Corporation 53 Yes 07/30/87 08/26/87 49.50%(a)
American Southwest Financial Corporation 55 Yes 10/29/87 10/29/87 100.00%
American Southwest Financial Corporation 56 Yes 10/29/87 10/29/87 100.00%
American Southwest Financial Corporation 57 Yes 12/22/87 12/22/87 100.00%
American Southwest Financial Corporation 58 Yes 12/23/87 12/23/87 100.00%
American Southwest Financial Corporation 60 Yes 02/25/88 02/25/88 100.00%
American Southwest Financial Corporation 61 Yes 02/24/88 02/24/88 100.00%
American Southwest Financial Corporation 62 Yes 03/30/88 03/30/88 100.00%
American Southwest Financial Corporation 63 Yes 04/28/88 04/28/88 100.00%
American Southwest Financial Corporation 64 Yes 05/26/88 05/26/88 100.00%
American Southwest Financial Corporation 66 Yes 06/23/88 06/23/88 100.00%
American Southwest Financial Corporation 67 Yes 07/28/88 07/28/88 100.00%
American Southwest Financial Corporation 68 Yes 09/29/88 09/29/88 100.00%
Westam Mortgage Financial Corporation 2 Yes 05/26/88 05/26/88 32.50%
Westam Mortgage Financial Corporation 4 Yes 07/27/88 07/27/88 20.00%
Westam Mortgage Financial Corporation 7 Yes 11/30/88 11/30/88 20.50%
FHLMC 6 Yes 05/27/88 05/27/88 100.00%
FHLMC 7 Yes 05/31/88 05/31/88 100.00%
FHLMC 14 Yes 08/29/88 10/31/88 100.00%
Residential Mortgage Acceptance, Inc. I No 05/06/87 11/06/91 100.00%
Residential Mortgage Acceptance, Inc. II No 04/28/87 11/06/91 100.00%
Residential Mortgage Acceptance, Inc. III No 08/31/87 11/06/91 100.00%
Residential Mortgage Acceptance, Inc. IV No 08/27/87 11/06/91 100.00%
Residential Mortgage Acceptance, Inc. V No 10/29/87 11/06/91 100.00%
Ryland Acceptance Corporation 27 No 11/26/86 11/06/91 100.00%
Ryland Acceptance Corporation 28 No 12/18/86 11/06/91 100.00%
Ryland Acceptance Corporation 45 No 07/28/87 11/06/91 100.00%
Ryland Acceptance Corporation 56 No 12/22/87 11/06/91 100.00%
Merrill Lynch Trust 15 No 06/29/87 06/30/92 6.00%
Thrift Financial Corporation B Yes 01/29/87 07/24/92 33.65%
FBC Mortgage Securities Trust VII A No 01/28/87 08/14/92 15.32%
FBC Mortgage Securities Trust VII B No 01/27/87 08/14/92 15.32%
CMO Mortgage Investors Trust 6 Yes 03/01/91 9/28/92 100.00%
Santa Barbara Funding 2A No 02/27/87 11/18/92 3.28%
Paine Webber O Yes 01/30/89 11/25/92 100.00%
Mortgage Capital Trust I A No 03/26/87 03/05/93 98.00%
- ----------
(a) These series are owned by Southwest Capital Mortgage Funding Limited
Partnership in which the Company owns the entire partnership interest. The
Company is obligated to pay 1% of all Net Cash Flow to the former general
partner. The percentages represent the Company's beneficial interest.
</TABLE>
The Mortgage Instruments Securing or Underlying the Outstanding Structured
Financings
The Mortgage Instruments pledged as collateral for ASW 45 and ASW 50 are
beneficially owned by Southwest Capital Mortgage Funding Limited Partnership
("Southwest Funding") of which the Company purchased the general partnership
interest in 1993 but is obligated to pay the former general partner 1% of the
Net Cash Flows received by Southwest Funding. The Mortgage Instruments pledged
as collateral for RAC 27, RAC 28, RAC 45 and RAC 56 are beneficially owned by
ASR Finance Corporation ("ASR"), a subsidiary of the Company. Ownership of
such Mortgage Instruments entitles Southwest Funding and ASR, respectively, to
the Net Cash Flows on the Mortgage Instruments pledged to secure such series
of CMOs. The Mortgage Instruments pledged as collateral for the remaining
series of CMOs are owned by the Issuers of such CMOs. Where the Issuer is not
the Company or its subsidiary, the Company owns all or a part of the residual
interests which entitles the Company to all or a part of the Net Cash Flows
from the Mortgage Instruments.
The following table sets forth certain information relating to the
Mortgage Instruments securing or underlying the Outstanding Structured
Financings as of December 31, 1993. When used in the table below, "WAM" refers
to the weighted average remaining maturity in months, "WAC" refers to the
weighted average coupon rate on the Mortgage Instruments, and "PSA %" refers
to the actual prepayment experience since the date the Company acquired the
Mortgage Instruments or the Mortgage Interests, expressed as a percentage of
the Prepayment Assumption Model described elsewhere in this section. The
remaining principal balance has been adjusted for the Company's ownership
interest. (Dollars in thousands.)
PRINCIPAL
BALANCE
SERIES TYPE (000) WAC WAM PSA %
- ------------------ ---------------------- ----------- ------- ---- ------
ASW 45 GNMA I $ 9,535 10.50% 267 403
ASW 48 FNMA 74,306 8.50% 273 312
ASW 50 GNMA I 32,895 11.00% 238 351
ASW 53 GNMA I 23,500 11.00% 249 356
ASW 55 GNMA I 44,423 11.00% 252 352
ASW 56 GNMA I 39,208 12.00% 248 378
ASW 57 FHLMC 36,644 11.00% 222 412
ASW 58 FHLMC 17,883 11.50% 233 456
ASW 60 GNMA I 90,078 9.00% 278 216
ASW 61 GNMA I 88,015 9.00% 277 221
ASW 62 GNMA I 62,209 10.50% 281 397
ASW 63 GNMA I 52,934 11.00% 237 341
ASW 64 FHLMC 72,191 9.50% 275 394
ASW 66 GNMA I 109,111 9.50% 281 292
ASW 67 GNMA I 92,901 9.50% 289 317
ASW 68 GNMA I 55,890 9.50% 286 308
Westam 2 GNMA I 127,837 9.50% 281 292
Westam 4 GNMA I 157,060 9.00% 280 236
Westam 7 GNMA I 146,545 9.50% 288 327
FHLMC 6 FHLMC 35,178 9.50% 275 415
FHLMC 7 FHLMC 23,619 9.50% 274 402
FHLMC 14 FHLMC 35,726 9.00% 281 397
RMA I FNMA 29,530 8.50% 279 576
RMA II Mortgage Certificates 7,968 9.12% 254 828
RMA III GNMA I; FNMA 61,069 8.05% 281 228
RMA IV GNMA I 21,581 11.00% 237 537
RMA V GNMA I; FNMA 61,918 8.00% 273 229
RAC 27 Mortgage Loans 3,677 9.42% 270 758
RAC 28 Mortgage Loans 5,024 9.27% 257 656
RAC 45 Mortgage Loans 1,701 8.69% 266 921
RAC 56 Mortgage Loans 1,297 9.53% 260 1,068
MLT 15 GNMA 6,537 11.00% 240 532
TFC B FHLMC 24,068 9.50% 209 626
FBC 7A FHLMC 5,207 10.52% 192 600
FBC 7B GNMA 4,542 11.50% 232 582
Santa Barbara 2 FHLMC 4,101 9.50% 255 795
Paine Webber O GNMA 162,222 10.00% 296 676
Mortgage Capital
Trust 1 A GNMA I; GNMA II 20,736 11.02% 261 654
-----------
Total $ 1,848,866
===========
The prepayment experience on the Mortgage Instruments will significantly
affect the average life of such Structured Financings because all or a
substantial portion of such prepayments will be paid to the holders of the
related Structured Financings as principal payments on such Structured
Financings. Prepayments on mortgage loans commonly are measured by a
prepayment model (the "Prepayment Assumption Model"). 100% of the Prepayment
Assumption Model means that each mortgage loan underlying a Mortgage
Certificate and each Mortgage Loan (regardless of interest rate, principal
amount, original term to maturity or geographic location) prepays at an annual
compounded rate of 0.2% per annum of its outstanding principal balance in the
first month after origination, that this rate increases by an additional 0.2%
per annum in each month thereafter until the thirtieth month after origination
and in the thirtieth month and in each month thereafter prepays at a constant
prepayment rate of 6% per annum.
The Prepayment Assumption Model does not purport to be either a historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any pool of mortgage
loans, including the Mortgage Instruments underlying the Structured
Financings, and there is no assurance that the prepayment of the Mortgage
Instruments underlying the Structured Financings will conform to any of the
assumed prepayment rates. The rate of principal payments on pools of mortgage
loans is influenced by a variety of economic, geographic, social and other
factors. In general, however, Mortgage Instruments are likely to be subject to
higher prepayment rates if prevailing interest rates fall significantly below
the interest rates on the Mortgage Instruments. Conversely, the rate of
prepayment would be expected to decrease if interest rates rise above the
interest rate on the Mortgage Instruments. Other factors affecting prepayment
of mortgage loans include changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties, assumability
of mortgage loans and servicing decisions.
DESCRIPTION OF THE OUTSTANDING STRUCTURED FINANCINGS
Each series of CMOs, other than those issued by RMA, constitutes a
nonrecourse obligation of the Issuer of such series of CMOs payable solely
from the Mortgage Instruments and any other collateral pledged to secure such
series of CMOs. Each series of the Structured Financings is structured so that
the monthly payments on the Mortgage Instruments pledged as collateral,
together (in certain cases) with the reinvestment income at assumed rates,
will be sufficient to make the required interest and principal payments on
each Class of the Structured Financings on a timely basis.
Interest payments on each Class of the Structured Financings are due and
payable on specified dates, except for zero coupon Classes ("Principal Only
Classes") and compound interest Classes as to which interest accrues but
generally is not paid until other designated Classes are paid in full. Each
Class of the Structured Financings, except the Principal Only Classes,
provides for the payment of interest either at a fixed rate, or at an interest
rate which resets periodically based on a specified spread from (i) the
arithmetic mean of quotations of the London interbank offered rates ("LIBOR")
for either one- or three-month Eurodollar deposits, determined according to
the frequency of payment dates, subject to a specified maximum interest rate,
(ii) the Monthly Weighted Average Cost of Funds Index for Eleventh District
Savings Institutions (the "COF Index"), as published by the Federal Home Loan
Bank of San Francisco (the "FHLB/SF"), subject to a specified maximum interest
rate or (iii) other specified indices. See Notes 2 and 3 to Consolidated
Financial Statements for additional information on the Structured Financings
and their respective variable rate classes.
Principal payments on the Structured Financings are made on each payment
date for such series and generally are allocated to the earlier maturing
Classes until such Classes are paid in full. However, in certain series of
Structured Financings, principal payments on certain Classes are made
concurrently with principal payments on other Classes of such series of
Structured Financings in certain specified percentages (as described in the
prospectus supplement or offering circular for such series of Structured
Financings). In addition, payments of principal on some Classes (referred to
as "SAY," "PAC," "Sinker" or "TAC Classes") occur pursuant to a specified
repayment schedule to the extent funds are available therefor, regardless of
which other Classes of the same series of Structured Financings remain
outstanding. Payments of principal on certain CMO Classes (referred to as
"Retail CMOs") are paid only through redemptions either by the holders of such
Retail CMOs or by the Issuer of such Retail CMOs (subject to certain
conditions and priorities as described in the prospectus supplement for a
series of Structured Financings including Retail CMOs). Each of the Principal
Only Classes has been issued at a substantial discount from par value and
receives only principal payments.
Certain Classes of the Structured Financings will be subject to early
redemption (in the case of a series of CMOs) or early termination (in the case
of MPCs) by the Issuer. The Company has certain specified rights as owner of
the residual interest in the REMICs or owner of beneficial interests of the
Issuer to instruct the Issuer of certain series of CMOs to redeem the CMOs
early. Certain Classes which represent the residual interest in the REMIC
(referred to as "Residual Interest Classes") generally also are entitled to
additional amounts, such as the Net Cash Flows from the Mortgage Instruments
and the remaining assets in the REMIC after the payment in full of the other
Classes of the same series of Structured Financings.
The following table sets forth certain information with respect to the
Outstanding Structured Financings. The initial and remaining principal
balances have been adjusted to reflect the Company's ownership interest. For
the classes that bear variable interest rates, the formula is stated by the
index (1L:one-month LIBOR; 3L:three-month LIBOR; and COFI:COF Index), the
spread and the maximum interest rate. (Dollars in thousands.)
SUMMARY OF THE OUTSTANDING STRUCTURED FINANCINGS
INITIAL REMAINING STATED
PRINCIPAL PRINCIPAL MATURITY
SERIES CLASS BALANCE BALANCE COUPON DATE
- ------------------- ----- ---------- --------- ----------------- --------
ASW 45 A $ 32,819 $ 0 -- 02/25/04
B 73,582 0 -- 02/25/16
C 30,814 0 -- 02/25/16
D 11,286 10,122 7.900% 02/25/17
ASW 48 A 34,650 0 -- 10/01/99
B 24,633 0 -- 11/01/01
C 106,157 0 -- 08/01/07
D 49,885 39,045 8.450% 09/01/17
E 32,175 42,554 8.450% 09/01/17
ASW 50 A 20,567 0 -- 06/25/12
B 98,604 18,730 3L + 0.65%; 13% 06/25/17
C 29,329 12,128 10.450% 06/25/17
ASW 53 A 26,776 0 -- 10/25/02
B 13,860 0 -- 01/25/06
C 17,944 1,924 7.000% 07/25/13
D 47,644 15,557 3L + 0.7%; 13% 07/25/17
E 5,198 8,020 7.000% 07/25/17
ASW 55 A 67,200 0 -- 09/25/04
B 36,000 3,559 8.125% 10/25/12
C 87,200 25,061 1L + 0.8%; 12.5% 10/25/17
D 9,600 15,817 8.125% 10/25/17
ASW 56 A 181,000 14,926 1L + 0.7%; 12% 10/25/12
B 11,000 11,000 1L + 0.95%; 13% 04/25/13
C 8,000 13,283 8.250% 04/25/16
ASW 57 A 121,700 0 -- 01/20/14
B 39,500 5,010 1L + 0.85%; 13% 01/20/07
C 34,520 23,690 10.500% 11/20/15
D 4,280 7,945 10.500% 01/20/19
ASW 58 A 28,885 0 -- 06/20/16
B 80,775 9,416 1L + 0.7%; 13% 11/20/18
C 11,590 4,717 8.000% 11/20/18
D 3,750 3,750 10.000% 11/20/15
ASW 60 A 10,033 0 -- 05/01/13
B 20,150 0 -- 05/01/13
C 91,000 41,887 9.000% 03/01/18
D 79,000 52,807 8.900% 03/01/18
ASW 61 A 53,200 4,097 8.775% 10/01/11
B 12,800 0 -- 06/01/13
C 10,000 0 -- 03/01/14
D 10,000 0 -- 06/01/14
E 50,000 50,000 8.900% 03/01/18
F 43,169 26,137 8.500% 03/01/18
G 20,981 12,703 9.625% 03/01/18
ASW 62 A 146,200 0 -- 02/01/13
B 36,000 16,372 1L + 1.1%; 13% 07/01/16
C 36,000 16,372 8.800% 07/01/16
D 1,000 1,710 9.500% 03/01/17
E 31,000 31,000 9.200% 04/01/18
ASW 63 A $ 21,165 $ 0 -- 08/01/12
B 82,000 33,003 1L + 0.85%; 13% 03/01/17
C 18,000 5,909 0.000% 03/01/17
D 77,000 12,641 8.580% 05/01/18
E 2,000 3,300 9.000% 05/01/18
ASW 64 A 21,000 0 -- 01/17/05
B 35,760 15,361 1L + 0.6%; 13% 06/17/19
C 33,600 0 -- 05/17/12
D 20,820 0 -- 12/17/14
E 56,820 56,806 8.500% 06/17/19
F 81,600 0 -- 06/17/17
G 45,600 0 -- 06/17/17
H 4,800 0 -- 06/17/19
I 100 0 Residual 06/17/19
ASW 66 A 87,250 13,950 9.000% 03/01/12
B 16,380 0 -- 02/01/14
C 25,900 25,900 9.450% 08/01/14
D 36,330 36,330 9.450% 03/01/17
E 39,892 2,885 1L + 0.9%; 14.5% 04/01/18
F 25,000 5,074 9.750% 06/01/18
G 22,540 22,540 9.450% 07/01/18
H 46,958 9,003 5.000% 07/01/18
ASW 67 A 14,190 0 -- 03/01/99
B 33,750 0 -- 08/01/08
C 13,150 6,725 9.300% 10/01/10
D 37,680 37,680 9.450% 03/01/15
E 45,000 0 -- 12/01/15
F 15,700 15,700 9.450% 07/01/16
G 23,160 0 -- 01/01/17
H 28,400 28,400 9.450% 08/01/18
I 39,220 9,636 5.950% 08/01/18
ASW 68 A 45,230 7,999 8.750% 10/01/12
B 41,010 41,010 8.750% 10/01/18
C 16,920 9,615 COFI + 1.25%; 16%
D 15,260 0 -- 10/01/18
E 31,580 0 -- 10/01/18
F 100 0 Residual 10/01/18
Westam 2 A 98,740 13,239 8.750% 01/01/12
B 28,230 0 -- 04/01/14
C 25,000 0 -- 04/01/15
D 97,670 97,670 9.450% 06/01/18
E 10,000 2,369 0.000% 06/01/18
F 90,651 21,479 9.230% 06/01/18
Westam 4 A 28,480 0 -- 11/01/00
B 39,710 0 -- 02/01/08
C 25,470 14,341 8.950% 01/01/11
D 39,030 39,030 8.950% 04/01/14
E 17,175 0 -- 08/01/14
F 20,070 0 -- 06/01/15
G 35,410 35,410 8.950% 08/01/16
H 37,950 37,950 8.950% 08/01/18
I 97,151 39,762 8.950% 08/01/18
Westam 7 A 50,250 0 -- 08/01/14
B 40,420 0 -- 12/01/18
C 60,320 0 -- 06/01/17
D 44,100 18,056 9.200% 12/01/18
E 31,770 31,770 9.270% 02/01/07
F 63,760 63,760 9.300% 10/01/15
G 42,100 42,100 9.400% 12/01/18
H 14,470 0 -- 06/01/06
I 40,530 0 -- 09/01/14
J 12,613 0 -- 12/01/18
FHLMC 6 A $ 64,350 $ 0 -- 12/15/16
B 31,736 0 -- 12/15/16
C 56,371 8,963 9.050% 06/15/19
D 6,760 3,307 1L + 0.6%; 12.75% 06/15/19
Z 3,250 4,284 9.500% 06/15/19
R 32 8 Residual 06/15/19
FHLMC 7 A 32,160 0 -- 12/15/16
B 17,700 0 -- 12/15/16
C 2,030 0 -- 11/15/01
D 13,988 757 1L + 0.4%; 12% 07/15/14
E 8,502 0 -- 08/15/13
F 1,500 757 8.000% 07/15/14
G 17,520 17,520 8.500% 09/15/18
H 4,580 4,580 8.500% 06/15/19
Z 2,000 0 -- 06/15/19
R 20 5 Residual
FHLMC 14 A 64,091 0 -- 12/15/19
B 43,088 35,726 9.000% 12/15/19
C 11,406 0 0.000% 12/15/19
D 14,664 0 -- 12/15/19
R 20 0 Residual 12/15/19
RMA I A 21,200 0 -- 08/01/11
B 11,800 0 -- 08/01/11
C 17,160 4,320 7.500% 08/01/17
D 26,800 14,552 3L + 0.6%; 13% 08/01/16
E 14,240 7,732 21.975%-(1.8X3L); 08/01/16
21.975%
F 8,800 8,800 8.500% 08/01/17
RMA II A 25,075 0 -- 05/01/09
B 11,965 0 -- 08/01/13
C 15,750 5,492 8.900% 05/01/17
D 1,480 1,480 8.900% 08/01/17
RMA III A 27,500 0 -- 06/01/97
B 12,300 0 -- 03/01/00
C 26,000 22,532 7.000% 06/01/04
D 14,500 5,002 3L + 0.55%; 11.5% 06/01/04
Z 19,700 32,320 8.000% 06/01/17
RMA IV A 75,250 7,001 1L + 0.65%; 11.5% 05/25/11
B 10,000 0 -- 05/25/08
C 5,000 2,000 9.700% 08/25/11
D 5,500 5,500 10.000% 02/25/12
Z 4,250 8,000 10.250% 08/25/17
RMA V A 28,000 14,240 3L + 0.8%; 12.75% 11/01/07
B 62,000 31,531 6.000% 11/01/07
Z 11,944 19,333 8.100% 08/01/17
RAC 27 A 15,400 0 -- 12/01/93
B 37,350 0 -- 09/01/01
C 70,600 0 -- 12/01/10
D 40,100 3,296 9.250% 12/01/13
E 3,550 926 9.450% 12/01/16
RAC 28 A-1 86,000 2,114 11.500% 12/25/16
A-2 117,000 2,876 7.250% 12/25/16
RAC 45 A 13,100 0 -- 08/01/00
B 21,400 0 -- 11/01/09
C 15,000 1,820 9.375% 08/01/13
D 1,500 505 9.375% 08/01/17
RAC 56 A 27,900 0 -- 12/25/02
B 12,600 0 -- 06/25/06
C 10,650 0 -- 08/25/09
D 5,000 0 -- 06/25/09
E 4,850 1,270 9.500%
ML Trust 15 A 30,000 6,537 3L +.05%; 11% 09/23/17
TFC-B A $ 68,315 $ 0 -- 11/20/10
B 23,096 1,779 8.80% 05/20/13
C 16,521 8,411 8.55% 05/20/18
D 4,135 2,650 9.10% 05/20/18
FBC 7A A 36,763 5,299 3L + .50%; 11.5% 01/20/18
FBC 7B A 45,954 5,024 3L + .040%; 11.3% 01/25/17
Santa Barbara II A 11,085 2,307 3L +.65%; 13% 03/20/18
B 2,706 0 -- 03/20/09
C 1,679 0 -- 12/20/12
D 2,841 395 5% 12/20/16
E 1,399 1,399 5% 03/20/18
PaineWebber O A 24,826 0 -- 04/01/19
B 68,746 0 -- 04/01/19
C 53,936 42,973 9.5% 04/01/19
D 72,174 72,174 9.5% 04/01/19
E 54,374 54,374 9.5% 04/01/19
F 163,944 0 -- 03/01/10
G 22,000 0 -- 08/01/10
H 40,000 0 -- 04/01/19
I 100 100 9.5% 05/01/19
CMI 6K A 100 21 2023.520% 02/22/21
MCIA A 51,548 11,325 3L + .60%; 12.40% 06/01/17
B 46,452 10,205 8.3% 06/01/17
---------- ----------
Total $6,500,067 $1,885,524
========== ==========
Net Cash Flows
Sources of Net Cash Flows
The Net Cash Flows available from the Company's Mortgage Assets are
derived principally from three sources: (i) the favorable spread between the
interest amounts on the Mortgage Instruments securing or underlying Structured
Securities and the interest amounts of the Structured Financings Classes;
(ii) reinvestment income in excess of the amount thereof required to be
applied to pay the principal of and the interest on the Structured Financings;
and (iii) any amounts available from prepayments on the Mortgage Instruments
that are not necessary for the payments on the Structured Financings. The
amount of Net Cash Flows generally decreases over time as the Classes are
retired. Distributions of Net Cash Flows represent both the return on and the
return of the investment in the Mortgage Assets purchased. In addition, the
Company may exercise the right to instruct the Issuer to early redeem part or
all of a series of Structured Financings and sell the related Mortgage
Instruments, in which case the net proceeds (after payment of the Structured
Financings and related costs) will be remitted to the Company.
Factors Affecting Net Cash Flows
The principal factors which influence Net Cash Flows are as follows:
(1) Other factors being equal, Net Cash Flows in each payment period tend
to decline over the life of a series of Structured Financings, because (a) as
normal amortization of principal and principal prepayments occur on the
Mortgage Instruments, the principal balances of the Mortgage Instruments are
reduced; (b) the principal payments on the Mortgage Instruments generally are
first used to pay the principal on the earlier, lower-yielding Classes of such
Structured Financings, thereby resulting in a reduction of the favorable
spread between the interest rate on the Mortgage Instruments and the interest
rates on the outstanding Classes, and (c) the higher coupon Mortgage
Instruments are likely to be prepaid faster, reinforcing the same effect.
(2) The rate of prepayments on the Mortgage Instruments significantly
affects the Net Cash Flows. Because prepayments shorten the life of the
Mortgage Instruments, a higher rate of prepayments normally reduces overall
Net Cash Flows. The rate of prepayments is affected by mortgage interest rates
and other factors. Generally, increases in mortgage interest rates reduce
prepayment rates, while decreases in mortgage interest rates increase
prepayment rates. Because an important component of Net Cash Flows derives
from the spread between the weighted average interest rate on the Mortgage
Instruments and the weighted average interest on the outstanding Classes of
the Structured Financings, prepayments occuring during the early life of such
Structured Financings have a more negative effect on Net Cash Flows than the
same volume of prepayments have at a later date.
(3) With respect to variable rate Classes of Structured Financings,
increases in the interest rate index increase the interest rate payable on
such Classes and thus reduce or, in some instances, eliminate Net Cash Flows,
while decreases in the index decrease the interest rate payable and thus
increase Net Cash Flows.
(4) The interest rate at which the monthly cash flow from the Mortgage
Instruments may be reinvested until payment dates for the Structured
Financings influences the amount of the Net Cash Flows unless such
reinvestment income is not paid to the owner of the related Mortgage Asset.
(5) The administrative expenses of a series of Structured Financings (if
any) may increase as a percentage of Net Cash Flows as the outstanding
balances of the Mortgage Instruments decline, if some of such administrative
expenses are fixed. In later years, it can be expected that fixed expenses
will exceed the available cash flow. Although reserve funds generally are
established to cover such shortfalls, there can be no assurance that such
reserves will be sufficient to cover such shortfalls. In addition, although
each series of Structured Financings generally has an optional redemption
provision that allows the Issuer or the Company, if applicable, to retire the
remaining Classes after certain dates, there can be no assurance that the
Issuer or the Company will exercise such options and, in any event, in a high
interest rate environment the market value of the remaining Mortgage
Instruments may be less than the amount required to retire the remaining
outstanding Classes. The Company may be liable for administrative expenses
relating to a series of Structured Financings if reserves prove to be
insufficient. Moreover, any unanticipated liability or expenses with respect
to the Structured Financings could adversely affect Net Cash Flows.
In addition, if the Company elects to instruct the Issuer to early redeem
part or all of a series of Structured Financings and sell the related Mortgage
Instruments, the net proceeds after the early redemption will depend on the
sales price realized by the Issuer for the Mortgage Instruments.
See Note 13 to the Consolidated Financial Statements for additional
information on the future Net Cash Flow.
Hedging
The Company from time to time hedges its Mortgage Assets and indebtedness
in whole or in part so as to provide protection from interest rate
fluctuations or other market movements. With respect to assets, hedging can be
used either to increase the liquidity or decrease the risk of holding an asset
by guaranteeing, in whole or in part, the price at which such asset may be
disposed of prior to its maturity. With respect to indebtedness, hedging can
be used to limit, fix or cap the interest rate on variable rate indebtedness.
The Company's hedging activities may include the purchase of interest rate cap
agreements, the consummation of interest rate swaps, the purchase of Stripped
Securities, the maintenance of short positions in financial futures contracts,
the purchase of put options on such contracts and the trading of forward
contracts. For a description of the Company's current hedging activities, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Hedging Transactions."
Certain of the federal income tax requirements that the Company must
satisfy to qualify as a REIT limit the Company's ability to hedge. See
"Business -- Federal Income Tax Considerations -- Qualification of the Company
as a REIT." Therefore, the Company may be prevented from adequately hedging
its Mortgage Assets or indebtedness. In addition, hedging strategies that may
not jeopardize the Company's REIT status in a slowly rising interest rate
environment could jeopardize the Company's REIT status in a rapidly rising
interest rate environment.
CAPITAL RESOURCES
Subject to the terms of the Company's Bylaws, the availability and cost of
borrowings, various market conditions and restrictions that may be contained
in the Company's financing arrangements from time to time and other factors as
described herein, the Company increases the amount of funds available for its
activities with the proceeds of borrowings including borrowings under loan
agreements, repurchase agreements and other credit arrangements.
Subject to the foregoing, the Company's borrowings may bear fixed or
variable interest rates, may require additional collateral in the event that
the value of existing collateral declines on a market value basis and may be
due on demand or upon the occurrence of certain events. Repurchase agreements
are agreements pursuant to which the Company sells Mortgage Assets for cash
and simultaneously agrees to repurchase such Mortgage Assets on a specified
date for the same amount of cash plus an interest component. The Company also
may increase the amount of funds available for investment through the issuance
of debt securities (including Structured Financings).
It can be anticipated that a substantial portion of the assets of the
Company will be pledged to secure indebtedness incurred by the Company.
Accordingly, such assets will not be available for distribution to the
stockholders of the Company in the event of the Company's liquidation except
to the extent that the value of such assets exceeds the amount of such
indebtedness.
On May 28, 1992, a wholly owned limited-purpose subsidiary of the Company
issued $80,000,000 of Secured Notes under an Indenture to a group of
institutional investors. The Secured Notes bear a fixed interest rate of 9.02%
per year. Principal repayments are $3,222,222 per quarter during the first
four quarters and $2,097,222 per quarter thereafter through May 15, 2001. The
Secured Notes are collateralized by all of the Mortgage Assets of the
subsidiary and funds held by the trustee (including the reserve fund and the
collection account).
Under the Indenture, the excess, if any, of the income portion of the cash
flow from the collateral pledged (determined on the Federal income tax basis)
over the interest and other expenses on the Secured Notes is remitted to the
Company. The principal portion of the cash flow (total cash flow in excess of
the income portion) is used to make the scheduled principal payment and
interest payment, if necessary. Depending on the level of certain specified
financial ratios relating to the collateral, any remaining principal portion
of the cash flow is required to either prepay the Secured Notes at par,
increase the reserve fund up to its $20,000,000 maximum, or is remitted to the
Company for its unrestricted use.
On January 12, 1994, as the initial step of the Company's new plan to
invest in income-producing properties, the Company acquired 17 apartment
properties consisting of 2,461 units located in Tucson, Arizona, Houston,
Texas and Albuquerque, New Mexico. The total acquisition costs, including
closing costs, were approximately $61.6 million, which was financed by
assumption of two existing first mortgage loans of $7.1 million, 15 new first
mortgage loans totalling $38.6 million, seller carryback notes of $6.5 million
and a cash payment of $9.4 million. Each of the properties is owned by a newly
formed, single-asset subsidiary which is wholly owned by the Company or one of
its subsidiaries. The first mortgage loans are generally non-recourse to the
subsidiary or the Company.
The Company's Bylaws provide that it may not incur indebtedness if, after
giving effect to the incurrence thereof, aggregate indebtedness (other than
Structured Financings and any loans between the Company and its trusts or
corporate subsidiaries), secured and unsecured, would exceed 300% of the
Company's net assets, on a consolidated basis, unless approved by a majority
of the Unaffiliated Directors. For this purpose, the term "net assets" means
the total assets (less intangibles) of the Company at cost, before deducting
depreciation or other non-cash reserves, less total liabilities, as calculated
at the end of each quarter in accordance with generally accepted accounting
principles.
The Company may increase its capital resources by making additional
offerings of its Common Stock or securities convertible into the Company's
Common Stock. The actual or perceived effect of such offerings may be the
dilution of the book value or earnings per share which may result in the
reduction of the market price of shares of the Company's Common Stock. The
Company is unable to estimate the amount, timing or nature of future sales of
its Common Stock as such sales will depend upon market conditions and other
factors. See "Business -- Special Considerations -- Future Offerings of Common
Stock."
OPERATING RESTRICTIONS
The Company presently may not purchase commodities or commodity futures
contracts (other than interest rate futures when used solely for hedging). The
Company may not invest in unimproved real property or underwrite securities of
other issuers. The foregoing restrictions may not be changed without the
approval of the holders of a majority of the outstanding shares of the
Company's Common Stock.
Except as otherwise restricted, the operating policy of the Company is
controlled by its Board of Directors, which has the power to modify or alter
such policy without the consent of the stockholders. Although the Company has
no present intention of modifying its operating policies described herein, the
Board of Directors in the future may conclude that it would be advantageous
for the Company to do so.
COMPETITION
There are numerous real estate companies, insurance companies, financial
institutions and other property owners that compete with the Company in
seeking properties for acquisition and in attracting and retaining tenants.
EMPLOYEES
The Company currently has five full time salaried employees.
MANAGEMENT AGREEMENT
THE MANAGER
The Manager is an Arizona limited partnership. The Manager is engaged in
the business of advising the Company with respect to various aspects of the
Company's business and operations, managing the overall business and
operations of the Company and representing the Company in its dealings with
third parties. Jon A. Grove, Frank S. Parise, Jr. and Joseph C. Chan have been
directors or officers of general partners of the Manager since its
organization.
TERMS OF THE MANAGEMENT AGREEMENT
The Company and the Manager are parties to a Management Agreement with a
term expiring on December 31, 1994, subject to annual extensions between the
Company and the Manager. The Management Agreement may be terminated by the
Company without cause at any time upon 60 days written notice by a majority
vote of its Unaffiliated Directors or by a vote of the holders of a majority
of the outstanding shares of Common Stock. In addition, the Company has the
right to terminate the Management Agreement for cause in the event of (i) a
breach by the Manager of any provision contained in the Management Agreement
occurs; (ii) an order for relief is entered with respect to the Manager in an
involuntary case under federal or state bankruptcy, insolvency or other
similar laws; or (iii) the Manager (a) ceases or admits in writing its
inability to pay its debts as they become due, or makes a general assignment
for the benefit of or enters into an arrangement with creditors, (b) applies
for or consents to the appointment of a receiver, trustee, assignee,
custodian, liquidator or sequestrator, or proceedings seeking such appointment
are commenced, (c) authorizes or files a voluntary petition in bankruptcy, or
applies for or consents to the application of any bankruptcy, reorganization,
arrangement, readjustment of debt, insolvency, dissolution, liquidation or
other similar law, or proceedings to such end are instituted against the
Manager, or (d) permits or suffers all or any substantial part of its
properties or assets to be sequestered or attached by court order, or (iv) if
any two of Messrs. Grove, Parise or Chan shall cease to be a director, officer
or shareholder of at least one partner of the Manager or if they collectively
cease to control the majority of the voting decisions of the Manager.
The Manager at all times is subject to the supervision of the Company's
Board of Directors and has only such functions and authority as the Company
may delegate to it. The Manager is responsible for the day-to-day operations
of the Company and performs such services and activities relating to the
assets and operations of the Company as may be appropriate, including:
(a) serving as the Company's consultant with respect to formulation of
investment criteria by the Board of Directors;
(b) representing the Company in connection with the purchase of
assets;
(c) structuring financings of the Company;
(d) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for
the Company by the Manager;
(e) providing the executive and administrative personnel, office space
and services required in rendering services to the Company;
(f) administering the day-to-day operations of the Company and
performing and supervising the performance of such other administrative
functions necessary in the management of the Company as may be agreed upon
by the Manager and the Board of Directors, including the collection of
revenues, the payment of the Company's debts and obligations and
maintenance of appropriate computer services to perform such
administrative functions;
(g) communicating on behalf of the Company with the holders of the
equity and debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies
and to maintain effective relations with such holders;
(h) counseling the Company in connection with policy decisions to be
made by the Board of Directors; and
(i) upon request by and in accordance with the direction of the Board
of Directors, investing or reinvesting any money of the Company.
Management Fee
The Manager receives an annual management fee equal to 3/8 of 1% of the
"Average Invested Assets" of the Company and its subsidiaries for each year.
The Management Agreement provides for a quarterly management fee, although the
Board of Directors has approved payment of the management fee monthly, with
adjustments made quarterly. The term "Average Invested Assets" for any period
means the average of the aggregate book value of the consolidated assets of
the Company and its subsidiaries, including those assets pledged to secure
Structured Financings, invested, directly or indirectly, in equity interests
in and loans secured by real estate, before reserves for depreciation or bad
debts or other similar non-cash reserves, less the book value of the issued
and outstanding Structured Financings of the Company and its subsidiaries
computed by taking the average of such values at the end of each month during
such period.
In the event that the Management Agreement is terminated by the Company or
is not renewed by the Company on terms at least as favorable to the Manager as
the current Management Agreement other than as a result of a termination by
the Company for cause (as specified above and defined in the Management
Agreement), the Manager will be entitled to receive from the Company the
management fee that would have been payable by the Company to the Manager
pursuant to such Management Agreement based on the investments made by the
Company prior to the date on which the Management Agreement is so terminated
(or not renewed) for the 12 full fiscal quarters beginning on the date of such
termination (or failure to renew) as more fully described in the Management
Agreement.
The Manager's management fee must be calculated by the Manager within 45
days after the end of each quarter, and such calculation must be promptly
delivered to the Company for payment within 60 days of the end of each fiscal
quarter, subject to adjustment at the end of the year.
Prior to 1994, if the Company's annual taxable income exceeded an amount
equal to its average net worth times the sum of the ten year U.S. Treasury
rate plus one percentage point, the Company paid the Manager, as incentive
management fee, 25% of the excess. In December 1993, in connection with the
renewal of the Management Agreement for 1994, the Manager and the Company
agreed to eliminate the incentive management fee provision. On December 16,
1993, the Company granted to the Manager options to purchase 1,549,000 shares
of the Company's Common Stock and 451,000 shares of phantom stock options. The
exercise price for the stock options and phantom stock options is $1.72 per
share which is 10% higher than the market price on that date. The exercise
price will be reduced by the total amount of per share dividends paid during
the period the options are outstanding. One-third of the total options are
currently exercisable; one-third will become exercisable on December 16, 1994;
and the remainder will become exercisable on December 16, 1995. The options
and the phantom options will expire on December 16, 1998, if not terminated
earlier pursuant to the terms of the option agreements.
For information relating to management fees, see Note 8 to consolidated
financial statements.
Administration Fees
The Manager also performs certain analysis and other services in
connection with the administration of Structured Financings issued by the
Company or by any other Issuer with respect to which the Company acquires
Mortgage Interests, including working with the Master Servicer (as defined
herein), if any, and the Company or the other Issuer to ensure proper
servicing and administration. For such activities, the Company currently pays
the Manager an annual administration fee of $10,000 for each series of
Mortgage Interests acquired before 1991, $10,000 for the aggregate Mortgage
Interests acquired in 1991 and $10,000 for the aggregate Mortgage Interests
acquired in 1992. See Note 8 to the consolidated financial statements.
Expenses
The Manager is required to pay employment expenses of its personnel, rent,
telephone, utilities and other office expenses (except those relating to a
separate office or office facilities, if any, maintained by the Company or its
subsidiaries, if any), and certain travel and miscellaneous administrative
expenses of the Manager. The Company is required to pay all other expenses of
operation (as set forth in the Management Agreement) up to an amount per year
with respect to certain of such expenses equal to the greater of 2% of the
Company's Average Invested Assets or 25% of the Company's Net Income for that
year. Expenses in excess of such amount will be paid by the Manager, unless
the Unaffiliated Directors determine that, based upon unusual or non-recurring
factors, a higher level of expenses is justified for such fiscal year. In the
event that the Company's operating expenses for any fiscal year total less
than the greater of 2% of the Company's Average Invested Assets or 25% of its
Net Income for that fiscal year, then, within 120 days after the end of such
fiscal year, with the consent of the Unaffiliated Directors, the Manager will
be repaid all compensation previously reimbursed by the Manager to the Company
on account of operating expenses having exceeded the greater of 2% of its
Average Invested Assets or 25% of its Net Income during one or more prior
fiscal years, except that the amount of any repayment of compensation to the
Manager may not, when added to all other operating expenses of the Company for
such fiscal year, exceed the greater of 2% of the Company's Average Invested
Assets or 25% of its Net Income for that fiscal year. The Manager's right to
repayment of previously reimbursed compensation will be cumulative, and the
amount of previously reimbursed compensation which has not been repaid to the
Manager will be carried forward to and be repaid to the Manager in subsequent
fiscal years. Prior to any such repayment, the Unaffiliated Directors must
determine that the Company's operating expenses which were in excess of the
limitation set forth above in one or more prior fiscal years were reasonable
when incurred in connection with the operations of the Company.
Right of First Refusal
The Manager has granted the Company a right of first refusal, for as long
as the Manager or an affiliate of the Manager acts as the Company's manager
pursuant to the Management Agreement or any extension thereof, to purchase any
assets held by the Manager or its affiliates prior to any sale, conveyance or
other transfer, voluntarily or involuntarily, of such assets by the Manager or
its affiliates. See "Business -- Special Considerations -- Potential Conflicts
of Interest."
Limits of Responsibility
Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to render the services called for thereunder and
will not be responsible for any action of the Company's Board of Directors in
following or declining to follow its advice or recommendations. The Manager,
the partners of the Manager and any of their partners, directors, officers,
stockholders and employees will not be liable to the Company, any other
Issuer, any subsidiary of the Company, the Unaffiliated Directors, the
Company's stockholders or any subsidiary's stockholders for acts performed in
accordance with and pursuant to the Management Agreement, except by reason of
acts constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties under the Management Agreement. The Company has
agreed to indemnify the Manager, the partners of the Manager and any of their
partners, directors, officers, stockholders and employees, with respect to all
expenses, losses, damages, liabilities, demands, charges and claims arising
from any of their acts or omissions not constituting bad faith, willful
misconduct, gross negligence or reckless disregard of duties, performed in
good faith in accordance with and pursuant to the Management Agreement. The
Management Agreement does not limit or restrict the right of the Manager, the
partners of the Manager or any of their partners, directors, officers,
stockholders, employees or affiliates from engaging in any business or
rendering services of any kind to any other person, including the purchase of,
or rendering advice to others purchasing, assets which meet the Company's
policies and criteria, except that the Manager (but not its partners or any of
their partners, directors, officers, stockholders, employees or agents) is not
permitted to provide any such services to any residential mortgage REIT other
than the Company and its subsidiaries. The Manager has the right to
subcontract with third parties, including affiliates of the Manager, to
provide services to the Manager and the Company. Any payment of fees to such
third parties will be the sole responsibility of the Manager.
THE SUBCONTRACT AGREEMENT
The Manager and ASFS are parties to a Subcontract Agreement pursuant to
which ASFS performs certain services for the Manager in connection with the
administration of Structured Financings issued by the Company or by any Issuer
affiliated with ASFS with respect to which the Company acquires Mortgage
Interests or owns the underlying Mortgage Instruments. Under the Subcontract
Agreement, ASFS charges an administration fee for each series of CMOs
generally equal to a maximum of $20,000 per year.
The Subcontract Agreement extends through December 31, 1994. Thereafter,
successive extensions, each for a period not to exceed one year, may be made
by agreement between the Manager and ASFS. The Subcontract Agreement may be
terminated by either party upon six months prior written notice, except that
the Manager may terminate the Subcontract Agreement at any time upon 60 days
written notice in the event the Company no longer retains the Manager. In
addition, the Manager has the right to terminate the Subcontract Agreement
upon the happening of certain specified events, including a breach by ASFS of
any provision contained in the Subcontract Agreement.
ASFS is a privately held Arizona corporation which is indirectly
beneficially owned by the Class A shareholders of American Southwest Financial
Corporation and American Southwest Finance Co., Inc. The Class A shareholders
of American Southwest Financial Corporation and American Southwest Finance
Co., Inc. consist primarily of numerous finance entities, each of which was
organized and controlled by one or more separate concerns engaged in the
homebuilding business and none of which owns more than 10% of the shares of
stock of either of such corporations.
Pursuant to the Subcontract Agreement, ASFS will not assume any
responsibility other than to render the services called for therein. ASFS and
its directors, officers, stockholders and employees will not be liable to the
Company, the Manager, or any of their directors or stockholders for any acts
or omissions by ASFS, its directors, officers, stockholders or employees under
or in connection with the Subcontract Agreement, except by reason of acts
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties under the Subcontract Agreement. The Company has
agreed to indemnify and hold harmless American Southwest Financial
Corporation, American Southwest Finance Co., Inc., ASFS and their officers and
directors from any action or claim brought or asserted by any party by reason
of any allegation that American Southwest Financial Corporation, American
Southwest Finance Co., Inc. or ASFS is an affiliate or is otherwise
accountable or liable for the debts or obligations of the Company or its
affiliates.
PROPERTY MANAGEMENT AGREEMENT
The Company has entered into a property management agreement with Pima
Realty Advisors, Inc. (the "Property Manager") for each of its current
properties. The Property Manager is an affiliate of the Manager. Each property
management agreement, which has a current term through December 31, 1994, was
approved by the Unaffiliated Directors. Under the agreement, the Property
Manager provides the customary property management services at its cost
without profit or distributions to its owners, subject to the limitation of
the prevailing management fee rates for similar properties in the market. The
Property Manager currently manages over 6,000 apartment units, including those
owned by the Company.
The Property Manager has developed computer, accounting, management,
reporting and control systems to monitor property operations. Detailed annual
budgets are prepared for each property. Monthly, quarterly and annual reports
are prepared addressing occupancy rates, turnover ratios, budget variances,
delinquencies and other operating information. Weekly reports are provided for
each property detailing leasing and occupancy activities. The Property Manager
also maintains and analyzes demographic resident data. Prior to entering into
a lease, the Property Manager generally reviews the credit of the prospective
tenant to attempt to minimize bad credit risks and identify tenants having a
poor rental history. This information is intended to enable the Property
Manager to identify and act quickly on specific conditions affecting
individual properties.
Each of the current properties is operated by a staff including a resident
manager and a maintenance and apartment preparation staff. Policies and
procedures utilized at the property sites follow established federal and state
laws and regulations, including lease contracts, on-site marketing procedures,
credit collection and eviction standards. As a result of active onsite
management and strict prospective tenant qualification standards, the Company
expects to experience low rent loss to delinquencies or early lease
terminations.
SPECIAL CONSIDERATIONS
REAL ESTATE INVESTMENT CONSIDERATIONS
General
Real property investments are subject to varying degrees of risk. The
yields available from equity investments in real estate depend on the amount
of income earned and capital appreciation generated by the related properties
as well as the expenses incurred. If the properties do not generate income
sufficient to meet operating expenses, including debt service and capital
expenditures, the Company's income will be adversely affected. Income from the
properties may be adversely affected by the general economic climate
(including unemployment rates), local conditions such as oversupply of
competing income-producing properties or a reduction in demand for income-
producing properties in the area, the attractiveness of the properties to
tenants, competition from other available income-producing properties, the
affordability of single family homes, the ability of the Company to provide
adequate maintenance and insurance and increased operating costs (including
real estate taxes). Certain significant expenditures associated with an
investment in real estate (such as mortgage payments, real estate taxes and
maintenance costs) generally are not reduced when circumstances cause a
reduction in income from the investment. In addition, income from properties
and real estate values are also affected by a variety of other factors, such
as governmental regulations and applicable laws (including real estate, zoning
and tax laws), interest rate levels and the availability of financing.
Furthermore, real estate investments are relatively illiquid and, therefore,
will tend to limit the Company's ability to vary its portfolio promptly in
response to changes in economic or other conditions.
Potential Environmental Liability
Under various federal, state and local laws, ordinances and regulations,
an owner of real estate may be held liable for the costs of removal or
remediation of certain hazardous or toxic substances located on or in the
property. These laws often impose such liability without regard to whether the
owner knew of, or was responsible for, the presence of the hazardous or toxic
substances. The presence of such substances, or the failure to remediate such
substances properly, may adversely affect the owner's ability to sell or rent
the property or to borrow using the property as collateral. Other federal and
state laws require the removal of damaged asbestos-containing material in the
event of remodeling or renovation.
All of the current properties have been subject to a Phase I environmental
site assessment and limited asbestos survey (which involve inspection without
soil or groundwater analysis) by independent environmental consultants
undertaken in 1993. As a result the findings of the Phase I environmental
assessment, a Phase II assessment involving soil and groundwater testing was
performed at four properties by independent environmental consultants. The
assessment shows that the groundwater at one of the properties is
contaminated. Based on the report of the environmental engineers, the Company
believes that the contamination has been caused by a nearby service station
and that the owner of the station has commenced clean up procedures under the
direction of the local governmental authority. The Company has informed the
local governmental authority of the groundwater contamination and asked the
authority to expand the clean up procedures to include the Company's property.
The Company believes that the environmental liability for its property would
not have a material adverse effect on the Company's business or results of
operations. The Company will engage environmental engineers to perform annual
soil and water analysis at those four properties.
The Company has determined that there are minor amounts of asbestos-
containing materials ("ACMs") in five of the Company's properties. The Company
maintains an Operations and Maintenance Program that details operating
procedures with respect to ACMs prior to any renovation and that requires
periodic inspection by the Company's employees for any change in condition of
existing ACMs.
Except as set forth above, the reports have not revealed any environmental
liability, nor is the Company aware of any environmental liability, that the
Company believes would have a material adverse effect on the Company's
business, assets or results of operation. No assurance, however, can be given
that these reports reveal all environmental liabilities, or that no prior
owner created any material environmental condition not known to the Company or
that future uses and conditions (including changes in applicable environmental
laws and regulations) will not result in imposition of environmental
liability. In the event the Company discovers a material environmental
condition relating to any of its properties, the Company could be required to
expend funds to remedy such condition.
Uninsured Loss
The Company will carry comprehensive liability, fire, flood (where
applicable), extended coverage and rental loss insurance with policy
specifications, limits and deductibles customarily carried for similar
properties. There are, however, certain types of extraordinary losses (such as
losses resulting from earthquakes) that may be either uninsurable or not
economically insurable. Should an uninsured loss occur, the Company could lose
its investment in and anticipated profits and cash flow from a property and
would continue to be obligated on any mortgage indebtedness on the property.
Americans with Disabilities Act
The properties must comply with Title III of the Americans with
Disabilities Act (the "ADA") to the extent that the properties are "public
accommodations" and/or "commercial facilities" as defined by the ADA.
Compliance with the ADA requirements could require removal of structural
barriers to handicapped access in certain public access areas of the Company's
properties, where such removal is readily achievable. The ADA does not,
however, consider residential properties, such as apartment communities to be
public accommodation or commercial facilities, except to the extent portions
of such facilities, such as a leasing office, are open to the public.
Noncompliance with the ADA could result in imposition of fines or an award of
damages to private litigants. If required changes involve a greater
expenditure than the Company currently anticipates, or if the changes must be
made on a more accelerated basis than it anticipates, the Company's operations
could be adversely affected. No specific regulations have been promulgated
under the ADA and, thus, it is uncertain how enforcement of the ADA would
affect specific building attributes. However, the Company believes that the
properties comply with all present requirements under the ADA.
Fair Housing Amendments Act of 1988
The Fair Housing Amendments Act of 1988 (the "FHA") requires multifamily
residential properties first occupied after March 13, 1991 to be accessible to
the handicapped. Noncompliance with the FHA could result in the imposition of
fines or an award of damages to private litigants. The Company believes that
its properties that are subject to the FHA are in compliance with such law.
MARKET RISKS RELATING TO MORTGAGE ASSETS
General
The results of the Company's operations depend, among other things, on the
level of Net Cash Flows generated by the Company's Mortgage Assets. The
Company's Net Cash Flows vary primarily as a result of changes in mortgage
prepayment rates, short-term interest rates, reinvestment income and borrowing
costs, all of which involve various risks and uncertainties as set forth
below. Prepayment rates, interest rates, reinvestment income and borrowing
costs depend upon the nature and terms of the Mortgage Assets, the geographic
location of the properties securing the mortgage loans included in or
underlying the Mortgage Assets, conditions in financial markets, the fiscal
and monetary policies of the United States Government and the Board of
Governors of the Federal Reserve System, international economic and financial
conditions, competition and other factors, none of which can be predicted with
any certainty. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- General" and "Business -- Operating
Policies and Strategies -- Net Cash Flows."
The projected rates of return to the Company on its Mortgage Assets will
be based upon assumed levels of prepayments on the underlying Mortgage
Instruments, assumed rates of interest or pass-through rates on the Structured
Financings that bear variable interest rates, and assumed rates of
reinvestment income and expenses with respect to such Structured Financings.
The actual levels of interest rates on Structured Financings bearing variable
interest rates, prepayment rates, reinvestment income and administration
expenses will affect the level of the Company's Net Cash Flows. To the extent
that the assumptions employed by the Company vary from actual experience, the
actual Net Cash Flows received by the Company may vary significantly from
those projected by the Company as to timing and amount over the lives of such
Structured Financings and from one period to another, and such returns could
be negative under certain circumstances. The Company's Net Cash Flows on such
Mortgage Assets also may be affected by the cost and availability of credit
enhancement devices (such as overcollateralization, primary mortgage
insurance, mortgage pool insurance, special hazard insurance and guaranteed
investment contracts) necessary to obtain the desired rating on such
Structured Financings.
Prepayment Risks
Mortgage prepayment rates vary from time to time and may cause declines in
the amount and duration of the Company's Net Cash Flows. Prepayments of
Mortgage Instruments generally increase when then current mortgage interest
rates fall below the interest rates on the fixed-rate mortgage loans included
in such Mortgage Instruments. Conversely, prepayments decrease when then
current mortgage interest rates exceed the interest rates on the mortgage
loans included in such Mortgage Instruments. See "Business -- Special
Considerations -- Market Risks -- Interest Rate Fluctuation Risks." Prepayment
experience also may be affected by the geographic location of the mortgage
loans included in Mortgage Instruments, the types (whether fixed or adjustable
rate) and assumability of such mortgage loans, conditions in the mortgage
loan, housing and financial markets, and general economic conditions.
In general, without regard to the interest rates payable on classes of a
series of Structured Financings, prepayments on Mortgage Instruments bearing a
net interest rate higher than or equal to the highest interest rate on the
related series of Structured Financings will have a negative impact on the Net
Cash Flows of the Company because such principal payments eliminate or reduce
the favorable interest spread earned on the Mortgage Instruments.
Net Cash Flows on Mortgage Instruments also tend to decline over the life
of the Structured Financings because the classes of such Structured Securities
with earlier stated maturities or final payment dates tend to have lower
interest rates. In addition, because an important component of the Net Cash
Flows derives from the favorable spread between the weighted average interest
rate on such Mortgage Instruments and the weighted average interest rate on
the Structured Financings, a given volume of prepayments concentrated during
the early life of a series of Structured Financings would reduce the weighted
average lives of the earlier maturing classes of such Structured Financings
bearing lower interest rates. Thus, an early concentration of prepayments
would have a greater negative impact on the Net Cash Flows of the Company than
the same volume of prepayments at a later date.
Mortgage prepayments also shorten the life of the Mortgage Instruments,
thereby reducing the overall Net Cash Flows and causing an inherent decline in
the Company's income as described under "Business -- Special Considerations --
Risks of Decline in Net Cash Flows and Income."
No assurance can be given as to the actual prepayment rate of mortgage
loans included in or underlying the Mortgage Instruments in which the Company
has an interest.
Interest Rate Fluctuation Risks
Changes in interest rates affect the performance of the Company and its
Mortgage Assets. A portion of the Outstanding Structured Financings bears
variable interest rates. As of December 31, 1993, $239 million of the $1.89
billion of the Outstanding Structured Financings bore variable interest rates.
Consequently, changes in short-term interest rates significantly influence the
Company's net income.
Increases in short-term interest rates increase the interest cost on
variable rate Structured Financings and decrease the Company's Net Cash Flows.
Conversely, decreases in short-term interest rates decrease the interest cost
on the variable rate Structured Financings and increase the Company's Net Cash
Flows.
As stated above, increases in mortgage interest rates generally decrease
mortgage prepayment rates which increase the Company's Net Cash Flows, and
decreases in mortgage interest rates generally increase mortgage prepayment
rates which decrease the Company's Net Cash Flows. Therefore, changes in
short-term and mortgage interest rates in the same direction generally have
opposite effects on the Company's Net Cash Flow. However, during a given
period of time, short-term and mortgage interest rates may not change
proportionately or may even change in opposite directions. In addition, the
amounts of the effect on the Company's Net Cash Flows from identical changes
in short-term and mortgage interest rates usually vary significantly. Thus,
the net effect of changes in short-term and mortgage interest rates may vary
significantly, resulting in significant fluctuations in Net Cash Flows.
To the extent consistent with its election to qualify as a REIT, the
Company from time to time utilizes hedging techniques to mitigate against
fluctuations in market interest rates. However, no hedging strategy can
completely insulate the Company from such risks, and certain of the federal
income tax requirements that the Company must satisfy to qualify as a REIT
severely limit the Company's ability to hedge. Even hedging strategies
permitted by the federal income tax laws could result in hedging income which,
if excessive, could result in the Company's disqualification as a REIT for
failing to satisfy certain REIT income tests. See "Business -- Federal Income
Tax Considerations -- Qualification of the Company as a REIT." In addition,
hedging involves transactions costs, and such costs increase dramatically as
the period covered by the hedging protection increases. Therefore, the Company
may be prevented from effectively hedging its investments. See "Business --
Operating Policies and Strategies -- Other Operating Strategies."
No assurances can be given as to the amount or timing of changes in
interest rates or their effect on the Company's Mortgage Assets or income
therefrom.
Reinvestment Income and Expense Risks
In the event that actual reinvestment rates decrease over the term of a
series of Structured Financings, reinvestment income will be reduced, which in
turn will adversely affect the Company's Net Cash Flows. The Company may also
be liable for the expenses relating to such Structured Financings including
administrative, trustee, legal and accounting costs and, in certain cases, for
any liabilities under indemnifications granted to the underwriters, trustees
or other Issuers. These expenses are used in projecting Net Cash Flows;
however, to the extent that these expenses are greater than those assumed,
such Net Cash Flows will be adversely affected. Moreover, in later years,
Mortgage Instruments may not generate sufficient cash flows to pay all of the
expenses incident to such Structured Financings. Although reserve funds
generally are established to cover such future expenses, there can be no
assurance that such reserves will be sufficient. In addition, the Company may
be liable for the amount of the obligations represented by any Structured
Financings issued by it.
No assurance can be given as to the actual reinvestment rates or the
actual expenses incurred with respect to such Structured Financings.
Borrowing Risks
Subject to the terms of the Company's Bylaws, the availability and cost of
borrowings, various market conditions, restrictions that may be contained in
the Company's financing arrangements from time to time and other factors, the
Company increases the amount of funds available for its activities with funds
from borrowings including borrowings under loan agreements, repurchase
agreements and other credit facilities. The Company's borrowings generally are
secured by Mortgage Assets owned by the Company. The Company's borrowings may
bear fixed or variable interest rates, may require additional collateral in
the event that the value of existing collateral declines on a market value
basis and may be due on demand or upon the occurrence of certain events. To
the extent that the Company's borrowings bear variable interest rates, changes
in short-term interest rates will significantly influence the cost of such
borrowings and can result in losses in certain circumstances. See "Business --
Special Considerations -- Market Risks -- Interest Rate Fluctuation Risks."
The Company also may increase the amount of its available funds through the
issuance of debt securities.
The Company's Bylaws limit borrowings, excluding the liability represented
by Structured Financings, to no more than 300% of the amount of its net assets
(as described herein) unless borrowings in excess of that amount are approved
by a majority of the Unaffiliated Directors (as defined herein). See "Business
- -- Operating Policies and Strategies -- Capital Resources." If the cost of
such borrowings increases to the extent that such cost exceeds the Net Cash
Flows on such Mortgage Assets, such an increase could result in losses in
certain circumstances. No assurance can be given as to the cost or continued
availability of any such borrowings by the Company. As of December 31, 1993,
the Company's borrowings totalled $42,699,000.
No assurance can be given as to the actual effect of borrowings by the
Company.
Inability to Predict Effects of Market Risks
Because none of the above factors including changes in prepayment rates,
interest rates, reinvestment income, expenses and borrowing costs are
susceptible to accurate projection, the Net Cash Flows generated by the
Company's Mortgage Assets, and thus distributions to the Company's
stockholders, cannot be predicted.
RISKS OF DECLINE IN NET CASH FLOWS AND INCOME FROM MORTGAGE ASSETS
The Company's income derives primarily from the Net Cash Flows received on
its Mortgage Assets, which are the greatest in the years immediately following
the purchase of Mortgage Assets and decline over time. This decline in Net
Cash Flows over time occurs as (i) the scheduled principal payments and
prepayments occur, the principal balances of the Mortgage Instruments decline
over time; (ii) interest rates on Structured Financings classes receiving
principal payments first generally are lower than those on later classes, the
relative interest cost of the Structured Financings increases over time; and
(iii) mortgage prepayments on Mortgage Instruments with higher interest rates
tend to be higher than on those with lower interest rates, the relative
interest income on the Mortgage Instruments decreases over time. See "Business
- -- Operating Policies and Strategies -- Net Cash Flows."
For both tax and accounting purposes, the Company's Net Cash Flows consist
of two components -- one representing return of a portion of the purchase
price of the Net Cash Flow Interest (the "Cost Component") and one
representing income on the investment in Net Cash Flow Interest (the "Income
Component"). Based on assumptions made at the time of the purchase with
respect to prepayment rates, interest rates, expense levels and other factors,
a Net Cash Flow Interest is expected to generate a specified rate of return.
If actual experience with respect to all of such factors proves to be the same
as reflected in the assumptions and the Net Cash Flow Interest is held to
maturity, the expected rate of return from the Net Cash Flow Interest will be
achieved. However, for both tax and accounting purposes, the Income Component
will be highest in years immediately following the purchase of the Net Cash
Flow Interest and will decline over time even if actual experience with
respect to all of the factors occurs. This inherent decline in the Income
Component requires that the Company reinvest the Cost Component in assets with
yields equal to or higher than the existing Mortgage Assets to continue to
achieve consistent yields on its investment even without regard to variances
in the interest, mortgage prepayment and reinvestment rates affecting the Net
Cash Flow Interests. Because the Company was precluded by its prior credit
facility from reinvesting the Cost Component until it was refinanced in May
1992, the yield on the Company's Mortgage Assets has been severely reduced by
the scheduled payments and prepayments of the Mortgage Instruments. In
addition, to the extent that actual mortgage prepayments experienced exceed
those assumed, this inherent decline in Net Cash Flows and income is
accelerated. See "Business -- Special Considerations -- Market Risks --
General."
As the Company has made the determination to reinvest the Net Cash Flows
in income-producing properties which may have a lower current yield than
Mortgage Assets, without regard to the mortgage prepayment rates and variable
interest rates, the Company may experience declining operating income over
time without the effect of any gain or loss on the sale of the properties. See
"Business -- Special Considerations -- Competition."
PLEDGED ASSETS
A substantial portion of the Company's assets currently are and in the
future can be expected to be pledged to secure its borrowings. Therefore, such
assets will not be available to the stockholders in the event of the
liquidation of the Company except to the extent that the market value thereof
exceeds the amounts due to the creditors. However, the market value of the
Mortgage Assets is uncertain because the market for Mortgage Assets of the
type owned by the Company is not well developed and fluctuates rapidly as the
result of numerous market factors (including interest rates and prepayment
rates) as well as the supply of and demand for such assets.
COMPETITION
There are numerous real estate companies, insurance companies, financial
institutions and other property owners that compete with the Company in
seeking properties for acquisition and in attracting and retaining clients.
MARKET PRICE OF COMMON STOCK
The market price of the Company's Common Stock has been extremely
sensitive to a wide variety of factors including the Company's operating
results, dividend payments (if any), actual or perceived changes in short-term
and mortgage interest rates and their relationship to each other, actual or
perceived changes in mortgage prepayment rates, and any variation between the
net yield on the Company's assets and prevailing market interest rates. It can
be expected that the performance of the Company's income-producing properties
will have an increasingly important effect on the market price of the
Company's Common Stock. Any actual or perceived unfavorable changes in the
real estate market and other factors may adversely affect the market price of
the Company's Common Stock.
FUTURE OFFERINGS OF COMMON STOCK
The Company in the future may increase its capital resources by making
additional offerings of its Common Stock or securities convertible into its
Common Stock. The actual or perceived effect of such offerings may be the
dilution of the book value or earnings per share of the Company's Common Stock
which may result in the reduction of the market price of the Company's Common
Stock. The Company is unable to estimate the amount, timing or nature of
future sales of its Common Stock as such sales will depend upon market
conditions and other factors such as its need for additional equity, its
ability to apply or invest the proceeds of such sales of its Common Stock, the
terms upon which its Common Stock could be sold.
MANAGEMENT FEES
The Manager advises the Company with respect to various aspects of the
Company's business and operations, manages the Company's overall business and
operations, and represents the Company in its dealings with third parties
pursuant to the terms of the Management Agreement. In the event that the
Management Agreement is terminated by the Company or is not renewed by the
Company on terms at least as favorable to the Manager as the current
Management Agreement other than as a result of a termination by the Company
for cause (as specified above and defined in the Management Agreement), the
Manager will be entitled to receive from the Company the management fee that
would have been payable by the Company to the Manager pursuant to such
Management Agreement based on the investments made by the Company prior to the
date on which the Management Agreement is so terminated (or not renewed) for
the 12 full fiscal quarters beginning on the date of such termination (or
failure to renew) as more fully described in the Management Agreement.
POTENTIAL CONFLICTS OF INTEREST
The Company is subject to potential conflicts of interest arising from its
relationship with the Manager and the Property Manager. The Management
Agreement does not limit or restrict the right of the Manager, the partners of
the Manager or any of their directors, officers or employees from engaging in
any business or rendering services of any kind to any other person except that
the Manager (but not its partners or their directors, officers or employees)
are not permitted to provide any such services to any residential mortgage
REIT other than the Company. The Company may purchase assets from entities
which may be affiliates of the Manager. Although certain agreements and
activities must be approved by the Unaffiliated directors (as described
below), the day-to-day transactions between the Company and the Manager and
the Property Manager are not subject to the specific pre-approval of the
Unaffiliated Directors. See "Business -- Management Agreement -- Terms of
Management Agreement" and "Business -- Property Management Agreement."
The Company's Articles of Incorporation limit the liability of its
directors and officers to the Company and its stockholders to the fullest
extent permitted by Maryland law, and both the Company's Articles and Bylaws
provide for indemnification of the directors and officers to such extent. The
Management Agreement also limits the responsibilities and liabilities of the
Manager, the partners of the Manager and any of their partners, directors,
officers, stockholders and employees and provides for their indemnification
against liabilities except in certain circumstances. See "Business --
Management Agreement -- Terms of the Management Agreement -- Limits of
Responsibility." The Property Management Agreement also limits the
responsibilities and liabilities of the Property Manager. See "Business --
Property Management Agreement." In addition, the Subcontract Agreement limits
the responsibilities of ASFS and provides for the indemnification of ASFS, its
affiliates and their directors and officers against various liabilities. See
"Business -- Management Agreement -- The Subcontract Agreement."
Counsel to the Company has furnished, and in the future may furnish, legal
services to the Manager, affiliates of the Manager, certain Issuers (including
those affiliated with ASFS), certain Mortgage Suppliers and certain Mortgage
Finance Companies. There is a possibility that in the future the interests of
certain of such parties may become adverse, and counsel may be precluded from
representing one or all of such parties. If any situation arises in which the
interests of the Company appear to be in conflict with those of the Manager,
its affiliates, Mortgage Suppliers or any Mortgage Finance Companies,
additional counsel may be retained by one or more of the parties.
With a view toward protecting the interests of the Company's stockholders,
the Bylaws of the Company provide that a majority of the Board of Directors
(and a majority of each committee of the Board of Directors) must not be
"Affiliates" of the Manager or "Advisors," as these terms are defined in the
Bylaws, and that the investment policies of the Company must be reviewed
annually by these directors (the "Unaffiliated Directors"). Moreover, the
annual renewals of the Management Agreement and the Property Management
Agreement require the affirmative vote of a majority of the Unaffiliated
Directors. In addition, a majority of such Unaffiliated Directors may
terminate the Management Agreement or the Property Management Agreement at any
time upon 60 days' notice. See "Business -- The Management Agreement."
CERTAIN CONSEQUENCES OF AND FAILURE TO MAINTAIN REIT STATUS
In order to maintain its qualification as a REIT for federal income tax
purposes, the Company must continually satisfy certain tests with respect to
the sources of its income, the nature and diversification of its assets, the
amount of its distributions to stockholders and the ownership of its stock.
See "Business -- Federal Income Tax Considerations -- Qualification of the
Company as a REIT." Among other things, these restrictions may limit the
Company's ability to acquire certain types of assets that it otherwise would
consider desirable, limit the ability of the Company to dispose of assets that
it has held for less than four years if the disposition would result in gains
exceeding specified amounts, limit the ability of the Company to engage in
hedging transactions that could result in income exceeding specified amounts,
and require the Company to make distributions to its stockholders at times
that the Company may deem it more advantageous to utilize the funds available
for distribution for other corporate purposes (such as the purchase of
additional assets or the repayment of debt) or at times that the Company may
not have funds readily available for distribution.
The Company's operations from time to time generate taxable income in
excess of its net income for financial reporting purposes. The Company also
may experience a situation in which its taxable income is in excess of the
actual cash receipts. See "Business -- Federal Income Tax Considerations --
Activities of the Company." To the extent that the Company does not otherwise
have funds available, either situation may result in the Company's inability
to distribute substantially all of its taxable income as required to maintain
its REIT status. See "Business -- Federal Income Tax Considerations."
Alternatively, the Company may be required to borrow funds to make the
required distributions which could have the effect of reducing the yield to
its stockholders, to sell a portion of its assets at times or for amounts that
are not advantageous, or to distribute amounts that represent a return of
capital which would reduce the equity of the Company. In evaluating assets for
purchase, the Company considers the anticipated tax effects of the purchase
including the possibility of any excess of taxable income over projected cash
receipts.
The Internal Revenue Service has recently completed an audit of the
Company and the revenue agent conducting the audit has issued a report in
which he recommends that the Company lose its REIT election commencing with
the 1989 taxable year. The Internal Revenue Service claims that the Company
did not meet the statutory requirements to be taxed as a REIT for the years
ending December 31, 1989, 1990 and 1991 because it claims that the Company did
not demand certain shareholder information from one shareholder of record
pursuant to Regulation section 1.857-8 promulgated under the Internal Revenue
Code within the specified 30 day period after each of the Company's applicable
year ends. The Company disagrees with the revenue agent's report and will
either file a protest with the District Director of the Internal Revenue
Service or bring a claim in the United States Tax Court challenging the
proposed adjustment in that report. See "Legal Proceedings" and Note 10 to the
Consolidated Financial Statements.
If the Company should not qualify as a REIT in any tax year, it would be
taxed as a regular domestic corporation and, among other consequences,
distributions to the Company's stockholders would not be deductible by the
Company in computing its taxable income. Any such tax liability could be
substantial and would reduce the amount of cash available for distributions to
the Company's stockholders. See "Business -- Federal Income Tax
Considerations." In addition, the unremedied failure of the Company to be
treated as a REIT for any one year would disqualify the Company from being
treated as a REIT for the four subsequent years.
EXCESS INCLUSIONS
A portion of the dividends paid by the Company constitutes unrelated
business taxable income to certain otherwise tax-exempt stockholders which
will constitute a floor for the taxable income of stockholders not exempt from
tax, and will not be eligible for any reduction (by treaty or otherwise) in
the rate of income tax withholding in the case of nonresident alien
stockholders. See "Business -- Federal Income Tax Considerations -- Tax
Consequences of Common Stock Ownership -- Excess Inclusion Rule."
MARKETABILITY OF SHARES OF COMMON STOCK AND RESTRICTION ON OWNERSHIP
The Company's Articles of Incorporation prohibit ownership of its Common
Stock by tax-exempt entities that are not subject to tax on unrelated business
taxable income and by certain other persons (collectively "Disqualified
Organizations"). Such restrictions on ownership exist so as to avoid
imposition of a tax on a portion of the Company's income from excess
inclusions.
Provisions of the Company's Articles of Incorporation also are designed to
prevent concentrated ownership of the Company which might jeopardize its
qualification as a REIT under the Code. Among other things, these provisions
provide (i) that any acquisition of shares that would result in the
disqualification of the Company as a REIT under the Code will be void, and
(ii) that in the event any person acquires, owns or is deemed, by operation of
certain attribution rules set out in the Code, to own a number of shares in
excess of 9.8% of the outstanding shares of the Company's Common Stock
("Excess Shares"), the Board of Directors, at its discretion, may redeem the
Excess Shares. In addition, the Company may refuse to effectuate any transfer
of Excess Shares and certain stockholders, and proposed transferees of shares,
may be required to file an affidavit with the Company setting forth certain
information relating, generally, to their ownership of the Company's Common
Stock. These provisions may inhibit market activity and the resulting
opportunity for the Company's stockholders to receive a premium for their
shares that might otherwise exist if any person were to attempt to assemble a
block of shares of the Company's Common Stock in excess of the number of
shares permitted under the Articles of Incorporation. Such provisions also may
make the Company an unsuitable investment vehicle for any person seeking to
obtain (either alone or with others as a group) ownership of more than 9.8% of
the outstanding shares of Common Stock. Investors seeking to acquire
substantial holdings in the Company should be aware that this ownership
limitation may be exceeded by a stockholder without any action on such
stockholder's part in the event of a reduction in the number of outstanding
shares of the Company's Common Stock.
INVESTMENT CONSEQUENCES OF EXEMPTION FROM INVESTMENT COMPANY ACT
The Company conducts its business so as not to become regulated as an
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). Accordingly, the Company does not expect to be
subject to the restrictive provisions of the Investment Company Act. The
Investment Company Act exempts entities that are "primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate." Under current interpretations of the staff of the
Securities and Exchange Commission, in order to qualify for this exemption,
the Company must maintain at least 55% of its assets directly in Mortgage
Loans, certain Mortgage Certificates and certain other qualifying interests in
real estate. The Company's ownership of certain Mortgage Assets therefore may
be limited by the Investment Company Act. In addition, certain Mortgage
Certificates may be treated as securities separate from the underlying
mortgage loans and, thus, may not qualify as "mortgages and other liens on and
interests in real estate" for purposes of the 55% requirement, unless such
Mortgage Certificates represent all the certificates issued with respect to an
underlying pool of mortgages. If the Company failed to qualify for exemption
from registration as an investment company, its ability to use investment
leverage would be substantially reduced, it would be prohibited from engaging
in certain transactions with affiliates, and it would be unable to conduct its
business as described herein. Such a failure to qualify could have a material
adverse effect on the Company. See "Business -- Operating Policies and
Strategies -- Operating Restrictions."
FEDERAL INCOME TAX CONSIDERATIONS
QUALIFICATION OF THE COMPANY AS A REIT
General
The Company has made an election to be treated as a real estate investment
trust ("REIT"). Thus, if the Company satisfies certain tests in each taxable
year with respect to the nature of its income, assets, share ownership and the
amount of its distributions, among other things, it generally should not be
subject to tax at the corporate level on its income to the extent that it
distributes cash in the amount of such income to its stockholders.
The Internal Revenue Service has recently completed an audit of the
Company and the revenue agent conducting the audit has issued a report in
which he recommends that the Company lose its REIT election commencing with
the 1989 taxable year. The Internal Revenue Service claims that the Company
did not meet the statutory requirements to be taxed as a REIT for the years
ending December 31, 1989, 1990 and 1991 because it claims that the Company did
not demand certain shareholder information from one shareholder of record
pursuant to Regulation section 1.857-8 promulgated under the Internal Revenue
Code within the specified 30 day period after each of the Company's applicable
year ends. The Company disagrees with the revenue agent's report and will
either file a protest with the District Director of the Internal Revenue
Service or bring a claim in the United States Tax Court challenging the
proposed adjustment in that report. See "Legal Proceedings" and Note 10 to the
Consolidated Financial Statements.
The unremedied failure of the Company to be treatd as a REIT for any
taxable year could materially and adversely affect the stockholders. For
instance, the net income of the Company would be taxed at ordinary corporate
rate (currently a maximum of 34 percent). The Company would not receive a
deduction for any dividends to the stockholders and those dividends would be
treated as ordinary income to the stockholders to the extent of the Company's
earnings and profits. As a result of such taxes, a material reduction would
occur on the cash available for distribution to the stockholders as dividends.
Further, the unremedied failure of the Company to be treated as a REIT for any
one year would disqualify the Company from being treated as a REIT for the
four subsequent years.
In order to maintain its qualification as a REIT for federal income tax
purposes, the Company must continually satisfy certain tests with respect to
the sources of its income, the nature and diversification of its assets, the
amount of its distributions, and the ownership of the Company. The following
is a summary discussion of those various tests.
Sources of Income
The Company must satisfy three separate income tests for each taxable year
with respect to which it intends to qualify as a REIT: (i) the 75% income
test; (ii) the 95% income test; and (iii) the 30% income test.
Under the first test, at least 75% of the Company's gross income for the
taxable year must be derived from certain qualifying real estate related
sources. The 95% income test requires that at least 95% of the Company's gross
income for the taxable year must be derived from the items of income that
either qualify under the 75% test or are from certain other types of passive
investments. Finally, the 30% income test requires the Company to derive less
than 30% of its gross income for the taxable year from the sale or other
disposition of (1) real property, including interests in real property and
interests in mortgages on real property, held for less than four years, other
than foreclosure property or property involuntarily converted through
destruction, condemnation or similar events, (2) stock or securities or swap
agreements held for less than one year, and (3) property in "prohibited
transactions." A prohibited transaction is a sale or disposition of dealer
property that is not foreclosure property or, under certain circumstances, a
real estate asset held for at least four years.
If the Company inadvertently fails to satisfy either the 75% income test
or the 95% income test, or both, and if the Company's failure to satisfy
either or both tests is due to reasonable cause and not willful neglect, the
Company may avoid loss of REIT status by satisfying certain reporting
requirements and paying a tax equal to 100% of any excess nonqualifying
income. See "Business -- Federal Income Tax Considerations -- Taxation of the
Company." There is no comparable safeguard that could protect against REIT
disqualification as a result of the Company's failure to satisfy the 30%
income test.
The Company anticipates that its gross income will continue to consist
principally of the income that satisfies the 75% income test. The composition
and sources of the Company income should allow the Company to satisfy the
income tests during each year of its existence. Certain short-term
reinvestments, however, may generate qualifying income for purposes of the 95%
income test but nonqualifying income for purposes of the 75% income test, and
certain hedging transactions could give rise to income that, if excessive,
could result in the Company's disqualification as a REIT for failing to
satisfy the 30% income test, the 75% income test, and/or the 95% income test.
The Company intends to monitor its reinvestments and hedging transactions
closely to attempt to avoid disqualification as a REIT.
Nature and Diversification of Assets
At the end of each quarter of the Company's taxable year, at least 75% of
the value of the Company's assets must be cash and cash items (including
receivables), federal government securities and qualifying real estate assets.
Qualifying real estate assets include interests in real property, and
mortgages, equity interests in other REITs, any stock or debt instrument for
so long as the income therefrom is qualified temporary investment income and,
subject to certain limitations, interests in REMICs. The balance of the
Company's assets may be invested without restriction, except that holdings of
the securities of any one non-governmental issuer may not exceed 5% of the
value of the Company's assets or 10% of the outstanding voting securities of
that issuer.
If the Company fails to satisfy the 75% asset test at the end of any
quarter of its taxable year as a result of its acquisition of securities or
other property during that quarter, the failure can be cured by a disposition
of sufficient nonqualifying assets within 30 days after the close of that
quarter. The Company will take such action as may be required to cure any
failure to satisfy the 75% asset test within 30 days after the close of any
quarter. The Company may not be able to cure any failure to satisfy the 75%
asset test, however, if assets that the Company believes are qualifying assets
for purposes of the 75% asset test are later determined to be nonqualifying
assets.
Distributions
Each taxable year the Company must distribute as dividends to its
stockholders an amount at least equal to (i) 95% of its REIT taxable income
(determined before the deduction of dividends paid and excluding any net
capital gain) plus (ii) 95% of the excess of its net income from foreclosure
property over the tax imposed on such income by the Code, less (iii) any
excess noncash income (as determined under the Code).
Generally, a distribution must be made in the taxable year to which it
relates. A portion of the required distribution, however, may be made in the
following year if certain guidelines are followed. Further, if the Company
fails to meet the 95% distribution requirement as a result of an adjustment to
the Company's tax returns by the Internal Revenue Service ("IRS"), the Company
may, if the deficiency is not due to fraud with intent to evade tax or a
willful failure to file a timely tax return, retroactively cure the failure by
paying a deficiency dividend to stockholders and certain interest and
penalties to the IRS.
The Company intends to make distributions to its stockholders on a basis
that will allow the Company to satisfy the distribution requirement. In
certain instances, however, the Company's pre-distribution taxable income may
exceed its cash flow and the Company may have difficulty satisfying the
distribution requirement. The Company intends to monitor closely the
relationship between its pre-distribution taxable income and its cash flow. It
is possible, although unlikely, that the Company may decide to terminate its
REIT status as a result of any such cash shortfall. Such a termination would
have adverse consequences to the stockholders. See "Business -- Federal Income
Tax Considerations -- Status of the Company as a REIT."
Ownership of the Company
Shares of the Company's Common Stock must be held by a minimum of 100
persons for at least 335 days in each taxable year after the Company's first
taxable year. Further, at no time during the second half of any taxable year
after the Company's first taxable year may more than 50% of the Company's
shares be owned, actually or constructively, by five or fewer individuals
(including pension funds and certain other types of tax-exempt entities). To
evidence compliance with these requirements, the Company is required to
maintain records that disclose the actual ownership of its outstanding shares.
Each year, in order to satisfy that requirement, the Company will demand
written statements from record holders owning designated percentages of Common
Stock disclosing, among other things, the identities of the actual owners of
such shares. The Company's Articles of Incorporation contain repurchase
provisions and transfer restrictions designed to prevent violation of the
latter requirement. Therefore, the Company believes that its shares of Common
Stock currently are owned by a sufficient number of unrelated persons to allow
the Company to satisfy the ownership requirements for REIT qualification.
TAXATION OF THE COMPANY
For any taxable year in which the Company qualifies and elects to be
treated as a REIT under the Code, it generally will not be subject to federal
income tax on that portion of its taxable income that is distributed to its
stockholders in or with respect to that year. Regardless of distributions to
stockholders, however, the Company may become subject to a tax on certain
types of income.
The Company uses the calendar year both for tax purposes and for financial
reporting purposes. Due to the differences between tax accounting rules and
generally accepted accounting principles, the Company's REIT Taxable Income
will vary from its net income for financial reporting purposes.
TAX CONSEQUENCES OF COMMON STOCK OWNERSHIP
The federal income tax consequences of ownership in the Company's common
is a complex matter and may vary depending on the income tax status of the
stockholder. Accordingly, the following discussion is intended to be general
in nature. Stockholders should consult their own tax advisors regarding the
income tax considerations with respect to their investments in the Company.
Dividend Income
Distributions to stockholders out of the Company's current or accumulated
earnings and profits will be taxable as "portfolio income" in the year
received and not as income from a passive activity. With respect to any
dividend declared by the Company in October, November or December of any
calendar year and payable to stockholders of record as of a specified date
prior to the end of the year, however, that dividend will be deemed to have
been received by the stockholder on December 31 if the dividend is actually
paid in January of the following calendar year.
The Company's dividends will not be eligible for the dividends-received
deduction for corporations. If the Company's total distributions for a taxable
year exceed its current and accumulated earnings and profits, a portion of
each distribution will be treated first as a return of capital, reducing a
stockholder's basis in his shares (but not below zero), and then as capital
gain in the event such distributions are in excess of a stockholder's adjusted
basis in his shares.
Distributions properly designated by the Company as "capital gain
dividends" will be taxable to the stockholders as long-term capital gain, to
the extent those dividends do not exceed the Company's actual net capital gain
for the taxable year, without regard to the stockholder's holding period for
his shares. The Company will notify stockholders after the close of its
taxable year regarding the portions of the distributions that constitute
ordinary income, return of capital and capital gain. The Company also will
notify shareholders regarding their reported share of excess inclusion income.
See "Excess Inclusion Rule" below.
Excess Inclusion Rule
Ownership by the Company of residual interests in REMICs may adversely
affect the federal income taxation of the Company and of certain stockholders
to the extent those residual interests generate "excess inclusion income." The
Company's excess inclusion income during a calendar quarter generally will
equal the excess of its taxable income from residual interests in REMICs over
its "daily accruals" with respect to those residual interests for the calendar
quarter. The daily accruals are calculated by multiplying the adjusted issue
price of the residual interest by 120 percent of the long-term federal
interest rate in effect on the REMIC's startup date. It is possible that the
Company will have excess inclusion income without associated cash. In taxable
years in which the Company has both a net operating loss and excess inclusion
income it will still have to report a minimum amount of taxable income equal
to its excess inclusion income. In order to maintain its REIT status, the
Company will be required to distribute at least 95 percent of its taxable
income, even if its taxable income is comprised exclusively of excess
inclusion income and otherwise has a net operating loss.
In general, each stockholder is required to treat the stockholder's
allocable share of the portion of the Company's "excess inclusions" that is
not taxable to the Company as an "excess inclusion" received by such
stockholder. The portion of the Company's dividends that constitute excess
inclusions typically will rise as the degree of leveraging of the Company's
activities increase. Therefore, all or a portion of the dividends received by
the stockholders may be excess inclusion income. Excess inclusion income will
constitute unrelated business taxable income for tax-exempt entities and may
not be used to offset deductions or net operating losses from other sources
for most other taxpayers.
TAX-EXEMPT ORGANIZATIONS AS STOCKHOLDERS
The Code requires a tax-exempt stockholder of the Company to treat as
unrelated business taxable income its allocable share of the Company's excess
inclusions. The Company is likely to receive excess inclusion income. See
"Excess Inclusion Rule," above. The Company's Common Stock may not be held by
tax-exempt entities which are not subject to tax on unrelated business taxable
income.
TAXATION OF FOREIGN STOCKHOLDERS
Distributions of cash generated by the Company in its operations that are
paid to foreign persons generally will be subject to United States withholding
tax rate at a rate of 30 percent or at a lower rate if a foreign person can
claim the benefit of a tax treaty. Notwithstanding the foregoing,
distributions made to foreign stockholders will not be subject to treaty
withholding reductions to the extent of their allocable shares of the portion
of the Company's excess inclusions that are not taxable to the Company for the
period under review. It is expected that the Company will continue to have
excess inclusions. Distributions to foreign persons of cash attributable to
gain on the Company's sale or exchange of real properties, if any, generally
will be subject to full United States taxation and withholding. If a foreign
person holds more than five percent of the shares of the Company, gain from
the sale of the person's shares could be subject to full United States
taxation if the Company held any real property interests and was not a
domestically controlled REIT.
The federal income taxation of foreign persons is a highly complex matter
that may be affected by many considerations. Accordingly, foreign investors in
the Company should consult their own tax advisors regarding the income and
withholding tax considerations with respect to their investments in the
Company. Foreign governments and organizations, and their instrumentalities,
may not invest in the Company.
BACKUP WITHHOLDING
The Company is required by the Code to withhold from dividends 20% of the
amount paid to stockholders, unless the stockholder (i) files a correct
taxpayer identification number with the Company, (ii) certifies as to no loss
of exemption from backup withholding and (iii) otherwise complies with the
applicable requirements of the backup withholding rules. The Company will
report to its stockholders and the IRS the amount of dividends paid during
each calendar year and the amount of tax withheld, if any. Stockholders should
consult their tax advisors as to the procedure for insuring that the Company
dividends to them will not be subject to backup withholding.
STATE AND LOCAL TAXES
The discussion herein concerns only the federal income tax treatment
likely to be accorded the Company and its stockholders. No discussion has been
provided regarding the state or local tax treatment of the Company and its
stockholders. The state and local tax treatment may not conform to the federal
income tax treatment described above and each investor should discuss such
issues with his state and local tax advisor.
ITEM 2. PROPERTIES
The principal executive offices of the Company and the Manager are located
at 335 North Wilmot, Suite 250, Tucson, Arizona 85711, telephone (602) 748-
2111.
ITEM 3. LEGAL PROCEEDINGS
On March 4, 1994, the Internal Revenue Service sent to the Company a
proposed adjustment (the "Proposed Adjustment") to the amount of taxes owed by
the Company for the years ended December 31, 1989, December 31, 1990 and
December 31, 1991 as indicated below:
Year Tax
---- ---
December 31, 1989 $1,212,309
December 31, 1990 $5,183,922
December 31, 1991 $7,438,132
The Proposed Adjustment did not include any amounts for interest which
might be owed by the Company. The Internal Revenue Service claimed that the
Company did not meet the statutory requirements to be taxed as a REIT for the
applicable years because the Internal Revenue Service maintains that the
Company did not demand certain shareholder information pursuant to Regulation
section 1.857-8 promulgated under the Internal Revenue Code within the
specified 30 day period after each of the Company's applicable year ends.
The Company disagrees with the revenue agent's report and will either file
a protest with the District Director of the Internal Revenue Service or bring
a claim in the United States Tax Court challenging the Proposed Adjustment.
The Company believes that it has made all of the requisite demands of its
shareholders for each applicable year and has met the requirements under the
Code. The Company also believes that the Internal Revenue Service has
incorrectly applied the rules in Regulation section 1.857-8. The Company
believes that the IRS's position is without merit and intends to vigorously
defend its position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is listed and principally traded on the
American Stock Exchange ("AMEX") under the symbol the "ASR". The following
table sets forth for the periods indicated the high and low sales prices of
the Company's Common Stock as reported by the AMEX and the cash dividends paid
per share on the Company's Common Stock for the periods indicated.
DIVIDEND
HIGH LOW PER SHARE
------ ------ ---------
1993
First quarter................................... 3 3/16 2 --
Second quarter.................................. 2 3/16 1 3/16 --
Third quarter................................... 1 7/8 1 1/4 .05
Fourth quarter.................................. 2 3/16 1 1/2 .18
1992
First quarter................................... 7 5/8 5 5/8 .25
Second quarter.................................. 6 5/8 4 1/4 .20
Third quarter................................... 5 1/4 2 1/8 --
Fourth quarter.................................. 3 3/16 2 1/2 --
1991
First quarter................................... 8 1/4 4 5/8 .35
Second quarter.................................. 9 7 .35
Third quarter................................... 9 7 5/8 .37
Fourth quarter.................................. 9 6 3/4 .37
On March 28, 1994, the closing sales prices for shares of the Company's
Common Stock on the AMEX Composite Tape was $1.625 per share.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT PER SHARE DATA)
The following selected financial data are qualified in its entirety by,
and should be read in conjunction with, the consolidated financial statements
and notes thereto appearing elsewhere herein. The data below have been derived
from the audited consolidated financial statements of the Company.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN THOUSANDS) EXCEPT PER SHARE AMOUNTS
------------------------------------------------------------------------------
1993 1992 1991 1990 1989
STATEMENT OF OPERATIONS DATA -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Income
Income on Mortgage Instruments and
related assets pledged under
Structured Financings........... $ 185,636 $ 249,986 $ 307,023 $ 344,713 $ 377,943
Expenses on Structured Financings. (180,991) (253,588) (277,688) (318,409) (354,788)
Provision for Reserves............ (20,286) (57,588) (2,737)
Income from Mortgage Assets --
prospective yield method........ 2,619 4,521 5,157 3,500 2,867
Interest income on other Mortgage
Instruments..................... 3,672
Amortization of hedging costs, net (3,296) (4,465)
Other............................. 1,069 1,223 20 10 359
-------------- -------------- -------------- -------------- --------------
Total income (loss)............... (11,953) (55,446) 31,775 26,518 25,588
-------------- -------------- -------------- -------------- --------------
Expenses
Interest expense on borrowings.... 5,577 6,325 6,594 10,290 17,249
Operating and management expenses. 1,949 3,104 6,355 4,164 2,632
-------------- -------------- -------------- -------------- --------------
Total expenses.................... 7,526 9,429 12,949 14,454 19,881
-------------- -------------- -------------- -------------- --------------
Net Income (loss) before cumulative
effect of accounting change....... (19,479) (64,875) 18,826 12,064 5,707
Cumulative effect of accounting
change............................ (21,091)
-------------- -------------- -------------- -------------- --------------
Net income (loss)................... $ (40,570) $ (64,875) $ 18,826 $ 12,064 $ 5,707
============== ============== ============== ============== ==============
Per average outstanding shares
Net income (loss) before
cumulative effect of accounting
change.......................... $ (1.25) $ (4.04) $ 1.25 $ .84 $ .40
Cumulative effect of accounting
change............................ (1.36)
-------------- -------------- -------------- -------------- --------------
Net income (loss)................. $ (2.61) $ (4.04) $ 1.25 $ .84 $ .40
============== ============== ============== ============== ==============
Dividends per share................. $ .23 $ .45 $ 1.44 $ .95 $ .48
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Weighted average shares outstanding. 15,522 16,043 15,033 14,434 14,326
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------------------------
1993 1992 1991 1990 1989
BALANCE SHEET DATA -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Mortgage Instruments pledged under
Structured Financings............. $ 1,401,839 $ 2,260,776 $ 3,022,363 $ 3,408,650 $ 3,748,230
Mortgage Assets -- prospective yield
method............................ 10,970 18,074 34,470 26,019 28,341
Total assets........................ 1,453,302 2,317,580 3,061,810 3,436,961 3,781,465
Borrowings.......................... 42,699 65,498 61,527 82,884 106,665
Structured Financings secured by
Mortgage Instruments.............. 1,374,928 2,175,010 2,842,228 3,207,857 3,533,445
Total stockholders' equity.......... 30,948 75,284 149,585 138,542 139,405
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
In early 1993, the Company determined to shift its focus to the ownership
of income-producing properties from the ownership of Mortgage Assets.
Accordingly, the Company decided to discontinue acquiring additional Mortgage
Assets and to invest its available funds in income-producing properties. The
Company may hold its existing Mortgage Assets and continue to receive the net
cash flows or it may decide to dispose of some or all of the Mortgage Assets
and invest the net proceeds in real estate properties.
In January 1994, as the initial step for the Company's plan to invest in
real estate properties, the Company completed its acquisition of 17 apartment
properties consisting of 2,461 units for a total cost of approximately
$61,600,000. As the acquisition occurred after December 31, 1993, the
operating results of these properties will be reflected in the consolidated
financial statements of the Company beginning with January 1994.
Results of Operations
At December 31, 1993, the Company's assets are primarily mortgage assets
consisting of (1) mortgage instruments which include mortgage loans and
mortgage certificates (representing interests in pools of mortgage loans) and
(2) mortgage interests which entitle the Company to receive the excess of the
cash flow on pools of mortgage instruments over the required payments on
structured financings which they secure. Substantially all of the Company's
mortgage instruments secure or underlie various series of structured
financings. Structured financings consist of collateralized mortgage
obligations ("CMOs"), multiclass participation certificates ("MPCs").
The Company derives substantially all of its cash flow from the difference
between (i) the cash flow from the mortgage instruments, together with
reinvestment income earned thereon and (ii) the amount required for payments
on the related structured financings, together with related administrative
expenses, if any.
Prepayment rates significantly affect the Company's income and cash flows.
Faster mortgage prepayment rates result in the mortgage instruments and the
related structured financing being outstanding for a shorter period of time.
Because the mortgage instruments generally have higher stated interest rates
than the related structured financing, faster prepayment rates decrease the
Company's income and future cash flow. Conversely, slower prepayment rates
increase the Company's income and future cash flow.
Mortgage prepayment rates are influenced by various factors, the most
important being current mortgage interest rates, the strength of the economy,
conditions in the residential housing mortgage loan and financial markets and
seasonal changes. Generally, increases in mortgage interest rates decrease
mortgage prepayment rates, resulting in an increase in the Company's income.
On the other hand, declines in mortgage interest rates generally increase
mortgage prepayment rates, resulting in a decrease in the Company's income.
A portion of the structured financings bear variable interest rates.
Consequently, the Company's net income is also significantly influenced by
changes in short-term interest rates. Increases in short-term interest rates
(primarily the London Interbank Offered Rates -- "LIBOR") increase the
interest cost on the structured financings, and decrease the Company's income.
Conversely, decreases in short-term interest rates increase the Company's
income and decrease its interest expense. As of December 31, 1993, variable
interest rates applied to $239 million of $1.89 billion principal amounts of
structured financings.
It is generally expected that changes in short-term interest rates and
mortgage interest rates will have opposite effects on the Company's net income
as these rates normally change in the same direction. However, during a given
period of time, they may not change proportionally or may even change in
opposite directions. In addition the amounts of the effect on the Company's
net cash flows from identical changes in short-term and mortgage interest
rates usually vary significantly. Thus, the net effect of changes in short-
term and mortgage interest rates may vary significantly between periods
resulting in significant fluctuations in net cash flows.
The weighted average interest rate on mortgage instruments securing
structured financings declines over time as mortgage instruments with higher
interest rates generally are prepaid faster than those with lower interest
rates. In addition, the average interest rate on the fixed-rate structured
financings increases over time as the earlier classes having lower interest
rates are paid off. Consequently, without regard to the effect of changes in
variable interest rates, the spread between the average interest rate on the
mortgage instruments and the average interest rate on the related structured
financings is higher in the earlier years and declines over the life of the
investment. The rate of the decline is higher when the mortgage prepayment
rates are faster.
1993 Compared to 1992
The Company had a net loss after giving effect to a change in accounting
principle of $40.6 million ($2.61 per average share outstanding) in 1993. This
compares to a net loss of $64.9 million ($4.04 per average share outstanding)
for 1992. The losses for both years were primarily due to charges to income to
reduce the net carrying values of a substantial portion of the mortgage assets
as a result of the record levels of mortgage prepayment rates. Prior to
December 1993, if a mortgage asset was impaired (i.e. the estimated future net
cash flow was less than the net carrying value), the Company charged income to
reduce the net carrying value of the mortgage asset to the undiscounted net
cash flow amount. As discussed more fully in Note 1 to the consolidated
financial statements, the Company adopted FASB Statement No. 115 as of
December 31, 1993. Under the FASB Statement, a mortgage asset is impaired when
the yield on the net carrying value of the mortgage asset using estimated
future net cash flow is less than the risk-free yield. If a mortgage asset is
impaired, the net carrying value is reduced to the estimated fair market
value. The adoption of the FASB Statement resulted in a charge to income of
$21,091,000 which is reported as the cumulative effect of a change in
accounting principle in the consolidated financial statements. As a result of
the adoption of FASB Statement No. 115, beginning in 1994, income on
substantially all of the mortgage assets will be recorded under the
prospective yield method. The weighted average prospective yield on the total
net mortgage assets at December 31, 1993 is approximately 24% per annum. The
actual yield is subject to changes depending on the actual and projected
mortgage prepayment rates and short-term interest rates.
As a result of extremely high prepayment rates during 1993, the principal
balance of mortgage instruments pledged under structured financings decreased
by $976 million during 1993. The decrease in mortgage instruments balance
reduced the net interest margin for 1993 as well as those anticipated for
subsequent years.
Operating expenses for 1993 have been reduced by $470,000 as a result of
the reimbursement received from the insurance carriers for the legal fees
incurred in defending the Company in the previously disclosed class action
lawsuits. Operating expenses for 1992 were reduced by $400,000 as a result of
the reversal of deferred compensation expenses accrued relating to the stock
option plans.
1992 Compared to 1991
The Company had a net loss of $64.9 million ($4.04 per average share
outstanding) in 1992, including $57.5 million ($3.59 per share) charges to
income to reduce the net carrying values of certain mortgage assets resulting
from the historically high prepayment rates experienced throughout 1992
combined with the high estimated prepayment rates expected to occur in the
future. This compares to net income of $18.8 million ($1.25 per average share
outstanding) for 1991. The high mortgage prepayments experienced in 1992 was
due to very low mortgage rates during the year, the lowest in over 20 years.
Operating expenses declined in 1992 due to no incentive management fee
earned as a result of the loss incurred by the Company and the reversal of
$400,000 deferred compensation expenses accrued relating to the stock option
plans.
Taxable Income and Dividends
The Company declared and paid dividends totalling $3,565,000 ($.23) in
1993 compared with $7,305,000 ($.45) for 1992 and $21,630,000 ($1.44 per
share) for 1991.
The Company has excess inclusion income from the residual interest in
certain real estate mortgage investment conduits ("REMICs") which cannot be
used to offset operating losses and deductions from other sources. Under the
current tax law for REITs, excess inclusion income is required to be
distributed as dividends. Excluding the effect of excess inclusion income,
the Company had an estimated taxable loss of $45,000,000 in 1993, bringing the
total net operating loss carryover to $68,046,000 which can be carried forward
to offset ordinary income other than excess inclusion income for 15 years.
Although the Company may incur net operating losses in 1994, it may
realize excess inclusion income which is required to be distributed as
dividends.
The difference between book income (loss) and taxable income (loss)
consists primarily of (1) amortization of premiums and discounts on mortgage
instruments and structured financing, (2) income recognition of mortgage
assets accounted for under the prospective yield method, (3) reserves on
mortgage assets which are not deductible currently, and (4) excess inclusion
income for tax purposes. These timing differences will reverse in future
years.
In March 1994, following a routine audit of the Company by the IRS for
1989, 1990 and 1991, the IRS sent to the Company a proposed adjustment (the
"Proposed Adjustment") of taxes due of $13,834,000. The IRS claims that the
Company did not comply with the legal requirements of Regulation Section
1.857-8 under the Internal Revenue Code with respect to the demand for certain
shareholder information. The Company believes that it has met the requirements
under the Internal Revenue Code and that the IRS's position is without merit
and intends to vigorously defend its position.
Hedging Transactions
The Company maintains a hedging program to mitigate the negative effect of
increases in LIBOR rates. The Company has purchased agreements for 1994, under
which the LIBOR rate to be incurred by the Company on $240 million of the
variable rate structured financings will be at the lower of the actual rates
or 5.5%. In addition, the Company has established a short position on three-
month Eurodollar future contracts which, if maintained until expiration, has
the effect of fixing the Company's three-month LIBOR rate for 1995 on
approximately $85 million. In connection with the adoption of FASB Statement
No. 115, the Company included the unrealized loss on the futures contracts in
the provision for impairment. Accordingly, those futures contracts have the
effect of fixing the Company's three-month LIBOR rate for financial accounting
purposes at approximately 5% for 1995.
Liquidity, Capital Resources and Commitments
Structured financings are collateralized by mortgage instruments and
related assets and are generally nonrecourse to the Company. Principal and
interest payments on these financings are payable solely from the principal
and interest payments from the underlying mortgage instruments.
In May 1992, a wholly owned limited-purpose subsidiary of the Company
issued $80,000,000 of secured notes ("Notes") under an indenture to a group of
institutional investors. The Notes bear a fixed interest rate of 9.02% per
year and principal repayments are $2,097,222 per quarter. The Notes are
collateralized by all of the mortgage assets of the subsidiary and funds held
by the trustee (including the reserve fund and the collection account).
Under the Indenture, the excess, if any, of the income portion of the cash
flow from the collateral pledged (determined on the Federal income tax basis)
over the interest and other expenses on the Notes is remitted to the Company.
The principal portion of the cash flow (total cash flow in excess of the
income portion) is used to make the scheduled principal payment and interest
payment, if necessary. Depending on the level of certain specified financial
ratios relating to the collateral, any remaining principal portion of the cash
flow is required to either prepay the Notes at par, or is remitted to the
Company for its unrestricted use.
The reserve fund balance reached its specified maximum of $20,000,000
during the first quarter of 1993. The reserve fund is used to make the
scheduled payments on the Notes if the cash flow available from the collateral
is not sufficient to make the scheduled payments.
Under the current short-term interest rates and estimated mortgage
prepayment rates prepared by major securities dealers, the Company expects to
generate $9.3 million of net cash flow (after debt service payments) in 1994
from its mortgage assets. The Company intends to use such funds for the
purchase of real estate properties, payment of the required dividends, hedging
and working capital purposes.
At December 31, 1993, the Company had unrestricted cash and temporary
investments of approximately $10.4 million. The Company used such funds to
complete its initial real estate acquisition consisting of seventeen apartment
complexes located in Tucson, Arizona, Albuquerque, New Mexico and Houston,
Texas. The total purchase price, including closing costs, was approximately
$61,600,000. The purchase was financed by a combination of new mortgage loans
and the assumption of existing mortgage loans totalling $45,700,000, seller
carryback financing of $6,500,000 and cash of approximately $9,400,000. The
mortgage loans bear fixed interest rates and generally have a ten-year term.
Summarized Financial Data
The Company believes that the following summarized financial data provide
a more meaningful presentation of the Company's assets and liabilities. The
summarized proforma balance sheet data have been prepared assuming the
acquisition of the 17 apartment properties in January 1994 had occurred on
December 31, 1993. (In thousands.)
<TABLE>
<CAPTION>
December 31,
Pro Forma -----------------------------
12/31/93 1993 1992
-------------- -------------- -------------
ASSETS
<S> <C> <C> <C>
Real estate investments............................... $ 65,562 $ 3,855 $
Mortgage interests, net of structured financings...... 37,881 37,881 112,228
Cash.................................................. 878 10,407 5,129
Other assets.......................................... 1,925 1,925 7,620
-------------- -------------- -------------
Total Assets $ 106,246 $ 54,068 $ 124,977
============== ============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Debt secured by real estate......................... $ 52,178 $ $
Debt secured by mortgage interests.................. 18,393 18,393 47,905
Accrued interest and other liabilities.............. 4,727 4,727 1,788
-------------- -------------- -------------
Total Liabilities 75,298 23,120 49,693
-------------- -------------- -------------
Stockholders' Equity
Capital............................................. 155,158 155,158 155,158
Treasury stock...................................... (2,311) (2,311) (2,110)
Retained earnings (deficit)......................... (121,899) (121,899) (77,764)
-------------- -------------- -------------
Total Stockholders' Equity 30,948 30,948 75,284
-------------- -------------- -------------
Total Liabilities and Stockholders' Equity $ 106,246 $ 54,068 $ 124,977
============== ============== =============
</TABLE>
The following summarized cash flow data are intended to provide a
simplified presentation of the Company's cash flows for the years ended
December 31, 1993, 1992 and 1991 (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
------------- ------------ -------------
<S> <C> <C> <C>
Cash flow from operations................................ $ 22,643 $ 34,121 $ 39,600
Returns of investments................................... 14,407 18,258 4,824
Required principal payments on Secured Notes and
additions to restricted funds.......................... (21,124) (22,010) (21,357)
------------- ------------ -------------
Cash available for reinvestment and dividends............ 15,926 30,369 23,067
Purchase of investments and hedging instruments.......... (6,882) (11,311) (455)
Payment of dividends..................................... (3,565) (13,315) (21,582)
Stock (repurchase) issuance.............................. (201) (2,110) 300
------------- ------------ -------------
Increase in unrestricted cash............................ $ 5,278 $ 3,633 $ 1,330
============= ============ =============
</TABLE>
Other Information
To the extent that the inflation rate influences federal monetary policy
and results in rising short-term interest rates or declines in long-term
interest rates, the Company's results of operations would be adversely
affected. Generally, higher inflation rates would increase the rental rates
and operating expenses of apartments, which would increase the net operating
income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the report thereon, the
notes thereto and the supplementary data commencing at page F-1 of this
report, which financial statements, report, notes and data are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference
to the definitive proxy statement to be filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the definitive proxy statement to be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the definitive proxy statement to be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to the definitive proxy statement to be filed pursuant to Regulation 14A.
<TABLE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ -------
<S> <C>
3(a) First Amended and Restated Articles of Incorporation of the Registrant(1)
3(b) Articles of Amendment to the First Amended and Restated Articles of Incorporation of the
Registrant(3)
3(c) Bylaws of the Registrant(1)
4 Specimen Certificate representing $.01 par value Common Stock(1)
10(a) Management Agreement between the Registrant and ASMA Mortgage Advisors Limited Partnership
(5)
10(b) Subcontract Agreement between ASMA Mortgage Advisors Limited Partnership and American
Southwest Financial Services, Inc.(3)
10(c) Right of First Refusal between the Company and the Manager(3)
10(d) Limited Partnership Agreement of Southwest Capital Mortgage Funding Limited Partnership(2)
10(e) Amended and Restated Stock Option Plans(4)
10(f) Indemnification and Use of Name Agreement Between the Company and American Southwest(4)
10(g) Indenture dated May 28, 1992 between CIMSA Financial Corporation and State Street Bank and
Trust Company(5)
10(h) Dividend Reinvestment and Stock Purchase Plan(3)
10(i) Agreement for Purchase and Sale of Apartments ("Purchase Agreement") dated July 15, 1993 by
and between Buyer and Seller.(6)
10(j) First Amendment to Purchase Agreement dated August 18, 1993, by and between Buyer and
Seller.(6)
10(k) Second Amendment to Purchase Agreement dated September 21, 1993 by and between Buyer and
Seller.(6)
10(l) Third Amendment to Purchase Agreement dated October 27, 1993 by and between Buyer and
Seller.(6)
10(m) Master Property Management Agreement with Pima Realty Advisors, Inc. for the year ending
December 31, 1994 and the signature page for each of the properties.(6)
10(n) Deed of Trust, Security Agreement, Financing Statement and Assignment of Leases and Rents
dated as of January 11, 1994 made by the following entities for the benefit of Lexington
Mortgage Company(6):
ASV-I Properties, Inc.
ASV-III Properties, Inc.
ASV-IV Properties, Inc.
ASV-V Properties, Inc.
ASV-VI Properties, Inc.
ASV-VII Properties, Inc.
ASV-VIII Properties, Inc.
ASV-IX Properties, Inc.
ASV-X Properties, Inc.
ASV-XI Properties, Inc.
ASV-XII Properties, Inc.
ASV-XIII Properties, Inc.
ASV-XIV Properties, Inc.
ASV-XV Properties, Inc.
ASV-XVI Properties, Inc.
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries of the Registrant
- --------------
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form S-11 (No. 33-15232) filed August 19, 1987 and declared effective on
August 19, 1987.
(2) Incorporated herein by reference to Registrant's Registration Statement on
Form S-11 (No. 33-20429) filed March 16, 1988 and declared effective on
March 17, 1988.
(3) Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 1988 as filed with the Commission on or about March 30,
1989.
(4) Incorporated herein by reference to Registrant's Registration Statement on
Form S-3 (33-42923) filed on September 30, 1991 and declared effective on
October 1, 1991.
(5) Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 1992.
(6) Incorporated herein by reference to Registrant's Report on Form 8-K filed
with the Commission on or about March 29, 1994.
(b) Financial Statements and Financial Statement Schedules filed as part of
this report:
1. Financial Statements of the Company -- as listed in the "Index to
Financial Statements" on page F-1 of this Annual Report Form 10-K.
2. Financial Statement Schedules -- no schedules are required because
of the absense of conditions under which they are required or
because the information is given in the financial statements and
notes beginning on page F-1 of this Annual Report on Form 10-K.
(c) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the Company during the
fourth quarter of 1993.
</TABLE>
<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.
ASR INVESTMENTS CORPORATION
Date: March 29, 1994
By: /s/ Jon A. Grove
---------------------------------------
Jon A. Grove
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Jon A. Grove Director, Chairman of the Board, President and Chief March 29, 1994
- --------------------------------------- Executive Officer (Principal Executive Officer)
Jon A. Grove
/s/ Frank S. Parise, Jr. Director, Vice Chairman, Chief Administrative Officer March 29, 1994
- --------------------------------------- and Secretary
Frank S. Parise, Jr.
/s/ Joseph C. Chan Director, Executive Vice President and Chief March 29, 1994
- --------------------------------------- Operating Officer (Principal Financial and Accounting
Joseph C. Chan Officer)
/s/ Earl M. Baldwin Director March 29, 1994
- ---------------------------------------
Earl M. Baldwin
/s/ John J. Gisi Director March 29, 1994
- ---------------------------------------
John J. Gisi
/s/ Raymond L. Horn Director March 29, 1994
- ---------------------------------------
Raymond L. Horn
/s/ Frederick C. Moor Director March 29, 1994
- ---------------------------------------
Frederick C. Moor
</TABLE>
ASR INVESTMENTS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report........................................... F-2
Consolidated Balance Sheets as of December 31, 1993 and 1992........... F-3
Consolidated Statements of Operations for the years ended
December 31, 1993, 1992 and 1991..................................... F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1993, 1992 and 1991............................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1992 and 1991..................................... F-6
Notes to Consolidated Financial Statements............................. F-7
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
ASR Investments Corporation
We have audited the accompanying consolidated balance sheets of ASR
Investments Corporation as of December 31, 1993 and 1992, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1993 and 1992 and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for its investments in mortgage
assets as of December 31, 1993 to adopt Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
DELOITTE & TOUCHE
Tucson, Arizona
March 24, 1994
</AUDIT-REPORT>
<PAGE>
<TABLE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1992
(DOLLARS IN THOUSANDS)
<CAPTION>
1993 1992
--------------- ---------------
<S> <C> <C>
ASSETS
Mortgage instruments and related assets pledged under
structured financings (Notes 2 and 5)....................... $ 1,401,839 $ 2,260,776
Mortgage assets -- prospective yield method (Notes 3 and 5)... 10,970 18,074
Unrestricted cash and cash equivalents........................ 10,407 5,129
Restricted cash and cash equivalents (Note 5)................. 24,306 25,981
Deferred hedging and loan costs (Note 4)...................... 508 4,783
Other assets.................................................. 5,272 2,837
--------------- ---------------
Total Assets................................................ $ 1,453,302 $ 2,317,580
=============== ===============
LIABILITIES
Notes payable (Note 5)........................................ $ 42,699 $ 65,498
Interest payable.............................................. 495 738
Other liabilities............................................. 4,232 1,050
Structured financings secured by mortgage instruments (Note 2) 1,374,928 2,175,010
--------------- ---------------
Total Liabilities........................................... 1,422,354 2,242,296
--------------- ---------------
STOCKHOLDERS' EQUITY
Common Stock, par value $.01 per share;
40,000,000 shares authorized; 16,243,649 shares issued...... 162 162
Additional paid-in capital.................................... 154,996 154,996
Cumulative deficit............................................ (121,899) (77,764)
Common stock in Treasury, at cost -- shares: 743,656 in 1993;
651,218 in 1992............................................. (2,311) (2,110)
--------------- ---------------
Total Stockholders' Equity.................................. 30,948 75,284
--------------- ---------------
Total Liabilities and Stockholders' Equity.................. $ 1,453,302 $ 2,317,580
=============== ===============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<CAPTION>
1993 1992 1991
-------------- -------------- --------------
<S> <C> <C> <C>
INCOME
Income on mortgage instruments pledged under
structured financings (Note 2)..................... $ 185,636 $ 249,986 $ 307,023
Expenses on structured financings (Note 2)........... (180,991) (253,588) (277,688)
-------------- -------------- --------------
Income (loss) on mortgage instruments, net........... 4,645 (3,602) 29,335
Income from mortgage assets -- prospective yield
method (Note 3).................................... 2,619 4,521 5,157
Provision for reserves (Notes 2 and 3)............... (20,286) (57,588) (2,737)
Other................................................ 1,069 1,223 20
-------------- -------------- --------------
Total Income (Loss)................................ (11,953) (55,446) 31,775
-------------- -------------- --------------
EXPENSES
Interest expense on notes payable.................... 5,577 4,538
Interest expense on bank loan and short-term
borrowings......................................... 1,787 6,594
Operating expenses (Note 8).......................... 1,949 3,104 6,355
-------------- -------------- --------------
Total Expenses..................................... 7,526 9,429 12,949
-------------- -------------- --------------
Income (Loss) before cumulative effect of a change in
accounting principle............................... (19,479) (64,875) 18,826
Cumulative effect of a change in accounting principle
(Note 1)........................................... (21,091)
-------------- -------------- --------------
Net Income (Loss).................................... $ (40,570) $ (64,875) $ 18,826
============== ============== ==============
Per average share amounts -- Income (Loss) before
cumulative effect of a change in accounting
principle.......................................... $ (1.25) $ (4.04) $ 1.25
Cumulative effect of a change in accounting principle (1.36) -- --
-------------- -------------- --------------
Net Income (Loss).................................... $ (2.61) $ (4.04) $ 1.25
============== ============== ==============
Average Shares of Common Stock Outstanding........... 15,522 16,043 15,033
============== ============== ==============
Dividends Declared per Share......................... $ 0.23 $ 0.45 $ 1.44
============== ============== ==============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS)
<CAPTION>
COMMON
ADDITIONAL STOCK IN
PAR PAID-IN TREASURY
SHARES VALUE CAPITAL DEFICIT AT COST TOTAL
---------- --------- ------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1991............... 14,540 $ 145 $ 141,177 $ (2,780) $ 0 $ 138,542
Stock issuance......................... 1,704 17 13,830 13,847
Net income............................. 18,826 18,826
Dividends declared..................... (21,630) (21,630)
---------- --------- ------------- -------------- ------------ -------------
Balance, December 31, 1991............. 16,244 162 155,007 (5,584) 149,585
Stock (repurchase)..................... (11) (2,110) (2,121)
Net (loss)............................. (64,875) (64,875)
Dividends declared..................... (7,305) (7,305)
---------- --------- ------------- -------------- ------------ -------------
Balance, December 31, 1992............. 16,244 162 154,996 (77,764) (2,110) 75,284
Stock (repurchase...................... (201) (201)
Net (loss)............................. (40,570) (40,570)
Dividends declared..................... (3,565) (3,565)
---------- --------- ------------- -------------- ------------ -------------
Balance, December 31, 1993............. 16,244 $ 162 $ 154,996 $ (121,899) $ (2,311) $ 30,948
========== ========= ============= ============== ============ =============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
ASR INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS)
<CAPTION>
1993 1992 1991
-------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss).................................... $ (40,570) $ (64,875) $ 18,826
Principal noncash charges (credits)
Amortization of premium and discounts on mortgage
instruments...................................... (15,798) (4,342) 2,595
Amortization of discounts on structured financings. 36,911 47,318 14,619
Provision for reserves............................. 20,286 57,133 1,570
Cumulative effect of accounting change............. 21,091 -- --
Increase (decrease) in interest payable............ (243) 373 (298)
Amortization and depreciation...................... 4,671 1,632 2,183
Other.............................................. (3,705) (3,118) 105
-------------- -------------- --------------
Cash Provided By Operations.......................... 22,643 34,121 39,600
-------------- -------------- --------------
INVESTING ACTIVITIES
Net reduction in mortgage instruments and related
assets pledged under structured financings......... 874,735 765,929 383,692
Reduction in mortgage assets -- prospective yield
method............................................. 8,065 8,428 2,950
Purchase of mortgage assets -- prospective yield
method............................................. (4,447) (10,189)
Sale of mortgage assets.............................. 2,587
Increase in other investments........................ (2,435)
(Increase) in deferred hedging costs................. -- (3,709) (455)
(Increase) decrease in restricted cash............... 1,675 (25,981)
-------------- -------------- --------------
Cash Provided By Investing Activities................ 877,593 737,065 386,187
-------------- -------------- --------------
FINANCING ACTIVITIES
Increase (decrease) in notes payable, net............ (22,799) 65,498 --
(Decrease) in short-term borrowings and bank loan.... (61,527) (21,357)
Payment of dividends................................. (3,565) (13,315) (21,582)
Payment of structured financings..................... (868,393) (756,099) (381,818)
Stock issuance (repurchase).......................... (201) (2,110) 300
-------------- -------------- --------------
Cash (Used In) Financing Activities.................. (894,958) (767,553) (424,457)
-------------- -------------- --------------
Cash and cash equivalents
Increase during the year........................... 5,278 3,633 1,330
Balance -- beginning of year....................... 5,129 1,496 166
-------------- -------------- --------------
Balance -- end of year............................. $ 10,407 $ 5,129 $ 1,496
============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for Company's interest..................... $ 5,121 $ 5,859 $ 6,386
============== ============== ==============
Cash paid by mortgage certificates for interest on
structured financings.............................. $ 151,084 $ 212,444 $ 267,144
============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Common stock issued for net assets of acquired
company............................................ $ -- $ -- $ 13,547
============== ============== ==============
See Notes to Consolidated Financial Statements.
</TABLE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in the consolidated financial
statements.
Mortgage Assets and Accounting Change
The Company's mortgage assets consist of (1) mortgage instruments which
include mortgage loans and mortgage certificates (representing interests in
pools of mortgage loans) and (2) mortgage interests which entitle the Company
to receive the excess of the cash flow on pools of mortgage instruments over
the required payments on structured financings which they secure.
Substantially all of the Company's mortgage instruments secure or underlie
various series of structured financings. Structured financings consist of
collateralized mortgage obligations ("CMOs") or multiclass participation
certificates ("MPCs") and are generally payable solely from the principal and
interest payments on the underlying mortgage instruments and are generally
nonrecourse to the Company.
For mortgage assets that do not meet all of the conditions for non-equity
investments specified in EITF Consensus on Issue No. 89-4, "Accounting for a
Purchased Investment in Collateralized Mortgage Obligation Instrument or in a
Mortgage-Backed Interest-Only Certificate" ("EITF 89-4"), the mortgage
instruments are presented separately from the related structured financings.
For mortgage assets that are not impaired, the premiums and discounts on the
mortgage instruments and the structured financings are amortized to income
using the interest method over their stated maturities; the effect of actual
principal prepayments are accounted for in the current period.
Mortgage assets which meet the conditions of EITF 89-4, including interest
only bonds ("IOs"), are stated at their net investment amounts (i.e., net of
the related structured financings) which are amortized over the estimated
lives using the prospective yield method prescribed by EITF 89-4. Under this
method, an effective yield is calculated for each mortgage asset at the
beginning of an accounting period using the then net carrying value (including
an allocated portion of the deferred hedging costs) and the estimated future
net cash flow from the asset. The estimated future net cash flow is
calculated using the current variable interest rates (including the effect of
hedging instruments) and current projected mortgage prepayment rates for the
remaining life of the asset. The calculated effective yield is used to accrue
income on the asset for that accounting period. The actual cash flow received
is first applied to the accrued income and any remaining amount is then used
to reduce the carrying value of the asset.
For all mortgage assets, prior to December 1993, if the estimated future
undiscounted net cash flow of a mortgage asset was less than the net carrying
amount (including an allocated portion of the deferred hedging cost), the
Company ceased to recognize income and recorded a writedown through the
establishment of a reserve or reduced the net carrying value of the asset for
the difference.
In January 1994, the EITF reached a tentative conclusion in Issue 93-18
("EITF 93-18") that Statement of Financial Accounting Standards No. 115,
''Accounting for Certain Investments in Debt and Equity Securities" is
applicable to the mortgage assets. Under FASB Statement 115, if the yield on a
mortgage asset is less than the risk-free yield, the asset should be written
down to its estimated fair value. The Company adopted FASB Statement No. 115
as of December 31, 1993 and further reduced the net carrying value of those
mortgage assets (including the effect of the cost of the hedging instruments)
by $21,091,000. The charge to income is reported as the cumulative effect of a
change in accounting principle. The accounting change resulted in the
reduction in the net carrying value of substantially all of the mortgage
assets. Beginning in 1994, income on those mortgage assets which have been
written down for impairment will also be recognized under the prospective
yield method. At December 31, 1993, the estimated effective yield based on the
carrying value of such mortgage assets was approximately 24%.
Income Taxes
The Company has elected to be taxed as a real estate investment trust
(REIT) under the Internal Revenue Code of 1986, as amended. As a REIT, the
Company must distribute at least 95% of its annual taxable income, including
excess inclusion income, to its stockholders. Accordingly, no provision has
been made for income taxes in the accompanying consolidated financial
statements. (See Note 10)
Earnings Per Share
Earnings per share are computed using the weighted average number of
shares of common stock and common stock equivalents (if dilutive) outstanding
during the year.
Reclassifications
Certain reclassifications have been made to conform the prior years with
the current year presentation.
NOTE 2 -- INVESTMENTS IN MORTGAGE INSTRUMENTS AND STRUCTURED FINANCINGS
The balances of mortgage instruments and related assets pledged under
structured financings as of December 31, 1993 and 1992 were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
MORTGAGE CERTIFICATES STRUCTURED FINANCINGS
---------------------------------------------- ----------------------------------
STATED PRINCIPAL BALANCE PRINCIPAL BALANCE
SERIES TYPE RATE 1993 1992 1993 1992
- -------------------- ---------- ---------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
ASW 45 GNMA I 10.50% $ 9,535 $ 50,587 $ 10,122 $ 52,385
ASW 48 FNMA 8.50 74,306 143,037 81,597 147,406
ASW 50 GNMA I 11.00 32,895 49,520 30,858 46,372
ASW 53 GNMA I 11.00 23,500 36,083 25,501 38,514
ASW 55 GNMA I 11.00 44,423 66,469 44,439 66,492
ASW 56 GNMA I 12.00 39,208 54,808 39,211 54,808
ASW 57 FHLMC 11.00 36,644 55,884 36,646 55,884
ASW 58 FHLMC 11.50 17,883 28,649 17,883 28,649
ASW 60 GNMA I 9.00 90,078 136,507 94,694 140,019
ASW 61 GNMA I 9.00 88,015 135,780 92,936 139,388
ASW 62 GNMA I 10.50 62,209 102,989 65,445 107,453
ASW 63 GNMA I 11.00 52,934 78,602 54,853 81,067
ASW 64 FHLMC 9.50 72,191 134,933 72,169 134,887
ASW 66 GNMA I 9.50 109,111 177,931 115,682 184,747
ASW 67 GNMA I 9.50 92,901 153,926 98,141 159,345
ASW 68 GNMA I 9.50 55,890 91,860 58,625 95,085
Westam 2 GNMA I 9.50 127,837 206,824 134,757 214,829
Westam 4 GNMA I 9.00 157,060 241,913 166,493 248,560
Westam 7 GNMA I 9.50 146,545 249,102 155,685 256,547
---------------- ---------------- ---------------- ----------------
Total principal................. 1,333,165 2,195,404 1,395,737 2,252,437
Net discounts................... (22,643) (37,175) (74,858) (155,247)
Accrued interest................ 11,790 19,448 17,069 26,824
Reserves........................ -- -- 36,980 50,996
Restricted cash................. 79,527 83,099 -- --
---------------- ---------------- ---------------- ----------------
Total......................... 1,401,839 2,260,776 $ 1,374,928 $ 2,175,010
================ ================ ================ ================
Less: Structured financings... (1,374,928) (2,175,010)
---------------- ----------------
Net investment in mortgage
assets.......................... $ 26,911 $ 85,766
================ ================
</TABLE>
Structured financings are generally nonrecourse to the Company. Interest
and principal payments on these obligations are payable solely from the
interest and principal payments received on the mortgage instruments pledged
thereunder. The issue dates, latest maturities and weighted average interest
rates on the structured financings as of December 31, 1993 and 1992 were as
follows:
Weighted Average
Stated Rate
Latest ----------------
Series Issue Date Maturity 1993 1992
- ---------------------------------- ----------- ----------- ------- -------
ASW 45 02/27/87 02/25/17 7.90% 6.03%
ASW 48 06/25/87 09/01/17 8.45 8.38
ASW 50 06/30/87 06/25/17 6.51 6.63
ASW 53 07/30/87 07/25/17 5.22 5.21
ASW 55 10/29/87 10/25/17 5.83 5.77
ASW 56 10/29/87 04/25/16 5.48 5.11
ASW 57 12/22/87 01/20/19 9.63 9.47
ASW 58 12/23/87 01/20/19 6.29 6.10
ASW 60 02/25/88 03/01/18 8.94 8.74
ASW 61 02/24/88 03/01/18 8.88 8.67
ASW 62 03/30/88 04/01/18 7.97 7.72
ASW 63 04/28/88 05/01/18 5.17 5.63
ASW 64 05/26/88 06/17/19 7.51 6.82
ASW 66 06/23/88 07/01/18 8.94 8.06
ASW 67 06/16/88 08/01/18 9.10 8.60
ASW 68 09/29/88 10/01/18 8.15 7.47
Westam 2 05/26/88 06/01/18 9.18 8.89
Westam 4 07/27/88 08/01/18 8.95 8.95
Westam 7 10/20/88 12/01/18 9.31 9.32
----------- ------- -------
Weighted Average Rate 8.34% 8.06%
======= =======
The stated interest rates of the following structured financings are
determined monthly or quarterly based on the following rate calculations,
subject to specified maximum interest rates. The outstanding principal
balances at December 31, were as follows (dollars in thousands):
MAXIMUM
CLASS 1993 1992 RATE CALCULATION RATE
- ---------- --------- --------- ----------------------------------- -------
ASW 45-B $ -- $ 28,968 Three-month LIBOR + 0.60% 12.00%
ASW 50-B 18,919 28,146 Three-month LIBOR + 0.65% 13.00
ASW 53-D 15,714 24,595 Three-month LIBOR + 0.70% 13.00
ASW 55-C 25,062 40,359 One-month LIBOR + 0.80% 12.50
ASW 56-A 14,927 31,574 One-month LIBOR + 0.70% 12.00
ASW 56-B 11,000 11,000 One-month LIBOR + 0.95% 13.00
ASW 57-B 5,010 8,745 One-month LIBOR + 0.85% 13.00
ASW 58-B 9,416 16,588 One-month LIBOR + 0.70% 13.00
ASW 60-A -- 3,564 One-month LIBOR + 1.00% 13.00
ASW 61-C -- 3,179 One-month LIBOR + 0.90% 13.00
ASW 62-B 16,372 36,000 One-month LIBOR + 1.10% 13.00
ASW 63-B 33,003 46,987 One-month LIBOR + 0.85% 13.00
ASW 64-B 15,362 21,786 One-month LIBOR + 0.60% 13.00
ASW 64-F -- 16,163 One-month LIBOR + 0.80% 14.50
ASW 66-E 2,885 24,700 One-month LIBOR + 0.90% 14.50
ASW 68-C 9,616 11,073 COFI + 1.25% 13.00
ASW 68-E -- 18,589 COFI + 1.40% 14.00
--------- ---------
Total $ 177,286 $ 372,016
========= =========
The variable interest rates at December 31 were as follows:
1993 1992
----- -----
One-month LIBOR............................................. 3.25% 3.31%
Three-month LIBOR........................................... 3.38% 3.44%
COFI........................................................ 3.82% 4.51%
Income before provision for impairment on mortgage instruments and related
assets pledged under structured financings consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1993 1992 1991
------------ ------------- -------------
<S> <C> <C> <C>
Interest income....................................... $ 168,408 $ 244,063 $ 307,938
Net amortization of premiums and discounts............ 15,798 4,342 (2,595)
Reinvestment income................................... 1,430 1,581 1,680
------------ ------------- -------------
Total Income........................................ 185,636 249,986 307,023
------------ ------------- -------------
Interest expense...................................... 143,001 205,145 262,104
Amortization of discounts............................. 36,911 47,318 14,619
Bond administration expenses.......................... 1,079 1,125 965
------------ ------------- -------------
Total Expense....................................... 180,991 253,588 277,688
------------ ------------- -------------
Income (loss) on mortgage instruments, net............ $ 4,645 $ (3,602) $ 29,335
============ ============= =============
</TABLE>
At December 31, 1993, the scheduled principal payments based on the
contractual life of the structured financings are presented below. As the
payments are made solely based on the cash receipts from the mortgage
instruments pledged thereto, the actual payments are likely to be higher as a
result of prepayments on the mortgage instruments (dollars in thousands).
1994 $ 85,252
1995 18,125
1996 20,080
1997 22,244
1998 24,641
1,225,395
1999 and thereafter ----------
$1,395,737
Total ==========
NOTE 3 -- MORTGAGE ASSETS -- PROSPECTIVE YIELD METHOD
The net carrying values of the mortgage assets accounted for under the
prospective yield method as of December 31, were as follows (in thousands):
1993 1992
----------- -----------
FHLMC 6....................................... $ 479 $ 1,899
FHLMC 7....................................... 415 1,466
RMA I......................................... -- 510
RMA II........................................ 955 1,011
RMA III....................................... 951 974
RMA IV........................................ 315 1,787
RMA V......................................... 1,493 3,501
RAC 27........................................ -- 146
RAC 28........................................ -- 118
RAC 45........................................ -- 110
RAC 56........................................ -- 68
ML Trust 15................................... 690 1,014
FBC Trust 7A.................................. 633 1,075
FBC Trust 7B.................................. 553 799
TIMCO 86-B.................................... 216 507
CMIT 6 IO..................................... 667 1,518
Paine Webber 0................................ 1,634 1,051
Mortgage Capital Trust IA..................... 1,659 --
Santa Barbara II Trust 1...................... 310 520
----------- -----------
Total....................................... $ 10,970 $ 18,074
=========== ===========
At December 31, 1993, the mortgage assets entitle the Company to the right
to receive the excess of the interest income on $516,699,000 of mortgage
instruments with a weighted average stated rate of 9.34% over the interest
expense on a similar amount of structured financings with a weighted average
stated rate of 8.20%. At December 31, 1992, the mortgage assets entitle the
Company to the right to receive the excess of the interest income on
$630,369,000 of mortgage instruments having a weighted average stated rate of
9.16% over the interest expense on a similar amount of structured financings
having a weighted average stated rate of 7.55%.
The interest rate on a portion of the structured financings related to the
mortgage assets is determined monthly or quarterly based on the following rate
calculations, subject to specified maximum interest rates. The Company's share
of the variable-rate structured financings at December 31, were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
MAXIMUM
1993 1992 RATE CALCULATION RATE
----------- ------------ ----------------------------------------------- -----------
<S> <C> <C> <C> <C>
FHLMC 6A $ -- $ 16,273 One-month LIBOR + 0.80% 14.00%
FHLMC 6D 3,307 4,115 One-month LIBOR + 0.60% 12.75%
FHLMC 7A -- 8,549 One-month LIBOR + 0.80% 14.50%
FHLMC 7D 757 3,229 One-month LIBOR + 0.40% 12.00%
FHLMC 14D -- 3,738 COFI + 1.25% 16.00%
RMA I-B -- 377 Three-month LIBOR + 0.35% 11.00%
RMA I-D 14,552 26,800 Three-month LIBOR + 0.60% 13.00%
RMA I-E 7,732 14,240 21.975% minus (1.8x three-month LIBOR) 21.89%
RMA III-D 5,002 8,207 Three-month LIBOR + 0.55% 12.50%
RMA IV-A 7,001 17,208 One-month LIBOR + 0.65% 11.50%
RMA V-A 14,240 19,257 Three-month LIBOR + 0.80% 12.75%
ML 15A 6,537 9,864 Three-month LIBOR + 0.50% 11.00%
SBA II-1 2,307 4,405 Three-month LIBOR + 0.65% 13.00%
FBC 7A-1 5,299 8,512 Three-month LIBOR + 0.50% 11.50%
FBC 7B-1 5,741 7,706 Three-month LIBOR + 0.40% 11.25%
MCT IA 11,325 -- Three-month LIBOR + 0.60% 12.40%
----------- ------------
Total $ 83,800 $ 152,480
=========== ============
</TABLE>
NOTE 4 -- HEDGING TRANSACTIONS
The Company has purchased interest rate cap agreements to hedge against
the effect of increases in LIBOR on its operating results. At December 31,
1993, the Company had purchased a LIBOR rate cap of 5.5% for 1994 on
approximately $240,000,000. In addition, the Company has used Eurodollar
futures contracts to fix the Company's three-month LIBOR rate for 1995 on
approximately $85,000,000. In connection with the adoption of FASB Statement
115 as discussed in Note 1, the Company included the unrealized loss on the
futures contracts in the cumulative effect of a change in accounting
principle. Accordingly, those futures contracts have the effect of fixing the
Company's three-month LIBOR rate for financial accounting purposes at
approximately 5% for 1995.
NOTE 5 -- NOTES PAYABLE
On May 28, 1992, a wholly owned limited-purpose subsidiary of the Company
issued $80,000,000 of Secured Notes ("Notes") under an indenture ("Indenture")
to a group of institutional investors. The Notes bear a fixed interest rate of
9.02% per year. Principal repayments are $2,097,222 per quarter. The Notes are
collateralized by all of the mortgage assets of the subsidiary and funds held
by the trustee (including the reserve fund and the collection account).
Under the Indenture, the excess, if any, of the income portion of the cash
flow from the collateral pledged (determined on the Federal income tax basis)
over the interest and other expenses on the Note is remitted to the Company.
The principal portion of the cash flow (total cash flow in excess of the
income portion) is used to make the scheduled principal and interest payments,
if necessary. Depending on the level of certain specified financial ratios
relating to the collateral, any remaining principal portion of the cash flow
over the scheduled principal payment is required to either prepay the Notes at
par, increase the reserve up to its $20 million maximum, or is remitted to the
Company for its unrestricted use. In 1993, the reserve fund reached its
maximum specified balance of $20,000,000. The reserve fund is used to make the
scheduled principal and interest payments on the Notes if the cash flow
available from the collateral is not sufficient to make the scheduled
payments.
Certain information relating to the notes payable was as follows (dollars
in thousands):
<TABLE>
<CAPTION>
At December 31:
1993 1992
------------ -------------
<S> <C> <C>
Amount outstanding................................................. $ 42,699 $ 65,498
Stated interest rate............................................... 9.02% 9.02%
Net carrying value of collateral pledged (including funds held by
trustee of $24,306 and $25,981).................................. $ 54,459 $ 115,112
<CAPTION>
For the year ended December 31:
1993 1992
------------ -------------
<S> <C> <C>
Maximum amount outstanding at any month-end........................ $ 65,498 $ 80,000
Average amount outstanding......................................... $ 55,532 $ 46,256
Average effective interest rate.................................... 10.04% 9.81%
</TABLE>
Amortization of deferred loan cost (including the cost of the bank loan)
for 1993, 1992 and 1991 amounted to $1,075,000, $762,000 and $507,000,
respectively.
NOTE 6 -- BANK LOAN AND SHORT-TERM BORROWING
On May 28, 1992, the Company used the proceeds from the Notes issuance to
pay off its bank loan and short-term borrowing. Certain information relating
to the bank loan and short-term borrowing was as follows (dollars in
thousands):
<TABLE>
<CAPTION>
For the years ended December 31:
1992 1991
------------ ------------
<S> <C> <C>
Maximum amount outstanding at any month-end......................... $ 63,181 $ 86,096
Average amount outstanding.......................................... $ 22,409 $ 74,951
Average effective interest rate..................................... 7.97% 8.80%
</TABLE>
NOTE 7 -- STOCK OPTION PLANS
The Company has two stock option plans which are administered by the Board
of Directors. The purpose of the plans is to provide a means of performance
based compensation to attract and retain directors and key personnel.
Under the plans, options to acquire a maximum of 700,000 shares of the
Company's common stock may be granted at an exercise price not less than the
fair market value of the stock. Prior to December 1992, optionholders
received, at no additional cost, dividend equivalent rights (DERs) which
entitle them to receive, upon exercise of the options, additional shares
calculated according to a formula using dividends declared and the market
price during the option period. The options expire ten years after the date of
grant. Upon exercise of the options, the Company can elect to distribute cash
in lieu of shares in an amount equal to the then current fair market value of
the DERs in the case of the qualified plan and the excess of the market value
of the shares issuable on exercise over the total exercise price in the case
of the nonqualified plan.
During 1993 and 1992, the Company repurchased at $5.72-$9 per share 7,138
and 136,359 shares, respectively, that were issued upon exercise of options in
1991.
Information on stock options granted and the related DERs earned is
summarized below:
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
------------- ---------------
<S> <C> <C>
Outstanding at December 31, 1990................................ 313,790
Options granted................................................. 125,000 $5.25
DERs earned..................................................... 67,568
Options and DERs exercised...................................... (158,294) $3.63-$5.25
-------------
Outstanding at December 31, 1991................................ 348,064 $3.63-$5.25
Options granted................................................. 276,716 $2.63
DERs earned..................................................... 31,741
Options and DERs canceled....................................... (205,862) $3.63-$4.50
-------------
Outstanding at December 31, 1992................................ 450,659 $2.63-$5.25
Options granted................................................. 16,046 $1.63-$2.19
-------------
Outstanding at December 31, 1993................................ 466,705 $1.63-$5.25
=============
</TABLE>
Options to purchase 424,480 shares (including 47,523 shares of DERs) were
exercisable at December 31, 1993.
NOTE 8 -- OPERATING EXPENSES
Related Party Transactions
Subject to the supervision of the Company's Board of Directors, Pima
Mortgage Limited Partnership (formerly known as ASMA Mortgage Advisors Limited
Partnership, the "Manager"), an Arizona limited partnership, manages the day-
to-day operations of the Company pursuant to a management agreement which has
a current term through December 31, 1994. Pursuant to the agreement, the
Manager receives a base management fee of 3/8 of 1% per annum of the Company's
average invested assets (net of structured financings). In addition, prior to
1994, the Manager was entitled to receive an incentive management fee equal to
25% of the amount by which the Company's annualized return on equity (based on
taxable income before net operating loss deductions and before deduction of
stock issuance costs) exceeds the ten-year U.S. Treasury rate plus 1%. In
December 1993, in connection with the renewal of the management agreement, the
Company and the Manager agreed to eliminate the incentive management fee
provision and the Company granted to the Manager non-qualified options to
purchase 1,549,000 shares of common stock and 451,000 shares of stock
appreciation rights ("SARs") with an exercise price of $1.72 per share. The
exercise price is 10% above the closing market price of the common stock on
the grant date. The exercise price will be reduced by the per share amount of
any dividends paid on the common stock during the period in which the options
and SARs are outstanding. One-third of the options and SARs are immediately
exercisable; one-third are exercisable one year after the grant; and the
remainder are exercisable two years after the grant. The options and SARs
expire five years after the date of grant.
Under the management agreement, the Manager must reimburse the Company for
any management fees received for the year to the extent that the operating
expenses (as defined) for the year exceed the greater of 2% of the Company's
average invested assets or 25% of its net income (as defined), unless the
unaffiliated directors determine that a higher level of expenses is justified
for such year. Additionally, if this agreement is terminated without cause
(as defined) or not renewed on terms as favorable to the Manager, the Manager
will be entitled to receive, for a three-year period, the management fees
relating to the invested assets purchased prior to the termination date, which
would have been payable had the agreement remained in effect.
The management fees for 1993, 1992 and 1991 were as follows (in
thousands):
1993 1992 1991
---- ---- ------
Base fee.................................................. $605 $812 $ 842
Incentive fee............................................. -- 30 2,704
---- ---- ------
Total................................................... $605 $842 $3,546
==== ==== ======
The Manager also performs certain analyses and other services in
connection with the issuance and administration of structured financings
related to the Company's mortgage assets. For such services, the Company paid
the Manager fees amounting $260,000 for 1993, $244,000 for 1992 and $220,000
for 1991 plus reimbursed costs.
Operating Expenses
Operating expenses for 1993 have been reduced by $470,000 as a result of
the reimbursement received from the insurance carriers for legal fees incurred
in defending the Company in the previously disclosed class action lawsuit.
Operating expenses for 1992 were reduced by $400,000 as a result of the
reversal of deferred compensation expense on stock options.
NOTE 9 -- SUBSEQUENT EVENT
On January 12, 1994, the Company acquired seventeen apartment complexes
located in Tucson, Arizona, Albuquerque, New Mexico and Houston, Texas. The
purchase price, including closing costs, was approximately $61,600,000. The
purchase was financed by a combination of new mortgage loans and the
assumption of existing mortgage loans totalling $45,700,000, seller carryback
financing of $6,500,000 and cash of approximately $9,400,000. The mortgage
loans bear fixed interest rates ranging from 7.5% to 10.1% and generally have
a ten-year term.
NOTE 10 -- TAXABLE INCOME (LOSS)
All of the dividends for 1993, 1992 and 1991 constitute ordinary income.
During these years, the Company had excess inclusion income from the residual
interest in certain real estate mortgage investment conduits ("REMICs") which
cannot be offset by operating losses and deductions from other sources. Under
the current tax law for REITs, excess inclusion income is required to be
distributed as dividends. Excluding the effect of excess inclusion income, the
Company had an estimated taxable loss of $45,000,000 in 1993 which can be
carried forward to offset ordinary income other than excess inclusion income
for 15 years.
In accordance with Statement of Financial Accounting Standards 109
disclosure requirements, at December 31, 1993, the tax basis of the Company's
total mortgage assets (net of structured financings) exceeded their net
carrying value by approximately $36,000,000.
The net income (loss) reported in the accompanying consolidated financial
statements is different than the taxable (loss) income due to the reporting of
some income and expense items in different periods for income tax purposes.
The difference consists primarily of (1) amortization of premium and discount
on mortgage instruments and structured financings; (2) income recognition of
mortgage assets accounted for under the prospective yield method; (3) reserves
on mortgage assets which are not currently deductible; and (4) excess
inclusion income for tax purposes. These timing differences will reverse in
future years.
The taxable loss for 1993 is subject to change when the Company prepares
and files its income tax returns. The taxable loss amounts also are subject to
adjustments, if any, resulting from audits of the Company's tax returns by the
Internal Revenue Service (the "IRS").
In March 1994, following a routine audit of the Company by the IRS for
1989, 1990 and 1991, the IRS sent to the Company a proposed adjustment (the
"Proposed Adjustment") of taxes due of $13,834,000. The IRS claims that the
Company did not comply with the legal requirements of Regulation Section
1.857-8 under the Internal Revenue Code with respect to the demand for certain
shareholder information and, thus, failed to qualify as a real estate
investment trust for those years. The Company believes that it has met the
requirements under the Internal Revenue Code and that the IRS's position is
without merit. The Company intends to vigorously defend its position.
Accordingly, the Company has made no provision for this uncertainty in the
accompanying consolidated financial statements.
NOTE 11 -- ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." Although management
uses its best judgment in estimating the fair value of these financial
instruments, there are inherent limitations in any estimation technique.
Therefore, the fair value estimates presented herein are not necessarily
indicative of the amounts which the Company could realize on a current
transaction.
Mortgage Instruments and Structured Financings (Mortgage Assets)
The mortgage instruments collateralize the structured financings and
cannot be sold or otherwise be disposed of so long as the structured
financings are outstanding. The Company cannot cause an early redemption of
the structured financings directly or indirectly, except in limited and
specified conditions. As of December 31, 1993, the mortgage assets had an
aggregate net carrying value (i.e., net of structured financings) of
$37,881,000 and an aggregate estimated fair value of $35,215,000. This
estimate is made based on the present value of the estimated net cash flows
from the mortgage assets.
The mortgage assets are not actively traded. The fair values of similar
mortgage assets generally are dependent upon two primary factors: (a) the
characteristics of the estimated cash flow from the mortgage assets and
(b) the discount rate used to calculate the present value of the estimated
cash flow. Generally, the characteristics of the estimated cash flow are
influenced by (1) the type, stated interest rate, age and credit
characteristics of the mortgage instruments underlying the structured
financings; and (2) the repayment schedule, stated interest rate, amount of
the exposure to variable interest rates, and the scheduled and optional
redemption provisions of each of the classes of the structured financing. The
discount rate used to calculate the present value of the estimated cash flow
is influenced by (1) the characteristics of the estimated cash flow,
(2) income tax characteristics of the mortgage asset, (3) market factors, such
as supply and demand conditions, and (4) interest rate expectations.
The estimated fair value of other financial instruments as of December 31,
1993 was as follows (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
AMOUNT VALUE
------------ -------------
<S> <C> <C>
Restricted and unrestricted cash and cash equivalents.............. $ 34,713 $ 34,713
Hedging instruments................................................ 508 508
Notes payable...................................................... 42,699 44,800
Interest payable and other liabilities............................. 4,727 4,727
</TABLE>
1. Restricted and unrestricted cash and cash equivalents, interest payable
and other liabilities -- The carrying values of these items are a reasonable
estimate of their fair values.
2. Hedging instruments -- The estimated fair value is based on quoted
market price or dealer quotes.
3. Notes payable -- Interest rates that are currently available to the
Company for issuance of debt with similar terms and remaining maturities are
used to estimate fair value of the notes which are not quoted on an exchange.
NOTE 12 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands Except Per Share Amounts)
TOTAL NET NET INCOME
INCOME INCOME (LOSS) DIVIDEND
1993 (LOSS) (LOSS) PER SHARE PER SHARE
-------------- ------------- ------------- -------------- ------------
$
First $ (9,069) $ (11,174) $(0.72) --
Second (1,126) (2,877) (0.19) --
Third 530 (1,320) (0.09) 0.05
Fourth (2,288) (25,199) (1.62) 0.18
1992
--------------
First $ 4,947 $ 2,815 $ 0.17 $0.25
Second (5,222) (7,560) (0.47) 0.20
Third (36,543) (38,732) (2.41) --
Fourth (18,628) (21,398) (1.36) --
1991
--------------
First $ 8,459 $ 5,071 $ 0.35 $0.35
Second 7,505 4,156 0.28 0.35
Third 7,469 4,556 0.31 0.37
Fourth 8,342 5,043 0.32 0.37
NOTE 13 -- OTHER CASH FLOW INFORMATION (UNAUDITED)
The Company derives substantially all of its cash flow from the excess
cash flow on the mortgage assets ("Net Cash Flows"). The amount of the Net
Cash Flows depends primarily on the factors described under "Assumptions"
below. At December 31, 1993, the net carrying value of the mortgage assets was
as follows (in thousands):
Mortgage assets associated with LIBOR-based
structured financings......................................... $ 32,285
Mortgage assets associated with fixed-rate or
COFI-based structured financings.............................. 5,596
-----------
Total.......................................................... $ 37,881
===========
The Net Cash Flows have been calculated based on the factors set forth
under "Assumptions." The calculated Net Cash Flows are not intended to predict
the Net Cash Flows to be received or income to be recognized by the Company or
to represent amounts that will be available for distribution as dividends to
stockholders. The calculated Net Cash Flows also do not reflect the required
principal repayments and interest expenses incurred by the Company on its
notes payable, hedging costs, operating expenses, other asset acquisitions by
the Company, various market conditions or other factors which could materially
affect the Net Cash Flows.
The interest rate and prepayment assumptions used herein do not purport to
represent the Company's expectation of the interest rates and prepayment rates
that may occur. There will be differences between the calculated Net Cash
Flows and the actual Net Cash Flows received by the Company as the actual
factors will be different than those set forth in the assumptions, and such
differences may be material.
Assumptions
1. Interest rates -- The assumed interest rates relating to the variable
rate structured financings associated with the Company's mortgage assets are
as follows:
<TABLE>
<CAPTION>
Case 1 Case 2 Case 3 Case 4 Case 5 Case 6
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1 Month LIBOR........ 2.25% 2.25% 3.25% 5.25% 5.25% 3.25%
3 Month LIBOR........ 2.38% 2.38% 3.38% 5.38% 5.38% 3.38%
COFI................. 3.02% 3.02% 3.82% 5.42% 5.42% 3.82%
</TABLE>
The interest rate assumptions under Cases 3 and 6 are based on the actual
interest rates on December 31, 1993.
2. Prepayments -- Prepayments on mortgage instruments commonly are
measured by a prepayment standard or model. The model used herein (the
"Prepayment Assumption Model") is based on an assumed per annum rate of
prepayment each month of the unpaid principal amount of a pool of new mortgage
loans. For mortgage instruments that have been outstanding for more than
thirty months, 100% of the Prepayment Assumption Model assumes a constant
prepayment rate of 6% per annum. All of the mortgage instruments underlying
the Company's investments have been outstanding for more than thirty months as
of December 31, 1993.
For the Net Cash Flows for Cases 1 to 5, the assumed prepayment rates are
used in the following manner. The actual rates are used for January, 1994. The
average of the estimates prepared by two investment banks for February through
June 1994, as indicated in the following table, are used for those months. The
prepayment rates are then assumed to change ratably from those estimates to
the rates indicated in the following table (terminal rates) over the third and
fourth quarters of 1994, and then remain at these terminal rates thereafter.
As a result, the assumed prepayment rates for 1994 are substantially higher
than the terminal rates indicated in the following table.
For Case 6, the actual rates are used for January, 1994 and then the rates
indicated for Case 6 in the following table are used thereafter.
The percentage of the Prepayment Assumption Model used in calculating the
Net Cash Flows is as follows:
PERCENT OF PREPAYMENT ASSUMPTION (%)
------------------------------------------
FEB-JUNE
COUPON 1994
MORTGAGE RATE CASES 1- CASES
COLLATERIAL (%) 5 CASE 1 2, 3 & 4 CASE 5 CASE 6
- -------------------------- ------ -------- ------ -------- ------ ------
FHLMC..................... 9.00% 770 612 469 250 469
FHLMC..................... 9.50 712 585 470 276 470
FHLMC..................... 10.50 544 546 460 319 460
FHLMC..................... 11.00 528 530 445 321 445
FHLMC..................... 11.50 528 525 441 326 441
FNMA...................... 8.00 813 805 485 214 485
FNMA...................... 8.50 841 695 470 217 470
GNMA...................... 8.00 655 517 295 132 295
GNMA...................... 9.00 748 568 402 191 402
GNMA...................... 9.50 669 536 408 204 408
GNMA...................... 10.00 539 514 405 219 405
GNMA...................... 10.50 568 473 385 238 385
GNMA...................... 11.00 557 465 375 246 375
GNMA...................... 11.50 530 416 335 227 335
GNMA...................... 12.00 526 416 335 232 335
PRIVATE/SEC............... 9.50 712 585 470 276 470
WHL./LOANS................ 9.00 770 612 469 250 469
WHL./LOANS................ 9.50 712 585 470 276 470
The prepayment assumptions for Case 6 are the averages of the prepayment
estimates of a number of major securities dealers as published by Knight-
Ridder on December 31, 1993.
3. Maturity -- Each class within the structured financings is assumed to
remain outstanding beyond its optional redemption date until its expected
maturity.
4. Reinvestment income -- Principal and interest payments on the mortgage
instruments are collected by a trustee and are reinvested until they are
needed for the principal and interest payments on the structured financings at
an assumed reinvestment rate equal to the assumed LIBOR rate minus 0.25% in
each case or at the rate specified in the applicable guaranteed investment
contracts. For the mortgage assets associated with the structured financings
issued by FHLMC, the Company receives no reinvestment income.
5. Administrative expenses -- An expense reserve fund is established for
certain series of structured financings. Deposits to the reserve funds are
made on bond payment dates based on .04% to .09% per annum of the outstanding
structured financing balances. Withdrawals from the reserve funds are made to
pay the administrative expenses as described below. Any balance remaining in
the reserve funds after full repayment of the structured financings is
distributed to the Company. There are no administrative expenses for
structured financings issued by FHLMC.
Trustee's fees -- 0.008% to 0.10% per year of the outstanding balances,
subject to minimum amounts of up to $5,000 per year per series.
Accounting and legal fees -- Range from $3,000 to $10,000 per year per
series of structured financings, some of which are increased at an annual
rate of 1.8125% below one-month LIBOR rate.
Administrator's fees -- Range from $0 to $20,000 per year per series of
structured financings.
6. Net Cash Flow distribution dates -- The Net Cash Flow is assumed to be
distributed to the Company immediately following the payment dates for each
series of financings.
Net Cash Flow Tables
Below are the Net Cash Flow amounts calculated based on the assumptions
described above (in thousands):
TOTAL MORTGAGE ASSETS
----------------------------------------------------------
YEAR CASE 1 CASE 2 CASE 3 CASE 4 CASE 5 CASE 6
- ------------------ -------- -------- -------- -------- -------- --------
1994 $ 21,627 $ 21,636 $ 20,444 $ 18,080 $ 18,048 $ 21,270
1995 13,086 13,822 12,868 10,961 11,562 14,718
1996 8,209 9,589 8,980 7,785 9,309 10,312
1997 5,364 6,642 6,264 5,519 7,465 7,123
1998 3,944 4,834 4,590 4,106 5,980 5,081
1999 2,792 3,742 3,592 3,295 4,856 3,946
2000 3,399 2,590 2,507 2,342 3,963 2,856
2001 2,210 1,796 1,752 1,665 3,290 1,984
2002 1,418 1,321 1,285 1,242 2,781 1,440
2003 893 2,432 2,468 2,511 2,207 1,792
2004-2008 746 5,596 5,640 5,714 7,638 6,879
2009-2013 (1,752) (285) (56) 399 7,455 346
2014-2018 (2,029) (1,545) (987) 1,246 5,614 (712)
-------- -------- -------- -------- -------- --------
Total........... $ 59,907 $ 72,170 $ 69,347 $ 64,865 $ 90,168 $ 77,035
======== ======== ======== ======== ======== ========
PRESENT VALUE OF CALCULATED NET CASH FLOWS
The table below sets forth the present value, on a semi-annual equivalent
basis as of December 31, 1993, of the calculated Net Cash Flows using the
indicated discount rates. The present value of the calculated Net Cash Flows
are not necessarily indicative of the amounts which the Company could realize
on a current transaction. (In thousands.)
TOTAL MORTGAGE ASSETS
DISCOUNT --------------------------------------------------------
RATE (%) CASE 1 CASE 2 CASE 3 CASE 4 CASE 5 CASE 6
- -------------------- -------- -------- -------- -------- ------- -------
0% $59,907 $72,170 $69,347 $64,865 $90,168 $77,035
5% 54,781 62,684 59,689 54,054 68,733 65,791
10% 49,828 55,345 52,457 46,811 56,422 57,569
15% 45,533 49,643 46,934 41,580 48,456 51,359
20% 41,912 45,132 42,607 37,601 42,828 46,515
25% 38,865 41,486 39,131 34,459 38,594 42,632
30% 36,284 38,476 36,275 31,906 35,267 39,442
35% 34,076 35,948 33,883 29,783 32,568 36,769
40% 32,167 33,790 31,845 27,984 30,327 34,492
MORTGAGE ASSETS ASSOCIATED WITH
LIBOR-BASED STRUCTURED FINANCINGS
DISCOUNT --------------------------------------------------------
RATE CASE 1 CASE 2 CASE 3 CASE 4 CASE 5 CASE 6
- -------------------- -------- -------- -------- -------- ------- -------
0% $53,133 $63,451 $59,840 $53,112 $71,950 $66,207
5% 47,657 54,301 50,890 44,206 55,302 56,024
10% 42,984 47,622 44,461 38,177 45,561 48,795
15% 39,124 42,586 39,666 33,836 39,204 43,432
20% 35,941 38,663 35,959 30,554 34,693 39,292
25% 33,292 35,517 33,003 27,976 31,290 35,991
30% 31,060 32,930 30,583 25,888 28,608 33,287
35% 29,156 30,760 28,559 24,156 26,427 31,024
40% 27,512 28,908 26,835 22,690 24,612 29,095
MORTGAGE ASSETS ASSOCIATED WITH
FIXED-RATE OR COFI-BASED STRUCTURED FINANCINGS
DISCOUNT --------------------------------------------------------
RATE CASE 1 CASE 2 CASE 3 CASE 4 CASE 5 CASE 6
- -------------------- -------- -------- -------- -------- ------- -------
0% $6,774 $8,719 $9,507 $11,753 $18,218 $10,828
5% 7,124 8,383 8,799 9,848 13,431 9,767
10% 6,844 7,723 7,996 8,634 10,861 8,774
15% 6,409 7,057 7,268 7,744 9,252 7,927
20% 5,971 6,469 6,648 7,047 8,135 7,223
25% 5,573 5,969 6,128 6,483 7,304 6,641
30% 5,224 5,546 5,692 6,018 6,659 6,155
35% 4,920 5,188 5,324 5,627 6,141 5,745
40% 4,655 4,882 5,010 5,294 5,715 5,397
<TABLE>
EXHIBIT 11
ASR INVESTMENTS CORP.
CALCULATION OF EARNING PER SHARE
FOR THE QUARTER AND YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
<CAPTION>
AVERAGE JAN FEB MARCH APRIL MAY JUNE JULY AUGUST SEPT OCT NOV DEC
------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of average
common shares
outstanding 15,522 15,593 15,579 15,531 15,507 15,507 15,507 15,507 15,507 15,507 15,507 15,507 15,500
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Fourth quarter
average outstanding
shares for earning
per share........... 15,505
======
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
CIMSA Financial Corporation........................... Arizona
ASR Finance Corporation............................... Arizona
ASR Mortgage Acceptance, Inc.......................... Arizona
Residential Mortgage Acceptance, Inc.................. Delaware
ASR Properties, Inc................................... Arizona
ASV -- II Properties, Inc............................. Arizona
ASV -- XVII Properties, Inc........................... Arizona
