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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-9360
ASSET INVESTORS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Maryland 84-1038736
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3410 South Galena Street, Suite 210 80231
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (303) 614-9400
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, New York Stock Exchange, Inc.
par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 5, 1999, 5,563,943 shares of common stock were outstanding, and the
aggregate market value of the shares (based upon the closing price of the common
stock on that date as reported on the New York Stock Exchange, Inc.) held by
non-affiliates was approximately $72,215,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the Registrant's 1999 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Annual Report.
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ASSET INVESTORS CORPORATION
Table of Contents
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 1998
Item Page
- ---- ----
PART I
1. Business............................................................. 1
Company Background.............................................. 1
Industry Background............................................. 2
Financial Information about Industry Segments................... 2
Development of Management Team.................................. 3
Growth and Operating Strategies................................. 3
Competition..................................................... 6
Taxation of the Company......................................... 6
Regulations..................................................... 7
Insurance....................................................... 7
Capital Resources............................................... 7
Dividend Reinvestment Plan...................................... 8
Restrictions on and Redemptions of Common Stock................. 8
Employees....................................................... 8
2. Properties........................................................... 9
3. Legal Proceedings.................................................... 11
4. Submission of Matters to a Vote of Security Holders.................. 11
PART II
5. Market For Registrant's Common Equity and Related Stockholder
Matters............................................................ 11
6. Selected Financial Data.............................................. 12
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 13
Results of Operations........................................... 13
Liquidity and Capital Resources................................. 17
Funds From Operations........................................... 18
Year 2000 Compliance............................................ 19
7a. Quantitative and Qualitative Disclosures About Market Risk........... 19
8. Financial Statements and Supplementary Data.......................... 20
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................... 20
PART III
10. Directors and Executive Officers of the Registrant................... 20
11. Executive Compensation............................................... 22
12. Security Ownership of Certain Beneficial Owners and Management....... 22
13. Certain Relationships and Related Transactions....................... 22
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 22
(i)
PART I
Introduction
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements in certain circumstances. Certain information
included in this report, our Annual Report to Stockholders and our filings with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, as well as
information communicated orally or in writing between the dates of such SEC
filings, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements may include
projections of our cash flow, dividends and anticipated returns on real estate
investments. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by the forward-looking statements. Such
factors include: general economic and business conditions; interest rate
changes; financing and refinancing risks; risks inherent in owning real estate
or debt secured by real estate; future development rate of homesites;
competition; the availability of real estate assets at prices which meet our
investment criteria; our ability to reduce expense levels, implement rent
increases, use leverage and other risks set forth in our SEC filings.
In this report, the words "the Company," "we," "our" and "us" refer to Asset
Investors Corporation, a Maryland corporation and, where appropriate, our
subsidiaries.
Item 1. Business.
Company Background
We are a Maryland corporation formed in 1986, and we have elected to be treated
for United States federal income tax purposes as a real estate investment trust
or "REIT." We are a self-administered and self-managed company in the business
of owning, acquiring, developing and managing manufactured home communities. As
of December 31, 1998, we held interests as owner, ground lessee or mortgage
lender (including participating mortgages) in 23 manufactured home communities
and two recreational vehicle parks with a total of 4,640 developed homesites
(sites with homes in place), 890 sites ready for homes, 1,960 sites available
for future development and 180 recreational vehicle sites. In addition, we
managed eleven communities for affiliates and third-party owners. Our shares of
common stock are listed on the New York Stock Exchange ("NYSE") under the symbol
"AIC."
We primarily conduct our business through our subsidiary Asset Investors
Operating Partnership and where appropriate its other subsidiary companies
(which we collectively refer to as the Operating Partnership). As of December
31, 1998, we owned 76% of the Operating Partnership. The Operating Partnership
also owns 27% of the common stock of Commercial Assets, Inc., a publicly-traded
REIT that is listed on the American Stock Exchange under the symbol "CAX."
Commercial Assets is also engaged in the ownership, acquisition and development
of manufactured home communities. In addition to acquiring and managing
manufactured homes for our own account, we also perform these services for
Commercial Assets, for which we are paid a management fee by Commercial Assets.
Our principal executive offices are located at 3410 S. Galena Street, Suite 210,
Denver, Colorado 80231 and our telephone number is (303) 614-9400.
- 1 -
Industry Background
A manufactured home community is a residential subdivision designed and improved
with sites for the placement of manufactured homes and related improvements and
amenities. Manufactured homes are detached, single-family homes which are
produced off-site by manufacturers and installed on sites within the community.
Manufactured homes are available in a variety of designs and floor plans,
offering many amenities and custom options.
Modern manufactured home communities are similar to typical residential
subdivisions containing centralized entrances, paved streets, curbs and gutters
and parkways. The communities frequently provide a clubhouse for social
activities and recreation and other amenities, which may include golf courses,
swimming pools, shuffleboard courts and laundry facilities. Utilities are
provided by or arranged for by the owner of the community. Community lifestyles,
primarily promoted by resident managers, include a wide variety of social
activities that promote a sense of neighborhood. The communities provide an
attractive and affordable housing alternative for retirees, empty nesters and
start-up or single-parent families. Manufactured home communities are primarily
characterized as "all age" communities and "adult" communities. In adult
communities, as least 80% of the tenants must be at least 55 years old, and in
all age communities there is no age restriction on tenants.
The owner of a home in our communities leases from us the site on which the home
is located. Typically, the leases are on a month-to-month or year-to-year basis,
renewable upon the consent of both parties or, in some instances, as provided by
statute. In some circumstances, we offer a 99-year lease to tenants in order to
enable the tenant to have some benefits of an owner of real property, including
creditor protection laws in some states. These leases can be cancelled,
depending on state law, for non-payment of rent, violation of community rules
and regulations or other specified defaults. Generally, rental rate increases
are made on an annual basis. The size of these rental rate increases depends
upon the policies that are in place at each community. Rental increases may be
based on fixed dollar amounts, percentage amounts, inflation indexes, or they
may depend entirely on local market conditions. We own interests in the
underlying land, utility connections, streets, lighting, driveways, common area
amenities and other capital improvements and are responsible for enforcement of
community guidelines and maintenance. Each homeowner within the manufactured
home communities is responsible for the maintenance of his or her home and
leased site, including lawn care in some communities.
The ownership of manufactured home communities, once fully occupied, tends to be
a stable, predictable asset class. The cost and effort involved in relocating a
home to another manufactured home community generally encourages the owner of
the home to resell it within the community.
Financial Information about Industry Segments
We operate in one industry segment, the ownership and management of real estate.
See the consolidated financial statements including their notes in Item 8 of
this report on Form 10-K.
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Development of Management Team
In February 1998, Mr. Bruce E. Moore became our President and Chief Operating
Officer. Mr. Moore has over 20 years experience in various aspects of the real
estate industry including manufactured home communities. Mr. Moore has a three
year employment agreement which provides that, in lieu of cash salary, he was
granted a 10-year option to purchase 250,000 shares of our common stock at a per
share price of $19-3/8. The option vests in three equal annual installments
commencing in February of 1999.
Growth and Operating Strategies
We measure our economic profitability based on Funds From Operations ("FFO"),
less an annual capital replacement reserve of at least $50 per developed
homesite. We believe that FFO, less a reserve, provides investors with an
understanding of our ability to incur and service debt and to make capital
expenditures. The Board of Governors of the National Association of Real Estate
Investment Trusts (also known as NAREIT) defines FFO as net income (loss),
computed in accordance with generally accepted accounting principles, excluding
gains and losses from debt restructuring and sales of property, plus real estate
related depreciation and amortization (excluding amortization of financing
costs), and after adjustments for unconsolidated partnerships and joint
ventures. We calculate FFO in a manner consistent with NAREIT's definition. In
our calculation we include adjustments for:
o the minority interest in the Operating Partnership owned by persons
other than us,
o costs we incurred in order to become self-managed, and
o amortization of management contracts.
FFO should not be considered an alternative to net income or net cash flows from
operating activities, as calculated in accordance with generally accepted
accounting principles, as an indication of our performance or as a measure of
liquidity. FFO is not necessarily indicative of cash available to fund future
cash needs.
Our primary objective is to maximize stockholder value by increasing the amount
and predictability of FFO on a per share basis, less a reserve for capital
replacements. We seek to achieve this objective primarily by:
o improving net operating income from our existing portfolio of
manufactured home communities;
o acquiring additional communities at values that are accretive on a per
share basis;
o earning increased management fees as Commercial Assets invests in more
manufactured home communities; and
o as Commercial Assets' FFO increases, our share of their FFO similarly
increases.
Company Policies
Management has adopted specific policies to accomplish our objective of
increasing the amount and predictability of our FFO on a per share basis, less a
reserve for capital replacements. These policies include:
o seeking to reduce our exposure to downturns in regional real estate
markets by obtaining a geographically diverse portfolio of communities;
o ensuring the continued maintenance of our communities by providing a
minimum $50 per homesite per year for capital replacements;
- 3 -
o using debt leverage to increase our financial returns;
o reducing our exposure to interest rate fluctuations by utilizing
long-term, fixed-rate, fully-amortized debt to pay off higher cost,
short term debt;
o selectively acquiring manufactured home communities that have potential
long-term appreciation of value through, among other things, rent
increases, expense efficiencies and in-park homesite development;
o improving the profitability of our communities through aggressive
management of occupancy, community development and maintenance and
expense controls;
o developing and maintaining resident satisfaction and a reputation for
quality communities through maintenance of the physical condition of
our communities and providing activities that improve the community
lifestyle; and
o recruiting and retaining capable community management personnel.
Future Acquisitions
In 1997, when we decided to enter the manufactured home community business, we
began to implement a business plan which called for the investment of our
capital in the acquisition of manufactured home communities. During the second
half of 1997 and during 1998, we have focused on identifying acquisition
opportunities that we believe provide returns that are accretive to our
stockholders.
Our acquisition of interests in manufactured home communities takes many forms.
In many cases we acquire fee title to the community. When a community has a
significant number of unleased homesites, we seek a stable return from the
community during the development and lease-up phase while also seeking to
participate in future increased earnings after development is completed and the
sites are leased. We seek to accomplish this goal by making loans to development
companies in return for participating mortgages that are non-recourse to the
borrowers and secured by the property. In general, our participating mortgages
earn interest at fixed rates and, in addition, participate in a profits or
revenues from the community. This profit participation right generally entitles
us to 50% of the net income and cash flow generated by the community.
We believe that acquisition opportunities for manufactured home communities are
attractive at this time because of the increasing acceptability of and demand
for manufactured homes and the continued constraints on development of new
manufactured home communities. We are actively seeking to acquire additional
communities on our own behalf and on behalf of Commercial Assets, and we are
currently engaged in various stages of negotiations relating to the possible
acquisition of a number of communities. The acquisition of interests in
additional communities could also result in our becoming increasingly leveraged
as we incur debt in connection with these transactions.
In 1998, we invested $60 million to acquire interests in seven manufactured home
communities that are located primarily in Arizona and Florida. These communities
have a total of 1,726 developed homesites, 56 sites ready for homes (sites with
homes in place) and 171 sites available for future development.
When evaluating potential acquisitions, we consider such factors as:
o the location and type of property;
o the value of the homes located on the leased land;
o the improvements, such as golf courses and swimming pools, at the
property;
o the current and projected cash flow of the property and our ability to
increase cash flow;
- 4 -
o the potential for capital appreciation of the property;
o the terms of tenant leases, including the potential for rent increases;
o the tax and regulatory environment of the community in which the
property is located;
o the potential for expansion of the physical layout of the property and
the number of sites;
o the occupancy and demand by residents for properties of a similar type
in the vicinity;
o the credit of the residents in a community;
o the prospects for liquidity through sale, financing or refinancing of
the property;
o the competition from existing manufactured home communities;
o the potential for the construction of new communities in the area; and
o the replacement cost of the property.
In order to allocate investments between us and Commercial Assets, the companies
have agreed that Commercial Assets will invest at least $50 million of its cash
resources in the acquisition of communities before we invest any further cash in
the acquisition of communities. Thereafter, the companies will coordinate their
investments. As of December 31, 1998, Commercial Assets had invested $23 million
in communities. Notwithstanding the above, we may acquire communities if a
material portion of the purchase price is paid for in units of limited
partnership interests in the Operating Partnership ("OP Units") or our common
stock.
Fees and Earnings from Commercial Assets
We manage Commercial Assets and own 27% of Commercial Assets' common stock.
Under the terms of our management agreement with Commercial Assets, we receive
the following fees:
o Acquisition Fees equal to 0.5% of the cost of each real estate-related
asset acquired by Commercial Assets;
o Base Fees equal to 1% per year of the net book value of Commercial
Assets' real estate-related assets;
o Incentive Fees equal to 20% of the amount by which Commercial Assets'
REIT income exceeds (a) its average net worth, multiplied by (b) 1%
over the ten year United States Treasury rate.
In the third quarter of 1998, Commercial Assets entered the manufactured home
community business and began acquiring interests in manufactured home
communities identified by us. As of December 31, 1998, Commercial Assets had
acquired interests in six communities at a cost of $23 million. Commercial
Assets paid us Base Fees and Acquisition Fees totaling $87,000 and $124,000,
respectively, during 1998 primarily due to Commercial Assets' investment in
communities. No Incentive Fees were paid by Commercial Assets during 1998.
The management agreement has a term of one-year, subject to annual renewal. The
board of directors of Commercial Assets has renewed the management agreement for
one more year. In addition, the management agreement has been amended. This
amendment provides that, during 1999, Incentive Fees will be based upon
Commercial Assets' FFO, less an annual capital replacement reserve of at least
$50 per developed homesite, instead of its REIT income. Both your management and
Commercial Assets believe that this amendment will cause our Incentive Fees to
be tied more closely to the economic profitability of Commercial Assets as
Commercial Assets is now engaged in the manufactured home community business.
Although there can be no assurance of such, we expect Commercial Assets to
continue to acquire interests in communities during 1999.
- 5 -
Expansion of Existing Communities
We will seek to increase the number of homesites and the amount of earnings
generated from our existing portfolio of manufactured home communities through
marketing campaigns aimed at increasing occupancy. We will also seek expansion
through future acquisitions and expansion of the number of sites available to be
leased to residents if justified by local market conditions and permitted by
zoning and other applicable laws. As of December 31, 1998, we held interests in
twelve communities with 890 sites ready for homes and 1,960 sites available for
future development.
Competition
There are numerous housing alternatives that compete with our manufactured home
communities in attracting residents. Our properties compete for residents with
other manufactured home communities, multifamily rental apartments, single
family homes and condominiums. The number of competitors in a particular area
could have a material effect on our ability to attract and maintain residents
and on the rents we are able to charge for homesites. In acquiring assets, we
compete with other REITs, pension funds, insurance companies, and other
investors, many of which have greater financial resources than we do. In
addition, Commercial Assets is also involved in acquiring manufactured home
communities.
Taxation of the Company
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986,
as amended (the "Code"), and we intend to operate in a manner which will allow
us to avail ourselves of the beneficial tax provisions applicable to REIT's. Our
qualification as a REIT depends on our ability to meet the various requirements
imposed by the Code, such as specifications relating to actual operating
results, distribution levels and diversity of stock ownership. In addition, our
ability to qualify as a REIT depends in part upon the actions of third parties
over which we have no control, or only limited influence. For instance, our
qualification depends upon the conduct of certain entities with which we have a
direct or indirect relationship, in our capacity as a lender, lessor, or holder
of non-controlling equity interests. Our qualification also depends upon
Commercial Assets' continued qualification as a REIT.
If we qualify for taxation as a REIT, we will generally not be subject to
Federal corporate income tax on our net income that is currently distributed to
stockholders. This treatment substantially eliminates the "double taxation" (at
the corporate and stockholder levels) that generally results from investment in
a corporation. If we fail to qualify as a REIT in any taxable year, we will be
subject to Federal income tax at regular corporate rates on our taxable income
(including any applicable alternative minimum tax). We have a net operating loss
("NOL") carryover of approximately $95 million which may, subject to some
restrictions and limitations, be used to offset taxable income in the event that
we fail to qualify as a REIT. Additionally, even if we qualify as a REIT, we may
be subject to certain state and local income and other taxes, and to Federal
income and excise taxes on our undistributed income.
If in any taxable year we fail to qualify as a REIT and as a result, incur a tax
liability, we might need to borrow funds or liquidate certain investments in
order to pay the applicable tax. In this situation, we would not be compelled to
make distributions as required for entities claiming REIT status under the Code.
Moreover, unless we would be entitled to relief under certain statutory
provisions, we would be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification is lost. Although we
currently intend to operate in a manner designed to qualify as a REIT, it is
possible that future economic, market, legal, tax or other considerations may
cause us to fail to qualify as a REIT, or may cause the Board of Directors to
revoke the REIT election.
- 6 -
We and our stockholders may be subject to state or local taxation in various
state or local jurisdictions, including those in which we or they transact
business or reside. The state and local tax treatment conferred upon us and our
stockholders may not conform to the Federal income tax treatment.
Regulations
General
Manufactured home communities, like other housing alternatives, are subject to
various laws, ordinances and regulations, including regulations relating to
recreational facilities such as swimming pools, clubhouses and other common
areas. We believe that we have obtained the necessary permits and approvals to
operate each of our properties in conformity with these laws.
Americans with Disabilities Act
Our current properties and any newly acquired communities must comply with the
Americans with Disabilities Act (the "ADA"). The ADA generally requires that
public facilities, such as clubhouses, swimming pools and recreation areas be
made accessible to people with disabilities. As we previously mentioned, many of
our communities have public facilities. In order to comply with these
requirements we have made improvements at our communities in order to remove
barriers to access. If we should ever fail to comply with ADA regulations we
could be fined or we could be forced to pay damages to private litigants. We
have made those changes required by the ADA which we believe are appropriate. We
believe that any further costs related to ADA compliance can be recovered by
cash flow from the individual properties without causing any material adverse
effect. If ongoing changes involve a greater expenditure than we currently
anticipate, or if the changes must be made on a more accelerated basis than we
anticipate, our ability to make expected distributions could be adversely
affected.
Rent Control Legislation
State and local laws, principally in Florida, might limit our ability to
increase rents on some of our properties, and thereby, limit our ability to
recover increases in operating expenses and the costs of capital improvements.
Enactment of rent control laws has been considered from time to time in
jurisdictions in which we operate. We presently expect to maintain manufactured
home communities and may purchase additional properties in markets that are
either subject to rent control laws or in which such legislation may be enacted.
Insurance
We believe that our properties are covered by adequate fire, flood and property
insurance policies. It is our policy to purchase insurance policies which
contain commercially reasonable deductibles and limits from reputable insurers.
We also believe that we have obtained adequate title insurance policies insuring
fee title to properties we have acquired.
Capital Resources
We have used our available cash balances, our FFO and our long-term and
short-term financing arrangements to provide working capital to support our
operations, to pay dividends and to acquire assets. Future acquisitions will be
financed by the most appropriate sources of capital, perhaps including our
available cash balances; undistributed FFO; long-term, secured debt; short-term,
- 7 -
secured debt; or the issuance of additional equity securities, including
interests in the Operating Partnership. This flexibility allows us to offer more
choices of "acquisition currency" to potential sellers of manufactured home
communities including the ability to defer some or all of the tax consequences
of a sale. We believe that this flexibility may offer sellers an incentive to
enter into transactions with us on favorable terms.
Without further stockholder approval, we are authorized to issue up to
50,000,000 shares of common stock. As of March 5, 1999, 5,563,943 shares of
common stock were issued and outstanding. The Board of Directors is authorized
to issue additional classes of stock (including preferred stock) without
stockholder approval. Depending upon the terms set by the Board of Directors,
the authorization and issuance of preferred stock or other new classes of stock
could adversely affect existing stockholders. Future offerings of stock may
result in the reduction of the net tangible book value per outstanding share and
a reduction in the market price of the stock. We are unable to estimate the
amount, timing or nature of such future offerings as any such offerings will
depend on general market conditions or other factors. As of March 5, 1999, we
have not authorized or issued additional classes of stock.
Dividend Reinvestment Plan
In 1998, we terminated our Automatic Dividend Reinvestment Plan due to the
administrative costs related to the plan.
Restrictions on and Redemptions of Common Stock
To qualify to be taxed as a REIT, we must comply with certain ownership
limitations with respect to shares of our common stock. Our Certificate of
Incorporation provides that shares of common stock generally may not be owned by
a person if the ownership of shares by such person would exceed 9.8% of our
outstanding shares or would result in the imposition of a tax on us.
Our Certificate of Incorporation empowers the Board of Directors, at its option,
to redeem shares of common stock or to restrict transfers of shares to comply
with the requirements described above. The redemption price we would pay if the
Board of Directors exercises this option to redeem shares would be the fair
market value of the common stock as reflected in the latest quotations on the
New York Stock Exchange. Our Certificate of Incorporation also provides that if
anyone acquires shares of our common stock in a manner or in a volume that would
result in our disqualification as a REIT under the Code, that acquisition is
deemed void to the fullest extent permitted under the law and the acquirer will
be deemed never to have had an interest in the shares. Furthermore, if a
transaction is determined to be void or invalid, the acquirer may be deemed to
have acted as agent on our behalf in acquiring such shares and may be deemed to
hold such shares on our behalf.
Each stockholder is required, upon demand, to disclose to the Board of Directors
in writing any information with respect to the direct and indirect ownership of
shares of our common stock as the Board of Directors deems necessary or prudent
in order to protect our tax status.
Employees
Our employees perform various acquisition and management functions. Brandywine
Financial Services Corporation and its affiliates provide our properties with
employees that perform property management, maintenance and sales services. Mr.
Bruce Moore was the founder and Chief Executive Officer of Brandywine prior to
becoming our President and Chief Operating Officer in February 1998. In addition
to our eight employees, approximately 260 Brandywine employees devote their full
- 8 -
attention to our communities. We reimburse Brandywine for the costs of these
employees. None of these employees are represented by a union, and we have never
experienced a work stoppage. We believe that we maintain satisfactory relations
with our employees.
Item 2. Properties.
The manufactured home communities in which we have interests are primarily
located in Florida and Arizona and are concentrated in or around four
metropolitan areas. We hold interests in these communities as owner, ground
lessee or mortgage lender (including participating mortgages). The following
table sets forth the states in which the communities in which we held an
interest on December 31, 1998 are located:
Number of Sites
--------------------------------------------------------------------------
Available for
Number of Ready for Future Recreational
Communities Developed Homes Development Vehicles
---------------- --------------- ------------- ---------------- ----------------
Florida 18 3,724 782 1,960 --
Arizona 4 798 109 -- 120
New Jersey 1 90 -- -- --
Pennsylvania 1 28 -- -- --
California 1 -- -- -- 65
--- ------ ---- ------ ----
Total 25 4,640 891 1,960 185
=== ===== ==== ====== ====
- 9 -
The following table sets forth information regarding each manufactured home
community in which we held an interest and those manufactured home communities
which we manage for others:
Average
Developed Monthly Sites Ready Sites Available
Community Location Homesites Occupancy(1) Rent RV Sites for Homes for Development
- -------------------------------------------------------------------------------------------------------------------
Owned Communities
Brentwood West Mesa, AZ 350 100% $274 -- -- --
Cardinal Court Largo, FL 138 99 255 -- -- --
Caribbean Cove Orlando, FL 255 100 264 -- 31 --
Forest View Homosassa, FL 187 99 219 -- 124 (3) --
Gulfstream Harbor Orlando, FL 379 99 304 -- 3 171
Gulfstream Harbor Orlando, FL
II 286 99 293 -- 22 --
Marina Dunes Marina, CA -- -- -- 65 -- --
Mullica Woods Egg Harbor City, NJ 90 100 440 -- -- --
Park Royale Pinellas Park, FL 258 95 331 -- 51 (3) --
Pinewood St. Petersburg, FL 220 98 277 -- -- --
Pleasant Living Riverview, FL 245 100 266 -- -- --
Salem Farm Bensalem, PA 28 100 417 -- -- --
Serendipity Ft. Myers, FL 338 99 265 -- -- --
Stonebrook Homosassa, FL 121 99 237 -- 97 (3) --
Sun Valley Tarpon Springs, FL 261 100 333 -- -- --
Westwind I (2) Dunedin, FL 195 99 313 -- -- --
Westwind II (2) Dunedin, FL 189 100 332 -- -- --
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Subtotal 3,540 99 286 65 328 171
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Participating Mortgage Communities (3)
Blue Heron Pines Punta Gorda, FL 116 100 227 -- 131 212
Blue Star Apache Junction, AZ 30 100 216 120 -- --
Brentwood Hudson, FL 69 93 171 -- 74 74
Lost Dutchman Apache Junction, AZ 150 100 237 -- 109 --
Royal Palm Haines City, FL 222 99 204 -- 64 175
Savanna Club Port St. Lucie, FL 7 100 198 -- -- 1,328
Sun Lake Grand Island, FL 238 98 240 -- 185 --
Sun Valley Apache Junction, AZ 268 100 237 -- -- --
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Subtotal 1,100 99 224 120 563 1,789
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Total Communities 4,640 99% $270 185 891 1,960
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Communities Managed for Commercial Assets
Cannery Village Newport Beach, CA -- --% $ -- -- -- 30
Casa Encanta Mesa, AZ 111 87 350 -- -- --
Cypress Greens Lakeland, FL 85 100 184 -- 22 --
Fiesta Village Mesa, AZ 175 98 273 -- -- 206
Riverside Ruskin, FL 220 100 418 -- 24 942
Southern Palms Mesa, AZ 51 100 203 -- -- --
----------------------------------------------------------------------------
Subtotal 642 97 319 -- 46 1,178
----------------------------------------------------------------------------
Communities Managed for Others
Countryside Brooksville, FL 73 99 129 -- 38 --
Edgewater Seminole, FL 130 100 157 -- -- --
Golden Crest Dunedin, FL 176 97 336 -- -- --
Lakewood Vero Beach, FL 329 98 292 -- 47 --
Windward Spring Hill, FL 199 100 232 -- 55 --
----------------------------------------------------------------------------
Subtotal 907 99 251 -- 140 --
----------------------------------------------------------------------------
============================================================================
Total Managed Communities 1,549 98% $281 -- 186 1,178
============================================================================
1 Excludes recreational vehicle sites, which are leased on a seasonal
basis.
2 We are the ground lessee of these communities.
3 We hold notes receivable secured by mortgages on these sites. The notes
earn interest and participate in profits or revenues from the sites.
- 10 -
Item 3. Legal Proceedings.
At March 5, 1999, there were no material legal proceedings, pending or
threatened, to which we were a party or to which any of our respective
properties were subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of our stockholders during the fourth
quarter of 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock is listed on the NYSE under the symbol "AIC." The high and low
closing sales prices of the shares of common stock as reported on the NYSE
Composite Tape and certain dividend information for the periods indicated were
as follows:
High Low Dividends
--------------- ------------- -------------
1998
First Quarter $ 20-7/8 $ 16 $ --
Second Quarter 19-5/16 15-7/8 .250
Third Quarter 17-5/16 13-5/16 .250
Fourth Quarter 14-15/16 12-1/8 .250
1997
First Quarter $ 21-1/4 $ 16-1/4 $ .475
Second Quarter 18-1/8 16-1/4 .300
Third Quarter 21-7/8 16-7/8 .325
Fourth Quarter 22-1/2 17 .350
As of March 5, 1999, 5,563,943 shares of common stock were issued and
outstanding and were held by 2,448 stockholders of record. We estimate there
were an additional 11,000 beneficial owners on that date whose shares were held
by banks, brokers or other nominees.
We, as a REIT, are required to distribute annually to stockholders at least 95%
of our "REIT taxable income," which, as defined by the Code and Treasury
regulations, is generally equivalent to net taxable ordinary income. We measure
economic profitability and intend to pay regular dividends to our stockholders
based on FFO, less an annual reserve for capital replacements of at least $50
per developed homesite, during the relevant period. The future payment of
dividends, however, will be at the discretion of the Board of Directors and will
depend on numerous factors including, our financial condition, capital
requirements, the annual distribution requirements under the provisions of the
Code applicable to REITs, and such other factors as the Board of Directors deems
relevant.
In 1998, 6,400 shares of common stock were issued to non-executive directors in
lieu of annual director fees as a private placement of our securities. The
non-executive directors were given the option of receiving either (1) $15,000
and 800 shares of common stock or (2) 1,600 shares of common stock.
- 11 -
Item 6. Selected Financial Data.
Our selected financial data set forth below, has been derived from and should be
read in conjunction with our audited consolidated financial statements including
their notes. Financial data as of December 31, 1998 and 1997, and for each of
the three years in the period ended December 31, 1998, is included elsewhere in
this report on Form 10-K.
Operating and Balance Sheet Data (in thousands, except per share data):
Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ---------- ---------- ----------
RENTAL PROPERTY OPERATIONS
Rental and other property revenues $ 10,479 $ 3,104 $ -- $ -- $ --
Interest on participating mortgages 3,174 -- -- -- --
Equity in earnings of rental property joint ventures -- 466 -- -- --
Property operating expenses (4,039) (1,398) -- -- --
----------- ----------- ---------- ---------- ----------
9,614 2,172 -- -- --
Depreciation (2,685) (693) -- -- --
----------- ----------- ---------- ---------- ----------
6,929 1,479 -- -- --
----------- ----------- ---------- ---------- ----------
SERVICE OPERATIONS
Property management income, net 156 69 -- -- --
Commercial Assets management fees 155 -- -- -- --
Amortization of management contracts (2,894) (744) -- -- --
----------- ----------- ---------- ---------- ----------
(2,583) (675) -- -- --
----------- ----------- ---------- ---------- ----------
OTHER ACTIVITIES
Non-agency MBS bonds revenues 50 2,966 11,513 8,499 1,531
Equity in earnings of Commercial Assets 975 3,663 1,875 1,742 1,354
General and administrative expenses (1,393) (1,042) (1,145) (1,895) (1,586)
Interest and other income 871 1,808 136 630 563
Interest expense (2,485) (368) (88) (63) (148)
Costs incurred to acquire management contract (2,092) (6,553) -- -- --
Management fees to former manager -- (570) (1,793) (980) (253)
Earnings from liquidating operations -- -- -- 6,507 11,897
Elimination of DERs -- -- (825) -- --
----------- ----------- ---------- ---------- ----------
INCOME BEFORE GAIN ON RESTRUCTURING OF BONDS AND
MINORITY INTEREST
272 708 9,673 14,440 13,358
Gain on restructuring of bonds -- 6,484 -- -- --
----------- ----------- ---------- ---------- ----------
INCOME BEFORE MINORITY INTEREST 272 7,192 9,673 14,440 13,358
Minority interest in Operating Partnership (60) 62 -- -- --
----------- ----------- ---------- ---------- ----------
NET INCOME $ 212 $ 7,254 $ 9,673 $ 14,440 $ 13,358
=========== =========== ========== ========== ==========
Per Share Amounts:
Basic earnings $ 0.04 $ 1.44 $ 1.97 $ 2.97 $ 4.59
Diluted earnings $ 0.04 $ 1.43 $ 1.95 $ 2.96 $ 4.58
Dividends $ 0.75 $ 1.45 $ 1.85 $ 1.70 $ 1.65
Weighted-Average Common Shares Outstanding 5,094 5,022 4,919 4,856 2,910
Weighted-Average Common Shares And Common Share
Equivalents Outstanding 5,113 5,061 4,966 4,883 2,914
- 12 -
December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- --------- --------- ---------
Real estate, before accumulated depreciation $101,941 $ 41,419 $ -- $ -- $ --
Investments in participating mortgages and
joint ventures 27,604 25,415 -- -- --
Investment in Commercial Assets 20,706 20,866 19,361 19,225 21,068
Total assets 158,226 119,161 90,344 79,653 109,539
Secured notes payable 51,006 10,677 -- -- 30,592
Minority interest in Operating Partnership 25,649 22,362 -- -- --
Stockholders' equity 78,636 83,515 86,365 78,759 72,965
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The following discussion and analysis of consolidated results of operations and
financial condition should be read in conjunction with our consolidated
financial statements included elsewhere in this report. In 1997, we decided to
change our business from the ownership of high-risk, residential collateralized
mortgage-backed securities to the ownership, acquisition, development and
management of manufactured home communities. This decision helped us to avoid
the volatility incurred by other owners of these securities following the
capital market crisis in the third quarter of 1998. During the last year and a
half we have been focused on the investment of our capital in the acquisition of
manufactured home communities. Since our capital has not yet been entirely
invested into this new business, our financial performance, and consequently our
stock price, has been adversely affected during this period.
Comparison of 1998 to 1997
Rental Property
Income from rental properties totaled $6,929,000 during 1998 and $1,479,000
during 1997. The increase between 1997 and 1998 was due to our acquisition of
communities during those years. Our first acquisition of interests in
manufactured home communities occurred in May 1997, and as of December 31, 1997,
we had invested $69 million in 19 communities. During 1998, we had invested an
additional $60 million in seven communities.
Inflation
We do not believe that changes in inflation rates would have a material adverse
effect on our business. In fact, we believe that inflation may positively impact
our business, in light of the fact that manufactured home communities represent
a more affordable housing choice for many people than other alternatives
available, increased inflation rates may allow us to demand increased rents
without losing tenants.
Service Operations
During 1998, we earned $156,000 in property management income versus $69,000
during 1997. Property management income increased during 1998 as compared to
1997 because property management contracts were not acquired until May 1997.
Amortization of management contracts increased from $744,000 to $2,894,000 in
- 13 -
1997 and 1998, respectively, due to our acquisition of property management
contracts in May 1997 and our acquisition of the Commercial Assets management
agreement in November 1997. Similarly, fee revenue from managing Commercial
Assets was $155,000 in 1998 and $0 in 1997.
Equity in Earnings of Commercial Assets
Income from our 27% interest in Commercial Assets for 1998 was $975,000 compared
to $3,663,000 for 1997. Prior to November 1997, Commercial Assets received
income from a portfolio of collateralized mortgage backed securities. It
restructured its portfolio in November 1997 and temporarily invested the
proceeds in short-term investments while considering alternative investments.
Commercial Assets announced that it intended to invest in manufactured home
communities in the third quarter of 1998, and as of December 31, 1998, it has
invested $23 million in such communities. Commercial Assets reported to us that
the decrease in income during 1998 as compared to 1997 was due to: (1) lower
yields during 1998 on short-term investments and interests in manufactured home
communities compared to yields on collateralized mortgage backed securities
during 1997, (2) the gain on the restructuring of the bonds recognized in 1997,
and (3) a non-recurring $500,000 expense in 1998 related to the cost of
investigating marina investments.
Non-agency MBS Bonds
In March 1997, we sold our portfolio of unrated credit support debt interests in
non-conforming residential mortgage loan securitizations known as "non-agency
MBS bonds" in order to reduce risk associated with this type of investment and
to maximize long-term, risk-adjusted returns to stockholders. Consequently,
income from non-agency MBS bonds decreased to $50,000 during 1998 compared with
$2,966,000 for 1997. Revenues from non-agency MBS bonds subsequent to March 1997
represent income from a small equity interest retained from the sale. No income
has been recognized from the retained equity interest after the first quarter of
1998, and we anticipate receiving minimal, if any, additional income in the
future from such retained interest.
Management Fees
We incurred $570,000 of management fees to our manager during 1997. There were
no management fees in 1998 due to our acquisition of our management agreement in
November 1997.
General and Administrative Expenses
Our general and administrative expenses were $1,393,000 for 1998 compared to
$1,042,000 for 1997. Expenses increased in 1998 primarily because of personnel
and related expenses incurred as a result of our becoming self-administered and
self-managed in November 1997. The cost increase was partially offset by
$100,000 of nonrecurring costs incurred in 1997 related to our reverse stock
split.
Interest and Other Income
Interest and other income for 1998 was $871,000 compared to $1,808,000 for 1997.
The proceeds from the restructuring of the non-agency MBS bonds were temporarily
invested until they were used to acquire manufactured home communities. By June
1998, we had used substantially all of the proceeds to acquire communities.
Therefore, we do not expect significant interest income in the future. The
average interest rate on our temporary investments was 5.4% during both 1998 and
1997.
- 14 -
Interest Expense
Interest expense increased in 1998 by $2,117,000 as compared to 1997 due to
borrowings used to acquire manufactured home communities. During 1998, we
incurred interest expense on (1) approximately $11 million assumed in connection
with the 1997 acquisitions of four manufactured home communities and (2)
approximately $40 million borrowed in mid-1998 in connection with the
acquisition of four additional communities. The 1998 interest expense figure
also includes $382,000 of amortized loan costs related to the 1998 borrowings.
Costs Incurred to Acquire Management Contract
During 1998, we achieved annualized returns before depreciation on certain of
our real estate investments in excess of 9% for a period of six months. Pursuant
to the November 1997 acquisition of our management contract, we issued 120,000
OP Units to the former manager and recognized a $2,073,000 expense for
additional consideration paid to the former manager. During 1997, we recognized
$6,553,000 of expense related to the purchase of our management contract.
Gain on Restructuring of Bonds
In connection with the resecuritization of the non-agency MBS bonds, a gain of
$7,359,000 was recognized during 1997 reduced by both $1,472,000 of Incentive
Fees related to the gain and an additional fee of $600,000 incurred in exchange
for the manager agreeing to continue as a loss mitigation advisor on the
non-agency MBS bonds. In addition, during the fourth quarter of 1997, we entered
into a transaction for the sale of interests in other bonds that had no carrying
value on our books. As a result of this transaction, a net gain of $1,197,000
was recognized in 1997.
Comparison of year ended December 31, 1997 to year ended December 31, 1996
Rental Property and Service Operations
From May 1997 through December 1997, we invested $69 million in manufactured
home communities and related assets. As of December 31, 1997, we had interests
in 19 manufactured home communities. In 1997, we earned $3,104,000 of rental and
other property revenues and $466,000 of equity in earnings of real estate joint
ventures and incurred $1,398,000 of property operating expenses and $693,000 of
depreciation related to the acquired communities. In addition, we earned $69,000
of property management income less $744,000 of amortization related to the
management contracts acquired.
Equity in Earnings of Commercial Assets
Income from our 27% interest in Commercial Assets for 1997 and 1996 was
$3,663,000 and $1,875,000, respectively. Commercial Assets reported to us that
the increase in income is primarily because of gains from the 1997 restructuring
of its portfolio of collateralized mortgage-backed securities ("CMBS bonds"),
prepayments on one of its CMBS bonds in the third quarter of 1997 and the
non-recurring charge in 1996 for the elimination of dividend equivalent rights
under Commercial Assets' stock option plan. The increase was partially offset by
higher management fees in 1997 and revenues from redemption of two CMBS bonds
and other prepayments in 1996.
- 15 -
Non-agency MBS Bonds
Income from our non-agency MBS bonds decreased to $2,966,000 during 1997
compared with $11,513,000 for 1996 primarily due to the resecuritization of the
bonds in March 1997. Revenues of $966,000 from the non-agency MBS bonds, since
the resecuritization, represent income from the retained equity interest.
Management Fees
In November 1997, stockholders approved a proposal to acquire our manager in
order to become a self-managed and self-administered REIT. Prior to the
acquisition, the manager received various fees for the advisory and other
services performed, and the manager provided all personnel and related overhead
necessary to conduct our regular business.
Management fees decreased to $570,000 during 1997 compared with $1,793,000 for
1996 primarily due to the resecuritization of the non-agency MBS bonds in March
1997. The manager received administrative fees of up to $3,500 for each
non-agency MBS bond and base fees on invested assets. Base fees were not paid on
cash or short-term investment balances. Therefore, as a result of the
resecuritization, administrative fees were eliminated, base fees declined, and
lower net income exclusive of the gain on the restructuring resulted in lower
incentive fees. In addition, all fees were discontinued upon our acquisition of
the manager in November 1997.
We incurred $322,000 of acquisition fees during 1997, relating to the
acquisition of manufactured home communities and management contracts. These
acquisition fees are capitalized and will be amortized over the estimated life
of the related assets. No acquisition fees were incurred in 1996.
General and Administrative Expenses
General and administrative expenses decreased by $103,000 in 1997 compared with
1996 due primarily to the (1) elimination of dividend equivalent right expense
in the second quarter of 1996, (2) reductions in accounting and consulting fees,
and (3) lower costs associated with stockholder relations.
Interest and Other Income
Interest and other income increased significantly during 1997 compared with 1996
because of higher cash balances subsequent to the resecuritization of the
non-agency MBS bonds. The average interest rate on our cash investments during
1997 was 5.4%.
Interest Expense
Interest expense during 1997 includes $342,000 on the secured notes payable
assumed with the acquisition of four manufactured home communities and $26,000
of interest on the $3 million of short-term borrowings outstanding at December
31, 1996. The $88,000 of interest expense during 1996 was on short-term
borrowings.
- 16 -
Costs Incurred to Acquire Management Contract
During the fourth quarter of 1997, we recognized a $6,553,000 nonrecurring
expense related to our purchase of our management contract, including $6,105,000
of non-cash expense from the issuance of OP Units to the former manager.
Gain on Restructuring of Bonds
The 1997 gains from the restructuring of non-agency MBS and other bonds totaled
$6,484,000. There were no such gains in 1996.
NOL and Capital Loss Carryovers
At December 31, 1998, our NOL carryover was approximately $95,000,000 and our
capital loss carryover was approximately $20,000,000. Subject to some
limitations, the NOL carryover may be used to offset all or a portion of our
REIT income, and as a result, to reduce the amount of income that we must
distribute to stockholders to maintain our status as a REIT. The NOL carryover
is scheduled to expire between 2007 and 2009 and the capital loss carryover is
scheduled to expire in 2000 and 2001.
Dividend Distributions
During 1998, we distributed $4,916,000 ($0.75 per share) to holders of common
stock and OP Units compared to 1997 distributions of $7,749,000 ($1.45 per
share) and 1996 distributions of $9,128,000 ($1.85 per share). Eighty percent of
1998 dividends and seventy-five percent of 1997 dividends constituted return of
capital distributions, which are not taxable to the stockholders to the extent
of their basis in their stock. Return of capital distributions were not made in
1996.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, we had cash and cash equivalents of $1,426,000. Our
principal activities that demand liquidity include our normal operating
activities, payments of principal and interest on outstanding debt, acquisitions
of or additional investments in properties, payments of dividends to
stockholders and distributions made to limited partners in the Operating
Partnership.
Our net cash provided by operating activities was $6,841,000 during 1998
compared to $3,931,000 during 1997. The increase was primarily a result of (1)
increased cash flow from the ownership and management of manufactured home
communities due to acquisitions in 1997 and 1998 offset by decreased cash flow
from the non-agency MBS bonds and short-term investments we held in 1997 and (2)
costs in 1997 in the amount of $448,000 associated with the acquisition of our
management contract.
In 1998, the net cash used by investing activities was $58,897,000, compared
with 1997 in which $27,479,000 of net cash was provided by investing activities.
Investing activities in 1998 were primarily related to the acquisition of
manufactured home communities, whereas, investing activities in 1997 primarily
consisted of the restructuring of bonds net of the acquisition of interests in
real estate. The restructuring of bonds in 1997 provided $69,807,000 of cash, of
which $46,344,000 was used to acquire interests in real estate.
- 17 -
Net cash provided by financing activities was $31,680,000 in 1998, compared with
net cash used by financing activities of $10,025,000 in 1997. This difference is
primarily due to short-term and long-term borrowings in 1998 versus our
repayment of short-term borrowings in 1997.
We have a line of credit with a bank which matures in September 2000. The line
of credit is secured by 1,015,674 shares of our Commercial Assets common stock.
Advances under this line of credit bear interest at the 30-day LIBOR rate plus
1.75%. The line of credit is limited to the lesser of (1) $5,000,000, (2) 65% of
the product of the trading price of Commercial Assets common stock times
1,015,674 or (3) 65% of the purchase price of certain unpledged real estate. As
of December 31, 1998, the limit was $4,000,000 and $2,000,000 was outstanding on
this line of credit.
As of December 31, 1998, 52% of our real estate and 34% of our total assets were
encumbered by debt. We had total outstanding indebtedness of $51.0 million, all
of which was secured by various manufactured home communities, participating
mortgages or shares of Commercial Assets stock. Our indebtedness was comprised
of $40.5 million of non-recourse secured, long-term financing and $10.5 million
of secured short-term financing. We expect to refinance the short-term debt with
non-recourse secured, long-term financing in 1999. As of December 31, 1998, none
of the long-term financing and all of the short-term financing bears interest at
variable rates. The weighted-average interest rate on the secured, long-term
notes payable was 6.8% with a weighted-average maturity of 10 years. The
weighted-average interest rate on our short-term financing was 7.5%.
We expect to meet our long-term liquidity requirements through long-term,
secured borrowings, the issuance of OP Units and other equity securities and
cash generated by operations.
FUNDS FROM OPERATIONS
We measure our economic profitability based on FFO, less an annual capital
replacement reserve of at least $50 per developed homesite. We believe that FFO,
less a reserve, provides investors with an understanding of our ability to incur
and service debt and to make capital expenditures. The Board of Governors of
NAREIT defines FFO as net income (loss), computed in accordance with generally
accepted accounting principles, excluding gains and losses from debt
restructuring and sales of property, plus real estate related depreciation and
amortization (excluding amortization of financing costs), and after adjustments
for unconsolidated partnerships and joint ventures. We calculate FFO in a manner
consistent with NAREIT's definition. In our calculation we include adjustments
for:
o the minority interest in the Operating Partnership owned by persons
other than us,
o costs we incurred in order to become self-managed, and
o amortization of management contracts.
FFO should not be considered an alternative to net income or net cash flows from
operating activities, as calculated in accordance with generally accepted
accounting principles, as an indication of our performance or as a measure of
liquidity. FFO is not necessarily indicative of cash available to fund future
cash needs.
- 18 -
For 1998 and 1997, our FFO was as follows (in thousands):
1998 1997
---------- -------
Income before minority interest in Operating Partnership $ 272 $ 7,192
Gain on liquidation of bonds -- (6,484)
Real estate depreciation 2,685 693
Real estate depreciation in joint ventures -- 155
Amortization of management contracts 2,894 744
Amortization of non-agency MBS bonds -- 1,016
Equity in Commercial Assets' adjustments for FFO 212 (1,546)
Costs incurred to acquire management contract 2,092 6,553
-------- --------
Funds From Operations (FFO) $ 8,155 $ 8,323
======== ========
Weighted average common shares and OP Units outstanding 6,540 5,254
======== ========
YEAR 2000 COMPLIANCE
Year 2000 issues have arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19". If not corrected, many computer applications could
fail or create erroneous results. The following disclosure provides information
regarding the current status of our Year 2000 compliance program.
Our critical hardware and software systems are currently Year 2000 compliant.
Upon failure of any system, data included in critical software (such as
rent-rolls and certain record-keeping systems) could be transferred to
alternative commercially available software at a reasonable cost and within a
reasonable time period. Consequently, we would be able to continue our business
operations without any material interruption or material effect on our business,
results of operations or financial condition. In addition, we anticipate that
any hardware or software that we acquire (including upgrades to existing
systems) between now and December 31, 1999 will be Year 2000 compliant.
Disruptions in the economy generally resulting from Year 2000 issues could also
materially adversely affect us. Moreover, because a large number of our tenants
may be dependent on social security payments to pay their rents, a failure of
the Social Security Administration to cause their systems to be Year 2000
compliant may result in a material adverse effect on our operations. The Social
Security Administration has announced that they will have their systems Year
2000 compliant before January 1, 2000.
We believe that the cost of modification or replacement of our less essential
accounting and reporting software and hardware that is not currently compliant
with Year 2000 requirements, if any, will not be material to our financial
position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our principal exposure to market risk is through our various debt instruments
and borrowings. The following is a list of these debt instruments and borrowing
arrangements.
We have $30.3 million of 6.5% non-recourse, secured long-term notes payable that
mature in 2018. We do not have significant exposure to changing interest rates
on these notes as the rate is fixed and the notes are fully amortizing.
- 19 -
We have $10.2 million of non-recourse, secured long-term notes payable that
mature in October 2000 with a principal payment at maturity of $9.4 million. The
rates on these notes range from 7.5% to 8.25% and are fixed. We intend to
refinance these notes during 1999 or 2000 with long-term, fully amortizing,
fixed rate debt. While changes in interest rates would affect the cost of funds
borrowed in the future to refinance the existing debt, we believe that the
effect, if any, of near-term changes in interest rates on our financial
position, results of operations or cash flows would not be material as the
existing debt is fixed rate until October 2000.
We have $8.5 million of recourse, secured short-term financing that bears
interest at the London Interbank Offered Rate ("LIBOR") plus 2.5%. We expect to
refinance this debt with non-recourse, secured, fixed rate, long-term debt in
1999. We have loan commitments from a lender for amounts in excess of the
existing loan amount for 20 year, fully amortized debt with fixed rates ranging
from 6.75% to 6.86%. If such expected refinancing occurs, we would not have
significant exposure to changing interest rates. If the loan is not refinanced
with fixed rate, fully amortized debt, then changes in LIBOR would affect the
cost of funds borrowed in the future.
We have a recourse, secured line of credit that bears interest at LIBOR plus
1.75%. As of December 31, 1998, the outstanding balance was $2.0 million.
Accordingly, changes in LIBOR would affect the cost of funds borrowed in the
future; however, its affect would not be material to our financial position,
results of operations or cash flows.
Item 8. Financial Statements and Supplementary Data.
The independent auditor's reports, consolidated financial statements and
schedules listed in the accompanying index are filed as part of this report and
incorporated herein by reference. See "Index to Financial Statements" on page
F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
We have had no changes in nor any disagreements with our accountants relating to
accounting or financial disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information set forth under the caption "Board of Directors and Officers" in
the proxy statement in connection with our 1999 Annual Meeting of Stockholders
which is to be filed after the date this report on Form 10-K is filed is hereby
incorporated by reference.
Executive Officers of the Registrant
The Executive Officers of the Company as of December 31, 1998 are:
Name Age Position with the Company
- -------------------------------------------------------------------------------
Terry Considine 51 Chairman of the Board of Directors and Chief
Executive Officer
Thomas L. Rhodes 59 Vice Chairman of the Board of Directors
Bruce E. Moore 56 President and Chief Operating Officer
David M. Becker 39 Chief Financial Officer, Secretary and Treasurer
- 20 -
Terry Considine has been our Chairman of the Board of Directors and Chief
Executive Officer since April 1998. From September 1996 to April 1998, Mr.
Considine served as our Co-Chairman of the Board of Directors and Co-Chief
Executive Officer. Mr. Considine also serves as Chairman of the Board of
Directors and Chief Executive Officer of Commercial Assets. He is the sole owner
of Considine Investment Co., and since July 1994, he has been the Chairman of
the Board of Directors and Chief Executive Officer of Apartment Investment and
Management Company ("AIMCO"), one of the largest apartment REITs in the United
States. Mr. Considine has been and remains involved as a principal in a variety
of real estate activities, including the acquisition, renovation, development
and disposition of properties. Mr. Considine has also controlled entities
engaged in other businesses such as television broadcasting, gasoline
distribution and environmental laboratories. Mr. Considine received a B.A. from
Harvard College and a J.D. from Harvard Law School and was admitted as a member
of the Massachusetts Bar.
Mr. Considine has had substantial real estate experience. From 1975 through July
1994, partnerships or other entities in which Mr. Considine had controlling
interests invested in approximately 35 multifamily apartment properties and
commercial real estate properties. Six of these real estate assets (four of
which were multifamily apartment properties and two of which were office
properties) did not generate sufficient cash flow to service their related
indebtedness and were foreclosed upon by their lenders, causing pre-tax losses
of approximately $11.9 million to investors and losses of approximately $2.7
million to Mr. Considine.
Thomas L. Rhodes has been our Vice Chairman of the Board of Directors since
April 1998. From September 1996 to April 1998, Mr. Rhodes served as Co-Chairman
of the Board of Directors and Co-Chief Executive Officer. From September 1996 to
April 1998, Mr. Rhodes also served as Commercial Assets' Co-Chairman of the
Board of Directors and Co-Chief Executive Officer. Mr. Rhodes has been
Commercial Assets' Vice Chairman of the Board since April 1998. Mr. Rhodes has
also been a Director of AIMCO since July 1994. Mr. Rhodes has served as the
President and a Director of National Review magazine since 1992. From 1976 to
1992, he held various positions at Goldman, Sachs & Co. and was elected a
General Partner in 1986. He currently serves as a Director of Delphi Financial
Group, Inc. and its subsidiaries, Delphi International, Ltd., Oracle Reinsurance
and The Lynde and Harry Bradley Foundation. Mr. Rhodes is Trustee of The
Heritage Foundation.
Bruce E. Moore was appointed as our President and Chief Operating Officer in
February 1998. He also serves as President and Chief Operating Officer of
Commercial Assets. Mr. Moore is the founder and was the Chief Executive Officer
of Brandywine Financial Services Corporation and its affiliates, a private real
estate firm specializing in various aspects of the real estate industry
including asset management, consulting, development, property management,
brokerage and capital formation. He is a certified public accountant and holds a
Masters in Accounting and a Bachelor of Science in Economics from the Wharton
School of the University of Pennsylvania. Mr. Moore is a Director and past
President of the Media Youth Center, and a past advisory-board member for the
Department of Recreation and Intercollegiate Athletics for the University of
Pennsylvania. In addition, Mr. Moore is a member of the National Association of
Real Estate Investment Trusts and the International Council of Shopping Centers.
David M. Becker has functioned as our Chief Financial Officer, Secretary and
Treasurer since December 1997 and was appointed to such positions in February
1998. Since December 1997, Mr. Becker has also served as Chief Financial
Officer, Secretary and Treasurer of Commercial Assets and was appointed to such
positions in April 1998. From September 1995 until joining us, he was both the
Chief Financial Officer of Westfield Development Company, Inc. and Vice
President-Finance of The Frederick Ross Co., related companies involved in
commercial real estate development, brokerage and management. Prior to September
- 21 -
1995, he held various executive positions with CONCORD Services, Inc., a
privately-held company involved in multiple businesses including trading,
manufacturing and finance. CONCORD Services, Inc. declared bankruptcy in
February 1995. In addition, Mr. Becker was Chief Financial Officer and General
Counsel of Ramtron International Corporation, a publicly-held semiconductor
manufacturer, from October 1989 until July 1994. Mr. Becker is an attorney and
certified public accountant. He received a B.A. from the University of Northern
Iowa and a J.D. from the University of Denver.
There are no family relationships between any of the executive officers,
directors or persons nominated or chosen by us to become a director or executive
officer and there are no arrangements or understandings pursuant to which any of
them were selected as directors or officers. Except as described above, none of
the persons nominated to become directors or executive officers have been
involved in any legal proceedings during the past five years that are material
to an evaluation of the ability or integrity of such persons.
The information set forth under the caption "Compliance with Section 16(a) of
the Exchange Act" in the proxy statement is hereby incorporated by reference.
Item 11. Executive Compensation.
The information set forth under the captions "Summary Compensation Table",
"Options/SAR Grants in Last Fiscal Year" and "Aggregate Option/SAR Exercises in
Last Fiscal Year and Fiscal Year-end Options/SAR Values" in the proxy statement
is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the proxy statement is hereby incorporated
by reference.
Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "Certain Relationships and Related
Transactions" in the proxy statement is hereby incorporated by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) The financial statements listed in the Index to Financial Statements on
Page F-1 of this report are filed as part of this report.
(a)(2) The financial statement schedules listed in the Index to Financial
Statements on Page F-1 of this report are filed as part of this report.
All other schedules are omitted since they are not applicable, not
required, or the information required to be set forth therein is
included in the financial statements, or in notes thereto.
(a)(3) The Exhibit Index is included on page 23 of this report.
(b) Reports on Form 8-K for the quarter ended December 31, 1998:
No current reports on Form 8-K were filed by the Company during the
fourth quarter of 1998.
- 22 -
INDEX TO FINANCIAL STATEMENTS
ASSET INVESTORS CORPORATION Page
Financial Statements:
Report of Independent Auditors...................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997........ F-3
Consolidated Statements of Income for the years ended December
31, 1998, 1997 and 1996........................................... F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996............................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.................................. F-6
Notes to Consolidated Financial Statements.......................... F-7
Financial Statement Schedules:
Schedule III -- Real Estate and Accumulated Depreciation........... F-21
Schedule IV -- Mortgage Loans on Real Estate....................... F-23
COMMERCIAL ASSETS, INC. (a significant unconsolidated subsidiary of the Company)
Financial Statements:
Report of Independent Auditors..................................... F-25
Consolidated Balance Sheets as of December 31, 1998 and 1997....... F-26
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996............................... F-27
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996................... F-28
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996................... F-29
Notes to Consolidated Financial Statements......................... F-30
Financial Statement Schedules:
Schedule III -- Real Estate and Accumulated Depreciation............ F-41
Schedule IV -- Mortgage Loans on Real Estate........................ F-42
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Asset Investors Corporation
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Asset
Investors Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. Our audits
also included the consolidated financial statement schedules listed in the
accompanying index. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with 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, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects the information set forth therein.
Ernst & Young LLP
Denver, Colorado
January 29, 1999
F-2
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
------------
1998 1997
---- ----
ASSETS
Real estate, net of accumulated depreciation of $3,378 and $693 $ 98,563 $ 40,726
Investments in participating mortgages 27,604 --
Investments in and notes receivable from real estate joint ventures -- 25,415
Cash and cash equivalents 1,426 21,802
Investment in Commercial Assets 20,706 20,866
Other assets, net 9,927 10,352
---------- ----------
Total Assets $ 158,226 $ 119,161
========== ==========
LIABILITIES
Secured long-term notes payable $ 40,506 $ 10,677
Secured short-term financing 10,500 --
Accounts payable and accrued liabilities 2,935 2,607
---------- ----------
53,941 13,284
---------- ----------
MINORITY INTEREST IN OPERATING PARTNERSHIP 25,649 22,362
STOCKHOLDERS' EQUITY
Common Stock, par value $.01 per share, 50,000 shares authorized 5,016 and 5,108
shares issued and outstanding, respectively
50 51
Additional paid-in capital 229,948 231,221
Dividends in excess of accumulated earnings (151,362) (147,757)
---------- ----------
78,636 83,515
---------- ----------
Total Liabilities and Stockholders' Equity $ 158,226 $ 119,161
========== ==========
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,
-----------------------
1998 1997 1996
---- ---- ----
RENTAL PROPERTY OPERATIONS
Rental and other property revenues $ 10,479 $ 3,104 $ --
Interest on participating mortgages 3,174 -- --
Equity in earnings of real estate joint ventures -- 466 --
Property operating expenses (4,039) (1,398) --
---------- --------- ---------
Income from property operations before depreciation 9,614 2,172 --
Depreciation (2,685) (693) --
--------- --------- ---------
Income from rental property operations 6,929 1,479 --
--------- --------- ---------
SERVICE OPERATIONS
Property management income, net 156 69 --
Commercial Assets management fees 155 -- --
Amortization of management contracts (2,894) (744) --
--------- --------- ---------
Loss from service operations (2,583) (675) --
--------- --------- ---------
OTHER ACTIVITIES
Non-agency MBS bonds revenues 50 2,966 11,513
Equity in earnings of Commercial Assets 975 3,663 1,875
Management fees to former manager -- (570) (1,793)
--------- --------- ---------
Income from other activities 1,025 6,059 11,595
--------- --------- ---------
General and administrative expenses (1,393) (1,042) (1,145)
Interest and other income 871 1,808 136
Interest expense (2,485) (368) (88)
Costs incurred to acquire management contract (2,092) (6,553) --
Elimination of DERs -- -- (825)
--------- --------- ---------
INCOME BEFORE GAIN ON RESTRUCTURING OF BONDS AND MINORITY
INTEREST 272 708 9,673
Gain on restructuring of bonds -- 6,484 --
--------- --------- ---------
INCOME BEFORE MINORITY INTEREST 272 7,192 9,673
Minority interest in Operating Partnership (60) 62 --
--------- --------- ---------
NET INCOME $ 212 $ 7,254 $ 9,673
========= ========= =========
BASIC EARNINGS PER SHARE $ 0.04 $ 1.44 $ 1.97
========= ========= =========
DILUTED EARNINGS PER SHARE $ 0.04 $ 1.43 $ 1.95
========= ========= =========
DIVIDENDS DECLARED PER SHARE $ 0.75 $ 1.45 $ 1.85
========= ========= =========
Weighted-Average Common Shares Outstanding 5,094 5,022 4,919
Weighted-Average Common Shares And Common Share Equivalents
Outstanding 5,113 5,061 4,966
See Notes to Consolidated Financial Statements.
F-4
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
Dividends In Accumulated
Additional Excess of Other Total
Common Stock Paid-In Accumulated Comprehensive Stockholders'
Shares Amount Capital Earnings Income Equity
------ ------ ------- -------- ------ ------
BALANCES - DECEMBER 31, 1995 24,356 $ 244 $ 227,546 $ (148,274) $ (757) $ 78,759
Comprehensive Income
Net income -- -- -- 9,673 -- 9,673
Unrealized appreciation of CMBS
bonds and non-agency MBS bonds -- -- -- -- 5,850 5,850
------ ----- ---------- ----------- ------- --------
Comprehensive Income -- -- -- 9,673 5,850 15,523
------ ----- ---------- ----------- ------- --------
Issuance of Common Stock 484 4 1,207 -- -- 1,211
Dividends -- -- -- (9,128) -- (9,128)
------ ----- ---------- ----------- ------- --------
BALANCES - DECEMBER 31, 1996 24,840 248 228,753 (147,729) 5,093 86,365
Comprehensive Income
Net income -- -- -- 7,254 -- 7,254
Reversal of unrealized holding
gains upon restructuring of bonds -- -- -- -- (5,093) (5,093)
------ ----- ---------- ----------- ------- --------
Comprehensive Income -- -- -- 7,254 (5,093) 2,161
------ ----- ---------- ----------- ------- --------
Issuance of Common Stock 459 5 2,266 -- -- 2,271
Dividends -- -- -- (7,282) -- (7,282)
One-for-five reverse stock split (20,191) (202) 202 -- -- --
------- ----- ---------- ----------- ------- --------
BALANCES - DECEMBER 31, 1997 5,108 51 231,221 (147,757) -- 83,515
Issuance of Common Stock 29 -- 434 -- -- 434
Repurchase of Common Stock (121) (1) (1,707) -- -- (1,708)
Net income -- -- -- 212 -- 212
Dividends -- -- -- (3,817) -- (3,817)
------ ----- ---------- ----------- ------- --------
BALANCES - DECEMBER 31, 1998 5,016 $ 50 $ 229,948 $ (151,362) $ -- $ 78,636
====== ===== ========== =========== ======= ========
See Notes to Consolidated Financial Statements.
F-5
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 212 $ 7,254 $ 9,673
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization 5,962 1,437 --
Minority interest in Operating Partnership 60 (62) --
Equity in earnings of Commercial Assets (917) (3,663) (1,875)
Costs incurred to acquire management contract 2,073 6,105 --
Accrued interest on participating mortgages (566) -- --
Amortization of non-agency MBS bonds -- 469 2,998
Equity in earnings of real estate joint ventures -- (466) --
Elimination of dividend equivalent rights -- -- 825
Increase in other assets (83) (647) (148)
Increase (decrease) in accounts payable and accrued liabilities
100 (12) 197
Gain on restructuring of assets -- (6,484) --
------- ------- -------
Net cash provided by operating activities 6,841 3,931 11,670
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of real estate (57,832) (31,502) --
Investments in participating mortgages, net (1,611) -- --
Investments in and advances to real estate joint ventures -- (14,842) --
Capital replacements (531) (55) --
Dividends from Commercial Assets 1,077 3,065 1,988
Acquisition of non-agency MBS bonds -- -- (15,893)
Principal collections and indemnifications on non-agency MBS
bonds -- 547 3,151
Distributions from real estate joint ventures -- 459 --
Proceeds from the restructuring of assets -- 69,807 --
--------- --------- ---------
Net cash provided by (used in) investing activities (58,897) 27,479 (10,754)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Common Stock dividends (3,817) (7,282) (9,128)
Payment of distributions to minority interest in Operating
Partnership (1,099) (467) --
Proceeds (paydowns) from secured short-term financing 10,500 (3,000) 3,000
Proceeds from secured notes payable borrowings 30,280 -- --
Payment of loan costs, including costs from interest rate hedges
(2,060) -- --
Principal paydown on secured long-term notes payable (451) (196) --
Repurchase of Common Stock (1,708) -- --
Proceeds from the issuance of Common Stock 35 920 301
--------- ---------- ----------
Net cash provided by (used in) financing activities 31,680 (10,025) (5,827)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(20,376) 21,385 (4,911)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
21,802 417 5,328
--------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,426 $ 21,802 $ 417
========= ========== ==========
See Notes to Consolidated Financial Statements.
F-6
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. The Company
Asset Investors Corporation ("AIC" and, together with its subsidiaries, the
"Company") is a Maryland corporation that owns and operates manufactured home
communities and has elected to be taxed as a real estate investment trust
("REIT"). AIC's Common Stock, par value $.01 per share ("Common Stock"), is
listed on the New York Stock Exchange under the symbol "AIC." In May 1997, AIC
contributed its net assets to Asset Investors Operating Partnership, L.P. (the
"Operating Partnership") in exchange for the sole general partner interest in
the Operating Partnership and substantially all of the Operating Partnership's
initial capital. AIC owns 76% of the Operating Partnership as of December 31,
1998. The Company also owns 27% of the Common Stock of Commercial Assets, Inc.
("CAX") and the non-voting stock of both AIC Manufactured Housing Corp.
("AICMHC") and Asset Investors Equity, Inc. ("AIE"). CAX is a publicly-traded
REIT (American Stock Exchange, Inc.: CAX) formed by the Company in August 1993.
AICMHC owns interests in manufactured home community management contracts and
AIE manages CAX.
Prior to 1997, the Company owned debt interests in residential mortgage loan
securitizations collateralized by pools of non-conforming (non-agency
guaranteed) single-family mortgage loans ("non-agency MBS bonds"). In February
1997, the Company decided to restructure the Company's asset base and redeploy
its assets in an attempt to both reduce risks associated with the Company's
non-agency MBS bonds and maximize long-term, risk-adjusted returns to
stockholders. In March 1997, under the first step of such plan, the Company
contributed its portfolio of non-agency MBS bonds into an owner trust in a
structured transaction in which the Company received $67,671,000 cash proceeds
and retained a small equity interest. Subsequently, the Company has acquired
interests in 23 manufactured home communities and two recreational vehicle parks
with 4,640 developed homesites, 890 sites ready for homes, 1,960 sites available
for future development and 180 recreational vehicle sites.
Prior to November 1997, the Company and CAX were managed by Financial Asset
Management LLC ("FAM"). An investor group led by Terry Considine, Thomas L.
Rhodes and Bruce D. Benson acquired FAM in September 1996. Mr. Considine is the
Chairman and Chief Executive Officer of both the Company and CAX. Mr. Rhodes is
Vice Chairman and Mr. Benson is a director of both the Company and CAX. In
November 1997, the Company's stockholders approved the acquisition of the assets
and operations of FAM in order to become a self-managed and self-administered
REIT. The $11,692,000 purchase price was paid by issuing 676,700 limited
partnership units of the Operating Partnership ("OP Units") plus up to 240,000
additional OP Units if certain performance goals, including investment and share
price targets, are achieved by the Company within a specified time period.
During the third quarter of 1998, the Company achieved the first set of
performance goals by realizing annualized returns before depreciation in excess
of 9% on its real estate investments for a period of six months. As a result of
achieving these goals, the Company issued 120,000 OP Units and recorded an
additional cost of acquiring the management contract of $2,092,000. This amount
was expensed in 1998. The issuance of the remaining 120,000 OP Units is
contingent upon the Company having a 90-day average per share price in excess of
$20.00 by June 1999.
F-7
B. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the
Operating Partnership and all majority owned subsidiaries. The minority interest
in the Operating Partnership represents the OP Units which are redeemable at the
option of the holder. When a holder elects to redeem OP Units, the Company
determines whether such OP Units will be redeemed for cash or shares of Common
Stock. The holders of OP Units receive the same amount per OP Unit in
distributions as the holders of Common Stock receive in dividends. As of
December 31, 1998, 1,545,000 OP Units were outstanding. All significant
intercompany balances and transactions have been eliminated in consolidation.
The Company's investment in CAX is recorded under the equity method.
Rental Properties and Depreciation
Rental properties are recorded at cost less accumulated depreciation.
Depreciation is computed using the straight line method over an estimated useful
life of 25 years for land improvements and buildings and five years for
furniture and other equipment. Significant renovations and improvements, which
improve or extend the useful life of the asset, are capitalized and depreciated
over the remaining estimated life. In addition, the Company capitalizes direct
and indirect costs (including interest, taxes and other costs) in connection
with the development of additional homesites within its manufactured home
communities. Maintenance, repairs and minor improvements are expensed as
incurred.
When conditions exist which indicate that the carrying amount of a property may
be impaired, the Company will evaluate the recoverability of its net investment
in the property by assessing current and future levels of income and cash flows.
As of December 31, 1998, there has been no impairment of the Company's
investment in rental properties.
Amortization
Included in other assets is the cost related to the acquisition of management
contracts, which is being amortized over a period of three years.
Revenue Recognition
The Company derives its income from the rental of homesites. The leases entered
into by residents for the rental of the site are generally for terms not longer
than one year and the rental revenues associated with the leases are recognized
when earned and due from residents. Property management revenues for services
provided to communities not owned by the Company are recognized when earned.
Interest on participating mortgages is recorded based upon outstanding balances
and interest rates per the terms of the mortgages. In addition, the Company
evaluates the collectibility of any unpaid interest and provides reserves as
necessary. As of December 31, 1998, there is a $149,000 reserve for uncollected
interest on the participating mortgages.
F-8
Deferred Financing Costs
Fees and costs incurred in obtaining financing are capitalized. Such costs are
amortized over the terms of the related loan agreements and are charged to
interest expense.
Interest Rate Lock Agreements
Interest rate lock agreements related to planned refinancings of identified
variable rate indebtedness are accounted for as anticipatory hedges. Upon the
refinancing of such indebtedness, any gain or loss associated with the
termination of the interest rate lock agreement is deferred and recognized over
the life of the refinanced indebtedness.
Income Taxes
AIC has elected to be taxed as a REIT as defined under the Internal Revenue Code
of 1986, as amended (the "Code"). In order for AIC to qualify as a REIT, at
least 95% of its gross income in any year must be derived from qualifying
sources. The activities of AICMHC and AIE are not qualifying sources.
As a REIT, AIC generally will not be subject to federal income taxes at the
corporate level if it distributes at least 95% of its REIT taxable income to its
stockholders. REITs are also subject to a number of other organizational and
operational requirements. If AIC fails to qualify as a REIT in any taxable year,
its taxable income will be subject to federal income tax at regular corporate
rates (including any applicable alternative minimum tax). Even if AIC qualifies
as a REIT, it may be subject to certain state and local income taxes and to
federal income and excise taxes on its undistributed income.
At December 31, 1998, AIC's net operating loss ("NOL") carryover was
approximately $95,000,000 and its capital loss carryover was approximately
$20,000,000. The NOL carryover may be used to offset all or a portion of AIC's
REIT income, and as a result, to reduce the amount that AIC must distribute to
stockholders to maintain its status as a REIT. The NOL carryover is scheduled to
expire between 2007 and 2009, and the capital loss carryover is scheduled to
expire in 2000 and 2001.
Earnings Per Share
Basic earnings per share for 1998, 1997 and 1996 are based upon the
weighted-average number of shares of Common Stock outstanding during each such
year. Diluted earnings per share reflect the effect of any dilutive, unexercised
stock options in each such year. In November 1997, the Company's stockholders
approved a one-for-five reverse split of the Common Stock. Accordingly, all
historical weighted-average share and per share amounts have been restated to
reflect the reverse stock split.
Statements of Cash Flows
For purposes of reporting cash flows, cash maintained in bank accounts, money
market funds and highly-liquid investments with an initial maturity of three
months or less are considered to be cash and cash equivalents. The Company made
interest payments of $1,975,000, $349,000 and $72,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
F-9
Non-cash investing and financing activities for 1998, 1997 and 1996 were as
follows (in thousands):
1998 1997 1996
--------- --------- -------
Issuance of OP Units for:
Real estate acquisitions $ 2,145 $ 10,922 $ --
Acquisition of former manager 2,073 11,692 --
Participating mortgages 17 -- --
Issuance of Common Stock for:
Real estate acquisitions -- 1,250 --
Services 120 101 --
Notes receivable 279 -- --
Elimination of dividend equivalent rights -- -- 825
Dividend equivalent rights -- -- 87
Assumption of secured notes payable as consideration for real
estate acquisitions -- 10,873 --
Real estate acquired under earn-out agreements 52 -- --
Unrealized holding gains and losses on debt securities -- 5,093 5,850
Receivables from minority interest in subsidiaries 337 -- --
Restructure of investments in and notes receivable from real
estate joint ventures into participating mortgages 25,415 -- --
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 1997 and 1996 consolidated
financial statements to conform to the classifications used in the current year.
Such reclassifications have no material effect on the operations as originally
presented.
Non-agency MBS Bonds
The Company's non-agency MBS bonds were acquired at a significant discount to
par value. The amortized cost of the non-agency MBS bonds was equal to the
outstanding principal amount net of unamortized discount and allowances for
credit losses. Earnings from non-agency MBS bonds were recognized based upon the
relationship of cash flows received during the period and estimates of future
cash flows to be received over the life of the bonds. The Company classified its
non-agency MBS bonds as available-for-sale, carried at fair value in the
financial statements. Unrealized holding gains on available-for-sale securities
were excluded from earnings and reported as a net amount in stockholders' equity
until realized.
F-10
C. Investments in Manufactured Home Communities
During 1998, the Company acquired interests in seven manufactured home
communities with approximately 1,730 developed sites, 60 sites ready for homes
and 170 sites available for development. Total investment was $59,977,000
consisting of $57,832,000 of cash and $2,145,000 of OP Units.
During 1997, the Company acquired interests in 17 manufactured home communities
and two recreational vehicle parks with approximately 2,800 developed sites, 400
recreational vehicle sites, 800 sites ready for homes, and 1,800 sites available
for future development. Total consideration paid for the interests in
communities and related manufactured home community management contracts was
$69,389,000, consisting of $46,344,000 of cash, $10,922,000 of OP Units,
$10,873,000 of assumed debt, and $1,250,000 of Common Stock.
The following unaudited pro-forma information has been prepared assuming the
resecuritization of the non-agency MBS bonds, the acquisition of the interests
in manufactured home communities and management contracts, the acquisition of
the former manager and CAX's restructuring of its bond portfolio had been
completed at the beginning of the periods presented. The unaudited pro-forma
information is presented for informational purposes only and is not necessarily
indicative of what would have occurred if the restructurings and the
acquisitions had been completed as of those dates. In addition, the pro-forma
information is not intended to be a projection of future results. The unaudited,
pro-forma results of operations for the years ended December 31, 1998 and 1997
are as follows (in thousands, except per share data):
1998 1997
---------- -------
Revenues $ 18,455 $ 18,555
========== ==========
Loss before gain on restructuring of bonds and minority interest $ (223) $ (5,312)
Gain on restructuring of bonds -- 8,855
Minority interest in Operating Partnership 49 (779)
---------- ----------
Net income (loss) $ (174) $ 2,764
========== ==========
Basic earnings per share $ (.03) $ .56
========== ==========
Diluted earnings per share $ (.03) $ .55
========== ==========
The Company is actively seeking to acquire additional communities and currently
is engaged in negotiations relating to the possible acquisition of a number of
communities. At any time, these negotiations are at various stages of
completion, which may include outstanding contracts to acquire certain
manufactured home communities, subject to satisfactory completion of the
Company's due diligence review.
F-11
D. Real Estate
Real estate at December 31, 1998 and 1997 is as follows (in thousands):
1998 1997
--------- ------
Land $ 11,226 $ 5,286
Land improvements and buildings 90,268 35,689
Furniture and other equipment 447 444
-------- --------
101,941 41,419
Less accumulated depreciation (3,378) (693)
-------- --------
Investment in real estate, net $ 98,563 $ 40,726
======== ========
Land improvements and buildings consist primarily of infrastructure, roads,
landscaping, clubhouses, maintenance buildings and common amenities.
E. Investments in Participating Mortgages
As of December 31, 1997, the Company had notes receivable of $15,872,000 from
joint ventures in which the Company owned a 50% joint venture interest.
Effective January 1, 1998, the Company sold its interest in the various joint
ventures to the other venturer and consolidated the various notes into a single
note secured by a number of manufactured home communities. The note bears 10%
interest, matures in 20 years and provides for additional advances up to a
maximum of $20,000,000. In addition, the Company receives additional interest up
to 50% of the borrower's profit from such communities.
In addition, the Company has mortgage loans secured by two contiguous
manufactured home communities and one recreational vehicle park in Arizona. The
first mortgage loan bears 10% interest. The second mortgage loan accrues 15%
interest and paid 9% interest through July 1998, with the pay rate increasing 1%
annually for three years to a maximum of 12% per annum. The third mortgage loan
accrues 15% interest and is payable from any cash flows in excess of the above
amounts. These loans mature in April 2001. The Company receives additional
interest of 3% of gross revenues, increasing to 11% of gross revenues in the
event of a refinancing of the debt on the communities, and 50% of net proceeds
from a sale or refinancing of the communities. In 1997, the mortgage loans were
accounted for as an equity investment in real estate. Effective January 1, 1998,
the Company reclassified the investment to participating mortgages.
As of December 31, 1998, the Company had investments in participating mortgages
of $27,604,000. During 1998, the Company had earnings of $3,174,000 from these
mortgages.
F. Investment in Commercial Assets
On December 31, 1998 and 1997, the Company owned 2,761,126 shares (approximately
27%) of the common stock of CAX. In November 1997, CAX sold or resecuritized its
entire portfolio of commercial mortgage loan securitizations of multi-family
real estate ("CMBS bonds") and temporarily invested the proceeds until it
determined which type of real estate assets to invest in. During the third
quarter of 1998, CAX announced that it plans to acquire manufactured home
communities, and during 1998, it had invested $23,000,000 for interests in six
communities.
F-12
Summarized financial information of CAX as reported by CAX is (in thousands):
Balance Sheets December 31,
-----------------------------------
1998 1997
---------------- ---------------
Cash and cash equivalents $ 3,292 $ 74,153
Short-term investments 45,066 --
Real estate 13,908 --
Investment in participating mortgages 9,328 --
Other assets 6,640 3,995
----------- -----------
Total assets 78,234 78,148
Total liabilities 980 443
----------- -----------
Stockholders' equity $ 77,254 $ 77,705
=========== ===========
Statements of Income Year Ended December 31,
-----------------------------------------
1998 1997 1996
------- ------- ------
Income from participating mortgages and leases $ 537 $ -- $ --
CMBS bonds 161 9,172 9,838
Interest and other income 3,874 945 319
General and administrative (420) (519) (805)
Management fees (87) (1,678) (1,425)
Elimination of dividend equivalent rights -- -- (966)
Interest expense -- -- (2)
--------- --------- -------
Operating income 4,065 7,920 6,959
Acquisition fees (124) -- --
Reserve for costs related to previously considered investments (500) -- --
Gain on restructuring of bonds -- 5,786 --
--------- --------- -------
Net income $ 3,441 $ 13,706 $ 6,959
========= ========= =======
G. Secured Long-Term Notes Payable
The following table summarizes the Company's secured long-term notes payable,
all of which are non-recourse to the Company (in thousands):
December 31,
------------------------------------
1998 1997
-------------- -------------
8.25% fixed rate notes maturing in October 2000 $ 4,519 $ 4,805
7.50% fixed rate notes maturing in October 2000 5,707 5,872
6.50% fixed rate notes maturing in December 2018 30,280 --
--------- ---------
$ 40,506 $ 10,677
========= =========
In 1998, the Company entered into an interest rate lock agreement which was
settled in September 1998. The Company realized a loss on the hedge of $802,000
which was deferred and is being amortized over the terms of the related notes
payable as a charge to interest expense.
Real estate assets which secure the secured notes payable had a net book value
of $76,993,000 at December 31, 1998. The Company has $37,000 in escrow for real
estate taxes on the secured notes payable at December 31, 1998.
F-13
Scheduled principal payments after December 31, 1998 for the secured notes
payable are (in thousands):
1999 $ 1,237
2000 10,567
2001 869
2002 927
2003 989
Thereafter 25,917
---------
$ 40,506
H. Secured Short-Term Financing
In September 1998, the Company executed a $5,000,000 revolving line of credit
with a bank that bears interest at the London Interbank Offered Rate ("LIBOR")
plus 1.75% per annum (6.87% at December 31, 1998). The line of credit is secured
by 1,016,000 shares of the common stock of CAX held by the Company and matures
in August 2000. At December 31, 1998, $2,000,000 was outstanding.
In December 1998, the Company borrowed $8,500,000 in short-term financing from a
bank. The loan is secured by the Company's $10,000,000 of participating
mortgages involving two communities and one recreational vehicle park in
Arizona. The loan bears interest at LIBOR plus 2.5% (7.67% at December 31, 1998)
and matures in June 1999. The Company may elect to extend the maturity to April
2001 at the same interest rate upon the payment of a 0.25% extension fee.
In July 1998, the Company borrowed $39,000,000 of non-recourse, secured
short-term financing, which bore interest at LIBOR plus 1% per annum. In
connection with the financing and extensions, the Company paid loan fees equal
to 0.625% of the amount borrowed and incurred $120,000 in other costs. The fees
and other costs have been included in interest expense. The proceeds from this
financing were used to acquire three manufactured home communities and to repay
$7,000,000 of secured short-term financing that the Company borrowed in June
1998 in connection with the acquisition of another manufactured home community.
The Company repaid the loan with proceeds from long-term secured notes payable
on its various properties and the $8,500,000 bank loan described above.
In 1996, the Company had a $10,000,000 secured revolving credit and term loan
agreement with a bank. Borrowings of $3,000,000 under this credit facility were
repaid and the agreement was canceled during the first quarter of 1997.
I. Commitments and Contingencies
In connection with a participating mortgage on a manufactured home community,
the Company entered into an earn-out agreement with respect to unoccupied
homesites. The Company advances an additional $17,000 pursuant to the
participating mortgage for each newly occupied homesite either in the form of
cash or 946 OP Units, as determined by the borrower. During 1998, the Company
advanced $116,000 in cash and $17,000 in OP Units, and during 1997, the Company
advanced $17,000 in OP Units for newly occupied homesites.
In connection with the acquisition of the assets and operations of its former
manager in November 1997, the Company entered in an agreement to issue
additional OP Units upon the achievement of certain performance goals by the
Company. Per the terms of the agreement, the Company will be required to issue
F-14
an additional 120,000 OP Units if the Company's average stock price exceeds
$20.00 per share for any 90-day period prior to June 17, 1999.
At December 31, 1998, there were 890 sites ready for homes and 1,960 sites
available for future development in properties which the Company has an interest
in. In connection with efforts to lease such sites, a sales corporation markets
an inventory of homes located in the various properties to potential tenants.
The Company's President owns 50% of the sales corporation. A portion of the cost
of this home inventory was financed by the sales corporation with a line of
credit guaranteed by the Company. As of December 31, 1998, $3,677,000 was
outstanding under the line of credit. The terms of the line of credit require
monthly payments of interest and payment of principal upon sale of the
inventory. If the inventory is not sold within one year, monthly payments of
principal are also required.
J. Operating Segments
Investments in adult communities constitute substantially all of the Company's
portfolio of manufactured home communities, and as such, management of the
Company assesses the performance of the Company as one operating segment.
K. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each type of financial instrument. The estimates of fair value have been
determined by the Company using available market information and valuation
methodologies.
o Cash and cash equivalents, accounts payable and accrued liabilities, and
secured short-term financing - the carrying amounts approximate fair value
because of the short maturity of these instruments.
o Investment in Commercial Assets - the fair value was determined based upon
the closing price of CAX common stock on the American Stock Exchange, Inc.
as of the end of each year.
o Secured long-term notes payable - based upon borrowing rates currently
available to the Company, the carrying value of mortgage notes payable
approximates their fair value.
The carrying values and fair values of the Company's investment in CAX at
December 31, 1998 and 1997, are as follows (in thousands):
1998 1997
--------------------------------- -------------------------------
Carrying Value Fair Value Carrying Value Fair Value
Investment in CAX $ 20,706 $ 16,739 $ 20,866 $ 18,465
======== ======== ======== ========
L. Common Stock and Dividends
During the third quarter of 1998, the Board of Directors authorized the Company
to repurchase up to 800,000 shares of its Common Stock in the open market and
through privately negotiated transactions. The shares may be purchased from time
to time as market conditions warrant. Through December 31, 1998, 121,250 shares
were repurchased at a cost of $1,708,000 ($14.09 per share).
F-15
In November 1997, the Company's stockholders approved a one-for-five reverse
split of the Company's Common Stock. The par value per share and number of
authorized shares were not changed as a result of the reverse stock split. In
connection with the split, $202,000 was transferred from Common Stock to
additional paid-in capital. All outstanding OP Units and options were also
adjusted to reflect the one-for-five reverse stock split.
During 1998, 1997 and 1996, the Company declared dividends totaling $3,817,000,
$7,282,000 and $9,128,000, respectively. In addition, holders of OP Units
received distributions totaling $1,099,000 and $467,000 from the Operating
Partnership during 1998 and 1997, respectively. The Operating Partnership did
not exist in 1996. During 1998 and 1997, 80% and 75%, respectively, of the
dividends distributed constituted return of capital distributions. There were no
return of capital distributions in 1996.
The Company's Certificate of Incorporation permits the Board of Directors to
issue additional classes of stock without further stockholder approval. As of
December 31, 1998, the Company has not issued any classes of stock other than
Common Stock.
M. Non-agency MBS Bonds
In March 1997, the Company resecuritized its portfolio of non-agency MBS bonds
by contributing them to a trust in which it retained the equity interest and
having the trust sell nonrecourse debt securities representing senior interests
in the trust's assets. The Company realized net proceeds of $67,671,000 and
recorded a net gain of $5,287,000 from the sale. The Company's retained equity
interest in the trust represents the first-loss class of the portfolio and,
accordingly, no carrying value was assigned to it. During 1997, the Company
recognized $2,966,000 of interest income from the non-agency MBS bonds of which
$966,000 was from the retained equity interest. The Company recorded revenues of
$50,000 from the retained equity interest during 1998.
N. Stock Option Plan
The Company has a Stock Incentive Plan (the "Stock Plan") for the issuance of up
to 3,000,000 qualified and non-qualified stock options and shares of Common
Stock to its directors, officers, employees and consultants. As of January 1,
1999 and 1998, 833,000 and 152,000, respectively, related to outstanding stock
options. The exercise price for stock options may not be less than 100% of the
fair market value of the shares of Common Stock at the date of grant. Stock
options granted through December 31, 1997 have 5-year terms and stock options
granted during 1998 have 10-year terms. All outstanding stock options are
non-qualified stock options.
Prior to May 1996, stock options granted under the Stock Plan automatically
accrued dividend equivalent rights ("DERs"). DERs were paid in shares of Common
Stock (or in other property that constituted the dividend) at the time of each
dividend distribution. During 1996, the Company incurred $87,000 of general and
administrative expenses from DERs covering 5,000 shares of Common Stock which
were subject to issuance pursuant to options granted under the Stock Plan. In
May 1996, the Company's stockholders approved an amendment to the Stock Plan
that allowed issuance of Common Stock to the option holders who voluntarily
relinquished their right to receive DERs in the future. As a result, the Company
recorded a one-time charge against 1996 earnings of $825,000 and issued 49,000
shares of Common Stock.
F-16
Presented below is a summary of the changes in stock options for the three years
ended December 31, 1998. As of December 31, 1998, the outstanding options have
exercise prices ranging from $5.85 to $19.375 and have a remaining
weighted-average life of 8.1 years.
Weighted Average
Exercise Price Shares
-------------- ------
Outstanding-December 31, 1995 $ 19.00 194,000
Granted 16.32 126,000
Exercised 7.05 (43,000)
Expired 39.74 (70,000)
-------- --------
Outstanding-December 31, 1996 12.86 207,000
Granted 18.12 21,000
Exercised 14.93 (62,000)
Expired 16.67 (14,000)
-------- --------
Outstanding-December 31, 1997 14.44 152,000
Granted 19.31 704,000
Exercised 13.85 (23,000)
-------- --------
Outstanding-December 31, 1998 $ 18.57 833,000
======== ========
Options granted to date vest over various periods up to four years. As of
December 31, 1998, 1997 and 1996, 151,000, 138,000 and 145,000, respectively, of
the outstanding options were exercisable.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options rather than the alternative fair
value accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using an
option-pricing model.
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
During 1998, 1997 and 1996, the estimated weighted-average grant-date fair value
of options granted was $2.91 per option, $1.72 per option and $.65 per option,
respectively. The Company assumed lives of five to ten years and risk-free
interest rates equal to the Five- or Ten-Year U.S. Treasury rates on the date
the options were granted depending on option term. In addition, the expected
F-17
stock price volatility and dividends rates were estimated based upon historical
experience over the two years ended December 31, 1998.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for per share data):
1998 1997 1996
----------- ------------ -----------
Pro forma net income $ 138 $7,219 $ 9,589
Pro forma earnings per share:
Basic $ 0.03 $ 1.44 $ 1.95
Diluted $ 0.03 $ 1.43 $ 1.93
O. Savings Plan
In connection with the acquisition of its former manager, the Company assumed a
401(k) defined-contribution employee savings plan, which provides substantially
all employees the opportunity to accumulate funds for retirement. The Company
may, at its discretion, match a portion of the contributions from participating
employees. During 1998, the Company matched $17,000 of employee contributions.
The Company did not match any portion of employee contributions during 1997.
P. Other Matters
Prior to November 1997, FAM (the former manager) provided all personnel and
related overhead necessary to conduct the Company's activities in exchange for
various fees provided for in a management agreement (the "AIC Management
Agreement"). In November 1997, the Company's stockholders approved the purchase
of FAM's assets and operations for $11,692,000 in connection with the Company
becoming a self-managed and self-administered REIT. The initial purchase price
and related costs were allocated $6,553,000 to the AIC Management Agreement and
$5,936,000 to a management agreement pursuant to which the Company manages CAX
(the "CAX Management Agreement"). The Company expensed the amount allocated to
the AIC Management Agreement in 1997 and is amortizing the cost of the CAX
Management Agreement over three years. In addition to the initial purchase
price, FAM received 120,000 additional OP Units in August 1998 because the
Company had annualized returns before depreciation in excess of 9% on certain of
its real estate investments. These OP Units were valued at $2,073,000 and are
expensed in 1998.
The CAX Management Agreement has been extended through December 31, 1999. During
1998, the Company earned management fees of $155,000 under the CAX Management
Agreement (net of elimination for the Company's 27% ownership of CAX). As of
December 31, 1998 and 1997, the net book value of the CAX Management Agreement
was $3,743,000 and $5,722,000, respectively, and is included in other assets.
Through March 31, 1997, the manager received a "Base Fee," an "Incentive Fee"
and an "Administrative Fee." The Base Fee was an annual fee equal to 3/8 of 1%
of the "average invested assets" of the Company for such year. The Incentive Fee
was equal to 20% of the amount of the Company's net income which was in excess
of the return on the Company's "average net worth" equal to the "Ten-Year U.S.
Treasury rate" plus 1%. The manager received an Administrative Fee of up to
$3,500 per annum per non-agency MBS bond for certain bond administration and
other related services. In connection with the change in the Company's assets,
F-18
the AIC Management Agreement was amended in April 1997, to: (i) increase the
Base Fee to 1% per annum of average invested assets; (ii) provide for an
acquisition fee (the "Acquisition Fee") equal to 0.5% of the cost of real estate
investments acquired; and (iii) change the Incentive Fee to be calculated from
Funds From Operations ("FFO"), less an annual capital replacements reserve of at
least $50 per developed homesite, rather than net income. In general, FFO is
equal to the Company's net income plus (a) depreciation of rental properties,
(b) amortization of management contracts, and (c) minority interest in the
Operating Partnership. The Administrative Fee was effectively eliminated as a
result of the resecuritization of the Company's non-agency MBS bonds.
During 1997 and 1996, the Company incurred the following fees under the AIC
Management Agreement (in thousands):
1997 1996
------------ -----------
Base Fees $ 272 $ 230
Incentive Fees 37 831
Administrative Fees 261 732
Acquisition Fees 322 --
------ ------
Total $ 892 $1,793
====== ======
The Company incurred $1,771,000 of additional Incentive Fees during 1997 from
its gain on the restructuring of its bonds plus an additional fee of $600,000 in
exchange for the Manager agreeing to continue as a loss mitigation advisor on
the non-agency MBS bonds. Such fees were charged against the Company's gain from
such restructuring.
F-19
Q. Selected Quarterly Financial Data (Unaudited)
Presented below is selected quarterly financial data for 1998 and 1997. All data
has been adjusted for the Company's one-for-five reverse stock split (in
thousands, except per share data).
Three Months Ended
----------------------------------------------------------------------------
1998 December 31, September 30, June 30, March 31,
- --------------------------------------- ------------------ ------------------ ------------------ -------------------
Revenues $ 4,840 $ 4,436 $ 3,419 $ 3,255
Income from rental property operations
2,023 1,995 1,570 1,341
Net income (loss) 408 (1,368) 627 545
Basic earnings (loss) per share 0.08 (0.27) 0.12 0.11
Diluted earnings (loss) per share 0.08 (0.27) 0.12 0.11
Dividends per share 0.25 0.25 0.25 --
Closing stock prices 1
High 14-15/16 17-5/16 19-5/16 20-7/8
Low 12-1/8 13-5/16 15-7/8 16
Weighted-average common shares
outstanding 5,030 5,123 5,115 5,109
Weighted-average common shares and
common shares equivalents
outstanding 5,041 5,123 5,142 5,143
Three Months Ended
----------------------------------------------------------------------------
1997 December 31, September 30, June 30, March 31,
- --------------------------------------- ------------------ ------------------ ------------------ -------------------
Revenues $ 4,431 $ 2,868 $ 2,320 $ 2,516
Income from rental property operations
793 489 197 --
Gain on restructuring of bonds 1,197 -- -- 5,287
Net income (loss) (3,249) 1,665 1,674 7,164
Basic earnings per share (.65) .33 .32 1.44
Diluted earnings per share (.65) .33 .32 1.43
Dividends per share .350 .325 .300 .475
Closing stock prices 1
High 22-1/2 21-7/8 18-1/8 21-1/4
Low 17 16-7/8 16-1/4 16-1/4
Weighted-average common shares
outstanding 5,057 5,048 5,012 4,968
Weighted-average common shares and
common shares equivalents
outstanding 5,057 5,093 5,035 5,003
- ------------------------
1 As reported on the NYSE Composite Tape.
F-20
ASSET INVESTORS CORPORATION
SCHEDULE III
Real Estate and Accumulated Depreciation
December 31, 1998
(In Thousands Except Site Data)
December 31, 1998
------------------------------------------------
Cost Total
Capital- Cost
Initial Cost ized Total Cost Net of
---------------- Subsequ- ---------------------- Accumu- Accumu-
Number Buildings uent Buildings lated lated
Date Year of and to and Depreci- Depreci- Encum-
Property Name Acquired Location Developed Sites Land Improvements Acquis. Land Improvements Total ation ation brances
-----------------------------------------------------------------------------------------------------------------------------------
Brentwood West 1998 Mesa, AZ 1972/1987 350 $ 1,050 $12,768 $ 3 $ 1,050 $12,771 $ 13,821 $ 301 $13,520 $ 6,930
Caribbean Cove 1998 Orlando, FL 1984 286 858 7,952 38 858 7,990 8,848 149 8,699 --
Cardinal Court 1997 Largo, FL 1959/1965 138 414 1,829 -- 414 1,829 2,243 132 2,111 --
Forest View 1997 Homosassa, FL 1987/1997 180 927 1,950 78 927 2,028 2,955 142 2,813 --
Gulfstream 1998 Orlando, FL 1980/1988 861 2,664 20,976 158 2,664 21,134 23,798 382 23,416 18,450
Marina Dunes 1997 Marina, CA 1979 65 195 3,572 11 195 3,583 3,778 165 3,613 --
Mullica Woods 1998 Egg Harbor City, 1985 90 270 3,399 18 270 3,417 3,687 115 3,572 --
NJ
Park Royale 1997 Pinellas Park, FL 1971 258 927 5,221 -- 927 5,221 6,148 354 5,794 2,210
Pinewood 1997 St. Petersburg, 1976 220 660 4,534 -- 660 4,534 5,194 213 4,981 2,695
FL
Pleasant Living 1997 Riverview, FL 1979 245 726 5,079 133 726 5,212 5,938 241 5,697 3,013
Salem Farm 1998 Bensalem, PA 1988 28 84 1,307 -- 84 1,307 1,391 44 1,347 --
Serendipity 1998 Ft. Myers, FL 1971/1974 338 1,014 7,635 80 1,014 7,715 8,729 179 8,550 4,900
Stonebrook 1997 Homosassa, FL 1987/1997 118 654 1,483 15 654 1,498 2,152 111 2,041 --
Sun Valley 1997 Tarpon Springs, 1972 261 783 5,974 9 783 5,983 6,766 402 6,364 2,308
FL
Westwind I 1997 Dunedin, FL 1970 195 -- 3,226 26 -- 3,252 3,252 225 3,027 --
Westwind II 1997 Dunedin, FL 1972 189 -- 3,210 31 -- 3,241 3,241 223 3,018 --
====================================================================================
Total 3,822 $11,226 $90,115 $600 $11,226 $90,715 $101,941 $3,378 $98,563 $40,506
====================================================================================
F-21
ASSET INVESTORS CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
For the Years Ended December 31, 1998, 1997, 1996
(in thousands)
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
Real Estate
Balance at beginning of year $ 41,419 $ -- $ --
Additions during the year:
Real estate acquisitions 59,977 41,364 --
Additions 583 55 --
Dispositions (38) -- --
---------- --------- -------
Balance at end of year $ 101,941 $ 41,419 $ --
========== ========= =======
Accumulated Depreciation
Balance at beginning of year $ (693) $ -- $ --
Additions during the year:
Depreciation (2,685) (693) --
Dispositions -- -- --
---------- --------- -------
Balance at end of year $ (3,378) $ (693) $ --
========== ========= =======
See Report of Independent Auditors and accompanying notes to consolidated
financial statements.
F-22
ASSET INVESTORS CORPORATION
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
(in thousands)
Principal
Amount of
Loans Subject
Final Periodic Carrying to Delinquent
Interest Maturity Payment Prior Face Amount Amount of Principal or
Description Rate Date Terms Liens of Mortgages Mortgages Interest
- --------------------- ------------ ---------- ---------- --------- -------------- --------------- ---------------
Lost Dutchman (1) 4/2001 (1) $ -- $ 10,261 $ 10,769 $ --
CADC (2) 10% 2/2018 (2) 5,654 16,716 16,835 --
========= ============== =============== ===============
$ 5,654 $ 26,977 $ 27,604 $ --
========= ============== =============== ===============
(1) Mortgage is made up of three loans secured by two manufactured home
communities and one recreational vehicle park. The first mortgage loan
bears 10% interest payable currently, the second loan accrues 15% interest
and paid 9% interest through July 1998 with pay rate increasing 1% annually
for three years to a maximum of 12% per annum, and the third loan accrues
15% interest payable from any remaining cash flows from the properties.
(2) The loan is secured by Brentwood, Blue Heron Pines, Royal Palm, Savanna
Club and Sun Lake communities and the undeveloped sites in Forest View,
Park Royale and Stonebrook communities. Interest is paid from any cash
flows from the properties.
F-23
ASSET INVESTORS CORPORATION
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
(in thousands)
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
Balance at beginning of period $ -- $ -- $ --
Additions during period:
Investments in participating mortgages 5,072 -- --
Accrued interest 3,204 -- --
Restructure of investment in and notes receivable from real
estate joint ventures 25,415 -- --
Deductions during period:
Collections of principal (3,450) -- --
Collections of interest (2,458) -- --
Amortization of loan costs (30) -- --
Reserve for uncollected interest (149) -- --
---------- --------- -------
Balance at close of period $ 27,604 $ -- $ --
========== ========= =======
F-24
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Commercial Assets, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Commercial
Assets, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. Our audits also
included the consolidated financial statement schedules listed in the
accompanying index. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Commercial Assets, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Denver, Colorado
January 29, 1999
F-25
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
------------
1998 1997
---- ----
ASSETS
Cash and cash equivalents $ 3,292 $ 74,153
Short-term investments 45,066 --
Real estate, net of accumulated depreciation of $50 12,628 --
Investments in participating mortgages 9,328 --
Investment in real estate joint venture 1,280 --
Investments in and notes receivable from Westrec 4,011 1,710
CMBS bonds 1,739 1,981
Other assets, net 890 304
---------- ----------
Total Assets $ 78,234 $ 78,148
========== ==========
LIABILITIES
Accounts payable and accrued liabilities $ 872 $ 368
Management fees payable to related parties 108 75
---------- ----------
980 443
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share, 25,000 shares authorized; no shares
issued or outstanding -- --
Common stock, par value $.01 per share, 75,000 shares authorized; 10,364 and
10,342 shares issued and outstanding, respectively 104 104
Additional paid-in capital 76,874 76,724
Retained earnings 276 877
---------- ----------
77,254 77,705
---------- ----------
Total Liabilities and Stockholders' Equity $ 78,234 $ 78,148
========== ==========
See Notes to Consolidated Financial Statements.
F-26
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
RENTAL PROPERTY OPERATIONS
Income from participating mortgages and leases $ 587 $ -- $ --
Depreciation (50) -- --
--------- -------- --------
Income from property operations 537 -- --
--------- -------- --------
Interest and other income 3,874 945 319
CMBS bonds revenue 161 9,172 9,838
General and administrative expenses (420) (519) (805)
Management fees paid to manager (87) (1,678) (1,425)
Interest expense -- -- (2)
Elimination of dividend equivalent rights -- -- (966)
--------- -------- ---------
OPERATING INCOME 4,065 7,920 6,959
Acquisition fees paid to manager (124) -- --
Costs related to potential marina investments (500) -- --
Gain on restructuring of bonds -- 5,786 --
--------- -------- --------
NET INCOME $ 3,441 $ 13,706 $ 6,959
========= ======== ========
BASIC AND DILUTED EARNINGS PER SHARE $ .33 $ 1.32 $ .68
========= ======== ========
DIVIDENDS DECLARED PER SHARE:
Regular dividends $ .39 $ .68 $ .68
Special dividends -- .26 .04
Capital gain dividends -- .17 --
--------- -------- --------
$ .39 $ 1.11 $ .72
========= ======== ========
Weighted-Average Common Shares Outstanding 10,357 10,332 10,247
Weighted-Average Common Shares and Common Share Equivalents Outstanding
10,372 10,371 10,254
See Notes to Consolidated Financial Statements.
F-27
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
(In thousands)
Retained
Earnings
(Dividends In Accumulated
Additional Excess of Other Total
Common Stock Paid-In Accumulated Comprehensive Stockholders'
Shares Amount Capital Earnings) Income Equity
------ ------ ------- --------- ------ ------
BALANCES - DECEMBER 31, 1995 10,142 $ 102 $ 75,523 $ (915) $(4,245) $ 70,465
Comprehensive Income
Net income -- -- -- 6,959 -- 6,959
Unrealized appreciation of CMBS bonds -- -- -- -- 856 856
------- ------ --------- -------- ------- ---------
Comprehensive Income -- -- -- 6,959 856 7,815
------- ------ --------- -------- ------- ---------
Issuance of common stock 174 1 1,036 -- -- 1,037
Dividends -- -- -- (7,398) -- (7,398)
------- ------ --------- -------- ------- ---------
BALANCES - DECEMBER 31, 1996 10,316 103 76,559 (1,354) (3,389) 71,919
Comprehensive Income
Net income -- -- -- 13,706 -- 13,706
Reversal of unrealized holding losses
upon restructuring of bonds -- -- -- -- 3,389 3,389
------- ------ --------- -------- ------- ---------
Comprehensive Income -- -- -- 13,706 3,389 17,095
------- ------ --------- -------- ------- ---------
Issuance of common stock 26 1 165 -- -- 166
Dividends -- -- -- (11,475) -- (11,475)
------- ------ --------- ------- ------- ---------
BALANCES - DECEMBER 31, 1997 10,342 104 76,724 877 -- 77,705
Issuance of common stock 22 -- 150 -- -- 150
Net income -- -- -- 3,441 -- 3,441
Dividends -- -- -- (4,042) -- (4,042)
------- ------ --------- -------- ------- ---------
BALANCES - DECEMBER 31, 1998 10,364 $ 104 $ 76,874 $ 276 $ -- $ 77,254
======= ====== ========= ======== ======= =========
See Notes to Consolidated Financial Statements.
F-28
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,441 $ 13,706 $ 6,959
Adjustments to reconcile net income to net cash flows from
operating activities:
Amortization of premium/discount on CMBS bonds and
short-term investments 274 (2,381) (2,155)
Accrued income on participating mortgages and leases
(443) -- --
Depreciation 50
Gain on restructuring of bonds -- (5,786) --
Issuance of common stock for dividend equivalent rights
-- -- 941
Increase in accounts payable and accrued liabilities 537 216 157
Decrease (increase) in other assets (154) (1,327) 18
-------- -------- --------
Net cash provided by operating activities 3,705 4,428 5,920
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of short-term investments (91,946) -- --
Collections on short-term investments 30,313 -- --
Proceeds from sale of short-term investments 16,085 -- --
Investments in participating mortgages, net (8,959) -- --
Purchases of real estate (12,671) -- --
Capital replacements (7) -- --
Investments in Westrec (2,301) -- --
Investment in real estate joint venture (1,280) -- --
Proceeds from restructuring of bonds -- 77,693 --
Collections on CMBS bonds 242 -- 9,857
Acquisitions of CMBS bonds -- (4,801) --
-------- -------- --------
Net cash provided by (used in) investing activities (70,524) 72,892 9,857
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (4,042) (11,475) (7,398)
Proceeds from the issuance of Common Stock -- 31 --
Paydowns on short-term financing -- -- (700)
-------- -------- --------
Net cash used in financing activities (4,042) (11,444) (8,098)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(70,861) 65,876 7,679
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
74,153 8,277 598
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,292 $ 74,153 $ 8,277
======== ======== ========
See Notes to Consolidated Financial Statements.
F-29
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Organization
Commercial Assets, Inc. ("CAX" and, together with its subsidiaries, the
"Company") is a Maryland corporation that has interests in manufactured home
communities and has elected to be taxed as a real estate investment trust
("REIT"). The Company's common stock, par value $.01, (the "Common Stock") is
listed on the American Stock Exchange under the symbol "CAX."
Prior to 1998, the Company owned subordinate classes of Commercial Mortgage
Backed Securities ("CMBS bonds"). The CMBS bonds were issued in commercial
mortgage loan securitizations involving multi-class issuances of debt securities
which were secured and funded as to the payment of principal and interest by a
specific group of mortgage loans on multi-family or other commercial real
estate. In 1997, the Company decided to restructure its asset base and cease to
invest in subordinate CMBS bonds. In November 1997, the Company restructured its
subordinate CMBS bond portfolio by selling, redeeming or resecuritizing its
various CMBS bonds. The restructuring resulted in the Company receiving
$77,693,000 cash and retaining an equity interest in an owner trust arising from
a resecuritization transaction (see Note H). The Company temporarily invested
the proceeds from such restructuring in government securities and short-term
investments until the Company decided what class of assets to reinvest such
funds in.
In the third quarter of 1998, the Company decided to invest in manufactured home
communities and as of December 31, 1998 has invested $23 million in interests in
manufactured home communities and adjoining land with 640 developed homesites,
50 sites ready for homes and 1,180 sites available for future development.
The Company's daily operations are performed by a manager pursuant to an
agreement currently in effect through December 1999 ("the Management
Agreement"). Prior to October 1996, the Company was managed by subsidiaries of
MDC Holdings, Inc. ("MDC"). In September 1996, MDC sold Financial Asset
Management LLC ("FAM"), the manager at such time, to an investor group led by
Terry Considine, Thomas L. Rhodes and Bruce D. Benson. In November 1997, the
assets of FAM, including the Management Agreement, were acquired by Asset
Investors Corporation ("AIC" and together with its subsidiaries, "Asset
Investors"), the current manager. Mr. Considine is Chairman of the Board of
Directors and Chief Executive Officer of both the Company and Asset Investors.
Mr. Rhodes is Vice Chairman and Mr. Benson is a director of both companies.
Asset Investors owns 27% of the Company's Common Stock. No change was made to
the Management Agreement during 1998 other than an extension. During 1999, the
Incentive Fee has been amended to provide that such fee is based on Adjusted
Funds From Operations ("AFFO") instead of REIT income. Generally, AFFO is book
net income plus depreciation, amortization and acquisition fees less an annual
capital replacement reserve equal to $50 per developed homesite.
The Management Agreement is subject to the approval of a majority of the
Company's independent directors and can be terminated by either party, without
cause, with 60 days' notice. Since the Company has no employees, certain
officers of Asset Investors are also officers of the Company.
F-30
B. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Real Estate and Depreciation
Real estate is recorded at cost less accumulated depreciation. Depreciation is
computed using the straight line method over an estimated useful life of 25
years for land improvements and buildings. Significant renovations and
improvements, which improve or extend the useful life of the asset, are
capitalized and depreciated over the remaining estimated life. Maintenance,
repairs and minor improvements are expensed as incurred.
When conditions exist which indicate that the carrying amount of a property may
be impaired, the Company will evaluate the recoverability of its net investment
in the property by assessing current and future levels of income and cash flows.
As of December 31, 1998, there has been no impairment of the Company's
investment in real estate.
Revenue Recognition
Interest on participating mortgages is recorded based upon outstanding balances
and interest rates per the terms of the mortgages. In addition, the Company
evaluates the collectibility of any unpaid interest and provides reserves as
necessary. As of December 31, 1998, there is no reserve for uncollected interest
on the participating mortgages. Rent on ground leases is recognized when earned
and due from lessee.
CMBS Bonds
Earnings from CMBS bonds was comprised of coupon interest and the amortization
of the purchase discount. Amortization of the purchase discount was recognized
by the interest method using a constant effective yield and assumed an estimated
rate of future prepayments, defaults and credit losses which was adjusted for
actual experience. The allowance for credit losses was equal to the undiscounted
total of future estimated credit losses. In the event the Company adjusted the
estimate of future credit losses, such adjustments would be included in current
period earnings.
The Company classifies its CMBS bonds as available-for-sale. Accordingly, the
CMBS bonds are carried at fair value in the financial statements. Unrealized
holding gains and losses on available-for-sale securities are excluded from
earnings and reported as a net amount in stockholders' equity until realized. If
the fair value of a CMBS bond declines below its amortized cost basis and the
decline is considered to be "other than temporary," the amount of the write-down
would be included in the Company's income. The decline in fair value is
considered to be other than temporary if the cost basis exceeds the related
projected cash flow from the CMBS bond discounted at a risk-free rate of return.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments generally approximate
their carrying basis or amortized cost.
F-31
Income Taxes
CAX 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, CAX'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, CAX is required, among other things,
to distribute annually to its stockholders at least 95% of its REIT income and
to meet certain asset, income and stock ownership tests. Regular and special
dividends declared in 1998, 1997 and 1996 represented ordinary taxable income to
the stockholders. In addition, the Company declared a capital gains dividend of
$.17 per share in 1997.
Earnings Per Share
Basic earnings per share for 1998, 1997 and 1996 are based upon the
weighted-average number of shares of Common Stock outstanding during each such
year. Diluted earnings per share reflect the effect of any dilutive, unexercised
stock options in 1998, 1997 and 1996.
Statements of Cash Flows
For purposes of reporting cash flows, cash maintained in bank accounts, money
market funds and highly-liquid investments are considered to be cash and cash
equivalents. The Company paid interest expense in cash of $8,000 in 1996. The
Company paid no interest expense in 1998 or 1997.
Non-cash investing and financing activities for 1998, 1997 and 1996 were as
follows (in thousands):
1998 1997 1996
-------- ------- -------
Principal collections on CMBS bonds transferred to restricted
cash $ $ 6,227 $ 1,214
Unrealized holding gains and losses on CMBS bonds -- 3,389 856
Issuance of Common Stock for services 150 135 --
Distributions of Common Stock pursuant to dividend equivalent
rights -- -- 96
Issuance of Common Stock as consideration for the elimination
of dividend equivalent rights -- -- 941
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 1997 and 1996 consolidated
financial statements to conform to the classifications currently used. The
effect of such reclassifications on amounts previously reported is immaterial.
F-32
C. Short-term Investments
During 1998, the Company acquired short-term investments consisting of
mortgage-backed bonds guaranteed by Federal Home Loan Mortgage Corporation and
Federal National Mortgage Association. These investments are classified as
available-for-sale, and the fair market value at December 31, 1998 approximates
the carrying value of $45,066,000.
D. Investments in Manufactured Home Communities
During 1998, the Company acquired interests in six manufactured home communities
with 640 developed sites, 50 sites ready for homes, and 1,180 sites available
for future development. Total investment was $22,910,000 paid in cash.
The following unaudited pro-forma information has been prepared assuming the
acquisition of the interests in manufactured home communities and the
restructuring of the Company's CMBS bonds had been completed at the beginning of
the periods presented. The unaudited pro-forma information is presented for
informational purposes only and is not necessarily indicative of what would have
occurred if the restructurings and the acquisitions had been completed as of
those dates. In addition, the pro-forma information is not intended to be a
projection of future results. The unaudited, pro-forma results of operations for
1998 and 1997 are as follows (in thousands, except per share data):
1998 1997
---- ----
Revenues (income from participating mortgages and leases, interest
income and CMBS bonds revenues) $ 5,375 $ 6,693
========== ==========
Income before gain on restructuring of bonds $ 3,724 $ 5,529
Gain on restructuring of CMBS bonds -- 6,069
---------- ----------
Net income $ 3,724 $ 11,598
========== ==========
Basic and diluted earnings per share $ .36 $ 1.12
========== ==========
The Company is actively seeking to acquire additional communities and currently
is engaged in negotiations relating to the possible acquisition of a number of
communities. At any time, these negotiations are at various stages of
completion, which may include outstanding contracts to acquire certain
manufactured home communities, subject to satisfactory completion of the
Company's due diligence review.
E. Investments in Participating Mortgages
As of December 31, 1998, the Company has investments in participating mortgages
secured by three manufactured home communities and adjoining land. The notes
accrue interest at 15% per annum and pay interest at 9% per annum through August
1999, with the pay rate increasing 1% each year thereafter to a maximum of 12%
per annum. The loans mature in September 2007. The Company also receives
additional interest of 50% of the net profits and cash flows from the
properties. In addition, as of December 31, 1998, the Company has investments in
participating mortgages secured by individual homes and home sites within two
manufactured home communities. These mortgages accrue interest at 10% and pay
interest from the cash flows from the homesites. The Company also receives
additional interest of 50% of the net profits and cash flows from the homesites.
As of December 31, 1998, the Company had investments in participating mortgages
of $9,328,000 and income of $451,000 from these mortgages during 1998.
F-33
F. Real Estate
Real estate at December 31, 1998, is as follows (in thousands):
Land $ 3,798
Land improvements and buildings 8,880
----------
12,678
Less accumulated depreciation (50)
Investment in real estate, net $ 12,628
==========
Land improvements and buildings consist primarily of infrastructure, roads,
landscaping, clubhouses, maintenance buildings and common amenities. The two
manufactured home communities involving the above real estate have been leased
to a third party. The first lease involves a community acquired by the Company
at a cost of $1.4 million and is for a term of 50 years. The Company receives
initial annual lease payments equal to 9% of its cost. The annual lease payments
increase by 4% per annum over the prior year's lease payments until the annual
lease payment equals 13% of the Company's cost. In addition, the Company
receives additional rent equal to 50% of the lessee's net cash flow from the
property. In the event of a sale of the property, the Company receives all
proceeds until it has realized its total purchase price of the property plus a
13% per annum rate of return. The Company then receives 50% of any sales
proceeds in excess of such amount.
The other community acquired by the Company involves two phases and has been
leased to the same third party for 50 years. Phase One has 220 developed
homesites and 24 sites ready for homes. Phase Two involves 940 sites available
for future development. Initial annual lease payments on Phase One is $890,000,
increasing by 4% per annum. There are no lease payments on Phase Two until the
sites are ready for homes, at which time, the annual lease payments on Phase Two
will be equal to 10% times the costs incurred in developing Phase Two. In
addition, the lessee pays to the Company additional rent equal to 50% of the
lessee's net cash flow from the property. In the event of a sale, the Company
receives 50% of any sales proceeds in excess of the Company's cost.
G. Investment in Real Estate Joint Venture
In November 1997, the Company invested $1,280,000 in a joint venture involving
the development of 30 homesites near Newport Beach, California. The Company
receives a priority return from the venture until the Company has received an
amount equal to 9% times $1,250,000 for 1999. The Company's subsequent annual
priority return increases by 5% over the prior year's amount. The other venturer
then receives a similar percentage return on its $300,000 investment in the
venture. In the event the property is sold, the Company receives all proceeds
until it has received its investment plus 20% per annum. The other venturer then
receives all proceeds until it has received its investment plus 20% per annum.
Any excess sales proceeds are then shared equally. The Company did not record
any income from this real estate joint venture in 1998.
H. CMBS Bonds
In November 1997, the Company restructured its portfolio of CMBS bonds. Nine
bonds were sold, one bond was redeemed and the remaining two CMBS bonds were
resecuritized by contributing the bonds and related restricted cash to an owner
trust in which the Company retained an equity interest. In a private placement,
the trust then sold debt securities representing senior interests in the trust's
assets. The principal balance of the equity interest retained by the Company is
F-34
$5,000,000. However, since the equity interest represents the first-loss class
of the portfolio and provides credit support for the senior debt securities, the
Company valued the equity interest at its then estimated fair market value of
$2,000,000. During 1998, the Company received $403,000 of which $242,000 was
recorded as a reduction in the net book value of the retained equity interest,
resulting in a net book value of $1,739,000 which the Company believes
approximates fair market value at December 31, 1998.
In 1997, three mortgages underlying one of the Company's CMBS bonds were
prepaid. As a result of the prepayment, the Company recognized $482,000 of
income from a prepayment penalty received and $2,305,000 of income from
accelerated discount amortization.
I. Investments in and Notes Receivable from Westrec
Prior to deciding to acquire manufactured home communities, the Company
evaluated acquiring interests in marinas and, in connection with this, acquired
a 12% interest in Westrec Marina Management Inc. ("Westrec") for approximately
$2,500,000 in March 1998. In the third quarter of 1998, the Company decided to
invest in manufactured housing communities and not to invest in marinas. The
Company has valued its investment in Westrec common stock at the price at which
the Company can re-sell such stock to Westrec. The Company has expensed $500,000
for the portion of its investment in Westrec in excess of the sales price plus
additional due diligence, legal, and other costs incurred in connection with
investigating investments in marinas. The Company also has a note receivable
from an affiliate of Westrec. The outstanding balance of the note receivable
(including interest receivable) is $1,883,000 and $1,710,000 at December 31,
1998 and 1997, respectively. In May 1998, the Company issued to an affiliate of
Westrec warrants to purchase 322,000 shares of Common Stock at $6.60 per share.
These warrants were cancelled in 1998.
J. Stock Option Plan
The Company has a Stock Incentive Plan for the issuance of non-qualified stock
options to its directors and officers, employees and consultants which as of
December 31, 1998, permitted the issuance of up to an aggregate of 3,000,000
shares of Common Stock, of which 454,000 and 717,000 related to outstanding
stock options as of December 31, 1998 and 1997, respectively. The exercise price
for stock options may not be less than 100% of the fair market value of the
shares of Common Stock at the date of the grant. The stock options have various
terms ranging up to 10 years.
Prior to May 30, 1996, stock options granted under the Stock Option Plan
automatically accrued dividend equivalent rights ("DERs") based on: (i) the
number of shares underlying the unexercised portion of the option; (ii)
dividends declared on the outstanding shares of the Company between the option
grant date and the option exercise date; and (iii) the market price of the
shares on the dividend record date. DERs were paid in shares of Common Stock (or
in other property that constituted the dividend) at the time of each dividend
distribution. During 1996, the Company incurred $96,000 of expenses from DERs
covering 16,000 shares of Common Stock which were subject to issuance pursuant
to options granted under the plan. On May 30, 1996, the Company's stockholders
approved the issuance of Common Stock in exchange for the elimination of DERs
for such options and, as a result, the Company recorded a $966,000 charge during
1996.
F-35
Presented below is a summary of the changes in stock options for the three years
ended December 31, 1998. As of December 31, 1998, the outstanding options have
exercise prices ranging from $5.625 to $6.875 and have a remaining
weighted-average life of 2.3 years.
Weighted
Average
Exercise Price Shares
-------------- ------
Outstanding - December 31, 1995 $ 6.94 574,000
Granted 5.86 83,000
Forfeited 6.68 (9,000)
------ ----------
Outstanding - December 31, 1996 6.80 648,000
Granted 6.30 87,000
Forfeited 7.30 (13,000)
Exercised 6.12 (5,000)
------ ----------
Outstanding - December 31, 1997 6.74 717,000
Granted 6.62 38,000
Forfeited 7.50 (290,000)
Expired 7.25 (11,000)
------ -----------
Outstanding - December 31, 1998 $ 6.23 454,000
====== ==========
Options granted to date vest over various periods up to two years. As of
December 31, 1998, 1997 and 1996, 445,000, 660,000 and 454,000, respectively, of
the outstanding options were exercisable.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options rather than the alternative fair
value accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using an
option-pricing model.
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
During 1998, 1997 and 1996, the estimated weighted-average, grant-date fair
value of options granted was $.76, $.42 and $.45, respectively. The Company
assumed lives of five to ten years and risk-free interest rates equal to the
Five- or Ten-Year U.S. Treasury rate on the date the options were granted
depending on option term. In addition, the expected stock price volatility and
dividend growth rates were estimated based upon historical averages over the two
years ended December 31, 1998, adjusted for changes based upon the Company's
investment in manufactured home community assets.
F-36
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for per share data):
1998 1997 1996
---- ---- ----
Pro forma net income $3,402 $ 13,670 $ 6,932
Pro forma basic and diluted earnings per share $ 0.33 $ 1.32 $ 0.68
K. Management Fees
The Company operates under a management agreement, pursuant to which the manager
advises the Company on its business and oversees its daily operations, subject
to the supervision of the Company's Board of Directors. Asset Investors has been
the manager since November 1997. Prior to November 1997, FAM was the manager.
The Management Agreement provides that the manager receives a "Base Fee," an
"Acquisition Fee" and an "Incentive Fee." The Base Fee is payable quarterly in
an amount equal to 1% per annum of the Company's average net book value of real
estate-related assets. The Acquisition Fee equals 0.5% of the cost of each real
estate asset acquired. The Incentive Fee equals 20% of the amount by which the
Company's REIT taxable income exceeds the amount calculated by multiplying the
Company's "average net worth" by the "Ten-Year United States Treasury rate" plus
1%. In 1997 and 1996, the manager also received "Administrative Fees" on each
CMBS bond outstanding. Administrative Fees were terminated in connection with
the November 1997 restructuring of the CMBS bond portfolio.
Fees paid to the manager during 1998, 1997 and 1996 were (in thousands):
1998 1997 1996
---- ---- ----
Base Fees $ 87 $ 598 $ 654
Acquisition Fees 124 23 --
Incentive Fees -- 1,024 713
Administrative Fees -- 56 58
------ -------- --------
$ 211 $ 1,701 $ 1,425
====== ======== ========
Acquisition Fees incurred in 1997 were capitalized as part of the cost of
acquiring CMBS bonds. In addition, the Company incurred $426,000 of Incentive
Fees in 1997 relating to the gain on the restructuring of the CMBS bonds.
Acquisition Fees incurred in 1998 were expensed because such fees were paid to
Asset Investors, owner of 27% of the Company's Common Stock.
The Management Agreement has been extended through December 31, 1999. During
1999, the Incentive Fee has been amended to provide that such fee is based on
CAX's Funds From Operations, less an annual capital replacement reserve of at
least $50 per developed homesite, instead of REIT income. In general, Funds From
Operations is equal to book net income plus depreciation, amortization and
acquisition fees.
L. Commitments
In connection with the acquisition of a manufactured home community, the Company
entered into an earn-out agreement with respect to 154 unoccupied homesites. The
Company will pay $17,000 to the former owner for each newly occupied homesite.
The Company has agreed to acquire from time to time ground leases related to
individual homesites. The purchase price for each lease will be equal to the
base annual rent provided for in each such ground lease divided by 9%. The
F-37
Company is not required to acquire such leases in groups of less than 10 leases.
The maximum number of leases the Company might purchase is approximately 500 for
total consideration of approximately $20 million.
M. Operating Segments
The Company has recently begun investing in manufactured home communities and
management assesses the performance of the Company as one operating segment.
N. Other Matters
The Company's Charter authorizes the Board of Directors to issue 25,000,000
shares, par value $.01 per share, of Preferred Stock. The Board of Directors is
authorized to fix the terms of the Preferred Stock, including preferences,
powers and rights (including voting rights) senior to the Common Stock. To date,
the Company has not issued any shares of Preferred Stock.
F-38
O. Selected Quarterly Financial Data (unaudited)
Presented below is selected quarterly financial data for the years ended
December 31, 1998 and 1997 (in thousands, except per share data).
Three Months Ended,
-------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
1998
- -------------------------------------------------- --------------- ----------------- --------------- ----------------
Income from rental property operations $ 390 $ 147 $ -- $ --
CMBS bonds 37 40 44 40
Interest and other income 767 1,012 1,042 1,053
Net income 967 486 986 1,002
Per share amounts:
Basic and diluted earnings .09 .05 .09 .10
Regular dividends .13 .13 .13 --
Stock prices (1)
High 6-1/4 6-7/8 7 7
Low 5-1/8 5-9/16 6-1/4 6-7/16
Weighted-average common shares outstanding 10,364 10,364 10,359 10,342
Weighted-average common shares and common share
equivalents outstanding 10,366 10,373 10,387 10,378
1997
- -------------------------------------------------- --------------- ----------------- --------------- ----------------
CMBS bonds revenue $ 1,512 $ 3,423 $ 2,193 $ 2,044
Interest and other income 734 51 49 111
Gain on restructuring of bonds 5,786 -- -- --
Net income 7,677 2,484 1,810 1,735
Per share amounts:
Basic and diluted earnings .74 .24 .17 .17
Regular dividends .17 .17 .17 .17
Special dividends .26 -- -- --
Capital gains dividends .17 -- -- --
Stock prices (1)
High 7-11/16 7-3/16 6-11/16 7
Low 6-9/16 6-5/8 6-3/16 6-3/8
Weighted-average common shares outstanding 10,342 10,342 10,326 10,316
Weighted-average common shares and common share
equivalents outstanding 10,408 10,381 10,348 10,351
- --------------------------------------------------
(1) Daily closing prices as reported on the AMEX Composite Tape.
F-39
Commercial Assets, Inc.
SCHEDULE III
Real Estate and Accumulated Depreciation
December 31, 1998
(In Thousands Except Site Data)
December 31, 1998
------------------------------------------------
Cost Total
Capital- Cost
Initial Cost ized Total Cost Net of
---------------- Subsequ- ---------------------- Accumu- Accumu-
Number Buildings uent Buildings lated lated
Date Year of and to and Depreci- Depreci- Encum-
Property Name Acquired Location Developed Sites Land Improvements Acquis. Land Improvements Total ation ation brances
-----------------------------------------------------------------------------------------------------------------------------------
Cypress Greens 1998 Lakeland, FL 1986 107 $ 240 $1,129 $7 $240 $1,136 $1,376 $16 $ 1,360 $ --
Riverside 1998 Ruskin, FL 1984 1,186 3,558 7,744 -- 3,558 7,744 11,302 34 11,268 --
==================================================================================
Total 1,293 $3,798 $8,873 $7 $3,798 $8,880 $12,678 $50 $12,628 $ --
==================================================================================
F-40
COMMERCIAL ASSETS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
For the Years Ended December 31, 1998, 1997, 1996
(in thousands)
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
Real Estate
Balance at beginning of year $ -- $ -- $ --
Additions during the year:
Real estate acquisitions 12,671 -- --
Additions 7 -- --
Dispositions -- -- --
---------- --------- -------
Balance at end of year $ 12,678 $ -- $ --
========== ========= =======
Accumulated Depreciation
Balance at beginning of year $ -- $ -- $ --
Additions during the year:
Depreciation (50) -- --
Dispositions -- -- --
---------- --------- -------
Balance at end of year $ (50) $ -- $ --
========== ========= =======
See Report of Independent Auditors and accompanying notes to consolidated
financial statements.
F-41
COMMERCIAL ASSETS, INC.
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
(in thousands)
Principal
Amount of
Loans Subject
Final Periodic Carrying to Delinquent
Interest Maturity Payment Prior Face Amount Amount of Principal or
Description Rate Date Terms Liens of Mortgages Mortgages Interest
- --------------------- ------------ ---------- ---------- --------- -------------- --------------- ---------------
Fiesta Village (1) 9/2007 (1) $ -- $ 8,033 $ 8,462 $ --
Savanna Club 10% 9/2018 (2) -- 822 828 --
Sun Lake 10% 9/2018 (2) -- 38 38 --
========= ============== =============== ===============
$ -- $ 8,893 $ 9,328 $ --
========= ============== =============== ===============
(1) The Fiesta Village loan is comprised of five mortgage loans secured by
three manufactured home communities and adjoining land. The notes accrue
interest at 15% per annum and pay interest at 9% per annum through August
1999, with the pay rate increasing 1% each year thereafter to a maximum
of 12% per annum.
(2) Interest is paid from any cash flows from the property.
F-42
COMMERCIAL ASSETS, INC.
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
(in thousands)
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
Balance at beginning of period $ -- $ -- $ --
Additions during period:
Investments in participating mortgages 8,913 -- --
Accrued interest 371 -- --
Loan costs 70 -- --
Deductions during period:
Collections of principal (20) -- --
Collections of interest (2) -- --
Amortization of loan costs (4) -- --
---------- --------- --------
Balance at close of period $ 9,328 $ -- $ --
========== ========= =======
F-43
EXHIBIT INDEX
Exhibit No. Description
2.1 Form of Mobile Home Park Purchase and Sale
Agreement dated as of May 13, 1997,
entered into in connection with the
acquisition of six manufactured housing
communities (incorporated herein by
reference to Exhibit 2.1 to the Current
Report on Form 8-K dated May 14, 1997,
Commission File No. 1-9360, filed on May
28, 1997).
2.1(a) Royal Palm Joint Venture Agreement dated
as of May 13, 1997, by and between Royal
Palm Village, LLC and Asset Investors
Operating Partnership, LP (incorporated
herein by reference to Exhibit 2.1(a) to
the Current Report on Form 8-K dated May
14, 1997, Commission File No. 1-9360,
filed on May 28, 1997).
2.1(b) Form of Assignment and Assumption
Agreement dated as of May 13, 1997,
entered into in connection with the
acquisition of Prime-Forest Partners
(incorporated herein by reference to
Exhibit 2.1(b) to the Current Report on
Form 8-K dated May 14, 1997, Commission
File No. 1-9360, filed on May 28, 1997).
2.2 Promissory Note dated as of July 30, 1997,
by and between the Registrant and Lost
Dutchman Parks, LLC (incorporated herein
by reference to Exhibit 2.2 to the Current
Report on Form 8-K dated July 30, 1997,
Commission File No. 1-9360, filed on
August 12, 1997).
2.2(a) Combination Deed of Trust, Assignment of
Rents, Security Agreement and Fixture
Financing Statement dated as of July 30,
1997, by and between the Registrant and
Lost Dutchman Parks, LLC (incorporated
herein by reference to Exhibit 2.2(a) to
the Current Report on Form 8-K dated July
30, 1997, Commission File No. 1-9360,
filed on August 12, 1997).
2.2(b) Assumption Agreement and Note Modification
dated as of July 30, 1997, by and between
the Registrant and Lost Dutchman Parks,
LLC (incorporated herein by reference to
Exhibit 2.2(b) to the Current Report on
Form 8-K dated July 30, 1997, Commission
File No. 1-9360, filed on August 12,
1997).
2.2(c) Commitment Letter dated as of July 10,
1997, by and between the Registrant and
Lost Dutchman Parks, LLC (incorporated
herein by reference to Exhibit 2.2(c) to
the Current Report on Form 8-K dated July
30, 1997, Commission File No. 1-9360,
filed on August 12, 1997).
- 23 -
2.3 Form of Joint Venture Agreement dated as
of September 30, 1997, between Asset
Investors Operating Partnership, L.P. and
Community Acquisition and Development
Corporation (incorporated herein by
reference to Exhibit 2.3 to the Current
Report on Form 8-K dated October 30, 1997,
Commission File No. 1-9360, filed on
November 13, 1997).
2.3(a) Earn-Out Agreement dated October 30, 1997,
between Community Casa del Mar Joint
Venture, Wilder Corporation of Delaware
and AIC Community Management Partnership
(incorporated herein by reference to
Exhibit 2.3(a) to the Current Report on
Form 8-K dated October 30, 1997,
Commission File No. 1-9360, filed on
November 13, 1997).
2.3(b) Form of Agreement of Sale dated as of
August 22, 1997, between Community
Acquisition and Development Partnership
and Wilder Corporation of Delaware
(incorporated herein by reference to
Exhibit 2.3(b) to the Current Report on
Form 8-K dated October 30, 1997,
Commission File No. 1-9360, filed on
November 13, 1997).
2.4 Contribution Agreement dated as of
February 27, 1998, between Asset Investors
Operating Partnership, L.P. and Roth
Associates of New Jersey (incorporated
herein by reference to Exhibit 2.4 to the
Current Report on Form 8-K dated February
27, 1998, Commission File No. 1-9360,
filed on March 13, 1998).
2.4(a) Contribution Agreement dated as of
February 27, 1998, between Asset Investors
Operating Partnership, L.P. and Salem Farm
Mobile Home Park, Inc. (incorporated
herein by reference to Exhibit 2.4(a) to
the Current Report on Form 8-K dated
February 27, 1998, Commission File No.
1-9360, filed on March 13, 1998).
2.5 Agreement of Sale dated as of April 13,
1998, between Community Acquisition Joint
Venture and Serendipity Properties, Inc.,
(incorporated herein by reference to
Exhibit 2.5 to the Registrant's Current
Report on Form 8-K dated May 29, 1998,
Commission File No. 1-9360, filed on June
12, 1998).
2.5(a) Assignment of Agreement of Sale dated as
of May 20, 1998, between Community
Acquisition Joint Venture and Asset
Investors Operating Partnership, L.P.
(incorporated herein by reference to
Exhibit 2.5(a) to the Registrant's Current
Report on Form 8-K dated May 29, 1998,
Commission File No. 1-9360, filed on June
12, 1998).
2.6 Purchase Agreement with Escrow
Instructions, as amended, dated as of
April 14, 1998 between Brentwood West
Partners, LLP and Parkbridge Capital
Group, Inc. (incorporated herein by
reference to Exhibit 2.6 to the
Registrant's Current Report on Form 8-K
dated May 29, 1998, Commission File No.
1-9360, filed on June 12, 1998).
- 24 -
2.6(a) Conditional Assignment of Contract dated
as of April 17, 1998, between Parkbridge
Capital Group, Inc. and Community
Acquisition Development Corporation.
(incorporated herein by reference to
Exhibit 2.6(a) to the Registrant's Current
Report on Form 8-K dated May 29, 1998,
Commission File
No. 1-9360, filed on June 12, 1998).
2.6(b) Assignment of Agreement of Sale dated as
of June 1, 1998, between Community
Acquisition Joint Venture and Asset
Investors Operating Partnership, L.P.
(incorporated herein by reference to
Exhibit 2.6(b) to the Registrant's Current
Report on Form 8-K dated May 29, 1998,
Commission File No. 1-9360, filed on June
12, 1998).
2.7 Agreement of Sale dated as of May 13,
1998, between HFIC, INC. and Gulfstream
Harbor, Inc. and Gulfstream Harbor II Inc.
(incorporated herein by reference to
Exhibit 2.7 to the Registrant's Current
Report on Form 8-K dated July 16, 1998,
Commission File No. 1-9360, filed on July
30, 1998).
2.7(a) Assignment of Agreement of Sale dated as
of July 15, 1998, between HFIC, INC. and
AIOP Gulfstream Harbor, LLC., AIOP
Gulfstream Outlot I, L.L.C., AIOP
Gulfstream Outlot II, L.L.C. and AIOP
Gulfstream Outlot III, L.L.C.
(incorporated herein by reference to
Exhibit 2.7(a) to the Registrant's Current
Report on Form 8-K dated July 16, 1998,
Commission File No. 1-9360, filed on July
30, 1998).
3.1 Certificate of Incorporation of Asse
Investors Corporation (the "Registrant"),
as amended (incorporated herein by
reference to Exhibit 3.1(b) to the
Quarterly Report on Form 10-Q of the
Registrant for the quarter ended June 30,
1989, Commission File No. 1-9360, filed on
August 14, 1989).
3.2 By-laws of the Registrant, as amended and
restated (incorporated herein by reference
to Exhibit 3.3 to the Annual Report on
Form 10-K of the Registrant for the fiscal
year ended December 31, 1993, Commission
File No. 1-9360 filed March 31, 1994).
3.2(a) June 21, 1994 Amendment to the By-laws of
the Registrant (incorporated herein by
reference to Exhibit 3.3(b) to the Annual
Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1994,
Commission File No.
1-9360 filed March 30, 1995).
3.2(b) March 15, 1995 Amendment to the By-laws of
the Registrant (incorporated herein by
reference to Exhibit 3.3(c) to the Annual
Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1994,
Commission File No. 1-9360 filed March 30,
1995).
3.2(c) January 14, 1997, Amendment to the By-laws
of the Registrant (incorporated herein by
reference to Exhibit 3.2(c) to the Annual
Report on Form 10-K of the Registrant for
the fiscal year ended December 31, 1996,
Commission File No. 1-9360, filed on March
24, 1997).
- 25 -
4 Form of certificate representing Common
Stock of the Registrant (incorporated
herein by reference to Exhibit 10.15 to
the Annual Report on Form 10-K of the
Registrant for the fiscal year ended
December 31, 1988, Commission File No.
1-9360, filed on April 5, 1989).
4.1 Automatic Dividend Reinvestment Plan
relating to the Common Stock of the
Registrant, as amended (incorporated
herein by reference to Exhibit 28 to the
Annual Report on Form 10-K of the
Registrant for the fiscal year ended
December 31, 1991, Commission File No.
1-9360, filed on March 30, 1992).
4.2 Revolving Credit and Term Loan Agreement,
dated as of July 24, 1996, by and between
the Registrant and First Bank National
Association (incorporated herein by
reference to Exhibit 4.1 to the Quarterly
Report on Form 10-Q of the Registrant for
the quarter ended June 30, 1996,
Commission File No. 1-9360, filed on
August 14, 1996).
4.2(a) Pledge Agreement, dated as of July 24,
1996, by and between the Registrant and
First Bank National Association
(incorporated herein by reference to
Exhibit 4.1(a) to the Quarterly Report on
Form 10-Q of the Registrant for the
quarter ended June 30, 1996, Commission
File No. 1-9360, filed on August 14,
1996).
10.1* Form of Indemnification Agreement between
the Registrant and each Director of the
Registrant (incorporated herein by
reference to Appendix A to the Proxy
Statement of the Registrant, Commission
File No. 1-9360, dated May 18, 1987).
10.2* 1998 Stock Incentive Plan of the
Registrant (incorporated herein by
reference to Exhibit 10.3 to the Quarterly
Report on Form 10-Q of the Registrant for
the quarter ended June 30, 1998,
Commission File No. 1-9360, filed on
August 14, 1998).
10.3 Contribution Agreement, dated as of August
20, 1993, by and between the Registrant
and Commercial Assets, Inc. (incorporated
herein by reference to Exhibit 10.19 to
the Quarterly Report on Form 10-Q of the
Registrant for the quarter ended September
30, 1993, Commission File No. 1-9360,
filed on November 15, 1993).
10.4(a) Trust Agreement dated as of March 26,
1997, among the Registrant, as depositor,
Asset Investors Secured Financing
Corporation and Wilmington Trust Company,
as Owner Trustee (incorporated herein by
reference to Exhibit 10.5(a) to the
Quarterly Report on Form 10-Q of the
Registrant for the quarter ended March 31,
1997, Commission File No. 1-9360, filed on
May 14, 1997).
- 26 -
10.4(b) Pooled Certificate Transfer Agreement
between the Registrant and Asset Investors
Secured Financing Corporation dated as of
March 26, 1997 (incorporated herein by
reference to Exhibit 10.5(b) to the
Quarterly Report on Form 10-Q of the
Registrant for the quarter ended March 31,
1997, Commission File No. 1-9360, filed on
May 14, 1997).
10.4(c) Indenture, dated as of March 27, 1997,
between Structured Mortgage Trust 1997-1
and State Street Bank and Trust Company
(incorporated herein by reference to
Exhibit 10.5(c) to the Quarterly Report on
Form 10-Q of the Registrant for the
quarter ended March 31, 1997, Commission
File No. 1-9360, filed on May 14, 1997).
10.4(d) Note Purchase Agreement, dated as of March
26, 1997, among Structured Mortgage Trust
1997-1, Asset Investors Secured Financing
Corporation and Bear, Stearns & Co. Inc.
(incorporated herein by reference to
Exhibit 10.5(d) to the Quarterly Report on
Form 10-Q of the Registrant for the
quarter ended March 31, 1997, Commission
File No. 1-9360, filed on May 14, 1997).
10.4(e) Trust Certificate issued to Asset
Investors Secured Financing Corporation
evidencing its ownership of the Structured
Mortgage Trust 1997-1 (incorporated herein
by reference to Exhibit 10.5(e) to the
Quarterly Report on Form 10-Q of the
Registrant for the quarter ended March 31,
1997, Commission File No. 1-9360, filed on
May 14, 1997).
10.5 Asset Contribution Agreement dated as of
September 8, 1997 between the Registrant,
Asset Investors Operating Partnership,
L.P., and Financial Asset Management, LLC
(incorporated herein by reference to
Exhibit 10.6 to the Quarterly Report on
Form 10-Q of the Registrant for the
quarter ended September 30, 1997,
Commission File No. 1-9360, filed on
November 12, 1997).
10.6 Loan Agreement dated as of July 16, 1998,
by and among AIOP Brentwood West, L.L.C.;
AIOP Lost Dutchman Notes, L.L.C.; AIOP
Mullica, L.L.C.; AIOP Gulfstream Harbor,
L.L.C.; AIOP Gulfstream Outlot I, L.L.C.;
AIOP Gulfstream Outlot II, L.L.C.; AIOP
Gulfstream Outlot III, L.L.C.; and AIOP
Serendipity, L.L.C., and Salomon Brothers
Realty Corp. and LaSalle National Bank
(incorporated herein by reference to
Exhibit 10.7 to the Registrant's Current
Report on Form 8-K dated July 16, 1998,
Commission File No. 1-9360, filed on July
30, 1998).
10.6(a) Promissory Note dated as of July 16, 1998,
between AIOP Lost Dutchman Notes, L.L.C.;
AIOP Brentwood West, L.L.C.; AIOP Mullica,
L.L.C.; AIOP Gulfstream Harbor, L.L.C.;
AIOP Gulfstream Outlot I, L.L.C.; AIOP
Gulfstream Outlot II, L.L.C.; AIOP
Gulfstream Outlot III, L.L.C.; and AIOP
Serendipity, L.L.C., and Salomon Brothers
Realty Corp. (incorporated herein by
reference to Exhibit 10.7(a) to the
- 27 -
Registrant's Current Report on Form 8-K
dated July 16, 1998, Commission File No.
1-9360, filed on July 30, 1998).
10.6(b) Pledge Agreement and Limited Recourse
Guaranty dated as of July 16, 1998 by and
among the Registrant, Asset Investors
Operating Partnership, L.P. and Salomon
Brothers Realty Corp. (incorporated herein
by reference to Exhibit 10.7(b) to the
Registrant's Current Report on Form 8-K
dated July 16, 1998, Commission File No.
1-9360, filed on July 30, 1998).
10.7 Credit Agreement dated as of September 1,
1998, between U.S. Bank National
Association and Asset Investors Operating
Partnership, L.P. and the Registrant
10.7(a) Promissory Note dated as of September 1,
1998, between U.S. Bank National
Association and Asset Investors Operating
Partnership, L.P. and the Registrant
10.8 Loan Agreement dated December 1, 1998,
between AIOP Lost Dutchman Notes, L.L.C.,
Asset Investors Operating Partnership,
L.P., the Registrant and U.S.
Bank National Association.
10.8(a) Promissory Note dated December 30, 1998,
between AIOP Lost Dutchman Notes, L.L.C.,
Asset Investors Operating Partnership,
L.P., the Registrant and U.S.
Bank National Association.
10.9 Form of Promissory Note to General
Electric Capital Assurance Company entered
into in connection with the financing of
five manufactured home communities.
10.10 Amended and Restated Loan Agreement dated
as of January 1, 1998, by and between
Community Acquisition and Development
Corporation, Community Casa del Mar Joint
Venture, Community Sunlake Joint Venture,
Community Brentwood Joint Venture,
Community Savanna Club Joint Venture,
Community Blue Heron Pines Corporation,
Community Sunlake Corporation, Community
Brentwood Corporation, Community Savanna
Club Corporation, Royal Palm Village, LLC
and Asset Investors Operating Partnership,
L.P.
10.10(a) Revolving Credit Promissory Note dated
as of January 1, 1998 between Community
Acquisition and Development Corporation,
Community Casa del Mar Joint Venture,
Community Sunlake Joint Venture, Community
Brentwood Joint Venture, Community Savanna
Club Joint Venture, Community Blue Heron
Pines Corporation, Community Sunlake
Corporation, Community Brentwood
Corporation, Community Savanna Club
Corporation, Royal Palm Village, LLC and
Asset Investors Operating Partnership,
L.P.
21.1 List of Subsidiaries
- 28 -
23.1 Independent Auditors' Consent- Ernst &
Young LLP.
27.1 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
- 29 -
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, 1999 By /s/Terry Considine
-------------------------------------
Terry Considine
Chairman and Chief Executive Officer
Date: March 24, 1999 By /s/Thomas L. Rhodes
-------------------------------------
Thomas L. Rhodes
Vice Chairman
Date: March 24, 1999 By /s/Bruce E. Moore
-------------------------------------
Bruce E. Moore
President and Chief Operating Officer
Date: March 24, 1999 By /s/David M. Becker
-------------------------------------
David M. Becker
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Capacity Date
---- -------- ----
/s/Terry Considine Director March 24, 1999
----------------------------
Terry Considine
/s/Thomas L. Rhodes Director March 24, 1999
- ----------------------------
Thomas L. Rhodes
/s/Bruce D. Benson Director March 24, 1999
- ----------------------------
Bruce D. Benson
/s/Bruce E. Moore Director March 24, 1999
- ----------------------------
Bruce E. Moore
/s/Elliot H. Kline Director March 24, 1999
- ----------------------------
Elliot H. Kline
/s/Richard L. Robinson Director March 24, 1999
- ----------------------------
Richard L. Robinson
Director
- ----------------------------
Tim Schultz
/s/William J. White Director March 24, 1999
- ----------------------------
William J. White
- 30 -