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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9360
ASSET INVESTORS CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 84-1038736
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3600 South Yosemite Street, Suite 350 80237
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
(303) 793-2703
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Common Stock,
par value $.01 per share New York Stock Exchange, Inc.
(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 February 28, 1997, 24,843,345 shares of Asset Investors Corporation Common
Stock were outstanding, and the aggregate market value of the shares (based upon
the closing price of the common stock on that date as reported on the New York
Stock Exchange, Inc.) held by non-affiliates was approximately $80,000,000.
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ASSET INVESTORS CORPORATION AND SUBSIDIARIES
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
Part I PAGE
ITEM 1. BUSINESS
(a) General Development of Business........................... 1
(b) Narrative Description of Business......................... 2
ITEM 2. PROPERTIES....................................................... 9
ITEM 3. LEGAL PROCEEDINGS................................................ 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.......................................................... 9
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREOWNER MATTERS....................................... 10
ITEM 6. SELECTED FINANCIAL DATA.......................................... 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 12
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA............................................... F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE........................... 21
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT....................................................... 21
ITEM 11. EXECUTIVE COMPENSATION........................................... 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................................ 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 27
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.......................................... 28
SIGNATURES.................................................................. 32
(i)
PART I
Item 1. BUSINESS.
(a) General Development of Business.
Asset Investors Corporation (the "Company") is a real estate investment
trust ("REIT") that was incorporated under Maryland law in 1986. Its shares of
Common Stock, par value $.01 per share, are listed on the New York Stock
Exchange ("NYSE") under the symbol "AIC." As of December 31, 1996, the Company
owned debt interests in residential mortgage loan securitizations collateralized
by pools of non-conforming (non-agency guaranteed) single-family (one- to
four-unit) mortgage loans ("non-agency MBS bonds") and owned 27% of the common
stock of Commercial Assets, Inc. (American Stock Exchange, Inc.: CAX)
("Commercial Assets"). Commercial Assets is a publicly-traded REIT formed by the
Company in August 1993 under Maryland law.
The Company operates in a manner that permits it to qualify for the
income tax treatment accorded to a REIT as defined under the Internal Revenue
Code of 1986, as amended (the "Code"). Accordingly, the Company's taxable income
("REIT income") is not subject to state or federal income tax at the corporate
level. In order to maintain its REIT status, the Company is required, among
other things, to distribute annually (as determined under the Code) to its
shareowners at least 95% of its REIT income, prior to the "dividends paid
deduction," and to meet certain asset, income and stock ownership tests.
The Company's asset acquisition and other policies are determined by
its Board of Directors. The Company's By-laws, as amended, require that a
specified number of the Board of Directors and each committee thereof be
comprised of persons constituting Independent Directors. Pursuant to the
Company's By-laws, an Independent Director is a person "who is not affiliated,
directly or indirectly, with the person or entity responsible for directing or
performing the day-to-day business affairs of the corporation (the "advisor"),
including a person or entity to which the advisor subcontracts substantially all
of such functions, whether by ownership of, ownership interest in, employment
by, any material business or professional relationship with, or by serving as an
officer of the advisor or an affiliated business entity of the advisor."
The Company's day-to-day operations are performed by Financial Asset
Management LLC (the "Manager"), pursuant to a management agreement (the
"Management Agreement") which is extended annually subject to the approval of a
majority of the Independent Directors. The Manager is subject to the supervision
of the Board of Directors. As part of its duties, the Manager presents the
Company with asset acquisition opportunities consistent with the policies and
objectives of the Company and furnishes the Board of Directors with information
concerning the acquisition, holding and disposition of assets. The Company has
no employees. Certain employees of the Manager have been designated as officers
of the Company.
Multi-Step Plan to Maximize Shareowner Value - In February 1997, the
Board of Directors adopted a multi-step plan (the "1997 Plan") to restructure
the Company's asset base and redeploy its assets in order to reduce risk
associated with the Company's non-agency MBS bond portfolio and maximize
long-term, risk-adjusted returns to shareholders. Under the first step of the
1997 Plan, the Company expects to contribute its portfolio of non-agency MBS
bonds into a structured transaction in which the Company will retain a small
equity interest. The Company plans to reinvest the cash proceeds from the
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structured transaction in real estate, a step which would likely reduce its
return on assets from 1996 levels, shift the Company's strategic emphasis to
achieving capital appreciation, and also reduce the risk borne by the Company in
its portfolio.
In addition, the 1997 Plan anticipates converting the Company to an
umbrella partnership real estate investment trust ("UPREIT"). The Company would
contribute certain of the Company's assets to an operating partnership while
retaining the general partner's interest. The Company anticipates that the
operating partnership will facilitate the future acquisition of real estate.
The 1997 Plan also provides for consideration of the Company's
acquisition of its Manager, a step which would result in the Company becoming
self-managed and fully integrated. A special committee of Independent Directors
has been established to evaluate this acquisition.
(b) Narrative Description of Business.
The Company seeks to: (i) generate cash flow in order to make
distributions to its shareowners; (ii) enable its shareowners to participate in
the market for real estate assets; and (iii) enhance stockholders' equity. There
can be no assurance that the Company will achieve any or all of these
objectives.
The discussion below describes the principal categories of assets which
the Company owned at December 31, 1996.
Non-Agency MBS Bonds - In late April 1994, the Company began acquiring
unrated credit support debt interests in non-conforming residential mortgage
loan securitizations known as "non-agency MBS bonds." Residential mortgage loan
securitization is the process of accumulating a specific group of mortgage loans
on residential (one- to four-unit) properties and structuring the monthly
principal and interest payments received from the owners of the properties
securing these mortgage loans into new multi-class debt instruments.
Non-agency MBS bonds are collateralized by mortgage loans that do not
meet Government National Mortgage Association ("GNMA"), Federal National
Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("FHLMC") guarantee standards, typically because the mortgage loans are so
called "jumbo" loans that exceed agency size limits (e.g., currently $214,600)
or because the borrower does not meet other agency credit underwriting criteria
(a "non-conforming mortgage loan"). If a borrower defaults on a mortgage loan
which is pledged as collateral for a residential mortgage loan securitization
and the proceeds of the foreclosure sale of the property securing the mortgage
loan are less than the unpaid balance of the mortgage, "foreclosure costs"
(necessary repair and maintenance costs during the foreclosure period, brokerage
fees, legal fees, taxes and insurance, net of proceeds from mortgage insurance,
if any) and interest advances, the holder of the non-conforming mortgage loan
suffers a loss. The loss would equal the unpaid principal balance plus
foreclosure costs and interest advances, net of proceeds from the foreclosure
sale and loss indemnifications, if any. Conversely, the holder of an
agency-guaranteed mortgage loan virtually is assured of full payment of
principal and interest because of the agency guarantee.
Because of credit risk, a securitization of non-conforming mortgage
loans requires some form of credit enhancement. One type of credit enhancement
commonly provided is through a "senior-subordinate" structure, where the
subordinate classes (or tranches) of the non-conforming residential mortgage
loan securitization provide credit protection to the senior classes by absorbing
the first losses from loan defaults or foreclosures. Based on the structure of
the non-conforming mortgage loan securitization, the cash flow (principal and
interest) from the non-conforming mortgage loans is allocated first to the
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senior bond classes and then to the subordinated bond classes. The senior class
consists of securities that may be rated from low investment grade "BBB" to
higher investment grades "A" through "AAA." The subordinated class typically
would be the lower rated, non-investment grade ("BB" and "B") and the unrated,
credit support bond class (which generally incurs the first losses). The Company
has acquired the subordinate bond classes which, while offering the potential of
a substantially higher yield than the more senior classes, have the greatest
credit risk. Such bond classes are considered to be speculative and are subject
to special risks, including a substantially greater risk of loss of principal
and non-payment of interest than the more senior, rated classes.
The principal of, and interest on, the non-conforming mortgage loans
which comprise the mortgage collateral for the non-agency MBS bonds may be
allocated among the classes of MBS bonds in many ways. The Company's right to
distributions of principal and interest is subordinated to all the more senior
classes of the non-agency MBS bond issuance. Furthermore, as the holder of the
credit support non-agency MBS bond class, the Company generally would not
receive any prepayments of principal from the non-conforming mortgage loans
which comprise the mortgage collateral for a period of at least five years from
the date of issuance.
Despite credit underwriting of the non-conforming mortgage loans by
mortgage originators, the nationally recognized credit rating agencies generally
are unwilling to give favorable ratings to classes of non-conforming mortgage
loan securitizations unless these classes have the benefit of credit
enhancement. An unrated credit support class absorbs the first losses when
homeowners default on their mortgage loans. Therefore, the inclusion of the
unrated credit support class in a non-conforming mortgage loan securitization
enables the rating agencies to rate the more senior bond classes.
Yield Considerations on Non-agency MBS Bonds - The yields on the
unrated credit support non-agency MBS bonds acquired by the Company are
extremely sensitive to prepayments, defaults and the severity and timing of
foreclosure losses on the non-conforming mortgage loans comprising the mortgage
collateral for such non-agency MBS bonds. As a holder of the credit support
class of non-agency MBS bonds, the Company's right to distributions of principal
and interest is subordinate to all of the more senior classes of bonds. Actual
losses on the mortgage collateral (after default, where the proceeds from the
foreclosure sale of the home are less than the unpaid balance of the mortgage
loan plus foreclosure costs and interest advances) are allocated first to the
Company's credit support non-agency MBS bonds (to the extent of their
outstanding principal balance) prior to being allocated to the more senior bond
classes.
Although the Company has earned a yield of approximately 18% to date on
its non-agency MBS bonds, a number of factors including a future down-turn in
the economy, or an uninsured natural disaster in geographic regions in which
properties that back the Company's bonds are located, may dramatically reduce
the high returns. Therefore, the Board of Directors concluded in connection with
the adoption of the 1997 Plan that the risks of investing in subordinate classes
on non-agency MBS bonds outweighed their potential returns.
Commercial Assets - During 1993, the Company contributed $75,000,000
(including $200,000 cash) to the capital of Commercial Assets. Commercial Assets
is an American Stock Exchange-listed REIT, which owns and manages debt
instruments issued in commercial mortgage loan securitizations ("CMBS bonds").
To date, Commercial Assets' primary emphasis has been on the acquisition of
credit support bond classes primarily secured by mortgage loans on multi-family
real estate.
The process of commercial mortgage loan securitization is similar to
the process of single-family mortgage loan securitization. Commercial Assets
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owns and manages interests that are heavily weighted toward the unrated and
lower-rated credit support classes of CMBS bonds issued in commercial mortgage
loan securitizations. As in non-agency MBS bonds, the subordinate classes of
CMBS bonds shield the more senior classes from losses on defaults from the
underlying commercial mortgage loans comprising the mortgage collateral and have
substantially greater credit risk than the more senior classes of such bonds.
Because of its tax status as a REIT, Commercial Assets' REIT income
generally is not subject to income tax at the corporate level. The Company will
not be subject to corporate income tax on the dividends it receives from its
shares of Commercial Assets stock as long as Commercial Assets maintains its
status as a REIT.
Competition
In acquiring assets, the Company and Commercial Assets compete with
other REITs, savings and loan associations, banks, mortgage bankers, mutual
funds, pension funds, professional money managers, insurance companies, and
other investors, many of which have greater financial resources than the
Company. Furthermore, many of these entities may be conducting business
activities through corporations, master limited partnerships or other business
forms, which may have more flexibility than the Company in conducting their
business operations because of the Company's status as a REIT or other reasons.
Capital Resources
The Company uses its cash flow from operating activities and short-term
credit facilities to provide working capital to support its operations, for the
payment of dividends to its shareowners and for the acquisition of assets.
The Company has entered into a transaction to contribute its non-agency
MBS bonds into a structured transaction (see "Multi-Step Plan to Maximize
Shareowner Value" above) that will provide the Company with approximately
$68,000,000 of cash after payment of transaction costs and management fees. The
Company plans to reinvest the cash in real estate. Investments in real estate
will likely generate lower returns than the Company has historically received
from its non-agency MBS bonds. However, such investments may result in increased
opportunities for capital appreciation and reduced portfolio risk. The Company's
goal is to invest in real estate assets with: (i) future capital appreciation
potential, (ii) a stable, unlevered return of approximately 9% to 10%, and (iii)
the option to convert the underlying land to an alternative use at some future
point in time. There is no assurance that the Company will achieve this goal.
See "FORWARD LOOKING INFORMATION" below.
In addition, the 1997 Plan anticipates converting the Company to an
UPREIT. The Company would contribute certain of its assets to an operating
partnership while retaining the general partner interest. The operating
partnership will facilitate the future acquisition of real estate. Sellers of
real estate interests to the Company could elect to receive as payment operating
partnership interests ("OP units") that could be converted to cash or Common
Stock of the Company at a later date.
Without further shareowner approval, the Company is authorized to issue
up to 50,000,000 shares of Common Stock, of which 24,843,345 shares were issued
and outstanding as of February 28, 1997. The Board of Directors is authorized to
issue additional classes of stock without shareowner approval. Depending upon
the terms set by the Board of Directors, the authorization and issuance of
preferred stock or other new classes of stock could affect adversely existing
shareowners. The effects on shareowners could include, among other things,
dilution of ownership interests of existing shareowners, restrictions on
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dividends on Common Stock and preferences to holders of a new class of stock in
the distribution of assets upon liquidation. As of February 28, 1997, the
Company has not authorized or issued additional classes of stock.
Dividend Reinvestment Plan
The Company has an Automatic Dividend Reinvestment Plan (the
"Reinvestment Plan") which was administered by KeyCorp Shareholder Services,
Inc. through January 31, 1997, and by Norwest Shareowner Services beginning
February 1, 1997. The Reinvestment Plan provides the Company's shareowners a
method of investing cash dividends paid by the Company in additional shares of
Common Stock purchased in the open market. The Reinvestment Plan also permits
participants to purchase additional Common Stock in the open market with
voluntary cash payments.
Investment Restrictions
The Company intends to continue its business and to conduct its
operations so as not to become regulated as an investment company under the
Investment Company Act of 1940, as amended (1940 Act"). The 1940 Act exempts
entities that, directly or through majority-owned subsidiaries, are "primarily
engaged in the business of purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate" ("Qualifying Interests"). Under current
interpretations by the staff of the Securities and Exchange Commission (the
"Commission"), in order to qualify for this exemption, the Company, among other
things, must maintain at least 55% of its assets in Qualifying Interests and may
also be required to maintain an additional 25% in Qualifying Interests or other
real estate-related securities. Compliance with this requirement limits the
assets the Company may acquire. In connection with its acquisition of non-agency
MBS bonds, the Company has adopted a policy of obtaining substantial foreclosure
rights with respect to the underlying mortgage loans. As a result of obtaining
such rights, the Company believes that its non-agency MBS bonds constitute
Qualifying Interests for the purpose of the 1940 Act.
Because greater than 55% of the Company's consolidated assets are
Qualifying Interests, the Company believes that it is not required to register
as an investment company under the 1940 Act. If the Commission or its staff were
to take a different position with respect to whether the Company's non-agency
MBS bonds constitute Qualifying Interests, the Company could be required either:
(i) to change the manner in which it conducts its operations to avoid being
required to register as an investment company; or (ii) to register as an
investment company, either of which could have an adverse effect on the Company
and the market prices for the Common Stock. The Company's intent is that any new
real estate assets acquired will also be Qualifying Interests. See "FORWARD
LOOKING INFORMATION" below.
Pursuant to restrictions set forth in its By-laws, the Company may not
"invest in unimproved real property (i.e., acquire an equity interest in
property for purposes other than producing income, which has no development or
construction in progress thereon nor is any development or construction planned
to commence thereon within the year); invest in mortgage loans (but not
including mortgage related securities) without an appraisal of the underlying
property; invest in real estate contracts of sale unless the same are in
recordable form; invest in or make a mortgage loan on property in excess of 100%
of its appraised value (unless other mortgage loan underwriting criteria would
justify such investment); or invest in or make a mortgage loan subordinate to a
mortgage or equity interest in the property held by the Manager, a director or
an affiliate of the foregoing." The foregoing restrictions may not be changed
without the approval of the Board of Directors, which has the power to modify or
alter such policies without the consent of shareowners. Although the Company has
no present intention of modifying such policies, the Board of Directors may
conclude in the future that it would be advantageous for the Company to modify
such policies if such modifications are in the best interests of the
shareowners.
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Management Agreement
The Management Agreement has been extended through December 31, 1997.
The Manager advises the Company on its business and oversees its day-to-day
operations, subject to the supervision of the Board of Directors of the Company.
The Manager also is obligated to present to the Company asset acquisition
opportunities consistent with the policies and objectives of the Company and to
furnish the Board of Directors of the Company with information concerning the
acquisition, holding and disposition of assets. The terms appearing in quotes
below which are not defined herein are defined in the Management Agreement.
The Management Agreement has been approved by the Independent
Directors. It may be terminated by either party with or without cause at any
time upon 60 days' written notice. In addition, the Company has the right to
terminate the Management Agreement upon the happening of certain specified
events including, among other things, a breach by the Manager of any material
provision which breach remains uncured for 30 days, or the bankruptcy of the
Manager. The Management Agreement also may be terminated at any time by a
majority vote of the: (i) Independent Directors; or (ii) holders of the shares
of Common Stock. The Manager is entitled to certain termination payments in the
event of, among other things, an acquisition of the Company resulting in the
termination of the Management Agreement.
The Manager receives various fees for the advisory and other services
performed in connection with the Management Agreement. The Manager provides all
personnel and certain overhead items (at its expense) necessary to conduct the
regular business of the Company.
Pursuant to the Management Agreement, the Manager receives a "Base
Fee," an "Incentive Fee" and an "Administrative Fee," all of which are payable
quarterly per the terms of the Management Agreement. The Base Fee is an annual
fee equal to 3/8 of 1% of the "average invested assets" of the Company and its
subsidiaries for such year. The Incentive Fee is equal to 20% of the amount the
Company's net book income, calculated in accordance with generally accepted
accounting principles ("GAAP"), which is in excess of a return on the Company's
"average net worth" equal to the "Ten-Year U.S. Treasury Rate" plus one percent.
In 1994 and 1995, the Incentive Fee was based on the Company's "cash
distributions to shareowners," rather than GAAP income. The Manager also
performs certain bond administration and other related services for the Company
pursuant to the Management Agreement and receives an Administrative Fee of up to
$3,500 per annum per non-agency MBS bond for such services.
The Company has agreed to indemnify the Manager and its affiliates with
respect to all expenses, losses, damages, liabilities, demands, charges or
claims of any nature in respect of acts or omissions of the Manager made in good
faith and in accordance with the Management Agreement.
The 1997 Plan provides for consideration of the Company's acquisition
of its Manager, a step which would result in the Company becoming self-managed
and fully integrated. A special committee of Independent Directors has been
established to evaluate this transaction.
Federal Income Taxation of the Company
General - For all taxable years commencing on or after January 1, 1987,
the Company has operated in a manner that permits it to qualify for the income
tax treatment accorded a REIT. To so qualify, in general, the Company is
required, among other things, to distribute annually (as determined under the
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Code), to its shareowners, at least 95% of its REIT income prior to the
dividends paid deduction. So long as the Company meets the REIT qualification
requirements, including its distribution requirements, the Company expects that,
with limited exceptions, its REIT income will not be subject to federal income
tax at the corporate level. If the Company fails to qualify as a REIT, it would
be subject to federal income tax on its REIT income at regular corporate rates
without any deduction for distributions to shareowners.
In order to qualify as a REIT, the Company must satisfy various
requirements with respect to: (i) the nature of its assets ("Asset
Requirements") and income ("Income Requirements"); (ii) the amount of
distributions to shareowners ("Distribution Requirements"); and (iii) certain
organizational matters ("Organizational Requirements").
Asset Requirements - At least 75% of the assets of the Company must
consist of specified real estate assets, cash or government securities. Also,
the Company cannot own equity securities of any one issuer (other than a
qualified REIT) which represent: (i) more than 5% of the total value of the
Company's assets; or (ii) more than 10% of the outstanding voting securities of
any one issuer (in each case other than another REIT). Under certain
circumstances, if the Company fails to satisfy the Asset Requirements at the end
of any quarter of its taxable year, such failure can be cured within 30 days
after the close of that quarter.
Income Requirements - The Income Requirements provide that at least 75%
of the Company's gross income must be derived from specified real estate
sources, including rents from real property and interest on mortgage
obligations. Additionally, at least 95% of the Company's gross income must
consist of income derived from items that qualify for the 75% test plus other
specified types of passive income, such as interest, dividends and gains from
the sale or other disposition of stock and securities.
If the Company fails to satisfy the foregoing Income Requirements, the
Company will nevertheless continue to qualify as a REIT but will be subject to a
100% tax on certain of its non-qualifying income if: (i) the Company otherwise
satisfies the requirements for qualification as a REIT; (ii) such failure is
held to result from reasonable cause and not willful neglect; and (iii) certain
other requirements are met.
The Income Requirements also require that less than 30% of the
Company's gross income be derived from the sale or other disposition of: (i)
stock or securities held for less than one year; (ii) property in a transaction
which is a "Prohibited Transaction" as defined in the Code; and (iii) most real
property held for less than four years. In addition, the Code generally imposes
a 100% tax on net gain derived from Prohibited Transactions. Failure to satisfy
the 30% test generally causes a loss of REIT status.
Distribution Requirements - In general, the Company is required to
distribute annually, to its shareowners, at least 95% of its REIT income prior
to the dividends paid deduction. Distributions may be made in cash, securities
or property. For this purpose (but not for purposes of determining how
distributions are to be taxed to shareowners), certain dividends paid by the
Company after the close of a taxable year may be considered as having been made
during such taxable year. Shareowners will be subject to tax, in the year of
declaration, on dividends declared by the Company during October, November and
December of a taxable year and paid before January 31 of the subsequent taxable
year.
At December 31, 1996, the Company had a net operating loss ("NOL")
carryover of approximately $96,000,000. The NOL may be used to offset all or a
portion of the Company's distribution requirement with respect to REIT income;
however, the NOL may not be used to reduce or eliminate the Company's
distribution requirement with respect to Excess Inclusion income (as defined in
the Code). Excess Inclusion income is the amount of income from a residual
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interest in a real estate mortgage investment conduit ("REMIC") which exceeds a
specified return as provided in the Code. A REMIC is a pass-through tax entity
created by the Tax Reform Act of 1986 to facilitate the structuring of
mortgage-asset transactions. To the extent the Company has either current or
accumulated earnings and profits, distributions generally will be treated as
ordinary income by the shareowners receiving such distributions. The Company's
NOL will not change how shareowners treat distributions from the Company for tax
purposes under the Code.
Organizational Requirements - Shares of Common Stock must be held by a
minimum of 100 persons for at least 335 days in each taxable year and no more
than 50% in value of the Common Stock can be owned, actually or constructively,
by five or fewer individuals at any time during the second half of each taxable
year. For this purpose an "individual" includes certain pension plans and other
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 of Common Stock. In fulfilling its obligations to maintain
records, the Company must demand written statements each year from the record
holders of designated percentages of its shares of Common Stock which would,
among other things, disclose the actual owners of such shares.
Failure to Qualify as a REIT - The Company will be subject to tax
(including any applicable alternative minimum tax) on its REIT income at regular
corporate rates without any deduction for distributions to shareowners if it
fails to qualify as a REIT in any taxable year. Even if the Company is not
disqualified as a REIT as a result of a failure to satisfy any of the tests
described above, it may be subject to certain excise taxes. Unless entitled to
relief under specific statutory provisions, the Company also will be
disqualified from treatment as a REIT for the following four taxable years. The
failure to qualify as a REIT for even one year could result in the Company
incurring substantial indebtedness in order to pay any resulting taxes, thus
reducing the amount of cash available for distribution to shareowners or for
acquisition of additional assets.
THE PROVISIONS OF THE CODE ARE EXTREMELY TECHNICAL AND COMPLEX. THIS
SUMMARY IS NOT INTENDED TO BE A DETAILED DISCUSSION OF ALL APPLICABLE PROVISIONS
OF THE CODE, THE RULES AND REGULATIONS PROMULGATED THEREUNDER, OR THE
ADMINISTRATIVE AND JUDICIAL INTERPRETATIONS THEREOF. THIS SUMMARY IS NOT
INTENDED TO BE A SUBSTITUTE FOR PRUDENT TAX PLANNING, AND EACH SHAREOWNER OF THE
COMPANY, INCLUDING FOREIGN AND TAX-EXEMPT ENTITIES, IS URGED TO CONSULT THEIR
OWN TAX ADVISOR WITH RESPECT TO THESE AND OTHER FEDERAL, STATE AND LOCAL TAX
CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE COMMON STOCK
OF THE COMPANY.
Restrictions on and Redemptions of Common Stock
To qualify as a REIT, the Company must meet certain ownership tests
with respect to its shares of Common Stock. In addition, the Company's
Certificate of Incorporation provides that shares of Common Stock may not be
owned by a person if the ownership of shares by such person would result in the
imposition of a tax on the Company or on any other holder (nominee or otherwise)
of shares of Common Stock. Provisions of the Code would impose such a tax if
shares of Common Stock were owned, directly or indirectly, by the United States,
any state or political subdivision thereof, any foreign government, any
international organization, a rural electric or telephone cooperative described
in Section 1381(a)(2)(C) of the Code, any agency or instrumentality of any of
the foregoing, or any organization exempt from tax under the Code that is not
subject to tax on its unrelated business taxable income.
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The Company's Certificate of Incorporation empowers the Board of
Directors, at its option, to redeem shares of Common Stock or to restrict
transfers of shares to conform ownership of the Common Stock with the
requirements described above. The redemption price to be paid is the fair market
value as reflected in the latest quotations on any exchange on which the shares
of Common Stock are listed or, if the Common Stock is not listed on any
exchange, on the over-the-counter market or, if no quotations are available, the
net asset value of the shares of Common Stock as determined by the Board of
Directors. The Company's Certificate of Incorporation also provides that any
acquisition of shares of Common Stock that would result in the disqualification
of the Company as a REIT under the Code shall be void to the fullest extent
permitted under applicable law and the intended transferee of such shares shall
be deemed never to have had an interest therein. Furthermore, if such provision
is determined to be void or invalid, then the transferee of such shares shall be
deemed, at the option of the Company, to have acted as agent on behalf of the
Company in acquiring such shares and to hold such shares on behalf of the
Company.
Each shareowner is required, upon demand, to disclose to the Board of
Directors in writing such information with respect to direct and indirect
ownership of shares of Common Stock as the Board of Directors deems prudent in
protecting the tax status of the Company.
Employees
The Company has no employees. Pursuant to the Management Agreement, the
Manager provides all personnel necessary to conduct the regular business of the
Company. Certain employees of the Manager have been designated as officers of
the Company. If the Company acquires its Manager, the employees of the Manager
would be deemed to be employees of the Company.
Item 2. PROPERTIES.
The Company does not own or lease any real estate or physical property.
Item 3. LEGAL PROCEEDINGS.
At February 28, 1997, there were no material legal proceedings, pending
or threatened, to which the Company or any of its subsidiaries was a party or
which any of their respective property was subject.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareowners during
the fourth quarter of 1996.
- 9 -
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREOWNER MATTERS.
The Company's Common Stock is listed on the NYSE under the symbol
"AIC." The high and low closing sales prices of the shares of Common Stock as
reported on the NYSE Composite Tape and certain dividend information for the
periods indicated were as follows:
High Low Dividends
------- ------- ---------
1996
First Quarter $ 3-3/8 $ 2-3/4 $ .090
Second Quarter 3-3/4 3-1/8 .090
Third Quarter 3-3/4 3-3/8 .095
Fourth Quarter 4 3-1/2 .095
1995
First Quarter $ 2-3/8 $ 1-5/8 $ .080
Second Quarter 2-5/8 2-1/4 .080
Third Quarter 2-7/8 2-3/8 .090
Fourth Quarter 3-3/8 2-5/8 .090
As of February 28, 1997, 24,843,345 shares of Common Stock were
outstanding and were held by 3,590 shareowners of record. The Company estimates
there were an additional 12,000 beneficial owners on that date whose shares were
held by banks, brokers or other nominees.
Item 6. SELECTED FINANCIAL DATA.
The selected financial data of the Company, set forth below, has been
derived from and should be read in conjunction with the Company's audited
consolidated financial statements and the notes thereto. Financial data as of
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996, is included elsewhere in this Annual Report on Form 10-K (in
thousands, except per share data).
Statement of Operations Data: (1)
Year Ended December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- ---------- ---------- -----------
Revenues from:
Ongoing operations $ 13,524 $ 10,871 $ 3,448 $ 1,126 $ --
Liquidating operations -- 7,328 15,456 (41,697)(2) (24,874)
--------- --------- --------- ---------- -----------
$ 13,524 $ 18,199 $ 18,904 $ (40,571) $ (24,874)
========= ========= ========= ========== ===========
Net income (loss) from:
Ongoing operations $ 9,673 $ 7,933 $ 1,461 $ (3,105) $ (2,482)
Liquidating operations -- 6,507 11,897 (47,913)(2) (29,640)
--------- --------- --------- ---------- ----------
$ 9,673 $ 14,440 $ 13,358 $ (51,018) $ (32,122)
========= ========= ========= ========== ==========
- 10 -
Year Ended December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- ---------- ----------
Net income (loss) per share $ .39 $ 0.60 $ 0.92 $ (3.64)(2) $ (2.30)
Dividends per share $ .37 $ 0.34 $ 0.33 $ 3.99 (3) $ 1.18
Weighted-average shares
outstanding 24,595 24,279 14,548 14,024 13,986
Balance Sheet Data:
December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- ---------- ---------- ----------- -----------
Total assets $ 90,344 $ 79,653 $ 109,539 $ 94,250 $ 241,116
Secured notes payable -- -- 30,592 42,000 48,000
Total stockholders' equity 86,365 78,759 72,965 (4) 47,187 (5) 153,316
Book value per share $ 3.48 $ 3.23 $ 3.01 (4) $ 3.35 (5) $ 10.96
- --------------------------
1 During 1993 through 1995, the Company sold substantially all of its
interests in collateralized mortgage obligations ("CMOs"). CMOs are
multi-class issuances of bonds which are secured and funded as to the
payment of interest and repayment of principal by a specific group of
mortgage loans or mortgage backed certificates and other collateral. These
ownership interests are referred to as "CMO Ownership Interests." Because
of the sale of these interests, the Company has classified as liquidating
operations its revenues from CMO Ownership Interests along with expenses
directly allocable to the CMO Ownership Interests. All other revenues and
expenses of the Company, including corporate general and administrative
expenses, are classified as ongoing operations.
2 Includes $24,399,000 ($1.74 per share) of cumulative effect of an
accounting change from adoption of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("FAS 115").
3 Includes $.25 per share in cash and $3.74 per share in shares of Commercial
Assets common stock.
4 Includes $17,208,000 of net proceeds and 10,053,794 shares of Common Stock
from a one-for-one rights offering of Common Stock completed December 16,
1994 (the "Rights Offering"). Shares of Common Stock were sold at $1.90 per
share, $2.04 per share less than the book value of the Common Stock prior
to the Rights Offering which reduced the book value per share from
approximately $3.94 to $3.01.
5 The decrease in book value per share between 1992 and 1993 reflects, among
other things, the payment of a dividend of $3.99 per share, including a
dividend of $3.74 per share in the form of shares of Commercial Assets
common stock.
- 11 -
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The table below summarizes the Company's results of operations during
the three years ended December 31, 1996 (in thousands, except per share data).
Year Ended December 31,
----------------------------------
Ongoing Operations: 1996 1995 1994
--------- --------- -------
Revenues
Non-agency MBS bonds $ 11,513 $ 8,499 $ 1,531
Equity in earnings of Commercial Assets 1,875 1,742 1,354
Other income and expenses, net 136 630 563
-------- -------- ---------
13,524 10,871 3,448
-------- -------- ---------
Expenses
Management fees 1,793 980 253
General and administrative 1,145 1,895 1,586
Elimination of DERs 825 -- --
Interest expense 88 63 148
-------- -------- ---------
3,851 2,938 1,987
-------- -------- ---------
Earnings from ongoing operations 9,673 7,933 1,461
-------- -------- ---------
Earnings from liquidating operations (1) -- 6,507 11,897
--------- --------- ----------
Book income $ 9,673 $ 14,440 $ 13,358
========= ========= ==========
Earnings from ongoing operations per share $ .39 $ .33 $ .10
Earnings from liquidating operations per share (1) -- .27 .82
--------- --------- ----------
Book income per share $ .39 $ .60 $ .92
========= ========= ==========
Estimated REIT Income (Loss):
Ongoing operations $ 14,959 $ 13,211 $ 3,401
Liquidating operations (1) (1,002) (5,886) (25,521)
--------- --------- ----------
Estimated REIT income (loss) $ 13,957 $ 7,325 $ (22,120)
========= ========== ==========
Estimated REIT income (loss) per share $ .57 $ .30 $ (1.52)
========= ========= ==========
Excess Inclusion income $ -- $ 636 $ 3,769
========= ========= ==========
Excess Inclusion income per share $ -- $ .03 $ .26
========= ========= ==========
Dividends $ 9,128 $ 8,255 $ 4,959
========= ========= ==========
Dividends per share $ .37 $ .34 $ .33
========= ========= ==========
Weighted-average shares outstanding (2) 24,595 24,279 14,548
- 12 -
- --------------------------
1 The Company has classified its revenues from CMO Ownership Interests along
with expenses directly allocable to the CMO Ownership Interests as revenues
and income from liquidating operations. All other revenues and expenses of
the Company, including corporate general and administrative expenses, are
classified as being generated by ongoing operations.
2 In December 1994, the Rights Offering resulted in net proceeds of
$17,208,000 and increased the Company's outstanding Common Stock by 71%,
from 14,158,208 shares to 24,212,002 shares. Shares issued in the Rights
Offering were sold for $1.90 per share, $2.04 per share less than the $3.94
book value of such shares immediately prior to completion of the Rights
Offering. The proceeds of the Rights Offering principally were used to
acquire non-agency MBS bonds.
Book Income
Non-agency MBS Bonds - Book income from the Company's non-agency MBS
bonds increased significantly during 1996 compared with 1995 and 1994 primarily
due to the acquisition of 55 and 74 non-agency MBS bonds during 1996 and 1995,
respectively, with an outstanding principal balance of $60,478,000 and
$99,398,000, respectively, and a weighted-average coupon of 7.4% and 6.9%,
respectively. The Company's effective book yield on its non-agency MBS bonds for
the years ended December 31, 1996, 1995 and 1994, taking into consideration an
estimate of future credit losses, was 18.5%, 18.7%, and 15.0%, respectively.
The Company's non-agency MBS bonds are subject to the risk of default
and foreclosure loss from the $43.7 billion principal balance of non-conforming
mortgage loans that, at December 31, 1996, backed its bonds. The subordinate
non-agency MBS bonds owned by the Company represent, on average, .51% of the
bond issuances that are collateralized by these mortgages.
For the years ended December 31, 1996, 1995 and 1994, the principal
amount of credit losses on the Company's non-agency MBS bonds was $13,295,000,
$3,056,000 and $331,000, respectively. Based on the cost of the applicable
non-agency MBS bonds, these losses had economic values (loss multiplied by the
purchase price percentage less amounts collected under indemnification
agreements) of $3,518,000, $265,000 and $7,000 for the years ended December 31,
1996, 1995 and 1994, respectively. The significant increase in credit losses
allocated to the Company is due to: (i) the acquisition of $60,478,000 and
$99,398,000 of principal amount of bonds during the years ended December 31,
1996 and 1995, respectively; and (ii) as mortgages mature, in particular during
their first five years, the defaults and the resulting credit losses are
expected to increase.
Subsequent to year end, the Company entered into an agreement to
contribute its non-agency MBS bonds into a structured transaction in which the
Company will retain a small equity interest in the portfolio. The Company
anticipates that the structured transaction will result in a 1997 gain of
approximately $6,000,000, or $.24 per share, and the Company's receipt of
approximately $68,000,000 of cash after payment of transaction costs and
management fees. The Company plans to reinvest the cash in real estate, a step
which would likely reduce its return on assets from 1996 levels. The Company is
beginning the process of reinvesting the proceeds of the transaction, and the
impact on future earnings is dependent upon, among other things, the yields of
the acquired assets and the timing of such acquisitions, and cannot be estimated
at this time. See "FORWARD LOOKING INFORMATION" below.
Commercial Assets - Income from the Company's shares of Commercial
Assets (which, for book income purposes, is based on the Company's pro rata
share of Commercial Assets' book income) for the years ended December 31, 1996,
- 13 -
1995 and 1994 was $1,875,000, $1,742,000 and $1,354,000, respectively.
Commercial Assets reported to the Company that the increase in income for 1996
over 1995 is primarily due to the early redemption of two bonds in May 1996
offset by a one-time, non-cash charge resulting from the issuance of 157,413
shares of Commercial Assets common stock for the elimination of dividend
equivalent rights under its stock option plan. Commercial Assets also reported
that the increase in income for 1995 over 1994 was due to a full year of
earnings in 1995 from the $91,971,000 principal amount of CMBS bonds acquired
during 1994.
At December 31, 1996 and 1995, Commercial Assets' CMBS bonds had
outstanding principal balances of $89,297,000 and $100,368,000, respectively,
and weighted-average coupons of 8.15% and 8.24%, respectively. The decrease in
the outstanding principal balance and weighted-average coupon of the CMBS bonds
from December 31, 1995, to December 31, 1996, was primarily the result of the
early bond redemptions in May 1996.
According to Commercial Assets, at December 31, 1996 and 1995, it had
$3,389,000 and $4,245,000, respectively, of unrealized holding losses on its
CMBS bonds. The Company's share of these unrealized holding losses, $907,000 and
$1,156,000 as of December 31, 1996 and 1995, respectively, was recorded as a
reduction in the carrying value of its investment in Commercial Assets and as a
component of stockholders' equity.
Other Income and Expenses, Net - Other income and expenses from ongoing
operations decreased during 1996 compared to 1995 and 1994 due to a decrease in
income from other sources and lower interest income from cash and cash
equivalents, because the Company has used substantially all of its available
cash to acquire non-agency MBS bonds.
Management Fees - Included in Management Fees attributable to ongoing
operations are Incentive Fees incurred by the Company along with Base Fees and
Administrative Fees applicable to the non-agency MBS bonds. Management Fees
included in ongoing operations increased during 1996 compared with 1995 and 1994
due to: (i) higher Administrative and Base Fees as a result of acquisitions of
non-agency MBS bonds during 1994 through 1996; (ii) a change in the method of
calculating Incentive Fees pursuant to the terms of an amendment to the
Management Agreement dated January 1, 1996; (iii) a decrease in the average
Ten-Year U.S. Treasury Rate to 6.44% during 1996, from 6.58% in 1995 and 7.09%
in 1994 which had the effect of lowering the threshold above which the Incentive
Fees are paid; and (iv) higher book income in 1996 compared to 1995 and higher
distributions in 1995 compared to 1994.
The Company's day-to-day operations are performed by the Manager
pursuant to the Management Agreement which is in effect through December 31,
1997. The Management Agreement has been approved by a majority of the
Independent Directors. Prior to April 1, 1996, the Company was managed by
Financial Asset Management Corporation, a wholly owned subsidiary of MDC
Holdings, Inc. ("MDC"). Effective April 1, 1996, Financial Asset Management LLC
assumed the obligations of the Management Agreement. From April 1, 1996, through
September 30, 1996, the Manager was 80% owned by two wholly owned subsidiaries
of MDC and 20% owned by Spencer I. Browne who was at the time the President,
Chief Executive Officer and a Director of the Company. On September 30, 1996,
MDC acquired Mr. Browne's 20% interest in the Manager and then sold 100% of the
Manager to an investor group led by Terry Considine and Thomas L. Rhodes. MDC
received sales proceeds of $11,450,000, including $6,000,000 of cash and
$5,450,000 of subordinated convertible notes. The notes are payable at specified
dates during the next ten years and are convertible, under certain
circumstances, into as much as a 47.6% ownership interest in the Manager.
- 14 -
In connection with the sale, Larry A. Mizel resigned as Chairman of the
Board of Directors and Mr. Browne resigned as President, Chief Executive Officer
and a Director of the Company. Terry Considine and Thomas L. Rhodes were elected
as Co-Chairmen of the Board of Directors and Co-Chief Executive Officers and
Leslie B. Fox was elected as President of the Company.
The 1997 Plan provides for consideration of the Company's acquisition
of the Manager, a step which would result in the Company becoming self-managed
and fully integrated. A special committee of the Board of Directors has been
established to evaluate this transaction. If the Company acquires the Manager,
management fees will be discontinued, but the Company will receive other
revenues and be obligated for expenses of the Manager. The impact of the
potential acquisition on the Company's earnings and cashflow is, in part,
dependent upon the consideration paid for the Manager and currently cannot be
estimated.
General and Administrative Expenses - General and administrative
expenses decreased during 1996 compared with 1995 due primarily to the
elimination of Dividend Equivalent Rights ("DER") expense in the second quarter
of 1996, reductions in legal and consulting fees, and lower costs associated
with the Company's annual report. General and administrative expenses from
ongoing operations increased during 1995 compared with 1994 due to, among other
things, an increase in DER expense, legal fees and printing costs.
Elimination of DERs - Prior to May 1996, options holders received
shares of Common Stock equal to the value of dividends received as if the
options were fully exercised. At their annual meeting in May 1996, the Company's
shareowners approved an amendment to the Company's 1986 Stock Option Plan which
permitted the Company to issue shares of Common Stock to the holders of options
who voluntarily relinquished their right to receive DERs in the future. The
issuance of Common Stock in exchange for the right to receive DERs in the future
resulted in a one-time, non-cash charge to second quarter 1996 earnings of
$825,000 and the issuance of 244,391 shares of Common Stock. The effect of the
amendment will be to reduce general and administrative expenses from the accrual
of DERs from options granted under the 1986 Stock Option Plan. General and
administrative expenses related to DERs totaled $337,000 in 1995.
Interest Expense - Interest expense on the Company's borrowing
facilities increased during 1996 compared to 1995 reflecting higher interest
rates and the increase in the average daily balance to $1,058,000 from $813,000.
Interest expense on the Company's borrowing facilities decreased during 1995
compared with 1994, principally due to lower borrowings in 1995 because of
excess available cash from the Rights Offering in December 1994. The effective
interest rate under the Company's short-term borrowing facilities during 1996,
1995 and 1994 was 8.18%, 7.21% and 5.02% per annum, respectively.
Liquidating Operations - In 1993, the Company began to liquidate its
CMO Ownership Interests and acquire credit-sensitive non-agency MBS bonds and
shares of Commercial Assets. Accordingly, the Company has classified as
liquidating operations its revenues from CMO Ownership Interests along with
expenses directly allocable to the CMO Ownership Interests. As of December 31,
1995, the Company had substantially liquidated all of its CMO Ownership
Interests. Earnings from liquidating operations during the years ended December
31, 1995 and 1994, were comprised of the following (in thousands):
- 15 -
Year Ended December 31,
-------------------------
1995 1994
------- --------
Revenues
CMO Ownership Interests $ 1,734 $ 2,082
Interest income 225 728
Net gain on sale of CMO Ownership Interests 5,369 12,646
------- --------
Total revenues 7,328 15,456
------- --------
Expenses
Management fees 234 496
General and administrative 23 339
Interest 564 2,724
------- --------
Total expenses 821 3,559
------- --------
Earnings from liquidating operations $ 6,507 $ 11,897
======= ========
The formal agreements between the issuer of each of the Company's CMOs
and the related bondholders allow the issuer of the CMO Ownership Interest to
sell the mortgage collateral and redeem the bonds at par at a predetermined date
or if the bond balance falls below a predetermined amount, for example, 10% of
the original bond balance (referred to as the "Call Rights"). Any excess
proceeds from the sale of the mortgage collateral over the funds required to
redeem the bonds is passed on to the residual interest holder. During the years
ended December 31, 1995 and 1994, the Company exercised Call Rights on its CMO
Ownership Interests resulting in gains of $2,153,000 and $12,883,000,
respectively. The exercise of these Call Rights during the years ended December
31, 1995 and 1994 reduced the outstanding principal amount of the Company's
mortgage collateral by $45,698,000 and $184,491,000, respectively.
On March 30, 1995, Asset Investors Securitization Corporation, a wholly
owned subsidiary of the Company ("Asset Securitization") sold 28 CMO Ownership
Interests and repaid the related outstanding secured notes payable. As of
December 31, 1994, the Company recognized $1,205,000 of net holding losses for
book income purposes related to the 28 CMO Ownership Interests sold. As a
result, no gain or loss was recorded on the sale of the CMO Ownership Interests
and repayment of the secured notes in 1995. During the years ended December 31,
1995 and 1994, the Company earned book income from Asset Securitization of
$733,000 and $3,306,000 (including $4,664,000 of gains from the exercise of Call
Rights in 1994), respectively.
On November 10, 1995, the Company sold 23 CMO Ownership Interests with a
net carrying value of $2,315,000 for $5,517,000 resulting in a net gain of
$3,202,000 which was included in earnings from liquidating operations in 1995.
REIT Income
The Company's estimated REIT income from ongoing operations during 1996
improved over 1995 and 1994 due to higher REIT earnings from non-agency MBS
bonds and increased dividends from Commercial Assets. The increase in REIT
earnings from non-agency MBS bonds was due to acquisitions of non-agency MBS
bonds in 1995 and 1996. The Company's estimated REIT losses from liquidating
operations for 1996 were less than 1995 and 1994 due to the sale of many of the
CMO Ownership Interests which generated REIT losses.
- 16 -
Substantially all of the difference between REIT income and book income
is due to: (i) the method of recording credit losses, which for REIT income
purposes are not deducted until they occur and which for book income purposes
are estimated and reflected as a reduction of revenues in the form of lower
discount amortization included in income from non-agency MBS bonds; (ii)
differences in the calculation of discount and premium amortization for REIT
income compared to book income attributable to non-agency MBS bonds; (iii) gains
on the sales of assets recorded for book income purposes that resulted in either
capital losses or capital gains for REIT income purposes that are reduced to
zero by the Company's capital loss carryover; and (iv) recognition of income
from Commercial Assets which for REIT income purposes is based upon dividends
received and which for book income purposes is based on the Company's pro rata
share of Commercial Assets' book income.
Excess Inclusion Income
The Company's Excess Inclusion income for the years ended December 31,
1996, 1995 and 1994 was $0, $636,000 and $3,769,000, respectively. Excess
Inclusion income was generated from certain of the CMO Ownership Interests owned
by the Company. Due to the liquidation of these CMO Ownership Interests, Excess
Inclusion income is not expected to be material in future periods.
NOL and Capital Loss Carryovers
At December 31, 1996, the Company's NOL carryover was approximately
$96,000,000 and its capital loss carryover was approximately $35,000,000. The
NOL carryover may be used to offset all or a portion of the Company's REIT
income, and as a result, to reduce the amount of income that the Company must
distribute to shareowners to maintain its status as a REIT. The NOL carryover is
scheduled to expire between 2007 and 2009 and the capital loss carryover is
scheduled to expire between 1998 and 2000.
Dividend Distributions
During 1996, the Company declared regular dividends of $9,128,000 ($.37
per share) compared to 1995 regular dividends declared of $8,255,000 ($.34 per
share). Twenty percent, or $.07 per share, of the 1995 distributions constituted
return of capital distributions, generally not taxable to the shareowners to the
extent of their basis in their stock. Return of capital distributions were not
made in 1996. During 1994, the Company declared regular dividends of $3,809,000
($.27 per share) and special dividends of $1,150,000 ($.06 per share).
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its cash flow from operating activities and other
capital resources to provide working capital to support its operations, for the
payment of dividends to its shareowners, for the acquisition of assets and for
the repayment of borrowings.
The table below summarizes the Company's operating cash flows and uses
of those cash flows for the years ended December 31, 1996, 1995 and 1994 (in
thousands).
- 17 -
Year Ended December 31,
----------------------------------------------
Cash Generated By Ongoing Operations: 1996 1995 1994
----------- ---------- ----------
Non-agency MBS bonds:
Interest $ 14,511 $ 9,830 $ 1,869
Principal 2,769 2,017 599
Indemnifications 382 807 137
Dividends from Commercial Assets 1,988 2,430 911
Borrowings (repayment) of short-term debt 3,000 (2,758) (1,482)
----------- ---------- ----------
Net Cash Generated by Ongoing Operations 22,650 12,326 2,034
----------- ---------- ----------
Cash Generated By Liquidating Operations:
CMO Ownership Interests -- 4,743 21,083
Release of restricted cash upon
repayment of secured notes payable -- 15,862 1,201
Sale of assets -- 25,038 17,194
Repayment of secured notes payable -- (30,592) (11,408)
----------- ---------- ----------
Net Cash Generated by Liquidating Operations -- 15,051 28,070
Total Expenses, Net of Interest Income and Other (2,841) (4,064) (2,035)
----------- ---------- ----------
Cash Generated by Operations $ 19,809 $ 23,313 $ 28,069
=========== ========== ==========
Issuance of Common Stock $ 301 $ -- $ 17,208
=========== ========== ==========
Dividends Paid $ (9,128) $ (8,981) $ (4,232)
=========== ========== ==========
Acquisitions of non-agency MBS bonds $ (15,893) $ (23,965) $ (33,624)
=========== ========== ==========
The Company's cash from ongoing operations continued to increase in
1996 compared to 1995 and 1994 due to acquisitions of non-agency MBS bonds.
Dividends from Commercial Assets have decreased because 1995 dividends include
the dividend declared in the fourth quarter of 1994 and distributed in January
1995.
Cash from liquidating operations, primarily consisting of CMO Ownership
Interests, ended in 1995 because of the exercises of Call Rights and sales of
CMO Ownership Interests in 1994 and 1995.
On July 19, 1995, the Company obtained a one-year, $1,000,000 unsecured
line of credit. The line of credit was renewed for an additional year on July
19, 1996. Advances under this line bear interest at the prime rate. At December
31, 1996 and 1995, there were no borrowings under this line of credit.
On July 24, 1996, the Company secured a $10,000,000 revolving credit
and term loan agreement with a bank. The loan is collateralized by certain of
the Company's non-agency MBS bonds with a net carrying value of $19,461,000 at
December 31, 1996. At December 31, 1996, $3,000,000 was borrowed under this
credit facility at an average effective interest rate of 8.25%. The loan was
repaid subsequent to year-end as a result of the structured transaction for the
non-agency MBS bonds. One of the Company's Independent Directors is a member of
the Board of Directors of the parent holding company of the bank.
- 18 -
In February 1997, the Company entered into an agreement to contribute
its non-agency MBS bonds into a structured transaction which will provide the
Company with approximately $68,000,000 of cash after payment of transaction
costs and management fees. The Company plans to reinvest the cash in real
estate. Investments in real estate will likely reduce the Company's return on
assets from 1996 levels, however, such investments may result in increased
opportunities for capital appreciation and reduce portfolio risk. The Company's
goal is to invest in real estate assets with: (i) future growth potential, (ii)
a stable, unlevered return of approximately 9% to 10%, and (iii) the option to
convert the underlying land to an alternative use at some future point in time.
There is no assurance that the Company will achieve this goal. Until the
proceeds from the structured transaction can be reinvested into real estate, the
Company may invest the proceeds in short-term investments which generate lower
returns. See "FORWARD LOOKING INFORMATION" below.
The Company had available cash of $5,328,000 at December 31, 1995,
generated cash from operations of $19,809,000 during the year ended December 31,
1996, including $3,000,000 borrowed on the revolving credit and term loan
agreement, enabling the Company to acquire 55 non-agency MBS bonds for
$15,893,000. The Company also declared $9,128,000 ($.37 per share) in dividends
during 1996. The Board of Directors will continue its policy of reviewing its
dividends on a quarter-to-quarter basis and will adjust distribution levels as
it considers necessary. See "FORWARD LOOKING INFORMATION" below.
Fair Value of Financial Instruments
The estimates of fair value of the Company's financial instruments have
been determined by the Company using available market information and valuation
methodologies. The fair values of the Company's short-term financial
instruments, including cash and cash equivalents, accounts payable and accrued
liabilities, management fees payable and short-term borrowings are estimated to
equal their carrying amounts or cost basis because of the short maturity of
these instruments. The estimate of fair value of the Company's investment in
Commercial Assets is based upon the per share trading price of the common stock
of Commercial Assets.
Due to the complex nature of mortgage securitization structures, every
non-agency MBS bond and CMO Ownership Interest varies significantly from
issuance to issuance. The collateral for each issuance is separate and distinct
from that underlying the collateral of any other issuance. These instruments are
not listed or traded on any exchange or other active market from which to obtain
a quoted market price for these financial instruments. Accordingly, the
estimates of fair value have been determined by the Company using available
market information and valuation methodologies. Considerable judgment was
required to interpret the market information and develop the estimates of fair
value at December 31, 1995. At December 31, 1996, the estimated fair value of
the non-agency MBS bonds was based upon the anticipated proceeds, net of
transaction costs, from contributing the portfolio into the proposed structured
transaction.
EXCEPT FOR THE ESTIMATED FAIR VALUE OF THE NON-AGENCY MBS BONDS BASED
ON THE PROPOSED STRUCTURED TRANSACTION, THE ESTIMATES OF FAIR VALUE PRESENTED
HEREIN ARE NOT NECESSARILY INDICATIVE OF THE AMOUNTS THE COMPANY COULD REALIZE
IN A CURRENT MARKET TRANSACTION. THE USE OF DIFFERENT MARKET ASSUMPTIONS,
VALUATION METHODOLOGIES OR BOTH MAY HAVE A MATERIAL EFFECT ON THE ESTIMATES OF
- 19 -
FAIR VALUE. THE FAIR VALUE ESTIMATES PRESENTED HEREIN ARE BASED ON PERTINENT
INFORMATION AVAILABLE TO MANAGEMENT AS OF FEBRUARY 28, 1997. FUTURE ESTIMATES OF
FAIR VALUE MAY DIFFER SIGNIFICANTLY FROM THE AMOUNTS PRESENTED HEREIN.
At December 31, 1996, the estimated fair value of the Company's
ownership interest in Commercial Assets was $18,638,000, compared to $15,531,000
at December 31, 1995. The increase in fair value was due to the increase in the
trading price per share from $5.625 per share at December 31, 1995 to $6.75 per
share at December 31, 1996. At February 28, 1997, the closing price of
Commercial Assets was $6.5625 per share.
At December 31, 1996 and 1995, the Company's non-agency MBS bonds are
carried at their estimated fair value of $68,079,000 and $52,753,000,
respectively. The increase in the fair value was due to the acquisition of 55
non-agency MBS bonds and unrealized holding gains of $5,601,000 during 1996
offset by principal repayments and indemnifications received during 1996. The
estimated fair value of the Company's non-agency MBS bonds will fluctuate over
time due to, among other things, changes in collateral prepayments and credit
performance, size of the Company's class relative to the size of the offering,
liquidity in the mortgage-backed securities market, changes in the values of the
related real estate and changes in prevailing long-term interest rates.
FORWARD LOOKING INFORMATION
Some of the statements in this Form 10-K, as well as statements made by
the Company in periodic press releases, oral statements made by the Company's
officials to analysts and shareowners in the course of presentations about the
Company and conference calls following quarterly earnings releases, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). The statements include
projections of the Company's cash flow and dividends. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. Such factors include the
following: general economic and business conditions; interest rate changes;
risks inherent in owning real estate or debt secured by real estate;
competition; the availability of real estate assets at prices which meet the
Company's investment criteria; the Company's ability to maintain or reduce
expense levels and the Company's ability to complete the 1997 Plan.
- 20 -
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements
PAGE
Consolidated Financial Statements of Asset Investors
Corporation and Subsidiaries
Report of Independent Auditors.................................. F-2
Consolidated Balance Sheets as of December 31,
1996 and 1995.........l......................................... F-3
Consolidated Statements of Income for the years
ended December 31, 1996, 1995 and 1994.......................... F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994........... F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994.................... F-6
Notes to Consolidated Financial Statements...................... F-7
Financial Statements of Commercial Assets, Inc. (a significant
unconsolidated subsidiary of the Company)
Report of Independent Auditors................................. F-18
Balance Sheets as of December 31, 1996 and 1995................ F-19
Statements of Income for the years ended
December 31, 1996, 1995 and 1994............................... F-20
Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994................... F-21
Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994................... F-22
Notes to Financial Statements.................................. F-23
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareowners
Asset Investors Corporation
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Asset
Investors Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Asset Investors Corporation and subsidiaries as of December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Phoenix, Arizona
February 28, 1997
F-2
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
December 31,
--------------------------------
1996 1995
---------- ----------
Assets
Cash and cash equivalents $ 417 $ 5,328
Non-agency MBS Bonds 68,079 52,753
Investment in Commercial Assets 19,361 19,225
Other assets, net 2,487 2,347
---------- ----------
Total Assets $ 90,344 $ 79,653
========== ==========
Liabilities
Accounts payable and accrued liabilities $ 454 $ 416
Management fees payable 525 478
Short-term borrowings 3,000 --
---------- ----------
Total Liabilities 3,979 894
---------- ----------
Stockholders' Equity
Common Stock, par value $.01 per share, 50,000,000
shares authorized 24,840,140 and 24,355,862 shares
issued and outstanding, respectively 248 244
Additional paid-in capital 228,753 227,546
Cumulative dividends (238,367) (229,239)
Cumulative net income 90,638 80,965
---------- ----------
Dividends in excess of net income (147,729) (148,274)
Unrealized holding gains (losses) on debt securities 5,093 (757)
---------- ----------
Total Stockholders' Equity 86,365 78,759
---------- ----------
Total Liabilities and Stockholders' Equity $ 90,344 $ 79,653
========== ==========
See Notes to Consolidated Financial Statements.
F-3
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended December 31,
--------------------------------------------
Ongoing Operations: 1996 1995 1994
--------- --------- ---------
Revenues
Non-agency MBS bonds $ 11,513 $ 8,499 $ 1,531
Equity in earnings of Commercial Assets 1,875 1,742 1,354
Other income and expenses, net 136 630 563
--------- --------- ---------
Total revenues 13,524 10,871 3,448
--------- --------- ---------
Expenses
Management fees 1,793 980 253
General and administrative 1,145 1,895 1,586
Elimination of DERs 825 -- --
Interest expense 88 63 148
--------- --------- ---------
Total expenses 3,851 2,938 1,987
--------- --------- ---------
Earnings from ongoing operations 9,673 7,933 1,461
--------- --------- ---------
Earnings from liquidating operations -- 6,507 11,897
--------- --------- ---------
Net income $ 9,673 $ 14,440 $ 13,358
========= ========= =========
Net income per share $ .39 $ .60 $ .92
========= ========= =========
Weighted-average shares outstanding 24,595 24,279 14,548
Dividends per share $ .37 $ .34 $ .33
See Notes to Consolidated Financial Statements.
F-4
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In thousands)
Unrealized
Additional Dividends In Holding Gains Total
Common Stock Paid-In Excess of Net (Losses) on Stockholders'
Shares Amount Capital Income Debt Securities Equity
------ ------- ---------- ----------- --------------- ----------
Balances - December 31, 1993 14,080 $ 141 $ 209,904 $ (162,858) $ -- $ 47,187
Issuance of Common Stock 10,132 101 17,278 -- -- 17,379
Net income -- -- -- 13,358 -- 13,358
Dividends -- -- -- (4,959) -- (4,959)
------ ----- ---------- ----------- ------- --------
Balances - December 31, 1994 24,212 242 227,182 (154,459) -- 72,965
Issuance of Common Stock 144 2 364 -- -- 366
Net income -- -- -- 14,440 -- 14,440
Dividends -- -- -- (8,255) -- (8,255)
Unrealized depreciation of CMBS bonds net
of appreciation of non-agency MBS bonds -- -- -- -- (757) (757)
------ ----- ---------- ----------- ------- --------
Balances - December 31, 1995 24,356 244 227,546 (148,274) (757) 78,759
Issuance of Common Stock 484 4 1,207 -- -- 1,211
Net income -- -- -- 9,673 -- 9,673
Dividends -- -- -- (9,128) -- (9,128)
Unrealized appreciation of CMBS bonds and
non-agency MBS bonds -- -- -- -- 5,850 5,850
------ ----- ---------- ----------- ------- --------
Balances - December 31, 1996 24,840 $ 248 $ 228,753 $ (147,729) $ 5,093 $ 86,365
====== ===== ========== =========== ======= ========
See Notes to Consolidated Financial Statements.
F-5
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
-------------------------------------------
1996 1995 1994
--------- --------- ----------
Cash Flows From Operating Activities
Net income $ 9,673 $ 14,440 $ 13,358
Adjustments to reconcile net income
to net cash flows from operating activities:
Accretion of discounts on non-agency MBS bonds 2,998 1,331 338
Equity in earnings of Commercial Assets (1,875) (1,742) (1,354)
Issuance of Common Stock for the elimination of DERs 825 -- --
(Increase) decrease in other assets (148) (138) 375
Increase (decrease) in accounts payable and accrued
liabilities 197 (1,022) 1,845
Net gain on sale of assets -- (5,369) (12,646)
Amortization of CMO Ownership Interests -- 923 7,738
Write-down of CMO Ownership Interests -- -- 2,715
------- --------- ----------
Net Cash Provided By Operating Activities 11,670 8,423 12,369
------- --------- ----------
Cash Flows From Investing Activities
Acquisition of non-agency MBS bonds (15,893) (23,965) (33,624)
Principal collections on non-agency MBS bonds 2,769 2,017 599
Indemnifications from non-agency MBS bonds 382 807 137
Dividends from Commercial Assets 1,988 2,430 911
Principal collections on CMO Ownership Interests -- 2,086 8,548
Proceeds from the sale of assets -- 25,038 17,194
Release of restricted cash upon repayment of
secured notes payable -- 15,862 1,201
--------- --------- ----------
Net Cash (Used By) Provided By Investing Activities (10,754) 24,275 (5,034)
--------- --------- ----------
Cash Flows From Financing Activities
Dividends paid (9,128) (8,981) (4,232)
Increase (decrease) in short-term borrowings, net 3,000 (2,758) (1,482)
Repayment of secured notes payable -- (30,592) (11,408)
Issuance of Common Stock 301 -- 17,208
---------- --------- ----------
Net Cash Used By Financing Activities (5,827) (42,331) 86
---------- --------- ----------
Cash and Cash Equivalents
(Decrease) increase (4,911) (9,633) 7,421
Beginning of year 5,328 14,961 7,540
---------- --------- ----------
End of year $ 417 $ 5,328 $ 14,961
========== ========= ==========
See Notes to Consolidated Financial Statements.
F-6
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. The Company
Asset Investors Corporation was incorporated under Maryland law on
October 14, 1986. The Common Stock is listed on the NYSE under the symbol "AIC."
The Company's assets primarily are non-agency MBS bonds and shares of Commercial
Assets' common stock.
B. Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned corporate subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation. The Company's investment in Commercial Assets is recorded under
the equity method. The Company has recorded its proportionate share of the
unrealized holding losses on the CMBS bonds of Commercial Assets.
Non-agency MBS Bonds - The Company's non-agency MBS bonds (also
referred to as high-yield bonds backed by home mortgage loans) are acquired at a
significant discount to par value. The amortized cost of the non-agency MBS
bonds is equal to the outstanding principal amount net of unamortized discount
and allowances for credit losses. The Company records an allowance for credit
losses when it acquires a non-agency MBS bond in an amount equal to the expected
future credit losses allocated to the subordinate bond. Future credit losses are
estimated using a methodology which assumes defaults on mortgage loans reach
their highest levels during years three through five of the mortgage loan. The
allowance for credit losses is adjusted for realized credit losses and changes
in estimates of future credit losses. Earnings from non-agency MBS bonds are
recognized based upon the relationship of cash flows received during the period
and estimates of future cash flows to be received over the life of the bonds.
The subordinate non-agency MBS bonds owned by the Company generally are not
scheduled to receive principal prepayments for at least their first five years.
The principal repayments from the subordinate bonds after year five may be
reduced by credit losses allocated to the bonds during the first five years.
Accordingly, the pricing discount is generally not amortized into income until
after year five when the effects of credit losses are more determinable. The
effect of this income recognition methodology is to defer income from
amortization of the significant discount on the bonds until later periods when
the ultimate cash flows from the subordinate non-agency MBS bonds are more
predictable.
The Company classifies its non-agency MBS bonds as available-for-sale,
carried at fair value in the financial statements. Unrealized holding gains on
available-for-sale securities are excluded from earnings and reported as a net
amount in stockholders' equity until realized. If the fair value of a non-agency
MBS bond declines below its amortized cost basis and the decline is considered
to be "other than temporary," the amount of the write-down would be included in
the Company's income (i.e., accounted for as a realized loss). The decline in
fair value is considered to be other than temporary if the cost basis exceeds
the related projected cash flow from the non-agency MBS bond discounted at a
risk-free rate of return.
Income Taxes - The Company operates in a manner that permits it to
qualify for the income tax treatment accorded to a REIT. If it so qualifies, the
Company's REIT income, with certain limited exceptions, will not be subject to
federal income tax at the corporate level. Accordingly, no provision for taxes
has been made in the consolidated financial statements.
F-7
In order to maintain its status as a REIT, the Company generally is
required, among other things, to distribute annually to its shareowners at least
95% of its REIT income reduced by its NOL carryover. The Company also is
required to meet certain asset, income and stock ownership tests.
Statements of Operations - In 1993, the Company began a program of
liquidating its CMO Ownership Interests and acquiring credit-sensitive assets
(non-agency MBS bonds and shares of Commercial Assets). Accordingly, the Company
classified as liquidating operations its revenues from CMO Ownership Interests
along with expenses directly allocable to the CMO Ownership Interests, including
interest on borrowings collateralized by CMO Ownership Interests. All other
revenues and expenses of the Company, including corporate general and
administrative expenses, are classified as ongoing operations.
Net Income (Loss) Per Share - Net income (loss) per share for the years
ended December 31, 1996, 1995 and 1994 was based upon the weighted-average
number of shares of Common Stock outstanding during each such year. The effect
of unexercised stock options was not material with respect to net income per
share in 1996, 1995 and 1994.
Statements of Cash Flows - For purposes of reporting cash flows, cash
maintained in bank accounts, money market funds and overnight cash investments
are considered to be cash and cash equivalents. The Company made interest
payments of $72,000, $903,000 and $2,972,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
Non-cash investing and financing activities for the years ended December
31, 1996, 1995 and 1994 were as follows (in thousands):
1996 1995 1994
-------- -------- --------
Dividends declared but not yet received from Commercial Assets $ -- $ -- $ 552
Unrealized holding gains (losses) on debt securities $ 5,850 $ (757) $ --
Distributions of Common Stock pursuant to DERs $ 87 $ 366 $ 171
Distributions of Common Stock as consideration for the
elimination of DERs $ 825 $ -- $ --
Dividends declared but not yet paid $ -- $ -- $ 726
Use of Estimates - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reclassifications - Certain reclassifications have been made in the 1995
and 1994 consolidated financial statements to conform to the classifications
used in the current year.
F-8
C. Non-agency MBS Bonds
As of December 31, 1996, the Company owned 214 non-agency MBS bonds,
with an aggregate outstanding principal balance on the date of acquisition of
$246,400,000 and an aggregate total cost of $73,087,000. The net carrying value
of the Company's non-agency MBS bonds was as follows (dollar amounts in
thousands):
Outstanding Balance
at December 31,
-----------------------------
Price (1) Coupon (2) 1996 1995
----- ------ ----------- -----------
Non-agency MBS bonds collateralized by:
30-year fixed-rate mortgage loans 31.4% 7.2% $ 161,331 $ 116,757
15-year fixed-rate mortgage loans 36.6 6.7 21,241 16,611
Adjustable-rate mortgage loans 24.9 7.3 4,488 4,149
Lesser quality mortgage loans(3) 58.9 8.6 10,097 14,083
Other subordinate non-agency MBS bonds (4) 27.3 6.9 27,422 28,565
---- --- --------- ---------
34.2% 7.2% 224,579 180,165
==== ===
Less:
Allowance for credit losses (116,413) (71,365)
Unamortized discount (46,087) (56,446)
--------- ---------
Amortized cost 62,079 52,354
Net unrealized holding gains 6,000 399
----------- -----------
Total net book value $ 68,079 $ 52,753
=========== ===========
- ---------------------------------
1 Weighted-average price as a percentage of the principal balance of the non-
agency MBS bonds.
2 Weighted-average coupon of non-agency MBS bonds at December 31, 1996.
3 The lesser quality mortgage loans, commonly referred to as "B and C"
mortgage loans, are mortgage loans made to borrowers who have credit
histories of a lower overall quality than most borrowers, generally a
result of previous repayment difficulties, brief job histories, previous
bankruptcies or other causes and are adjustable-rate mortgages. The average
price of these bond classes is higher because they represent a larger
percentage of their respective bond issuances than other non-agency MBS
bonds.
4 The non-agency MBS bonds that are backed by "other subordinate, non-agency
MBS bonds" are also known as "re-REMICs."
The Company's non-agency MBS bonds are subject to the risk of default
and foreclosure loss from the approximately $43,700,000,000 principal balance of
non-conforming mortgage loans that, on December 31, 1996, backed its bonds. The
subordinate non-agency MBS bonds owned by the Company represent, on average,
.51% of the bond issuances that are collateralized by these mortgages. The
future credit losses for each bond are limited to the outstanding balance of
each bond (averaging $1,049,000 at December 31, 1996).
The allowance for credit losses is: (i) increased or decreased for
changes in the Company's expectations of future credit losses; (ii) increased
for expectations of future credit losses when a non-agency MBS bond is acquired;
and (iii) reduced by actual credit losses allocated to the Company's non-agency
MBS bonds. The activity in the allowance for credit losses during the years
ended December 31, 1996 and 1995 was as follows (in thousands):
F-9
1996 1995
---------- ----------
Balance at the beginning of the year $ 71,365 $ 22,075
Additions to the allowance for credit
losses on non-agency MBS bonds 58,259 51,680
Credit losses (net of indemnifications
of $382 and $807, respectively) (13,211) (2,390)
---------- ---------
Balance at the end of the year $ 116,413 $ 71,365
========== =========
The mortgages which comprise the collateral for the Company's
non-agency MBS bonds are secured by single family residences in 53 states and
U.S. territories. Approximately 37%, 8% and 6% of the mortgage loans are
collateralized by properties in California, New York and New Jersey,
respectively.
Subsequent to year-end, the Company entered into an agreement to
contribute its non-agency MBS bonds into a structured transaction in which the
Company will retain a small equity interest. The Company anticipates that the
estimated $6,000,000 unrealized holding gain at December 31, 1996, will be
recognized in 1997 earnings.
D. Investment in Commercial Assets
On December 31, 1996 and 1995, the Company owned 2,761,126 shares
(approximately 27%) of the common stock of Commercial Assets. Commercial Assets
is a REIT which manages ownership interests in commercial mortgage loan
securitizations of multi-family real estate. The mortgages which comprise the
collateral for Commercial Assets' CMBS bonds are secured by apartment
communities and mobile home parks in 36 states. Approximately 26%, 13% and 8% of
the mortgage loans are collateralized by properties in Texas, Arizona and
Georgia, respectively. Presented below is the summarized financial information
of Commercial Assets as reported by Commercial Assets (in thousands):
Balance Sheets December 31,
---------------------------------
1996 1995
--------- ----------
CMBS bonds, net of $3,389 and
$4,245 of unrealized holding losses $ 61,460 $ 69,503
Cash and other assets 10,946 2,087
--------- ---------
Total Assets 72,406 71,590
--------- ---------
Short-term borrowings -- 700
Other liabilities 487 425
--------- ---------
Total Liabilities 487 1,125
--------- ---------
Stockholders' Equity $ 71,919 $ 70,465
========= =========
F-10
Statements of Income Year Ended December 31,
------------------------------------
1996 1995 1994
------- ------- -------
CMBS bonds $ 9,838 $ 8,980 $ 5,938
Interest 319 189 1,126
------- ------- -------
Total revenues 10,157 9,169 7,064
------- ------- -------
Management fees 1,425 1,151 598
General and administrative 805 1,393 1,220
Elimination of dividend equivalent rights 966 -- --
Interest 2 249 319
------- ------- -------
Total expenses 3,198 2,793 2,137
------- ------- -------
Net income $ 6,959 $ 6,376 $ 4,927
======= ======= =======
According to Commercial Assets, at December 31, 1996 and 1995, it had
$3,389,000 and $4,245,000, respectively, of unrealized holding losses on its
CMBS bonds. The Company's share of these unrealized holding losses on CMBS bonds
of $907,000 and $1,156,000, respectively, is recorded as a reduction in the
carrying value of its investment in Commercial Assets and as a component of
stockholders' equity.
E. Liquidating Operations
The Company, as of December 31, 1995, had substantially liquidated its
investment in CMO Ownership Interests. In 1995, the Company's balance sheet
reflected all the CMO Ownership Interests at their net carrying amount and the
statements of operations reflected earnings from CMO Ownership Interests on a
net basis as liquidating operations. The components of the CMO Ownership
Interests at December 31, 1995, and earnings from liquidating operations for the
two years then ended are as follows:
CMO Subsidiaries:
Restricted cash $ 1,150
Accrued interest receivable 228
CMO issuance costs, net 41
Mortgage collateral 32,391
Unamortized discount, net of premium,
on mortgage collateral (364)
---------
CMO Subsidiaries - assets 33,446
---------
Accrued interest payable 454
CMO Bonds 32,874
Unamortized discount on CMO Bonds (1,302)
Reserve 1,052
---------
CMO Subsidiaries - liabilities 33,078
---------
Total CMO Ownership Interests, net $ 368
=========
F-11
Year Ended December 31,
------------------------------
1995 1994
-------- ---------
Revenues
CMO Ownership Interests $ 1,734 $ 2,082
Interest income 225 728
Net gain on sale of CMO Ownership Interests 5,369 12,646
-------- ---------
Total revenues 7,328 15,456
-------- ---------
Expenses
Management fees 234 496
General and administrative 23 339
Interest 564 2,724
-------- ---------
Total expenses 821 3,559
-------- ---------
Earnings from liquidating operations $ 6,507 $ 11,897
======== =========
During the years ended December 31, 1995 and 1994, the Company, as
issuer of certain CMO Ownership Interests, exercised the Call Rights on these
interests, recognizing net gains of $2,153,000 and $12,833,000, respectively.
The exercise of Call Rights resulted in the sale of $45,698,000 and $184,491,000
principal amount of mortgage collateral from CMO subsidiaries during 1995 and
1994, respectively, and the early redemption of the related CMO bonds.
On March 30, 1995, Asset Investors Securitization Corporation, a wholly
owned subsidiary of the Company "Asset Securitization" sold 28 CMO Ownership
Interests and repaid the related outstanding secured notes payable. As of
December 31, 1994, the company recognized $1,205,000 of net holding losses for
book income purposes related to the 28 CMO Ownership Interests sold. As a
result, no gain or loss was recorded on the sale of the CMO Ownership Interests
and repayment of the secured notes in 1995. During the years ended December 31,
1995 and 1994, the Company earned book income from Asset Securitization of
$733,000 and $3,306,000 (including $4,664,000 of gains from the exercise of Call
Rights in 1994), respectively.
On November 10, 1995, the Company sold 23 CMO Ownership Interests with a
net carrying value of $2,315,000 for $5,517,000. The sale substantially
liquidated the Company's holdings of CMO Ownership Interests.
F. Short-Term Borrowings
On July 19, 1995, the Company obtained a one-year, $1,000,000 unsecured
line of credit. The line of credit was renewed for an additional year on July
19, 1996. Advances under this line bear interest at the prime rate. At December
31, 1996 and 1995, there were no borrowings under this line of credit.
On July 24, 1996, the Company secured a $10,000,000 revolving credit
and term loan agreement with a bank. The loan is collateralized by certain of
the Company's non-agency MBS bonds with a net carrying value of $19,461,000 at
December 31, 1996. At December 31, 1996, $3,000,000 was borrowed under this
credit facility at an average effective interest rate of 8.25%. The loan was
repaid subsequent to year-end as a result of the structured transaction for the
non-agency MBS bonds. One of the Company's Independent Directors is a member of
the Board of Directors of the parent holding company of the bank.
F-12
At December 31, 1995, the Company was able to borrow $9,456,000 under a
credit facility secured by certain non-agency MBS bonds based on the value of
the pledged collateral. There were no borrowings outstanding under this credit
facility at December 31, 1995 and this credit facility lapsed in 1996.
The Company as of December 31, 1995, had several repurchase agreement
facilities collateralized by certain non-agency MBS bonds. The collateral value
and interest rate related to the repurchase agreements were subject to periodic
adjustment. At December 31, 1995, the Company was able to borrow $9,155,000
under eight repurchase agreements, based on the value of the pledged collateral.
The Company canceled these repurchase agreement facilities in 1996.
G. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each type of financial instrument. The estimates of fair value have
been determined by the Company using available market information and valuation
methodologies. Considerable judgment was required to interpret the market
information and develop the estimates of fair value. EXCEPT FOR THE ESTIMATED
FAIR VALUE OF THE NON-AGENCY MBS BONDS BASED ON THE PROPOSED STRUCTURED
TRANSACTION, THE ESTIMATES OF FAIR VALUE PRESENTED HEREIN ARE NOT NECESSARILY
INDICATIVE OF THE AMOUNTS THE COMPANY COULD REALIZE IN A CURRENT MARKET
EXCHANGE. THE USE OF DIFFERENT MARKET ASSUMPTIONS AND/OR VALUATION METHODOLOGIES
MAY HAVE A MATERIAL EFFECT ON THE ESTIMATES OF FAIR VALUE. THE FAIR VALUE
ESTIMATES PRESENTED HEREIN ARE BASED ON PERTINENT INFORMATION AVAILABLE TO
MANAGEMENT AS OF FEBRUARY 28, 1997. FUTURE ESTIMATES OF FAIR VALUE MAY DIFFER
SIGNIFICANTLY FROM THE AMOUNTS PRESENTED HEREIN.
* Cash and cash equivalents, other assets, accounts payable and
accrued liabilities, management fees payable and short-term
borrowings - the carrying amounts approximate fair value because
of the short maturity of these instruments.
* Non-agency MBS bonds - there is no exchange or other active
market from which to obtain a quoted market price for these
financial instruments. At December 31, 1995, the estimate of fair
value was determined by multiplying the outstanding principal
balance by current prices of non-agency MBS bonds with similar
characteristics. At December 31, 1996, the estimated fair value of
the non-agency MBS bonds was based upon the anticipated proceeds,
net of transaction costs, from contributing the portfolio into the
proposed structured transaction as contemplated by the 1997 Plan.
* Investment in Commercial Assets - the fair value was determined
based upon the closing price of the Commercial Assets common stock
on the American Stock Exchange, Inc. as of the end of the year.
The carrying amounts and fair values of the Company's non-agency MBS
bonds and investment in Commercial Assets at December 31, 1996 and 1995, are as
follows (in thousands):
F-13
December 31, 1996 December 31, 1995
--------------------------- --------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
-------- --------- -------- ----------
Non-agency MBS bonds $ 62,079 $ 68,079 $ 52,354 $ 52,753
======== ======== ======== ========
Investment in Commercial Assets $ 19,361 $ 18,638 $ 19,225 $ 15,531
======== ======== ======== ========
H. Common Stock
On December 16, 1994, the Company sold 10,053,794 shares of Common
Stock pursuant to the Rights Offering, at a price to the public of $1.90 per
share, resulting in net proceeds to the Company of $17,208,000. Shares sold in
the Rights Offering were sold at $1.90 per share, $2.04 less than the $3.94 per
share book value immediately prior to the completion of the Rights Offering.
I. Stock Option Plan
The Company has its 1986 Stock Option Plan, as restated November 15,
1990, as amended (the "Stock Option Plan") for the issuance of non-qualified
stock options to its directors and officers. As of January 1, 1996, the Stock
Option Plan permitted the issuance of up to an aggregate of 1,502,639 shares of
Common Stock. Pending extension of the plan agreement, the issuance of 1,234,000
shares of Common Stock will be permitted as of January 1, 1997. The exercise
price for stock options may not be less than 100% of the fair market value of
the shares of Common Stock at the date of grant. Each of the stock options
granted to date expire five years from the date of grant.
Prior to May 1996, stock options granted under the Stock Option Plan
automatically accrued Dividend Equivalent Rights "DERs" based on: (i) the number
of shares underlying the unexercised portion of the option; (ii) dividends
declared on the outstanding shares of the Company between the option grant date
and the option exercise date; and (iii) the market price of the shares on the
dividend record date. DERs were paid in shares of Common Stock (or in other
property that constituted the dividend) at the time of each dividend
distribution. During the years ended December 31, 1996, 1995 and 1994, the
Company incurred $87,000, $337,000 and $180,000, respectively, of general and
administrative expenses from DERs covering 26,794, 128,857 and 82,627,
respectively, of shares of Common Stock which were subject to issuance pursuant
to options granted under the Stock Option Plan.
At their annual meeting in May 1996, the Company's shareowners approved
an amendment to the 1986 Stock Option Plan which permitted the Company to issue
shares of Common Stock to the holders of options who voluntarily relinquished
their right to receive DERs in the future. The issuance of Common Stock in
exchange for the right to receive DERs in the future resulted in a one-time,
non-cash charge to 1996 earnings of $825,000 and the issuance of 244,391 shares
of Common Stock. The effect of the amendment will be to reduce general and
administrative expenses from the accrual of DERs from options granted under the
Stock Option Plan.
Presented below is a summary of the changes in stock options for the
three years ended December 31, 1996. As of December 31, 1996, the outstanding
options have exercise prices ranging from $1.61 to $3.37 and have a remaining
weighted-average life of 3.7 years.
F-14
Average
Exercise
Price Shares
--------- ---------
Outstanding-December 31, 1993 $ 9.97 393,617
Granted 2.44 188,750
Forfeited 7.05 (33,723)
Issued in connection with the Rights Offering -- 388,993
-------- ---------
Outstanding-December 31, 1994 4.42 937,637
Granted 2.37 165,000
Expired 4.10 (132,448)
Forfeited 1.68 (2,564)
-------- ---------
Outstanding-December 31, 1995 3.80 967,625
Granted 3.26 631,000
Exercised 1.41 (213,093)
Forfeited 1.68 (1,602)
Expired 7.95 (348,637)
-------- ---------
Outstanding-December 31, 1996 $ 2.57 1,035,293
======== =========
Certain options granted to date vest over a two year period. As of
December 31, 1996, 1995 and 1994, 726,543, 805,122, and 776,349, respectively,
of the outstanding options were exercisable.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options rather than the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation." Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using an option pricing model.
Option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
During the years ended December 31, 1996 and 1995, the estimated
weighted-average grant-date fair value of options granted was $.13 per option
and $.17 per option, respectively, and the estimated total fair value of options
granted was $84,000 and $22,000, respectively The pro forma net income of the
Company reflecting the fair value of options granted was $9,589,000 ($.39 per
share) and $14,418,000 ($.60 per share) for the years ended December 31, 1996
F-15
and 1995, respectively. The estimated fair value of the options is amortized to
expense over the options' vesting period. The Company assumed a life of five
years and risk-free interest rate equal to the Five-Year U.S. Treasury rate on
the date the options were granted. In addition, the expected stock price
volatility and dividends growth rates were estimated based upon historical
averages over the three years ended December 31, 1996.
J. Other Matters
The Company operates under a Management Agreement with the Manager
which is extended annually and currently is in effect through December 31, 1997.
Pursuant to the Management Agreement, the Manager advises the Company on its
business and oversees its day-to-day operations subject to the supervision of
the Company's Board of Directors. During the years ended December 31, 1996, 1995
and 1994, the Company incurred combined Incentive Fees and Base Fees of
$1,061,000, $731,000 and $372,000, respectively. The Company also incurred
Administrative Fees pursuant to the Management Agreements and certain
administration agreements entered into with the Manager in connection with
certain of the Company's CMO Ownership Interests and non-agency MBS bonds.
Administrative Fees incurred for the years ended December 31, 1996, 1995 and
1994 were $732,000, $914,000 and $1,440,000, respectively.
The Company's day-to-day operations are performed by Financial Asset
Management LLC, (the "Manager") pursuant to the Management Agreement. The
Management Agreement was approved by a majority of the Independent Directors.
Prior to April 1, 1996, the Company was managed by Financial Asset Management
Corporation, a wholly owned subsidiary of MDC Holdings, Inc. ("MDC"). Effective
April 1, 1996, Financial Asset Management LLC assumed the obligations of the
Management Agreement. From April 1, 1996, through September 30, 1996, the
Manager was 80% owned by two wholly owned subsidiaries of MDC and 20% owned by
Spencer I. Browne who was at the time the President, Chief Executive Officer and
a Director of the Company. On September 30, 1996, MDC acquired Mr. Browne's 20%
interest in the Manager and then sold 100% of the Manager to an investor group
led by Terry Considine and Thomas L. Rhodes. MDC received sales proceeds of
$11,450,000, including $6,000,000 of cash and $5,450,000 of subordinated
convertible notes. The notes are payable at specified dates during the next ten
years and are convertible, under certain circumstances, into as much as a 47.6%
ownership interest in the Manager.
In connection with the sale, Larry A. Mizel resigned as Chairman of the
Board of Directors and Mr. Browne resigned as President, Chief Executive Officer
and a Director of the Company. Terry Considine and Thomas L. Rhodes were elected
as Co-Chairmen of the Board of Directors and Co-Chief Executive Officers and
Leslie B. Fox was elected as President of the Company.
The Company's restructuring plan also provides for consideration of the
Company's acquisition of the Manager, a step which would result in the Company
becoming self-managed and fully integrated. A special committee of Independent
Directors has been established to evaluate this transaction.
The Company's Certificate of Incorporation permits the Board of
Directors to issue additional classes of stock without further shareowner
approval. As of December 31, 1996, the Company has not issued any classes of
stock other than its Common Stock.
The officers and certain directors of the Company also serve as
officers, directors or both of Commercial Assets.
F-16
During 1996, 1995 and 1994, 0%, 12% and 100%, respectively, of the
dividends distributed to the Company's shareowners were Excess Inclusion income.
Excess Inclusion income results from holding residual interests in REMICs.
Excess Inclusion income may not be reduced by any expenses or deductions,
including normal operating expenses, losses from the Company's CMO Ownership
Interests and NOLs. Dividends paid to shareowners of the Company will be
characterized as Excess Inclusion income to the extent that such dividends are
attributable to Excess Inclusion income realized by the Company. Distributions
of Excess Inclusion income are taxable as ordinary income to shareowners.
During 1995, 20% of the dividends distributed constituted return of
capital distributions. There were no return of capital distributions in 1996.
At December 31, 1996, the Company's NOL carryover was approximately
$96,000,000 and its capital loss carryover was approximately $35,000,000. The
NOL carryover may be used to offset all or a portion of the Company's REIT
income, and as a result, to reduce the amount of income that the Company must
distribute to shareowners to maintain its status as a REIT. The NOL carryover is
scheduled to expire between 2007 and 2009 and the capital loss carryover is
scheduled to expire between 1998 and 2000.
K. Selected Quarterly Financial Data (Unaudited)
Presented below is selected quarterly financial data for the years
ended December 31, 1996 and 1995 (in thousands, except per share data):
Three Months Ended
----------------------------------------------------------------------------
1996 December 31, September 30, June 30, March 31,
- ------------------------------------- ------------------ ------------------- ------------------ ------------------
Revenues $ 3,427 $ 3,327 $ 3,417 $ 3,353
Net income 2,609 2,576 2,085 2,403
Net income per share .10 .11 .08 .10
Dividends per share .095 .095 .090 .090
Closing stock prices (2)
High 4 3-3/4 3-3/4 3-3/8
Low 3-1/2 3-3/8 3-1/8 2-3/4
Common Stock outstanding(3) 24,772 24,738 24,500 24,365
1995
- ------------------------------------- ------------------ ------------------- ------------------ ------------------
Revenues:
Ongoing operations $ 3,376 $ 3,164 $ 2,429 $ 1,902
Liquidating operations 3,234 (1) 228 136 3,730 (1)
Net income 5,848 2,715 1,870 4,007
Net income per share .25 .11 .07 .17
Dividends per share .090 .090 .080 .080
Closing stock prices (2)
High 3-3/8 2-7/8 2-5/8 2-3/8
Low 2-5/8 2-3/8 2-1/4 1-5/8
Common Stock outstanding(3) 24,336 24,294 24,259 24,227
- ------------------------
1 Includes gains on sales of CMO Ownership Interests.
2 As reported on the NYSE Composite Tape.
3 Weighted average for the period indicated.
F-17
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareowners
Commercial Assets, Inc.
Denver, Colorado
We have audited the accompanying balance sheets of Commercial Assets,
Inc. as of December 31, 1996 and 1995, and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Commercial Assets,
Inc. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Phoenix, Arizona
February 10, 1997
F-18
COMMERCIAL ASSETS, INC.
BALANCE SHEETS
(Dollar amounts in thousands)
December 31,
---------------------------
1996 1995
---------- ----------
Assets
Cash and cash equivalents $ 8,277 $ 598
Accrued interest receivable 597 675
Restricted cash 1,982 768
CMBS bonds 61,460 69,503
Other assets, net 90 46
---------- ----------
Total Assets $ 72,406 $ 71,590
========== ==========
Liabilities
Accounts payable and accrued liabilities $ 189 $ 133
Management fees payable 298 292
Short-term notes payable -- 700
---------- ----------
Total Liabilities 487 1,125
---------- ----------
Stockholders' Equity
Preferred Stock, par value $.01 per share, 25,000,000 shares authorized; no
shares issued or outstanding -- --
Common Stock, par value $.01 per share, 75,000,000 shares authorized;
10,315,809 and 10,142,034 shares issued and outstanding, respectively
103 102
Additional paid-in capital 76,559 75,523
Cumulative dividends declared (20,295) (12,897)
Cumulative net income 18,941 11,982
---------- ----------
Dividends in excess of net income (1,354) (915)
---------- ----------
Net unrealized holding losses on CMBS bonds (3,389) (4,245)
---------- ----------
Total Stockholders' Equity 71,919 70,465
---------- ----------
Total Liabilities and Stockholders' Equity $ 72,406 $ 71,590
========== ==========
See Notes to Financial Statements.
F-19
COMMERCIAL ASSETS, INC.
STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended December 31,
-----------------------------------------------
Revenues 1996 1995 1994
--------- --------- ---------
CMBS bonds $ 9,838 $ 8,980 $ 5,938
Interest 319 189 1,126
--------- --------- ---------
Total Revenues 10,157 9,169 7,064
--------- --------- ---------
Expenses
Management fees 1,425 1,151 598
General and administrative 805 1,393 1,220
Elimination of DERs 966 -- --
Interest 2 249 319
--------- --------- ---------
Total Expenses 3,198 2,793 2,137
--------- --------- ---------
Net Income $ 6,959 $ 6,376 $ 4,927
========= ========= =========
Net income per share $ .68 $ .63 $ .49
Weighted-average shares outstanding 10,247 10,104 10,047
Dividends per share
Regular dividends $ .68 $ .68 $ .50
Special dividends .04 -- .03
--------- --------- ---------
$ .72 $ .68 $ .53
========= ========= =========
See Notes to Financial Statements.
F-20
COMMERCIAL ASSETS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1995 and 1994
(In thousands)
Net
Unrealized
Additional Dividends In Holding Total
Common Stock Paid-In Excess of Losses on Stockholders'
Shares Amount Capital Net Income CMBS Bonds Equity
------ ------ ------- ---------- ---------- ---------
Balances - December 31, 1993 10,039 $ 100 $ 74,900 $ (24) $ -- $ 74,976
Issuance of Common Stock 14 1 94 -- -- 95
Net income -- -- -- 4,927 -- 4,927
Dividends -- -- -- (5,326) -- (5,326)
------- ------ --------- -------- ------- ---------
Balances - December 31, 1994 10,053 101 74,994 (423) -- 74,672
Issuance of Common Stock 89 1 529 -- -- 530
Net income -- -- -- 6,376 -- 6,376
Dividends -- -- -- (6,868) -- (6,868)
Unrealized depreciation of CMBS bonds -- -- -- -- (4,245) (4,245)
------- ------ --------- -------- ------- ---------
Balances - December 31, 1995 10,142 102 75,523 (915) (4,245) 70,465
Issuance of Common Stock 174 1 1,036 -- -- 1,037
Net income -- -- -- 6,959 -- 6,959
Dividends -- -- -- (7,398) -- (7,398)
Unrealized appreciation of CMBS bonds -- -- -- -- 856 856
------- ------ --------- -------- ------- ---------
Balances - December 31, 1996 10,316 $ 103 $ 76,559 $ (1,354) $(3,389) $ 71,919
======= ====== ========= ======== ======= =========
See Notes to Financial Statements.
F-21
COMMERCIAL ASSETS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
--------------------------------------------
1996 1995 1994
-------- -------- ---------
Cash Flows From Operating Activities
Net income $ 6,959 $ 6,376 $ 4,927
Adjustments to reconcile net income to net cash flows from
operating activities:
Amortization of discount on CMBS bonds and other assets (2,155) (638) (331)
Issuance of Common Stock for elimination of DERs 941 -- --
Decrease (increase) in accrued interest receivable 78 6 (569)
Increase in accounts payable and accrued liabilities 157 329 481
(Increase) decrease in other assets (60) 78 (76)
-------- -------- ---------
Net Cash Provided By Operating Activities 5,920 6,151 4,432
-------- -------- ---------
Cash Flows From Investing Activities
Principal collections from CMBS bonds 9,857 554 377
Acquisitions of CMBS bonds -- -- (65,628)
Acquisition of restricted cash -- -- (96)
-------- -------- ---------
Net Cash Provided By (Used In) Investing Activities 9,857 554 (65,347)
-------- -------- ---------
Cash Flows From Financing Activities
Dividends paid (7,398) (8,879) (3,315)
(Repayments) borrowings of short-term notes payable (700) (9,595) 10,295
-------- -------- ---------
Net Cash (Used In) Provided By Financing Activities (8,098) (18,474) 6,980
-------- -------- ---------
Cash and Cash Equivalents
Increase (decrease) 7,679 (11,769) (53,935)
Beginning of period 598 12,367 66,302
-------- -------- ---------
End of period $ 8,277 $ 598 $ 12,367
======== ======== =========
See Notes to Financial Statements.
F-22
COMMERCIAL ASSETS, INC.
NOTES TO FINANCIAL STATEMENTS
A. Organization
Commercial Assets, Inc. ("the Company") was incorporated under Maryland
law on August 11, 1993 by Asset Investors. The Company commenced operations on
October 12, 1993, the date on which Asset Investors contributed $75,000,000
($74,800,000 pursuant to the Contribution Agreement plus $200,000 cash) to the
capital of the Company and distributed approximately 70% of the shares of Common
Stock of Commercial Assets, Inc. to Asset Investors' shareowners. The Company's
Common Stock is listed on the American Stock Exchange under the symbol "CAX."
The Company's day-to-day operations are performed by Financial Asset
Management LLC, (the "Manager") pursuant to the Management Agreement, a
year-to-year agreement currently in effect through December 31, 1997. The
Management Agreement is subject to the approval of a majority of the Independent
Directors. Prior to April 1, 1996, the Company was managed by Financial Asset
Management Corporation, a wholly owned subsidiary of MDC Holdings, Inc. ("MDC").
Effective April 1, 1996, Financial Asset Management LLC assumed the obligations
of the Management Agreement. From April 1, 1996, through September 30, 1996,
Financial Asset Management LLC was 80% owned by two wholly owned subsidiaries of
MDC and 20% owned by Spencer I. Browne who was at the time the President, Chief
Executive Officer and a Director of the Company. On September 30, 1996, MDC
acquired Mr. Browne's 20% interest in Financial Asset Management LLC and then
sold 100% of the Manager to an investor group led by Terry Considine and Thomas
L. Rhodes. In connection with the sale, Larry A. Mizel resigned as Chairman of
the Board of Directors and Mr. Browne resigned as President, Chief Executive
Officer and a Director of the Company. Terry Considine and Thomas L. Rhodes were
elected as Co-Chairmen of the Board of Directors and Co-Chief Executive Officers
and Leslie B. Fox was elected as President of the Company. No change has been
made to the Management Agreement other than an extension, and Financial Asset
Management LLC will continue its obligations under the Management Agreement.
The Manager is subject to the supervision of the Board of Directors. As
part of its duties, the Manager presents the Company with asset acquisition
opportunities and furnishes the Board of Directors with information concerning
the acquisition, holding and disposition of assets. The Company has no
employees. Certain employees of the Manager have been designated as officers of
the Company.
The Company owns, and the Manager administers on the Company's behalf,
subordinate ownership interests in Commercial Mortgage Backed Securities, "CMBS
bonds." The CMBS bonds are issued in commercial mortgage loan securitizations
which generally are multi-class issuances of debt securities which are secured
and funded as to the payment of principal and interest by a specific group of
mortgage loans on multi-family or other commercial real estate.
To date, the Company's primary emphasis has been on the acquisition of
credit support classes of commercial securitizations backed by mortgage loans on
multi-family real property.
See Notes to Financial Statements.
F-23
B. Summary of Significant Accounting Policies
CMBS bonds - Earnings from CMBS bonds are comprised of coupon interest
and the amortization of the purchase discount. Amortization of the purchase
discount is recognized by the interest method using a constant effective yield
and assumes an estimated rate of future prepayments, defaults and credit losses
which is adjusted for actual experience. The allowance for credit losses is
equal to the undiscounted total of future estimated credit losses. In the event
the Company adjusts the estimate of future credit losses, such adjustments would
be included in current period earnings.
The Company classifies its CMBS bonds as available-for-sale.
Accordingly, the CMBS bonds are carried at fair value in the financial
statements. Unrealized holding gains and losses on available-for-sale securities
are excluded from earnings and reported as a net amount in stockholders' equity
until realized. If the fair value of a CMBS bond declines below its amortized
cost basis and the decline is considered to be "other than temporary," the
amount of the write-down would be included in the Company's income (i.e.,
accounted for as a realized loss). The decline in fair value is considered to be
other than temporary if the cost basis exceeds the related projected cash flow
from the CMBS bond discounted at a risk-free rate of return.
Fair Value of Financial Instruments - The fair value of the Company's
CMBS bonds is discussed in Note C. The fair value of all other financial
instruments of the Company generally approximate their carrying basis or
amortized cost.
Income Taxes - The Company intends to operate in a manner that will
permit it to qualify for the income tax treatment accorded to a REIT. If it so
qualifies, the Company's REIT income, with certain limited exceptions, will not
be subject to federal or state income tax at the corporate level.
Accordingly, no provision for taxes has been made in the financial statements.
In order to maintain its status as a REIT, the Company is required,
among other things, to distribute annually to its shareowners at least 95% of
its REIT income and to meet certain asset, income and stock ownership tests.
Dividends declared in 1996, 1995 and 1994 represented ordinary income to the
shareowners, in accordance with the Code.
Net Income Per Share - Net income per share for the years ended
December 31, 1996, 1995 and 1994 was based upon the weighted-average number of
shares of Common Stock outstanding during each such period. In 1996, 1995 and
1994, the effect of unexercised stock options was not material with respect to
net income per share.
Statements of Cash Flows - For purposes of reporting cash flows, cash
maintained in bank accounts, money market funds and overnight cash investments
are considered to be cash and cash equivalents. The Company paid interest
expense in cash of $8,000, $290,000 and $278,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
Non-cash investing and financing activities for the years ended
December 31, 1996, 1995 and 1994 were as follows (in thousands):
F-24
1996 1995 1994
-------- -------- --------
Principal collections on CMBS bonds transferred to
restricted cash $ 1,214 $ 397 $ 275
Unrealized holding gains (losses) on CMBS bonds $ 856 $ (4,245) $ --
Distributions of Common Stock pursuant to DERs $ 96 $ 376 $ 227
Distributions of Common Stock as consideration for the
elimination of DERs $ 941 $ -- $ --
Dividends declared but not yet paid $ -- $ -- $ 2,011
Use of Estimates - The preparation of the financial statements in
conformity with generally accepted accounting principals requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
C. CMBS Bonds
Based on the timing and amount of future credit losses estimated by the
Company, the weighted-average, yield-to-maturity of the Company's CMBS bonds at
December 31, 1996 and 1995, was 11.9%. The yield-to-maturity on the CMBS bonds
acquired by the Company will be extremely sensitive to defaults on the mortgage
loans collateralizing such CMBS bonds and the severity of losses resulting from
such defaults. The losses are due to a decline in the value of the properties
collateralizing the mortgage loans underlying the Company's CMBS bonds. The
losses may not be apparent until the maturity dates of the mortgage loans as the
property owner attempts to refinance or sell the property to repay the mortgage
loan. The weighted-average lives of the mortgage loans generally coincide with
the weighted-average lives of the CMBS bonds owned by the Company. The
weighted-average lives listed in the table below indicate the approximate time
until the maturity date of the Company's CMBS bonds.
The Company's subordinate CMBS bonds provide credit support to the more
senior bond classes of the related commercial securitization and are
collateralized by mortgage loans on multi-family properties located throughout
the country. Generally, any loss on an individual mortgage loan, which comprises
a portion of the collateral for all bond classes in a CMBS issuance, is absorbed
by the Company to the extent of the principal balance and interest payments of
the Company's related CMBS bonds. The mortgage loans collateralizing certain
CMBS bonds are held by a group of related entities, none of which individually
represent greater than 10% of the mortgage loans collateralizing the Company's
CMBS bonds. The Company's exposure to loss from its CMBS bonds is limited to
their amortized cost and restricted cash.
In May 1996, two CMBS bonds (Aspen MHC, Series 1994-1, Classes C and
D-1) with an outstanding principal balance of $9,664,000 and net carrying value
of $8,723,000 were redeemed eight years earlier than anticipated. The bonds were
acquired on March 8, 1994, for $9,088,000, or 84.3% of their outstanding
principal balance. Since the bonds were redeemed at par, $1,426,000 of discount
amortization was included in earnings during the year ended December 31, 1996.
The outstanding balance of the mortgage loans collateralizing the CMBS
bonds and the outstanding principal of the CMBS bonds that are senior to the
F-25
Company's CMBS bonds was $912,879,000 and $818,291,000, respectively, at
December 31, 1996. The Company provided an allowance for credit losses of
$12,720,000 at December 31, 1996 and 1995 on certain of its CMBS bonds. At
December 31, 1996, a mortgage loan with an outstanding balance of $788,000,
which collateralizes the Company's CMBS bonds, was foreclosed and subsequently
refinanced with a new property owner. During the years ended December 31, 1996
and 1995, there were no credit losses charged to operations or write-downs
charged against the allowance for credit losses. The mortgages which comprise
the collateral for the Company's subordinate CMBS bonds are secured by apartment
complexes in 36 states, with concentrations in Texas (26%), Arizona (13%) and
Georgia (8%).
Pursuant to the provisions of certain of the Company's CMBS bonds, cash
collections which would otherwise be attributable to the Company's interests are
required to be set aside in reserve accounts to support the eventual payment of
more senior classes of CMBS bonds. At December 31, 1996 and 1995, the amounts
set aside of $1,982,000 and $768,000, respectively, are shown as restricted cash
on the balance sheet.
Due to the complex nature of CMBS bonds, each instrument has a discrete
and unique risk/return profile. Not only do CMBS bonds vary significantly from
issuance to issuance, but the characteristics of the individual mortgage loans
underlying the securities of one issuance are distinct from the mortgage loans
underlying certificates of another issuance. There is no exchange or other
active market from which to obtain a quoted market price for these financial
instruments. The estimates of fair value have been determined by the Company
using available market information and valuation methodologies.
Considerable judgment was required to interpret the market information and
develop the estimates of fair value.
THE ESTIMATES OF FAIR VALUE PRESENTED HEREIN ARE NOT NECESSARILY
INDICATIVE OF THE AMOUNTS THE COMPANY COULD REALIZE IN A CURRENT MARKET
EXCHANGE. THE USE OF DIFFERENT MARKET ASSUMPTIONS, VALUATION METHODOLOGIES OR
BOTH MAY HAVE A MATERIAL EFFECT ON THE ESTIMATES OF FAIR VALUE. THE FAIR VALUE
ESTIMATES PRESENTED HEREIN ARE BASED ON PERTINENT INFORMATION AVAILABLE TO
MANAGEMENT AS OF DECEMBER 31, 1996. FUTURE ESTIMATES OF FAIR VALUE MAY DIFFER
SIGNIFICANTLY FROM THE AMOUNTS PRESENTED HEREIN.
The estimated fair value of the Company's CMBS bonds was $61,460,000 on
$89,297,000 of outstanding principal of bonds at December 31, 1996, and
$69,503,000 on $100,368,000 of outstanding principal of bonds at December 31,
1995. The estimate of fair value was determined by discounting the future cash
flows before estimates of credit losses of the CMBS bonds at interest rates
equal to a spread over U.S. Treasury rates with comparable terms to maturity.
The discount rates range from 10% to 27%. The interest rate spread over the U.S.
Treasury rate was based upon current market information of CMBS bonds with
similar characteristics. The fair value of CMBS bonds will fluctuate over time
due to, among other things, changes in prevailing interest rates, liquidity in
the CMBS bonds market, paydowns on the mortgage loans collateralizing the CMBS
bonds and changes in real estate values of the related commercial properties.
The decline in fair value below amortized cost is considered temporary, and,
accordingly, is excluded from earnings and reported as a component of
stockholders' equity.
Certain of the Company's CMBS bonds are pledged as collateral for the
Company's short-term notes payable (see Note D).
F-26
Presented below is a schedule of the CMBS bonds owned by the Company as
of December 31, 1996 and 1995 (dollar amounts in thousands):
Weighted- Outstanding Balance
Maturity Average Date Senior at December 31,
Description Coupon Date Life(5) Acquired Rating CMBS Bonds(4) 1996 1995
- -------------------------------------------- ------ -------- -------- -------- -------- ------------- -------- --------
Kidder, Peabody Acceptance Corporation I,
Series 1993-M2, Class E(1) 8.88% 8/2021 3.7 yrs 11/16/93 BB $ 79,744 $ 10,000 $ 10,000
Lehman Capital Corporation Trust
Certificate, Series 1994-2(2) 6.50% 10/2003 6.8 2/24/94 Unrated 2,143 2,143
Lehman Capital Corporation Trust
Certificate, Series 1994-3 6.50% 10/2003 6.8 2/24/94 Unrated 125,892 4,162 4,162
Aspen MHC, Series 1994-1, Class C(3) -- 6,261
Aspen MHC, Series 1994-1, Class D-1(3) -- 3,596
Fannie Mae Multi-Family REMIC Trust
1994-M2, Class C(6) 7.99% 1/2001 3.9 3/30/94 Unrated 321,980 10,704 11,587
Fannie Mae Multi-Family REMIC Trust
1994-M2, Class D(6) 8.18% 1/2004 6.7 3/30/94 Unrated 38,384 38,715
DLJ Mortgage Acceptance Corporation,
Series 1994-MF4, Class B-3 8.50% 4/2001 4.3 6/15/94 B 91,521 3,136 3,136
DLJ Mortgage Acceptance Corporation,
Series 1994-MF4, Class C 8.50% 4/2001 4.3 6/15/94 Unrated 4,183 4,183
Kidder, Peabody Acceptance Corporation I,
Series 1994-M1, Class C 8.25% 11/2002 4.6 11/29/94 B 199,154 8,930 8,930
Kidder, Peabody Acceptance Corporation I,
Series 1994-M1, Class D 8.25% 11/2002 4.9 11/29/94 Unrated 7,655 7,655
---- --- -------- -------- --------
Total outstanding balance 8.15% 5.5 yrs $818,291 89,297 100,368
==== === ========
Unamortized discount(7) (12,077) (14,393)
Allowance for credit losses(7) (12,720) (12,720)
Unamortized acquisition costs(7) 349 493
-------- --------
Amortized cost 64,849 73,748
Net unrealized holding losses(7) (3,389) (4,245)
-------- --------
Total net book value $ 61,460 $ 69,503
======== ========
- ------------------------------------------------------------------
1 The Company has a 75.2% ownership interest in this CMBS bond.
2 The Company has a 51.7% ownership interest in this CMBS bond.
3 These bonds redeemed in May 1996.
4 The outstanding principal balance at December 31, 1996, of the CMBS
bonds senior to the Company's subordinate CMBS bond classes. The amount is
aggregated for classes from a single issuance.
5 Remaining weighted-average life at December 31, 1996.
6 Payment of principal and interest is not guaranteed by FNMA.
7 The amounts are specifically identified to individual CMBS bonds.
F-27
D. Short-Term Notes Payable
The Company renewed its Loan and Security Agreement collateralized by
four CMBS bonds (FNMA 94-M2C, FNMA 94-M2D, Kidder 94-M1C and Kidder 94-M1D)
through November 29, 1997. No borrowings were outstanding on this line at
December 31, 1996 or 1995 and $21,616,000 was available to be borrowed. Advances
bear interest based upon a spread over the LIBOR. The Loan and Security
Agreement contains certain covenants with which the Company was in compliance at
December 31, 1996 and 1995. The amount the Company will be able to borrow under
its secured credit facility is subject to lender approval and will vary
depending on the value of the collateral pledged to secure such facility.
On July 19, 1996, the Company renewed a one-year, unsecured line of
credit with a bank for $1,000,000. Advances under this line bear interest at
prime. Two of the Company's Independent Directors were members of the Board of
Directors of the holding company of the bank during 1995 and 1996. At December
31, 1996, no advances were outstanding on this line of credit. At December 31,
1995, $700,000 was outstanding on this line of credit at an interest rate of
8.5% per annum.
E. Stock Option Plan
The Company has a Stock Option Plan for the issuance of non-qualified
stock options to its directors and officers which as of January 1, 1997 and
1996, permits the issuance of up to an aggregate of 947,693 and 701,948,
respectively, shares of Common Stock. The exercise price for stock options may
not be less than 100% of the fair market value of the shares of Common Stock at
the date of the grant. Each of the stock options granted to date has a five-year
term.
Prior to May 30, 1996, stock options granted under the Stock Option
Plan automatically accrued dividend equivalent rights ("DERs") based on: (i) the
number of shares underlying the unexercised portion of the option; (ii)
dividends declared on the outstanding shares of the Company between the option
grant date and the option exercise date; and (iii) the market price of the
shares on the dividend record date. DERs were paid in shares of Common Stock (or
in other property that constituted the dividend) at the time of each dividend
distribution. During the years ended December 31, 1996, 1995 and 1994, the
Company incurred $96,000, $376,000 and $227,000, respectively, of general and
administrative expenses from DERs covering 16,362, 63,566 and 36,485,
respectively, shares of Common Stock which were subject to issuance pursuant to
options granted under the Plan.
On May 30, 1996, the Company's shareowners approved an amendment to the
Stock Option Plan which provided for the issuance of Common Stock in exchange
for the elimination of the accrual of DERs for options granted under the Stock
Option Plan. Pursuant to the amendment, the Company incurred a $966,000 charge
(a $941,000 non-cash charge from the issuance of 157,413 shares of Common Stock
plus $25,000 of transactions costs) during 1996.
Presented below is a summary of the changes in stock options for the
three years ended December 31, 1996. The options outstanding at December 31,
1993 were granted at the inception of the Company. As of December 31, 1996, the
outstanding options have exercise prices ranging from $5.62 to $7.50 and have a
remaining weighted-average life of 2.1 years.
F-28
Average
Exercise
Price Shares
------- -------
Outstanding - December 31, 1993 $ 7.50 311,500
Granted 6.32 169,500
------ -------
Outstanding - December 31, 1994 7.09 481,000
Granted 6.15 92,500
------ -------
Outstanding - December 31, 1995 6.94 573,500
Granted 5.86 82,500
Forfeited 6.68 8,500
------ -------
Outstanding - December 31, 1996 $ 6.80 647,500
====== =======
As of December 31, 1996, no options have expired or been exercised.
Options granted to date vest over a two year period. As of December 31, 1996,
1995 and 1994, 453,500, 484,875, and 318,375, respectively, of the outstanding
options were exercisable.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options rather than the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation." Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using an option pricing model.
Option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
During the years ended December 31, 1996 and 1995, the estimated
weighted-average, grant-date fair value of options granted was $.45 and $.23,
respectively, and the estimated total fair value of options granted was $27,000
and $30,000, respectively. The pro forma net income of the Company reflecting
the fair value of options granted was $6,932,000 ($.68 per share) and $6,346,000
($.63 per share) for the years ended December 31, 1996 and 1995, respectively.
The estimated fair value of the options is amortized to expense over the
options' vesting period. The Company assumed a life of five years and risk-free
interest rate equal to the Five-Year U.S. Treasury rate on the date the options
were granted. In addition, the expected stock price volatility and dividends
growth rates were estimated based upon historical averages over the three years
ended December 31, 1996.
F-29
F. Other Matters
The Company operates under a Management Agreement with the Manager,
pursuant to which the Manager advises the Company on its business and oversees
its day-to-day operations, subject to the supervision of the Company's Board of
Directors.
The Company's day-to-day operations are performed by Financial Asset
Management LLC, (the "Manager") pursuant to the Management Agreement, a
year-to-year agreement currently in effect through December 31, 1997. The
Management Agreement is subject to the approval of a majority of the Independent
Directors. Prior to April 1, 1996, the Company was managed by Financial Asset
Management Corporation, a wholly owned subsidiary of MDC Holdings, Inc. ("MDC").
Effective April 1, 1996, Financial Asset Management LLC assumed the obligations
of the Management Agreement. From April 1, 1996, through September 30, 1996,
Financial Asset Management LLC was 80% owned by two wholly owned subsidiaries of
MDC and 20% owned by Spencer I. Browne who was at the time the President, Chief
Executive Officer and a Director of the Company. On September 30, 1996, MDC
acquired Mr. Browne's 20% interest in Financial Asset Management LLC and then
sold 100% of the Manager to an investor group led by Terry Considine and Thomas
L. Rhodes. MDC received sales proceeds of $11,450,000, including $6,000,000 of
cash and $5,450,000 of subordinated convertible notes. The notes are payable at
specified dates during the next ten years and are convertible, under certain
circumstances, into as much as a 47.6% ownership interest in Financial Asset
Management LLC.
In connection with the sale, Larry A. Mizel resigned as Chairman of the
Board of Directors and Mr. Browne resigned as President, Chief Executive Officer
and a Director of the Company. Terry Considine and Thomas L. Rhodes were elected
as Co-Chairmen of the Board of Directors and Co-Chief Executive Officers and
Leslie B. Fox was elected as President of the Company. No change has been made
to the Management Agreement other than an extension, and Financial Asset
Management LLC will continue its obligations under the Management Agreement.
During the years ended December 31, 1996, 1995 and 1994, the Company's
total management fees were $1,425,000, $1,151,000 and $924,000, respectively,
consisting of: (i) Base Fees of $654,000, $751,000 and $556,000, respectively;
(ii) Administrative Fees of $58,000, $65,000 and $42,000, respectively; and
(iii) Incentive Fees of $713,000, $335,000 and $0, respectively. There were no
acquisition fees incurred during 1996 and 1995 while $326,000 were incurred
during 1994. Acquisition Fees are capitalized as part of the cost of acquiring
CMBS bonds.
The Company's Charter authorizes the Board of Directors to issue
25,000,000 shares, par value $.01 per share, of Preferred Stock. To date, the
Company has not issued any classes of stock other than its Common Stock and has
not determined the terms under which any other classes would be issued. The
Charter of the Company authorizes the Board of Directors, without further
shareowner action, to fix the terms of the Preferred Stock, including
preferences, powers and rights (including voting rights) senior to the Common
Stock.
The officers and certain directors of the Company also serve as
officers, employees, directors or all three of Asset Investors and the Manager.
At December 31, 1995, the shares of Common Stock owned by MDC
represented 0.8% of the outstanding shares of Common Stock.
F-30
G. Selected Quarterly Financial Data (unaudited)
Presented below is selected quarterly financial data for the years
ended December 31, 1996 and 1995 (in thousands, except per share data).
Three Months Ended,
-----------------------------------------------------------------------
1996 December 31, September 30, June 30, March 31,
- -------------------------------------------- ----------------- ------------------ --------------- ------------------
Revenues 2,146 2,167 3,526 2,318
Net income 1,595 1,765 1,992 1,607
Net income per share .16 .17 .19 .16
Regular dividends declared per share .17 .17 .17 .17
Special dividends declared per share -- .04 -- --
Stock prices (1)
High 6-3/4 6-1/2 6-1/4 6-1/8
Low 6-3/16 5-7/8 5-3/4 5-3/4
Common Stock outstanding 10,315,809 10,315,809 10,315,809 10,158,396
1995
- -------------------------------------------- ----------------- ------------------ --------------- ------------------
Revenues $2,325 $2,243 $2,240 $2,349
Net income 1,508 1,686 1,649 1,533
Net income per share .15 .17 .16 .15
Regular dividends declared per share .17 .17 .17 .17
Stock prices (1)
High 6 6-5/16 6-1/2 6-3/8
Low 5-5/8 5-3/4 5-3/4 5-1/2
Common Stock outstanding 10,142,034 10,124,698 10,092,674 10,078,468
- ---------------
1 Daily closing prices as reported on the AMEX Composite Tape.
F-31
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Name Age Position(s) Held with the Company
- --------------------------------------------------------------------------------
Terry Considine 49 Co-Chairman of the Board of Directors (Class II)
and Co-Chief Executive Officer
Thomas L. Rhodes 57 Co-Chairman of the Board of Directors (Class III)
and Co-Chief Executive Officer
Leslie B. Fox 38 President and Chief Operating Officer
Kevin J. Nystrom 37 Senior Vice President and Chief Financial Officer
Elliot H. Kline 56 Independent Director (Class III) and Chairman of
the Audit Committee and Member of the Nominating
Committee
Richard L. Robinson 67 Independent Director (Class I) and Member of the
Audit and Nominating Committees
Tim Schultz 48 Independent Director (Class I) and Member of the
Audit and Nominating Committees
Bruce D. Benson 58 Director (Class II)
William J. White 59 Independent Director (Class I) and Member of the
Audit and Nominating Committees
Terry Considine was elected Co-Chairman of the Board and Co-Chief
Executive Officer of the Company and of Commercial Assets on October 1, 1996.
Since July 1994, Mr. Considine has also been Chairman of the Board of Directors,
President and Chief Executive Officer of Apartment Investment and Management
Company ("AIMCO"), a REIT that owns and manages multi-family housing complexes.
He is the sole owner of Considine Investment Co. and prior to July 1994, was
owner of approximately 75% of Property Asset Management, L.L.C., a Colorado
limited liability company, and its related entities (collectively, "PAM"), one
of the AIMCO predecessors. Mr. Considine also became an owner and Director of
the Manager, Financial Asset Management LLC on October 1, 1996. He served as a
Colorado State Senator from 1987-1992 and in 1992 was the Republican nominee for
election to the United States Senate from Colorado.
Thomas L. Rhodes was elected Co-Chairman of the Board and Co-Chief
Executive Officer of the Company and of Commercial Assets on October 1, 1996.
Mr. Rhodes has also been a Director of AIMCO since July 1994. Mr. Rhodes also
became an owner and Director of the Manager on October 1, 1996. Mr. Rhodes has
served as the President and a Director of National Review magazine since 1992.
From 1976 to 1992, he held various positions at Goldman, Sachs & Co. and was
elected a General Partner in 1986. He also served as a Director of Underwriters
Reinsurance Corporation from 1987 to 1993 and was a member of the Advisory Board
of TransTerra Co. during 1993. He currently serves as a Director of Delphi
Financial Group, Inc. and its subsidiaries, The Lynde and Harry Bradley
Foundation, and the Reserve Special Portfolio Trusts. Mr. Rhodes is Chairman of
- 21 -
the Empire Foundation for Policy Research, a Trustee of The Heritage Foundation,
a Trustee of The Manhattan Institute, a Board Member of the National Center for
Neighborhood Enterprise and a Member of the Council on Foreign Relations.
Leslie B. Fox has served as President and Chief Operating Officer of
the Company and of Commercial Assets since October 1996, served as Executive
Vice President and Chief Operating Officer of the Company and Commercial Assets
from February 1995 through September 1996 and served as a Vice President of the
Company from November 1993 until February 1995. From November 1993 until
February 1995, she was an Executive Vice President, Chief Investment Officer and
Assistant Secretary of Commercial Assets. Ms. Fox has been employed by the
Manager since November 1993 and served as a Vice President of the Manager from
February 1995 through September 1996 and as President since October 1, 1996.
From 1991 to 1993, Ms. Fox was Senior Vice President of NHP Capital Corp. in
Washington, D.C., a subsidiary of NHP, Inc. From 1987 to 1991, Ms. Fox was Vice
President of Finance/MIS at NHP Property Management Inc., also a subsidiary of
NHP, Inc.
Kevin J. Nystrom has served as Senior Vice President and Chief
Financial Officer of the Company and Commercial Assets since October 1996, and
served as Vice President and Chief Accounting Officer of the Company from
January 1993 through September 1996 and of Commercial Assets from its
organization through September 1996. He has been employed by the Manager since
September 1992. Prior to joining the Manager, Mr. Nystrom held a series of
positions, most recently as a Senior Manager, with Deloitte & Touche from
January 1985 to August 1992.
Elliot H. Kline has served as a Director of the Company since September
1988, as a member of the Audit Committee since December 1988, Chairman of the
Audit Committee since November 1990 and as a member of the Nominating Committee
since April 1989. Dr. Kline has served as Executive-in-Residence at Arizona
State University-West since August 1993. Dr. Kline served as President of In The
Interim Management Consulting, a firm specializing in consulting to
universities, from 1989 to 1993. Dr. Kline served as the Dean of the College of
Business Administration at the University of Denver from 1987 to 1989; as the
Dean and a Professor of the School of Business and Public Administration at the
University of the Pacific from 1977 to 1987; and as the Director and an
Associate Professor of the Institute of Public Affairs and Administration at
Drake University from 1970 to 1977.
Richard L. Robinson has served as a Director of the Company and as a
member of the Nominating Committee since January 1990 and a member of the Audit
Committee since August 1993. Mr. Robinson has served as Chairman of the Board of
Directors and Chief Executive Officer of Robinson Dairy, Inc., a Denver-based
institutional dairy products manufacturer and distributor, since 1975 and prior
thereto served in various executive positions with that company for 20 years.
Mr. Robinson also serves as a Director of First Bank System, Minneapolis,
Minnesota. He is active in numerous civic and charitable organizations, is Past
Chairman of the Greater Denver Chamber of Commerce and a Past President of the
State Board of Agriculture, the governing body for the Colorado State University
System.
Tim Schultz has been a Director of the Company since July 1994 and is a
member of the Audit and Nominating Committees. He is President and Executive
Director of the Boettcher Foundation, a Colorado not-for-profit, charitable
corporation, and from August 1994 until November 1995, he was Chairman and
President of Colorado Open Lands, a Colorado not-for-profit corporation. From
1990 until August 1994, he was employed by the law firm of Arnold & Porter as a
Consultant-Corporate/Government Relations with responsibilities ranging from
serving as chairman of a large land trust to representing clients' needs in
connection with state and local government issues. From May 1987 to July 1990,
Mr. Schultz served as Executive Director of the State of Colorado Department of
Local Affairs and from November 1983 to May 1987, as Commissioner of Agriculture
- 22 -
for the State of Colorado Department of Agriculture, both cabinet level
positions. From 1987 to 1991, he served as Chairman of the Colorado Economic
Development Commission.
Bruce D. Benson has served as a Director of the Company and Commercial
Assets since October 1996 and previously served as a Director of the Company and
a member of the Nominating Committee from February 1992 through November 1993.
Effective October 1, 1996, Mr. Benson became an Owner of the Manager. For the
past 28 years, he has been President and Owner of Benson Mineral Group, Inc., a
domestic oil and gas production company located in Denver, Colorado. He serves
on numerous Boards of Trustees and Boards of Directors, including President,
Denver Zoological Foundation; Chairman and Past President, Boy Scouts of
America, Denver Area Council; Past President and the Board of Trustees,
Berkshire School, Sheffield, Massachusetts; Past Trustee, Smith College,
Northampton, Massachusetts; past Chairman, Colorado Commission on Higher
Education; and past member, Board of Directors, Colorado University Foundation.
In 1994, he was the Republican nominee for the Governor of Colorado.
William J. White has served a Director of the Company since December
1996. Mr. White has served as Chairman of Bigelow and Co., an investment banking
firm located in Denver, Colorado that specializes in municipal and corporate
finance, since 1995. From 1992 through 1995, Mr. White was President and owner
of First Denver Financial Corporation and in 1991 and 1992, was President of
Affiliated Capital Markets, a division of Affiliated National Bank. Prior to
these positions, Mr. White served in various positions culminating as Chairman
of Kirchner Moore and Company.
Compliance With Section 16(a) of the Exchange Act
The Company's executive officers and Directors are required under the
Securities Exchange Act of 1934 to file reports of ownership and changes in
ownership of securities of the Company with the Securities and Exchange
Commission and the New York Stock Exchange, Inc. Copies of those reports also
must be furnished to the Company. Based solely upon a review of the copies of
reports furnished to the Company and written representations that no other
reports were required, the Company believes that for the year ended December 31,
1996, all required reports were filed on a timely basis.
Item 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The Company does not pay a salary, bonus or any other compensation to
its executive officers, other than stock options and prior to May 28, 1996,
dividend equivalent rights ("DERs") related to stock options granted to officers
and others from time to time under the Stock Option Plan. The Company does not
have any long-term incentive programs. The Manager provides (at its expense) all
personnel necessary to conduct the regular business of the Company. The Manager
receives various fees for advisory and other services performed under the
management agreement between the Company and the Manager. All salaries, bonuses
and other compensation (except stock options and DERs) received by the executive
officers of the Company are paid by the Manager. The Manager has not allocated
any portion of the compensation paid by it to the Company's executive officers
specifically for their services to the Company.
The following table sets forth information regarding compensation paid
to the Company's Chief Executive Officers:
- 23 -
Long-Term Compensation (1)
Awards-Securities
Name and Principal Positions Year Underlying Options (Shares)
- -------------------------------------------------------------------------------------------------------------------
Spencer I. Browne, President and Chief Executive Officer
through September 30, 1996 1996 200,000
1995 70,000
1994 99,977
Terry Considine, Co-Chief Executive Officer, effective
October 1, 1996 1996 --
Thomas L. Rhodes, Co-Chief Executive Officer, effective
October 1, 1996 1996 --
- ------------------------
1 All options granted under the Stock Option Plan have an exercise price equal
to 100% of the market price of the Common Stock on the date of grant, are
exercisable for a five-year term and, prior to May 28, 1996, automatically
accrued DERs related to dividends declared on the outstanding shares of
Common Stock between the date the option was granted and the date the option
was exercised. Options granted to Mr. Browne are fully vested. Amounts do
not reflect 9,023, 49,241 and 28,861 shares of Common Stock related to DERs
which accrued during 1996, 1995 and 1994, respectively. Additionally, on May
28, 1996, Mr. Browne received 82,987 shares of Common Stock in exchange for
the elimination of the accrual of DERs on stock options held by him.
Option Grants in 1996
The following table reflects information regarding the options granted to the
Company's Chief Executive Officers during 1996.
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
------------------------------------------------------------------------------------------
Percent of
Number of Total
Securities Options/SARs Exercise
Underlying Granted to or Base
Options Employees in Price Expiration
Name Granted (1) 1996 (2) ($/Share) (1) Date 5% 10%
- ------------------------------------------------------------------------------------------------------------------
Spencer I. Browne 110,000 22.2% 3.125 04/09/01 $ 94,972 $209,863
90,000 18.1% 3.375 07/30/01 83,921 185,442
------------------------ --------- --------
200,000 40.3% $178,893 $395,305
Terry Considine -- -- -- -- -- --
Thomas L. Rhodes -- -- -- -- -- --
- 24 -
There were no Stock Appreciation Rights ("SARs") granted by the Company
during December 31, 1996.
- -----------
1 See footnote 1 to the "Summary Compensation Table" above.
2 The Company has no employees. The percentage reflected relates to all
options granted to employees of the Manager who are officers of the Company
or to employees of the Manager whose time is devoted substantially to the
Company. See "Summary Compensation Table" above.
Aggregate Option Exercises During 1996 and Fiscal Year-End Option Value Table
The following table reflects the options exercised by the Company's
Chief Executive Officers during the year ended December 31, 1996, and the number
of shares of Common Stock covered by exercisable stock options as of December
31, 1996 (all stock options were exercisable at December 31, 1996).
Number of
Securities Value of
Underlying Unexercised
Number of Unexercised In-The-Money
Shares Acquired Options at Options at
Name on Excerise Value Realized (1) December 31, 1996 December 31, 1996 (2)
- ----------------------------------------------------------------------------------------------------------------
Spencer I. Browne 89,296 $180,491 304,135 $205,595
Terry Considine -- -- -- --
Thomas L. Rhodes -- -- -- --
- --------------------
1 The value was computed from the closing price of the Company's Common Stock
on June 6, 1996, the date the options were exercised, or $3.375 per share.
2 The closing price of the Company's Common Stock on December 31, 1996, was
$3.625 per share.
Notwithstanding anything to the contrary contained in any of the
Company's filings with the SEC under the Securities Act of 1933 or the
Securities Exchange Act of 1934, the following Board Report on Executive
Compensation shall not be incorporated into any future filings with the SEC.
Board Report on Executive Compensation
The Board of Directors of the Company has not established a
Compensation Committee. The Board is responsible for determining grants of stock
options under the Stock Option Plan. The Board believes that stock options link
management and shareowner interests and motivate executives to make long-term
business and operating decisions that will serve to increase the long-term total
return to shareowners.
The Board awarded stock options to the executive officers of the
Company during 1996 as an incentive for the executive officers with respect to,
among other things, implementation of the Company's business plan and as
- 25 -
compensation for attaining performance goals as determined by the Board.
Specifically, when granting these options, the Board considered the following
specific accomplishments of management: (i) the significant increase in the
Company's stock price during 1996; (ii) the acquisition of approximately $60
million par value at acquisition of high-yield, non-agency bonds backed by home
mortgage loans in 1996; (iii) increasing the Company's net income from ongoing
operations and distributions to shareowners during 1996; and (iv) through its
ownership of approximately 27% of Commercial Assets participating in the market
for commercial real estate securitizations.
Except with respect to compensation paid under the Stock Option Plan,
the Board has no role in setting the compensation policies of or the levels of
compensation paid to the Company's executive officers whether in the form of
salaries, bonuses or other annual compensation. Pursuant to the Management
Agreement, such compensation is paid by the Manager. See "Summary Compensation
Table" above.
THE BOARD OF DIRECTORS
Terry Considine, Co-Chairman Tim Schultz
Thomas L. Rhodes, Co-Chairman Bruce D. Benson
Elliot H. Kline William J. White
Richard L. Robinson
Compensation Paid to Directors
During 1996, each Independent Director of the Company received a fee of
$2,500 a month plus $300 for each meeting of the Board of Directors or committee
thereof attended. In addition, all Directors are reimbursed for expenses related
to their attendance at Board of Directors and committee meetings.
The former Chairman of the Board was granted five-year, non-qualified
stock options under the Stock Option Plan to purchase 110,000 shares of Common
Stock for $3.125 per share on April 9, 1996, and to purchase 90,000 shares of
Common Stock for $3.375 per share on July 30, 1996. These options are fully
vested.
The Independent Directors of the Company also are eligible to receive
grants of stock options under the Stock Option Plan. During the year ended
December 31, 1996, Messrs. Kline, Robinson and Schultz each were granted
non-qualified stock options to purchase 20,000 shares of Common Stock for $3.125
per share on April 9, 1996, and to purchase 25,000 shares of Common Stock for
$3.375 per share on July 30, 1996. The options granted are exercisable as to 50%
on the date of grant and as to 25% on each of the two succeeding anniversaries
of the date of grant. See Note 1 to the Summary Compensation Table above for the
other material terms of these stock options.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The table below sets forth, as of February 28, 1997, the number of
shares of Common Stock beneficially owned by each director and each executive
officer of the Company named in the Summary Compensation Table, individually,
and the number of shares beneficially owned by all of the Company's directors
and executive officers as a group, which information was furnished in part by
each such person.
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Amount and Nature of
Name of Beneficial Owner (1) Beneficial Ownership (2) Percent of Class (3)
---------------------------------------------------------------------------------------
Terry Considine -- *
Thomas L. Rhodes -- *
Elliot H. Kline 186,222 *
Richard L. Robinson 193,140 *
Tim Schultz 87,303 *
Bruce D. Benson -- *
William J. White -- *
All directors and executive
officers as a group (nine persons) 493,869 2.0%
- --------------------
* Denotes ownership of less than 1% of the outstanding shares of Common
Stock.
1 Includes, where applicable, shares of Common Stock owned by such person's
minor children and spouse and by other related individuals and entities.
Unless otherwise indicated, such person has sole voting and investment
power as to the shares listed.
2 Includes the following shares of Common Stock which such persons had the
right to acquire within 60 days after February 28, 1997, through the
exercise of stock options granted under the Stock Option Plan: Elliot H.
Kline - 107,848 shares; Richard L. Robinson - 107,848 shares; Tim Schultz
- 58,760 shares; and all directors and executive officers as a group -
292,956 shares.
3 All shares of Common Stock which a person had the right to acquire within
60 days after February 28, 1997, were deemed to be outstanding for the
purpose of computing the "Percent of Class" owned by such person but were
not deemed to be outstanding for the purpose of computing the "Percent of
Class" owned by any other person. At February 28, 1997, 24,843,345 shares
of Common Stock were outstanding.
As of February 28, 1997, no person or group was known to the Company to
be a beneficial owner of more than 5% of its Common Stock.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Compensation Committee Interlocks and Insider Participation
Messrs. Considine and Rhodes each serve as an Executive Officer and
Director of the Company and Mr. Benson serves as a Director of the Company.
Additionally, Messrs. Considine, Rhodes and Benson combined have an 82%
ownership interest in the Manager. The Manager receives management fees from the
Company under the Management Agreement. Messrs. Considine, Rhodes and Benson may
be deemed to have an interest in the Management Agreement, even though the
Management Agreement has been approved by the Independent Directors.
From time-to-time, the Company engaged PageWorks + Tri Design
("PageWorks"), a marketing and communications firm owned by the brother-in-law
of the former Chairman of the Board, Mr. Mizel, for graphic design, artwork and
other services related to the Company's shareowner reports. During 1996, the
Company paid PageWorks approximately $23,000.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. The following consolidated financial statements of the Company and of
Commercial Assets, Inc. (a significant, unconsolidated subsidiary of
the Company) are included in Part II, Item 8 of this Annual Report on
Form 10-K:
Asset Investors Corporation: PAGE
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31,
1996 and 1995............................................... F-3
Consolidated Statements of Operations for the
years ended December 31, 1996, 1995 and 1994................ F-4
Consolidated Statements of Stockholders'
Equity for the years ended December 31, 1996,
1995 and 1994............................................... F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994...................... F-6
Notes to Consolidated Financial Statements.................. F-7
Commercial Assets, Inc. (a significant unconsolidated subsidiary
of the Company):
Report of Independent Auditors............................. F-18
Balance Sheets as of December 31, 1996 and 1995............ F-19
Statements of Income for the years ended
December 31, 1996, 1995 and 1994........................... F-20
Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994..................... F-21
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994........................... F-22
Notes to Financial Statements.............................. F-23
- 28 -
2. Schedules to Consolidated Financial Statements:
All financial statement schedules have been omitted because they
are inapplicable or the information is provided in the Company's
consolidated financial statements and notes thereto, included in Part
II, Item 8, of this Annual Report on Form 10-K.
3. Exhibits:
Exhibit No. Description
3.1 Certificate of Incorporation of Asset Investors Corporation
(the "Registrant"), as amended (incorporated herein by
reference to Exhibit 3.1(b) to the Quarterly Report on Form
10-Q of the Registrant for the quarter ended June 30, 1989,
Commission File No. 1-9360, filed on August 14, 1989).
3.2 By-laws of the Registrant, as amended and restated
(incorporated herein by reference to Exhibit 3.3 to the
Annual Report on Form 10-K of the Registrant for the fiscal
year ended December 31, 1993, Commission File No. 1-9360
filed March 31, 1994).
3.2(a) June 21, 1994 Amendment to the By-laws of the Registrant
(incorporated herein by reference to Exhibit 3.3(b) to the
Annual Report on Form 10-K of the Registrant for the fiscal
year ended December 31, 1994, Commission File No. 1-9360
filed March 30, 1995).
3.2(b) March 15, 1995 Amendment to the By-laws of the Registrant
(incorporated herein by reference to Exhibit 3.3(c) to the
Annual Report on Form 10-K of the Registrant for the fiscal
year ended December 31, 1994, Commission File No. 1-9360
filed March 30, 1995).
3.2(c) January 14, 1997, Amendment to the By-laws of the
Registrant.
4 Form of certificate representing Common Stock of the
Registrant (incorporated herein by reference to Exhibit
10.15 to the Annual Report on Form 10-K of the Registrant
for the fiscal year ended December 31, 1988, Commission
File No. 1-9360, filed on April 5, 1989).
4.1 Automatic Dividend Reinvestment Plan relating to the Common
Stock of the Registrant, as amended (incorporated herein by
reference to Exhibit 28 to the Annual Report on Form 10-K
of the Registrant for the fiscal year ended December 31,
1991, Commission File No. 1-9360, filed on March 30, 1992).
4.2 Revolving Credit and Term Loan Agreement, dated as of July
24, 1996, by and between the Registrant and First Bank
National Association (incorporated herein by reference to
Exhibit 4.1 to the Quarterly Report on Form 10-Q of the
Registrant for the quarter ended June 30, 1996, Commission
File No. 1-9360, filed on August 14, 1996).
- 29 -
4.2(a) Pledge Agreement, dated as of July 24, 1996, by and between
the Registrant and First Bank National Association
(incorporated herein by reference to Exhibit 4.1(a) to the
Quarterly Report on Form 10-Q of the Registrant for the
quarter ended June 30, 1996, Commission File No. 1-9360,
filed on August 14, 1996).
10.1* Management Agreement dated as of January 1, 1995, between
the Registrant and Financial Asset Management Corporation
(incorporated herein by reference to Exhibit 10.1(b) to the
Quarterly Report on Form 10-Q of the Registrant for the
quarter ended March 31, 1995, Commission File No. 1-9360,
filed on May 15, 1995).
10.1(a)* Amendment to Management Agreement dated as of January 1,
1996, between the Registrant and Financial Asset Management
Corporation (incorporated herein by reference to Exhibit
10.1(a) to the Quarterly Report on Form 10-Q of the
Registrant for the quarter ended March 31, 1996, Commission
File No. 1-9360, filed on May 15, 1996).
10.1(b)* Assignment of Management Agreements dated as of April 1,
1996, between Financial Asset Management Corporation and
Financial Asset Management LLC (incorporated herein by
reference to Exhibit 10.1(b) to the Quarterly Report on
Form 10-Q of the Registrant for the quarter ended March 31,
1996, Commission file No. 1-9360, filed on May 15, 1996).
10.1(c)* Amendment to the Management Agreement dated as of January
1, 1997, between the Registrant and Financial Asset
Management LLC.
10.2* Form of Indemnification Agreement between the Registrant
and each Director of the Registrant (incorporated herein by
reference to Appendix A to the Proxy Statement of the
Registrant, Commission File No. 1-9360, dated May 18,
1987).
10.3* 1986 Stock Option Plan of the Registrant as restated
November 15, 1990 (incorporated herein by reference to
Exhibit A to the Proxy Statement of the Registrant,
Commission File No. 1-9360, dated April 22, 1991).
10.3(a)* First Amendment to the Registrant's 1986 Stock Option Plan
as restated November 15, 1990 (incorporated herein by
reference to Exhibit 10.9(b) to the Annual Report on Form
10-K of the Registrant for the fiscal year ended December
31, 1992, Commission File No. 1-9360, filed on April 5,
1993).
10.3(b)* Second Amendment to the Registrant's 1986 Stock Option Plan
as restated November 15, 1990, as amended (incorporated
herein by reference to Exhibit 10.9(c) to the Annual Report
on Form 10-K of the Registrant for the fiscal year ended
December 31, 1992, Commission File No. 1-9360, filed on
April 5, 1993).
- 30 -
10.3(c)* Third Amendment to the Registrant's 1986 Stock Option Plan
as restated November 15, 1990, as amended (incorporated
herein by reference to Exhibit 10.9(e) to the Quarterly
Report on Form 10-Q of the Registrant for the quarter ended
September 30, 1993, Commission File No. 1-9360, filed on
November 15, 1993).
10.3(d)* Fourth Amendment to the Registrant's 1986 Stock Option Plan
as restated November 15, 1990, as amended, dated March 11,
1996 (incorporated herein by reference to Exhibit 10.5(f)
to the Quarterly Report on Form 10-Q of the Registrant for
the quarter ended June 30, 1996, Commission File No.
1-9360, filed on August 14, 1996).
10.3(e)* Form of Non-Qualified Stock Option Agreement pursuant to
the 1986 Stock Option Plan of the Registrant as amended and
restated through November 15, 1990 (incorporated here-in by
reference to Exhibit 10.9(b) to the Annual Report on Form
10-K of the Registrant for the fiscal year ended December
31, 1991, Commission File No. 1-9360, filed on March 30,
1992).
10.4 Contribution Agreement, dated as of August 20, 1993, by and
between the Registrant and Commercial Assets, Inc.
(incorporated herein by reference to Exhibit 10.19 to the
Quarterly Report on Form 10-Q of the Registrant for the
quarter ended September 30, 1993, Commission File No.
1-9360, filed on November 15, 1993).
23 Independent Auditors' Consent - Ernst & Young LLP.
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the Registrant during the
fourth quarter of the period covered by this Annual Report on Form 10-K.
- 31 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ASSET INVESTORS CORPORATION
(Registrant)
Date: March 24, 1997 By /s/ Terry Considine
----------------------------
Terry Considine
Co-Chief Executive Officer
Date: March 24, 1997 By /s/ Thomas L. Rhodes
----------------------------
Thomas L. Rhodes
Co-Chief Executive Officer
Date: March 24, 1997 By /s/ Kevin J. Nystrom
----------------------------
Kevin J. Nystrom
Chief Financial Officer
Date: March 24, 1997 By /s/ Diane Schott Armstrong
----------------------------
Diane Schott Armstrong
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Capacity Date
/s/ Terry Considine Director March 24, 1997
- -----------------------------
Terry Considine
/s/ Thomas L. Rhodes Director March 24, 1997
- -----------------------------
Thomas L. Rhodes
/s/ Bruce D. Benson Director March 24, 1997
- -----------------------------
Bruce D. Benson
/s/ Elliot H. Kline Director March 24, 1997
- -----------------------------
Elliot H. Kline
/s/ Richard L. Robinson Director March 24, 1997
- -----------------------------
Richard L. Robinson
/s/ Tim Schultz Director March 24, 1997
- -----------------------------
Tim Schultz
/s/ William J. White Director March 24, 1997
- -----------------------------
William J. White
- 32 -