<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 25, 1997
REGISTRATION NO. 333-33679
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENTS)
445 MARINE VIEW AVENUE, SUITE 230, DEL MAR, CALIFORNIA 92014
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN M. ROBBINS
CHIEF EXECUTIVE OFFICER
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
445 MARINE VIEW AVENUE, SUITE 230
DEL MAR, CALIFORNIA 92014
(619) 350-5000
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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CAMERON JAY RAINS, ESQ. PETER T. HEALY, ESQ.
GRAY CARY WARE & FREIDENRICH O'MELVENY & MYERS LLP
4365 EXECUTIVE DRIVE, SUITE 1600 EMBARCADERO CENTER WEST
SAN DIEGO, CA 92121 275 BATTERY STREET, SUITE 2600
TELEPHONE: (619) 677-1400 SAN FRANCISCO, CA 94111
FACSIMILE: (619) 677-1477 TELEPHONE: (415) 984-8833
FACSIMILE: (415) 984-8701
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES OFFERING PRICE(1)(2) REGISTRATION FEE
TO BE REGISTERED
- --------------------------------------------------------------------------------------------
Common Stock, $.01 par value.. $86,250,000 $26,137(3)
============================================================================================
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(1) Assumes exercise of an over-allotment option granted to the Underwriters.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o).
(3) Previously paid at the time of the original filing.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE> 2
SUBJECT TO COMPLETION,
PRELIMINARY PROSPECTUS DATED SEPTEMBER 25, 1997
5,000,000 SHARES
LOGO
COMMON STOCK
------------------------
All of the shares of Common Stock offered hereby are being sold by American
Residential Investment Trust, Inc. ("AMREIT" or the "Company"), a real estate
investment trust organized in February 1997 to acquire adjustable-rate
residential Mortgage Securities and Mortgage Loans. Prior to this Offering,
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price per share will be
between $14.00 and $16.00. See "Underwriting" for information relating to the
determination of the initial public offering price.
Application has been made to list the Common Stock on the New York Stock
Exchange under the symbol " ."
SEE "RISK FACTORS" STARTING ON PAGE 9 FOR MATERIAL RISKS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS. THESE RISKS INCLUDE:
- - Interest Rate Fluctuations May Adversely Affect Net Interest Income
- - Increased Levels of Mortgage Loan Prepayments May Adversely Affect Net
Interest Income
- - Limited Operating History Does Not Predict Future Performance
- - Inability to Acquire Mortgage Assets with Favorable Interest Rates and Terms
May Adversely Affect Net Interest Income
- - Failure to Implement Company's Leverage Strategy May Adversely Affect Results
of Operations
- - Failure to Successfully Manage Interest Rate Risks May Adversely Affect
Results of Operations
- - Value of Mortgage Loans May Be Adversely Affected by Characteristics of
Underlying Property and Borrower Credit
- - Conflicts of Interest; Management also Employed by and Owns Securities of
Manager
- - Dependence on Key Personnel for Successful Operations
- - Failure to Manage Expansion May Adversely Affect Results of Operations
- - Real Estate Market Conditions May Adversely Affect Results of Operations
- - Investments in Mortgage Assets May Be Illiquid
- - Policies and Strategies May be Revised at the Discretion of the Board of
Directors
- - Management and Certain Affiliates Will Control Approximately 25% of
Outstanding Shares After the Offering
- - Failure to Maintain REIT Status May Subject Company to Corporate Level Tax
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Underwriting
Price to Discount and Proceeds to
Public Commissions(1) Company(2)
- ------------------------------------------------------------------------------------------------
Per Share................................. $ $ $
- ------------------------------------------------------------------------------------------------
Total..................................... $ $ $
- ------------------------------------------------------------------------------------------------
Total Assuming Full Exercise of
Over-allotment Option(3)................ $ $ $
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(1) See "Underwriting" for information regarding indemnification of the
Underwriters and other matters.
(2) Before deducting expenses estimated at $1,200,000, all of which are payable
by the Company. See "Underwriting."
(3) Assuming exercise in full of the 30-day option granted by the Company to the
Underwriters to purchase up to 750,000 additional shares, on the same terms,
solely to cover over-allotments. See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters, and
subject to their right to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made in New York City on or about
, 1997.
------------------------
PAINEWEBBER INCORPORATED
OPPENHEIMER & CO., INC.
EVEREN SECURITIES, INC.
SUTRO & CO. INCORPORATED
------------------------
THE DATE OF THIS PROSPECTUS IS , 1997.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY............................. 3
The Company.................................. 3
Summary Risk Factors......................... 4
Management of the Company.................... 6
The Manager.................................. 7
Federal Income Tax Consequences.............. 7
Dividend Policy and Distributions............ 7
The Offering................................. 8
Purpose of the Offering...................... 8
Summary Financial Information................ 8
RISK FACTORS................................... 9
Interest Rate Fluctuations May Adversely
Affect Net Interest Income................. 9
Increased Levels of Mortgage Loan Prepayments
May Adversely Affect Net Interest Income... 9
Limited Operating History Does Not Predict
Future Performance......................... 10
Inability to Acquire Mortgage Assets with
Favorable Interest Rates and Terms May
Adversely Affect Net Interest Income....... 10
Failure to Implement Company's Leverage
Strategy May Adversely Affect Results of
Operations................................. 10
Failure to Successfully Manage Interest Rate
Risks May Adversely Affect Results of
Operations................................. 11
Value of Mortgage Loans May Be Adversely
Affected by Characteristics of Underlying
Property and Borrower Credit............... 11
Conflicts of Interests; Management Also
Employed by and Owns Securities of
Manager.................................... 12
Dependence on Key Personnel for Successful
Operations................................. 13
Failure to Manage Expansion May Adversely
Affect Results of Operations............... 13
Real Estate Market Conditions May Adversely
Affect Results of Operations............... 13
Investments in Mortgage Assets May Be
Illiquid................................... 13
Policies and Strategies May be Revised at the
Discretion of the Board of Directors....... 14
Management and Certain Affiliates Will
Control Approximately 25% of Outstanding
Shares After Offering...................... 14
Failure to Maintain REIT Status May Subject
Company to Corporate Level Tax............. 14
Market for Common Stock May be Limited and
Market Price May Fluctuate Below Offering
Price...................................... 14
Failure to Qualify for Exemption Under
Investment Company Act Would Result in
Significant Regulatory Burden.............. 15
Future Offerings of Common Stock May Affect
Market Price of Common Stock............... 15
Ownership of Common Stock May Be
Restricted................................. 15
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Default of Manager under Securities Purchase
Agreement; Restrictive Covenants........... 16
Limitations on Acquisition and Change in
Control.................................... 17
Shares Eligible for Future Sale.............. 17
Dilution to Stockholders Purchasing in
Offering................................... 17
THE COMPANY.................................... 18
USE OF PROCEEDS................................ 19
DIVIDEND POLICY AND DISTRIBUTIONS.............. 19
CAPITALIZATION................................. 20
DILUTION....................................... 21
SELECTED FINANCIAL DATA........................ 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 23
Overview..................................... 23
Results Of Operations........................ 25
Liquidity And Capital Resources.............. 26
Recent Developments.......................... 26
BUSINESS....................................... 27
General...................................... 27
Residential Mortgage Industry................ 27
Investments.................................. 27
Funding...................................... 32
Capital Guidelines........................... 34
Risk Management.............................. 35
Certain Accounting Policies and Procedures... 39
Competition.................................. 39
Employees.................................... 40
Facilities................................... 40
Legal Proceedings............................ 40
MANAGEMENT OF THE COMPANY...................... 41
THE MANAGER.................................... 50
CERTAIN TRANSACTIONS........................... 55
PRINCIPAL STOCKHOLDERS......................... 59
DESCRIPTION OF CAPITAL STOCK................... 60
SHARES ELIGIBLE FOR FUTURE SALE................ 64
FEDERAL INCOME TAX CONSEQUENCES................ 65
ERISA CONSIDERATIONS........................... 74
UNDERWRITING................................... 75
CERTAIN PROVISIONS OF MARYLAND LAW AND THE
COMPANY'S CHARTER AND BYLAWS................. 77
LEGAL MATTERS.................................. 80
EXPERTS........................................ 80
ADDITIONAL INFORMATION......................... 80
GLOSSARY....................................... 81
INDEX TO FINANCIAL STATEMENTS.................. F-1
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2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing in this Prospectus. Capitalized and other terms relating
to the mortgage industry used herein shall have the definitive meanings assigned
to them in the Glossary which begins on page 81. Unless otherwise indicated, the
information in this Prospectus (i) assumes that the Underwriters' over-allotment
option will not be exercised and (ii) has been adjusted to reflect the 0.8-for-1
reverse stock split to be effected prior to the closing of this Offering. See
Note 8 of Notes to Financial Statements.
This Prospectus contains forward looking statements that inherently involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward looking statements as a result of
certain important factors. Investors should carefully consider the information
set forth under the heading "Risk Factors."
THE COMPANY
GENERAL
American Residential Investment Trust, Inc. ("AMREIT" or the "Company") is
a real estate investment trust that invests in residential adjustable-rate
Mortgage Assets. The Company will finance its acquisitions of Mortgage
Securities and Mortgage Loans (collectively "Mortgage Assets") with equity and
secured borrowings. AMREIT expects generally to earn interest on the portion of
its portfolio of Mortgage Assets financed with equity and to earn a net interest
spread on the leveraged portion of its portfolio of Mortgage Assets. The Company
is structured as a real estate investment trust, thereby generally eliminating
federal taxes at the corporate level on income it distributes to stockholders.
BUSINESS
Investments
AMREIT's current investment portfolio is comprised solely of Mortgage
Securities issued or guaranteed by federal government sponsored agencies.
Following the closing of this Offering, the Company will begin investing in
other types of Mortgage Securities and in Mortgage Loans. The Company's goal is
to use the mortgage banking experience of its management team to acquire
nonconforming Mortgage Loans with higher overall returns than similar Mortgage
Loans originated by its competitors. Accordingly, it has developed tailored
underwriting guidelines for nonconforming Mortgage Loans that it intends to
acquire from third-party originators through its Direct Purchase Program.
Management has initially developed tailored underwriting guidelines for the
following segments of the residential Mortgage Loan market: small multifamily
home loans, manufactured housing loans (not including mobile homes), mixed use
loans, rural home loans, mini-ranch home loans, and condominium/resort loans.
The Company expects that additional opportunities in other market segments will
become available as the Mortgage Loan market continues to change. The Company
has not yet acquired any Mortgage Loans pursuant to the Direct Purchase Program
and there can be no assurance that the program will be successfully implemented
or that any Mortgage Assets acquired through the program will be higher
yielding. The Company has not specifically identified any Mortgage Assets in
which to invest the net proceeds of this Offering.
Funding
The Company generally expects to finance the acquisition of 8% to 12% of
its Mortgage Assets with equity and the balance with third-party borrowing
facilities. The Company will earn interest on the Mortgage Assets financed with
equity and a net interest spread on the Mortgage Assets financed with
borrowings. AMREIT generally borrows funds pursuant to reverse repurchase
agreements. In a reverse repurchase agreement transaction, the Company agrees to
sell a Mortgage Asset and simultaneously agrees to repurchase the same Mortgage
Asset one to six months later at a higher price with the price differential
representing interest expense. From time to time the Company also intends to
securitize Mortgage Loans acquired through the Direct Purchase Program as part
of its overall financing strategy.
Capital Guidelines
The Company's capital management goal is to strike a balance between the
under-utilization of leverage, which reduces potential returns to stockholders,
and the over-utilization of leverage, which could reduce the Company's ability
to meet its obligations during adverse market conditions. For this purpose, the
Company
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has established a "Capital Policy" which establishes a minimum ratio of the
Company's equity capital to the total value of its Mortgage Assets. The Board of
Directors of the Company adjusts this ratio when it determines in its discretion
that the percentage of Mortgage Assets financed with debt is either too low or
too high. The Company expects that its aggregate minimum equity capital
requirement under the Capital Policy will generally range between 8% to 12% of
the total market value of the Company's Mortgage Assets. It may fluctuate out of
the expected range from time to time as a result of market conditions,
performance of hedges, credit risk, prepayments, general economic conditions and
general availability of financing. There can be no assurance that the Company's
equity capital will be sufficient to protect the Company against adverse effects
from interest rate adjustments or the obligation to sell Mortgage Assets on
unfavorable terms or at a loss.
Risk Management
AMREIT will implement certain processes and will follow a hedging program
intended to protect the Company against significant unexpected changes in
prepayment rates and interest rates. The Company will seek to minimize the
effects on earnings caused by higher than anticipated prepayment rates by
purchasing Mortgage Assets with prepayment penalties or which are fully-indexed
and have previously experienced periods of rising or falling interest rates. The
Company will seek to manage its Mortgage Asset portfolio to offset the potential
adverse effects from (i) lifetime and periodic rate adjustment caps on its
Mortgage Assets, (ii) the differences between interest rate adjustment indices
applicable to its Mortgage Assets and related borrowings, and (iii) the
differences between interest rate adjustment periods applicable to its Mortgage
Assets and related borrowings.
In order to reduce the credit risks associated with acquisitions of
Mortgage Loans under the Direct Purchase Program, Management will (i) employ a
quality control program, (ii) acquire Mortgage Loans that represent a broad
range of moderate risks as opposed to a concentrated risk, (iii) monitor the
credit quality of newly acquired and existing Mortgage Assets, and (iv)
periodically adjust loan loss allowances. The Company also expects to arrange
for servicing of any Mortgage Loans acquired pursuant to the Direct Purchase
Program with servicing entities that have expertise and experience in the types
of Mortgage Loans being acquired. Although Management intends to manage risks
associated with prepayment rates, interest rates and credit quality, there can
be no assurance that Management will be able to effectively manage such risks.
CURRENT OPERATIONS
In the quarter ended June 30, 1997, AMREIT generated net income of
approximately $438,000 and net income per share of $0.26. From the commencement
of operations on February 11, 1997 through June 30, 1997, the Company generated
net income of approximately $584,000 and net income per share of $0.35. At June
30, 1997, the Company held Mortgage Assets that had a carrying value of
approximately $229 million. All Mortgage Assets held at June 30, 1997 were
Agency Securities backed by adjustable-rate single family residential Mortgage
Loans.
SUMMARY RISK FACTORS
Each prospective purchaser of the shares of Common Stock (the "Shares")
offered hereby should review "Risk Factors" beginning on page 9 for a discussion
of certain factors that should be considered before acquiring the Shares,
including the following:
- - Interest Rate Fluctuations May Adversely Affect Net Interest Income. To the
extent the Company's cost of borrowings rises more rapidly than the yields on
its Mortgage Assets funded by such borrowings, the Company's net interest
income may be reduced or a net interest loss may result.
- - Increased Levels of Mortgage Loan Prepayments May Adversely Affect Net
Interest Income. In the event that the Company's Mortgage Assets are prepaid
prior to maturity, the Company may (i) have held the Mortgage Assets during
its least profitable period and lost the opportunity to receive interest at
the fully indexed rate, (ii) need to write-off capitalized premium amounts,
and (iii) be unable to acquire new Mortgage Assets to replace the prepaid
Mortgage Assets. The Company experienced higher than expected levels of
prepayments in the quarter ended June 30, 1997. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations."
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- - Limited Operating History Does Not Predict Future Performance. The Company
began operations in February 1997, and the Company's financial results to date
may not be indicative of future results. The Company's Management has limited
experience in managing a real estate investment trust.
- - Inability to Acquire Mortgage Assets with Favorable Interest Rates and Terms
may Adversely Affect Net Interest Income. The Company's net interest income
will depend on the Company's ability to acquire Mortgage Assets on acceptable
terms and at favorable spreads over the Company's borrowing costs. To the
extent the Company is unable to acquire sufficient number of Mortgage Loans
meeting its investment criteria, the Company's results of operations may be
adversely affected.
- - Failure to Implement Company's Leverage Strategy May Adversely Affect Results
of Operations. The Company relies on short-term borrowings to fund
acquisitions of Mortgage Assets. Any failure to obtain or renew adequate
funding on favorable terms, could have a material adverse effect on the
Company's operations. In such event, the Company could be required to sell
Mortgage Assets under adverse market conditions and incur losses as a result.
- - Failure to Successfully Manage Interest Rate Risks May Adversely Affect
Results of Operations. Developing an effective interest rate risk strategy is
complex and no strategy can completely insulate the Company from risks
associated with interest rate changes. Further, the cost of hedging
transactions and the federal tax laws applicable to real estate investment
trusts may limit the Company's ability to fully hedge its interest rate risks.
In addition, a provider of interest rate derivatives may become financially
unsound or insolvent, thereby rendering the Company unprotected against
interest rate risks.
- - Value of Mortgage Loans May Be Adversely Affected by Characteristics of
Underlying Property and Borrower Credit. In the event of a default on any
Mortgage Loan held by the Company, the Company will bear the risk of loss of
principal and the Mortgage Loan will cease to be eligible collateral for
borrowings. Mortgage Loans acquired pursuant to the Direct Purchase Program
will have certain distinct risk characteristics and will result in increased
credit risk to the Company.
- - Conflicts of Interest; Management Also Employed by and Owns Securities of
Manager. The executive officers of the Company will also be executive
officers, employees and stockholders of the Manager. Emphasis by Management on
maximizing income in order to achieve higher incentive fees for the Manager
could result in increased risk to the value of the Company's Mortgage Asset
portfolio.
- - Dependence on Key Personnel for Successful Operations. The Company's
operations depend in significant part upon the skills and experience of John
Robbins, Jay Fuller and other key personnel. The loss of any key person could
have a material adverse effect on the Company's business.
- - Failure to Manage Expansion May Adversely Affect Results of Operations. The
Company's expansion as a result of its investment of the net proceeds of this
Offering may cause a significant strain on the Company's and the Manager's
financial, management and other resources. If the Company is unable to manage
growth effectively, the Company's business, financial condition and results of
operations may be adversely affected.
- - Real Estate Market Conditions May Adversely Affect Results of Operations. The
Company's business may be adversely affected by periods of economic slowdown
or recession which may be accompanied by declining real estate values.
- - Investments in Mortgage Assets May Be Illiquid. Certain of the Company's
investments may lack a regular trading market and may be illiquid. The
Company's inability to liquidate Mortgage Assets could render it insolvent.
- - Policies and Strategies May Be Revised at the Discretion of the Board of
Directors. The Board of Directors has established, and generally can waive and
modify, the investment policies, and operating policies and strategies of the
Company. These policies do not limit the amount of capital which may be
invested in any one type of Mortgage Asset.
- - Management and Certain Affiliates Will Control approximately 25% of
Outstanding Shares After the Offering. Upon the closing of this Offering, the
Company's director and officers, the Manager and certain
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<PAGE> 7
affiliates thereof will beneficially own or have a right to control
approximately 25% of the outstanding shares of Common Stock of the Company. As
stockholders, they could exert significant influence over corporate actions
requiring the stockholder approval.
- - Failure to Maintain REIT Status May Subject Company to Corporate Level Tax. If
the Company fails to qualify as a real estate investment trust in any taxable
year, the Company may be subject to federal income tax as a regular, domestic
corporation, thereby significantly reducing or eliminating the amount of cash
available for distribution to its stockholders. Failure to qualify for real
estate investment trust status may reduce or eliminate the Company's advantage
over non-real estate investment trust companies.
MANAGEMENT OF THE COMPANY
The Company has entered into an agreement with Home Asset Management Corp.
(the "Manager") to provide management services to the Company. The Company's and
the Manager's management team is led by John Robbins and Jay Fuller, former
founders and executive officers of American Residential Mortgage Corporation
("AMRES Mortgage"). Management led AMRES Mortgage from a start-up company until
its sale to The Chase Manhattan Corporation in 1994. AMRES Mortgage is not
affiliated with either AMREIT or the Manager. Although the management team has
limited experience managing a real estate investment trust, each of the
executive officers of the Company has between 10 and 24 years and an average of
19 years of experience in the mortgage origination business and extensive
experience in originating nonconforming Mortgage Loans.
The Company is subject to conflicts of interest with the Manager and its
executive officers. The executive officers of the Company will also be executive
officers, employees and stockholders of the Manager. In evaluating Mortgage
Assets for investment and other strategies, Management could emphasize
maximizing income at the expense of other criteria, in order to achieve higher
incentive compensation for the Manager, which could result in increased risk to
the value of the Company's portfolio of Mortgage Assets. In addition, the
Management Agreement does not limit or restrict the right of the Manager to
render services of any kind to any third party except that the Manager and its
officers, directors or employees will not be permitted to provide any such
services to any real estate investment trust which invests in residential
Mortgage Assets, other than the Company.
The Company's bylaws require that a majority of the members of its Board of
Directors must be independent directors who are not officers or employees of the
Company. Upon the closing of this Offering, the Company will have seven members
serving on its Board of Directors, five of whom will be independent directors.
In addition to approval by the Board of Directors, the following actions require
approval by a majority of the independent directors:
- termination of the Management Agreement between the Company and the
Manager
- revisions to the Company's investment policies; and
- an amendment of the Company's Bylaws.
The Board of Directors may amend the Company's investment policies without
further approval by the Company's stockholders.
Although no additional fees will be payable to the Manager solely as a
result of this Offering, investment of the net proceeds of this Offering will
result in an increase in the Company's Mortgage Assets and thus an increase in
the management fees to be paid to the Manager. At the discretion of the
Manager's Board of Directors, the Manager may elect to pay a portion of such
fees to the Company's management team as a bonus. In addition, certain options
held by the management team will vest in full in the event the Company completes
additional public or private offerings which generate proceeds that, when
combined with the net proceeds of this Offering, exceed $150 million. See
"Management of the Company -- Option Grants."
6
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THE MANAGER
Pursuant to a Management Agreement, AMREIT has engaged the Manager to
generate and manage the Company's Mortgage Assets and to oversee the day-to-day
operations of the Company, subject to direction by the Company's Board of
Directors. The Manager funded AMREIT at its formation with a $20 million
investment through an intermediary entity. See "The Manager -- Relationship
between the Manager and the Company." Currently, the Manager derives
substantially all of its income from the Company, a majority of which is from
dividends and incentive fees. Accordingly, the success of the Manager is
substantially dependent upon the success of the Company. In addition, the
executive officers of the Company are also the executive officers of the Manager
and also beneficially own an interest in the Manager. See "The Manager,"
"Certain Transactions" and "Principal Stockholders."
The Company will pay to the Manager the following management fees and
incentive compensation:
- 1/8 of 1% per year, to be paid monthly, of the principal amount of Agency
Securities;
- 3/8 of 1% per year, to be paid monthly, of the principal amount of all
Mortgage Assets other than Agency Securities; and
- 25% of the amount by which the Company's net income (before deducting the
amount to be paid as incentive compensation) exceeds the annualized
return on equity equal to an average ten year U.S. Treasury Rate plus 2%.
Investment of the net proceeds of this Offering will result in an increase
in the Company's Mortgage Assets and thus an increase in the management fees to
be paid to the Manager.
The Management Agreement has an initial term of two years with automatic
one-year renewals. It may be terminated by the Company without cause only upon
each renewal date and may be terminated for cause at any time by either party.
In the event that the Management Agreement is terminated by the Company without
cause, the Company is obligated to pay the Manager a termination fee pursuant to
a specified formula. See "The Manager -- The Management Agreement."
------------------------
The Company was incorporated in Maryland on February 6, 1997. The principal
executive offices of the Company and the Manager are located at 445 Marine View
Avenue, Suite 230, Del Mar, California 92014. The telephone number is (619)
350-5000.
FEDERAL INCOME TAX CONSEQUENCES
The Company intends to elect, with the filing of its first federal
corporate income tax return in 1998, to be treated as a real estate investment
trust ("REIT") for federal income tax purposes. A corporation qualifying as a
REIT may avoid corporate income taxation by distributing its taxable income to
its stockholders annually. Subject to the qualifications stated in the section
of the Prospectus entitled "Federal Income Tax Consequences," Jeffers, Wilson,
Shaff & Falk, LLP ("Special Tax Counsel") has given the Company an opinion that
the Company is organized in conformity with the requirements for qualification
and taxation as a REIT under the Code and that its actual and proposed method of
operation as described in the Prospectus and as represented to Special Tax
Counsel will enable it to meet the requirements for qualification as a REIT. See
"Federal Income Tax Consequences -- Opinion of Special Counsel."
DIVIDEND POLICY AND DISTRIBUTIONS
The Company intends to distribute 95% or more of its net taxable income
(which does not necessarily equal net income as calculated in accordance with
GAAP) to its stockholders on a quarterly basis each year so as to comply with
the REIT provisions of the Code. Any taxable income remaining after the
distribution of the regular quarterly dividends will be distributed annually in
a special dividend on or prior to the date of the first regular quarterly
dividend payment date of the following taxable year. The dividend policy is
subject to revision in the discretion of the Board of Directors of the Company.
7
<PAGE> 9
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company (1)...... 5,000,000 Shares
Common Stock to be Outstanding after the
Offering (1)(2).............................. 6,614,000 Shares
Use of Proceeds.............................. To fund purchases of Mortgage Assets and for
general corporate purposes. See "Use of
Proceeds."
Proposed NYSE Symbol......................... " "
</TABLE>
- ---------------
(1) Assumes that the Underwriters' option to purchase up to an additional
750,000 shares of Common Stock to cover overallotments is not exercised.
(2) Excludes (i) 315,200 shares of Common Stock reserved for issuance pursuant
to options outstanding under the Company's 1997 Stock Incentive Plan (the
"Incentive Plan") and (ii) 212,800 shares of Common Stock reserved for
issuance pursuant to options to be issued under the Company's 1997 Stock
Option Plan (the "Option Plan") upon the closing of this Offering. See
"Management of the Company" and "Shares Eligible for Future Sale."
PURPOSE OF THE OFFERING
Pursuant to its reverse repurchase agreements, the Company must provide
collateral which has a greater value than the amount it borrows. Accordingly,
the Company is not able to finance the entirety of its acquisitions of Mortgage
Assets with debt. In order to obtain the debt financing necessary to implement
its investment strategy, the Company must have an equity base. The net proceeds
of this Offering will substantially increase the Company's current equity base.
The Company generally intends to finance the acquisition of between 8% and 12%
of its Mortgage Assets with equity and the balance with borrowings. The net
proceeds of this Offering available for investment purposes, after deducting the
expenses of this Offering ($1.2 million) and an underwriting discount and
commissions ($4.9 million), and assuming no exercise of the Underwriters' option
to purchase shares to cover over-allotments, will be approximately $69 million.
Accordingly, the Company anticipates that it will finance the acquisition of
additional Mortgage Assets with a value of approximately $500 million to $800
million as a result of the additional borrowings it may incur.
SUMMARY FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
FEB. 11, 1997 QUARTER FEB. 11, 1997
TO ENDED TO
JUNE 30, 1997 JUNE 30, 1997 MAR. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total interest income................................. $ 3,640 $ 3,334 $ 306
Net interest income................................... 724 568 156
Net income............................................ 584 438 146
Net income per share(1)............................... $ 0.35 $ 0.26 $0.09
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, 1997 MAR. 31, 1997
------------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Mortgage Assets................................................... $ 228,620 $ 152,883
Total assets...................................................... 231,518 161,302
Reverse repurchase agreements..................................... 209,539 141,068
Stockholders' equity.............................................. 20,603 19,948
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for information.
8
<PAGE> 10
RISK FACTORS
This Prospectus contains forward looking statements that inherently involve
risks and uncertainties. Before investing in the Shares, prospective investors
should give special consideration to the information set forth below, in
addition to the information set forth elsewhere in this Prospectus. The
following risk factors are interrelated and, consequently, investors should
consider such risk factors as a whole. The Company's actual results could differ
materially from those anticipated in these forward looking statements as a
result of certain factors. Investors should carefully consider the information
set forth under the heading "Risk Factors."
INTEREST RATE FLUCTUATIONS MAY ADVERSELY AFFECT NET INTEREST INCOME
Substantially all of the Company's Mortgage Assets will have a repricing
frequency of one year or less and substantially all of the Company's borrowings
will have maturities of six months or less. The interest rates on the Company's
borrowings may be based on interest rate indices which are different from, and
adjust more rapidly than, the interest rate indices of its related Mortgage
Assets. Consequently, changes in interest rates may significantly influence the
Company's net interest income. While increases in interest rates will generally
increase the yields on the Company's adjustable-rate Mortgage Assets, rising
rates will also increase the cost of borrowings by the Company. To the extent
such costs rise more rapidly than the yields, the Company's net interest income
will be reduced or a net interest loss may result.
Adjustable-rate Mortgage Assets are typically subject to periodic and
lifetime interest rate caps which limit the amount an adjustable-rate Mortgage
Asset interest rate can change during any given period. The Company's borrowings
will not be subject to similar restrictions. Hence, in a period of increasing
interest rates, the cost of the Company's borrowings could increase without
limitation by caps while the yields on the Company's Mortgage Assets could be
limited. Further, some adjustable-rate Mortgage Assets may be subject to
periodic payment caps that result in some portion of the interest being deferred
and added to the principal outstanding. This could result in receipt by the
Company of a lesser amount of cash income on its adjustable-rate Mortgage Assets
than is required to pay interest on the related borrowings, which will not have
such payment caps. These factors could lower the Company's net interest income
or cause a net interest loss during periods of rising interest rates, which
would negatively impact the Company's financial condition and results of
operations.
INCREASED LEVELS OF MORTGAGE LOAN PREPAYMENTS MAY ADVERSELY AFFECT NET INTEREST
INCOME
Prepayments of Mortgage Assets could adversely affect the Company's results
of operations in several ways. The Company anticipates that a portion of the
adjustable-rate Mortgage Assets to be acquired by the Company may bear initial
"teaser" interest rates which are lower than their "fully-indexed" rates (the
applicable index plus margin). In the event that such an adjustable-rate
Mortgage Asset is prepaid prior to or soon after the time of adjustment to a
fully-indexed rate, the Company will have held the Mortgage Asset during its
least profitable period and lost the opportunity to receive interest at the
fully-indexed rate over the expected life of the adjustable-rate Mortgage Asset.
In addition, the prepayment of any Mortgage Asset that had been purchased with a
premium by the Company would result in the immediate write-off of any remaining
capitalized premium amount and consequent reduction of the Company's net
interest income by such amount. Finally, in the event that the Company is unable
to acquire new Mortgage Assets to replace the prepaid Mortgage Assets, the
Company's financial condition and results of operations could be materially
adversely affected.
Mortgage Asset prepayment rates generally increase when new Mortgage Loan
interest rates fall below the interest rates on the adjustable-rate Mortgage
Assets. Prepayment experience also may be affected by the geographic location of
the property securing the adjustable-rate Mortgage Assets, the assumability of
the adjustable-rate Mortgage Assets, the ability of the borrower to obtain or
convert to a fixed-rate loan, conditions in the housing and financial markets
and general economic conditions. The level of prepayments is also subject to the
same seasonal influences as the residential real estate industry with prepayment
rates generally being highest in the summer months and lowest in the winter
months. The Company experienced higher than expected levels of prepayments in
the quarter ended June 30, 1997. Although the Company does
9
<PAGE> 11
not expect prepayment rates to continue at such levels, there can be no
assurance that the Company will be able to achieve or maintain lower prepayment
rates. Accordingly, the Company's financial condition and results of operations
could be materially adversely affected. See "Business -- Risk
Management -- Interest Rate Risk Management."
It is expected that Mortgage Loans acquired by the Company may contain
provisions restricting prepayments of such Mortgage Loans and require a charge
in connection with the prepayment thereof. Such prepayment restrictions can, but
do not necessarily, provide a deterrent to prepayments. Prepayment charges may
be in an amount which is less than the figure which would fully compensate the
Company for a lower yield upon reinvestment of the prepayment proceeds.
LIMITED OPERATING HISTORY DOES NOT PREDICT FUTURE PERFORMANCE
The Company began operations in February 1997 and, accordingly, has not yet
developed an extensive financial history or experienced a wide variety of
interest rate fluctuations or market conditions. Consequently, the Company's
financial results to date may not be indicative of future results.
Additionally, although Management has considerable expertise in the
acquisition and management of Mortgage Assets, mortgage finance, asset/liability
management and the management of corporations in real estate lending business,
Management has limited experience in managing a REIT and with certain tailored
Mortgage Loan products. There can be no assurance that the past experience of
Management will be appropriate to the business of the Company.
INABILITY TO ACQUIRE MORTGAGE ASSETS WITH FAVORABLE INTEREST RATES AND TERMS MAY
ADVERSELY AFFECT NET INTEREST INCOME
The Company's net interest income will depend, in large part, on the
Company's ability to acquire Mortgage Assets on acceptable terms and at
favorable spreads over the Company's borrowing costs. As a result of this
Offering, the Company will seek to acquire approximately $600 million or more of
additional Mortgage Assets. There can be no assurance that the Company will be
able to acquire sufficient Mortgage Assets at spreads above the Company's cost
of funds. In acquiring Mortgage Assets, the Company will compete with numerous
investment banking firms, savings and loan associations, banks, mortgage
bankers, insurance companies, mutual funds, other lenders, federal government
sponsored agencies such as GNMA, FNMA and FHLMC, and other entities purchasing
Mortgage Assets, many of which have greater financial resources than the
Company. In addition, there are several REITs similar to the Company and others
may be organized in the future. The effect of the existence of additional REITs
may be to increase competition for the available supply of Mortgage Assets
suitable for purchase by the Company. As it relates to the direct purchase
program, the Company competes on the basis of product type. The Company will
face competition from leaders already established in these markets. There can be
no assurance that the Company will be able to successfully compete with these
leaders.
The availability of Mortgage Loans meeting the Company's criteria is
dependent upon, among other things, the size of and level of activity in the
residential real estate lending market and, in particular, the demand for
nonconforming Mortgage Loans. The size and level of activity in the residential
real estate lending market depend on various factors, including the level of
interest rates, regional and national economic conditions and inflation and
deflation in residential property values. To the extent that the Company is
unable to acquire sufficient Mortgage Loans meeting its criteria, the Company's
results of operations will be materially adversely affected.
FAILURE TO IMPLEMENT COMPANY'S LEVERAGE STRATEGY MAY ADVERSELY AFFECT RESULTS OF
OPERATIONS
The Company relies on short term borrowings to fund acquisitions of
Mortgage Assets. Accordingly, the ability of the Company to achieve its
investment objectives depends on its ability to borrow money in sufficient
amounts and on favorable terms and on the Company's ability to renew or replace
on a continuous basis its maturing short term borrowings. In addition, the
Company is dependent upon a few lenders to provide the primary credit facilities
for its purchases of Mortgage Assets. Any failure to obtain or renew adequate
funding
10
<PAGE> 12
under these facilities or other financings on favorable terms, could reduce the
Company's net interest income and have a material adverse effect on the
Company's operations. The Company has no long term commitments with its lenders.
The Company's current borrowing facilities may be collateralized only by
Mortgage Securities.
In the event the Company is not able to renew or replace maturing
borrowings, the Company could be required to sell Mortgage Assets under adverse
market conditions and could incur losses as a result. In addition, in such
event, the Company may be required to terminate hedge positions, which could
result in further costs to the Company. Any event or development such as a sharp
rise in interest rates or increasing market concern about the value or liquidity
of a type or types of Mortgage Assets in which the Company's Mortgage Asset
portfolio is concentrated will reduce the market value of the Mortgage Assets,
which would likely cause lenders to require additional collateral. A number of
such factors in combination may cause difficulties for the Company, including a
possible liquidation of a major portion of the Company's Mortgage Assets at
disadvantageous prices with consequent losses, which could have a material
adverse effect on the Company and could render it insolvent.
Lenders will have claims on the Company's assets superior to the claims of
the holders of the Shares and may require that the Company agree to covenants
that could restrict its flexibility in the future and limit the Company's
ability to pay dividends. In the event of the insolvency or bankruptcy of the
Company, the creditor under reverse repurchase agreements may be allowed to
avoid the automatic stay provisions of the Bankruptcy Code and to foreclose on
the collateral agreements without delay. In the event of the insolvency or
bankruptcy of a lender during the term of a reverse repurchase agreement, the
lender may be permitted to repudiate the contract, and the Company's claim
against the lender for damages therefrom may be treated simply as one of the
unsecured creditors. Should this occur, the Company's claims would be subject to
significant delay and, if received, may be substantially less than the damages
actually suffered by the Company.
FAILURE TO SUCCESSFULLY MANAGE INTEREST RATE RISKS MAY ADVERSELY AFFECT RESULTS
OF OPERATIONS
The Company will follow a program intended to protect against interest rate
changes. However, developing an effective interest rate risk program is complex
and no program can completely insulate the Company from risks associated with
interest rate changes. In addition, hedging involves transaction costs. In the
event the Company hedges against interest rate risks, the Company may
substantially reduce its net income. Further, the federal tax laws applicable to
REITs may limit the Company's ability to fully hedge its interest rate risks.
Such federal tax laws may prevent the Company from effectively implementing
hedging strategies that Management determines, absent such restrictions, would
best insulate the Company from the risks associated with changing interest
rates. See "Business -- Risk Management -- Interest Rate Risk Management."
In the event that the Company purchases interest rate caps or other
interest rate derivatives to hedge against lifetime, periodic rate or payment
caps, and the provider of such caps on interest rate derivatives becomes
financially unsound or insolvent, the Company may be forced to unwind such caps
on its interest rate derivatives with such provider and may take a loss thereon.
Further, the Company could suffer the adverse consequences that the hedging
transaction was intended to protect against. Although the Company intends to
purchase interest rate caps and derivatives only from financially sound
institutions and to monitor the financial strength of such institutions on a
periodic basis, no assurance can be given that the Company can avoid such third
party risks.
Currently, the Company has entered into hedging transactions which seek to
protect only against the Mortgage Loans' lifetime rate caps and not against
periodic rate caps or unexpected payments. In addition, the Company's lifetime
cap hedges are for a two year period which does not begin until the second
quarter of 1998. Accordingly, the Company may not be adequately protected
against risks associated with interest rate changes and such changes could
adversely affect the Company's financial condition and results of operations.
VALUE OF MORTGAGE LOANS MAY BE ADVERSELY AFFECTED BY CHARACTERISTICS OF
UNDERLYING PROPERTY AND BORROWER CREDIT
The Company expects that a portion of its Mortgage Assets will consist of
Mortgage Loans. Accordingly, during the time it holds Mortgage Loans, the
Company will be subject to increased credit risks including risks
11
<PAGE> 13
of borrower defaults and bankruptcies and special hazard losses that are not
covered by standard hazard insurance (such as those occurring from earthquakes
or floods). In the event of a default on any Mortgage Loan held by the Company,
the Company will bear the risk of loss of principal to the extent of any
deficiency between the value of the secured property, and the amount owing on
the Mortgage Loan, less any payments from an insurer or guarantor. Defaulted
Mortgage Loans will also cease to be eligible collateral for borrowings, and
will have to be financed by the Company out of other funds until ultimately
liquidated. Although the Company intends to establish an allowance for Mortgage
Loan losses in amounts adequate to cover these risks, in view of its limited
operating history and lack of experience with the Direct Loan Program to date,
there can be no assurance that any allowance for Mortgage Loan losses which are
established will be sufficient to offset losses on Mortgage Loans in the future.
See "Business -- Investments -- Direct Purchase Program."
The Company anticipates that in the future a substantial portion of its
Mortgage Assets will consist of Mortgage Loans acquired pursuant to the Direct
Purchase Program. These Mortgage Loans will have certain distinct risk
characteristics and generally lack standardized terms, which may complicate
their structure. The underlying properties themselves may be unique and more
difficult to value than typical residential real estate properties. Although the
Company intends to seek geographic diversification of the properties which are
collateral for the Company's Mortgage Loans, it does not intend to set specific
diversification requirements (whether by state, zip code or other geographic
measure). Concentration in any one area will increase exposure of the Company's
Mortgage Assets to the economic and natural hazard risks associated with that
area. Further, certain properties securing Mortgage Loans may be contaminated by
hazardous substances resulting in reduced property values. If the Company
forecloses on a defaulted Mortgage Loan collateralized by such property, the
Company may be subject to environmental liabilities regardless of whether the
Company was responsible for the contamination. The results of the Direct Loan
Program may also be affected by various factors, many of which are beyond the
control of the Company, such as (i) local and other economic conditions
affecting real estate value, (ii) the ability of tenants to make lease payments,
(iii) the ability of a property to attract and retain tenants, (iv) interest
rate levels and the availability of credit to refinance such Mortgage Loans at
or prior to maturity, and (v) increased operating costs, including energy costs,
real estate taxes and costs of compliance with regulations.
Even assuming that properties secured by the Mortgage Loans held by the
Company provide adequate security for such Mortgage Loans, substantial delays
could be encountered in connection with the foreclosure of defaulted Mortgage
Loans, with corresponding delays in the receipt of related proceeds by the
Company. State and local statutes and rules may delay or prevent the Company's
foreclosure on or sale of the mortgaged property and may prevent the Company
from receiving net proceeds sufficient to repay all amounts due on the related
Mortgage Loan. In addition, the Company's servicing agent may be entitled to
receive all expenses reasonably incurred in attempting to recover amounts due
and not yet repaid on liquidated Mortgage Loans, thereby reducing amounts
available to the Company. Some properties which will collateralize the Company's
Mortgage Loans may have unique characteristics or may be subject to seasonal
factors which could materially prolong the time period required to resell such
properties.
CONFLICTS OF INTERESTS; MANAGEMENT ALSO EMPLOYED BY AND OWNS SECURITIES OF
MANAGER
The Company is subject to conflicts of interest with the Manager and its
executive officers. The executive officers of the Company will also be executive
officers, employees and stockholders of the Manager. Under the Management
Agreement, the Manager will receive an annual base management fee payable
monthly in arrears and the Manager will have the opportunity to earn incentive
compensation under the Management Agreement based on the Company's annualized
net income. The ability of the Company to achieve the performance level required
for the Manager to earn the incentive compensation is dependent upon the level
and volatility of interest rates, the Company's ability to react to changes in
interest rates and to implement the operating strategies described herein, and
other factors, many of which are not within the Company's control. In evaluating
Mortgage Assets for investment and other strategies, an undue emphasis on
maximizing income at the expense of other criteria, such as preservation of
capital, in order to achieve higher incentive compensation for the Manager,
could result in increased risk to the value of the Company's Mortgage Asset
portfolio. See "The Manager -- The Management Agreement -- Management Fees."
12
<PAGE> 14
The Management Agreement does not limit or restrict the right of the
Manager or any of its officers, directors, employees or affiliates to engage in
any business or to render services of any kind to any other person, including
purchasing, or rendering advice to others purchasing, Mortgage Assets which meet
the Company's policies and criteria, except that the Manager and its officers,
directors, or employees will not be permitted to provide any such services to
any REIT which invests primarily in residential mortgages, other than the
Company.
DEPENDENCE ON KEY PERSONNEL FOR SUCCESSFUL OPERATIONS
The Company's operations depend in significant part upon the skill and
experience of John Robbins and Jay Fuller. Although these executive officers
currently have employment agreements with the Manager, there can be no assurance
of the continued employment of such officers. The Company is also dependent on
other key personnel and on its ability to continue to attract, retain and
motivate qualified personnel. The loss of any key person could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management of the Company -- Executive Compensation" and
"-- Employment Contracts and Termination of Employment and Change of Control
Arrangements."
FAILURE TO MANAGE EXPANSION MAY ADVERSELY AFFECT RESULTS OF OPERATIONS
The Company's expansion as a result of its investment of the net proceeds
of this Offering may cause a significant strain on the Company's and the
Manager's financial, management and other resources. To manage the Company's
growth effectively, the Company and the Manager must continue to improve and
expand their existing resources and management information systems and attract,
train and motivate qualified personnel. If the Company and the Manager are
unable to manage growth effectively, the Company's financial conditions and
results of operations may be adversely affected.
In order to further develop the Direct Purchase Program, the Manager must
significantly expand its level of operations. The Company's operating results
may be adversely affected if the Company is not able to acquire a significant
number of Mortgage Loans directly from Correspondents pursuant to the Direct
Purchase Program.
The Company may require up to twelve months to fully implement its
financing strategy and increase its investment in Mortgage Assets to the desired
level. Until such level is achieved, the net interest income on the Company's
Mortgage Asset portfolio is expected to be lower than would be the case if its
financing strategy were fully implemented. Further, the Company may acquire new
Mortgage Assets with coupons that are initially low relative to prevailing short
term interest rates. As a result, the Company's interest income may be lower
during periods of rapid growth in the Company's Mortgage Assets.
REAL ESTATE MARKET CONDITIONS MAY ADVERSELY AFFECT RESULTS OF OPERATIONS
The Company's business may be adversely affected by periods of economic
slowdown or recession which may be accompanied by declining real estate values.
Any material decline in real estate values reduces the ability of borrowers to
use home equity to support borrowings and increases the loan-to-value ratios of
Mortgage Loans previously made, thereby weakening collateral coverage and
increasing the possibility of a loss in the event of default. In addition,
delinquencies, foreclosures and losses generally increase during economic
slowdowns and recessions.
INVESTMENTS IN MORTGAGE ASSETS MAY BE ILLIQUID
Although the Company expects that a majority of the Company's investments
will be in Mortgage Assets for which a resale market exists, certain of the
Company's investments may lack a regular trading market and may be illiquid. In
addition, during turbulent market conditions, the liquidity of all of the
Company's Mortgage Assets may be adversely impacted. There is no limit to the
percentage of the Company's investments that may be invested in illiquid
Mortgage Assets. In the event the Company required additional cash as a result
of a margin call pursuant to its financing agreements or otherwise, the Company
may be
13
<PAGE> 15
required to liquidate Mortgage Assets on unfavorable terms. The Company's
inability to liquidate Mortgage Assets could render it insolvent.
POLICIES AND STRATEGIES MAY BE REVISED AT THE DISCRETION OF THE BOARD OF
DIRECTORS
The Board of Directors has established the investment policies and
operating policies and strategies of the Company set forth in this Prospectus.
These policies and strategies may be modified or waived by the Board of
Directors without stockholder consent. Further, the Board of Directors is not
limited by its charter or bylaws in determining the Company's policies and
strategies. Accordingly, investors are not able to evaluate the credit or other
risks which may be applicable to the Mortgage Assets to be acquired by the
Company. A change in the Company's policies and strategies could adversely
affect the Company's business, financial condition and results of operations.
The Company has not specifically identified any Mortgage Assets in which to
invest the net proceeds of this Offering. The Company may acquire Mortgage
Assets with geographic, issuer, industry and other types of concentrations.
Accordingly, a significant portion of the Company's Mortgage Assets may be
subject to the risks associated with a single type of occurrence. In the event
of such an occurrence, the adverse effects on the Company's results of
operations will be significantly greater than if the Company's Mortgage Assets
were diversified with respect to such factors. See "Business -- Capital
Guidelines."
The Company does not currently intend to (i) issue senior securities, (ii)
make loans to other persons, (iii) invest in the securities of others for the
purpose of exercising control, (iv) underwrite securities of other issuers, (v)
offer securities in exchange for property or (vi) repurchase or otherwise
reacquire its shares or other securities.
MANAGEMENT AND CERTAIN AFFILIATES WILL CONTROL APPROXIMATELY 25% OF OUTSTANDING
SHARES AFTER OFFERING
Immediately following the closing of this Offering, the Company's directors
and officers, the Manager and certain of their affiliates will beneficially own
or have the right to control approximately 25% of the Company's outstanding
shares of Common Stock. Accordingly, these stockholders may continue to exert
significant influence over the outcome of most corporate actions requiring
stockholder approval, including the election of directors and the approval of
transactions involving a change in control of the Company. See "Principal
Stockholders."
FAILURE TO MAINTAIN REIT STATUS MAY SUBJECT COMPANY TO CORPORATE LEVEL TAX
The Company intends at all times to operate so as to qualify as a REIT for
federal income tax purposes. To qualify as a REIT, the Company must satisfy
certain tests related to the nature of its assets and income and it must also
distribute substantially all of its income (as specially defined for these
purposes) to its stockholders. If the Company fails to qualify as a REIT in any
taxable year and certain relief provisions of the Code do not apply, the Company
would be subject to federal income tax as a regular, domestic corporation, and
its stockholders would be subject to tax in the same manner as stockholders of
such corporation. Distributions to stockholders in any years in which the
Company fails to qualify as a REIT would not be deductible by the Company in
computing its taxable income. As a result, the Company could be subject to
income tax liability, thereby significantly reducing or eliminating the amount
of cash available for distribution to its stockholders. Further, the Company
could also be disqualified from re-electing REIT status for the four taxable
years following the year during which it became disqualified.
No assurance can be given that future legislation, regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to the Company's qualification as a REIT or the
federal income tax consequences of such qualification, which changes may reduce
or eliminate the Company's advantage over non-REIT companies. See "Federal
Income Tax Considerations."
MARKET FOR COMMON STOCK MAY BE LIMITED AND MARKET PRICE MAY FLUCTUATE BELOW
OFFERING PRICE
Prior to this Offering, there has not been a public market for the Common
Stock, and there can be no assurance that a regular trading market for the
Shares offered hereby will develop or, if developed, that any
14
<PAGE> 16
such market will be sustained. In the absence of a public trading market, an
investor may be unable to liquidate his investment in the Company. The initial
public offering price will be determined by the Company and representatives of
the Underwriters. There can be no assurance that the price at which the Shares
sell in the public market after the closing of this Offering will not be lower
than the price at which they are sold by the Underwriters. See "Underwriting."
In the event that a public market for the Shares develops, it is likely
that the market price of the Shares will be influenced by any variations between
the net yield on the Company's Mortgage Assets and prevailing market interest
rates. The Company's net income will be derived primarily from any positive
spread between the yield on the Company's Mortgage Assets and the cost of the
Company's borrowings. Such positive spread will not necessarily be greater in
high interest rate environments than in low interest rate environments. However,
in periods of high interest rates, the net income of the Company, and therefore
the dividend yield on the Shares, may be less attractive compared with
alternative investments, which could negatively impact the price of the Shares.
If the dividend yield on the Company's Shares declines, or if prevailing market
interest rates rise, the market price of the Shares may be adversely affected.
Accordingly, fluctuations in interest rates could have a material adverse affect
on the trading market for the Shares. See "-- Interest Rate Fluctuations May
Adversely Affect Net Interest Income -- Inability to Acquire Mortgage Assets
with Favorable Interest Rates and Terms May Adversely Affect Net Interest
Income -- Failure to Successfully Manage Interest Rate Risks May Adversely
Affect Results of Operations."
FAILURE TO QUALIFY FOR EXEMPTION UNDER INVESTMENT COMPANY ACT
WOULD RESULT IN SIGNIFICANT REGULATORY BURDEN
The Company at all times intends to conduct its business so as not to
become regulated as an investment company under the Investment Company Act.
Accordingly, the Company does not expect to be subject to the restrictive
provisions of the Investment Company Act. However, if the Company fails to
qualify for exemption from registration as an investment company, its ability to
use leverage would be substantially reduced, and it would be unable to conduct
its business as described herein. Any such failure to qualify for such exemption
could have a material adverse effect on the Company.
The Investment Company Act exempts entities that are "primarily engaged in
the business of purchasing or otherwise acquiring mortgages and other liens on
and interests in real estate." Under the current interpretation of the staff of
the Securities and Exchange Commission, in order to qualify for this exemption,
the Company must maintain at least 55% of its assets directly in Mortgage Loans,
qualifying Mortgage Securities and certain other qualifying interests in real
estate. In addition, unless certain Mortgage Securities represent all the
certificates issued with respect to an underlying pool of Mortgage Loans, such
Mortgage Securities may be treated as securities separate from the underlying
Mortgage Loans and, thus, may not qualify for purposes of the 55% requirement.
Therefore, the Company's ownership of certain Mortgage Assets may be limited by
the provisions of the Investment Company Act.
FUTURE OFFERINGS OF COMMON STOCK MAY AFFECT MARKET PRICE OF COMMON STOCK
The Company may in the future increase its capital resources by making
additional offerings of equity and debt securities, including classes of
preferred stock, Common Stock, commercial paper, medium-term notes, CMOs and
senior or subordinated notes. All debt securities and classes of preferred stock
will be senior to the Common Stock in a liquidation of the Company. The effect
of additional equity offerings may be the dilution of the equity of stockholders
of the Company or the reduction of the price of the Company's Common Stock, or
both. The Company is unable to estimate the amount, timing or nature of
additional offerings as they will depend upon market conditions and other
factors. There can be no assurance that the Company will be able to raise the
capital it will require through such offerings on favorable terms or at all. The
inability of the Company to obtain needed sources of capital on favorable terms
could have a material adverse affect on the Company. See
"Business -- Investments -- Funding."
OWNERSHIP OF COMMON STOCK MAY BE RESTRICTED
In order that the Company may meet the requirements for qualification as a
REIT at all times, the Company's Articles of Amendment and Restatement (the
"Charter") prohibits any person from acquiring or
15
<PAGE> 17
holding, directly or indirectly, shares of Common Stock in excess of 9.9% in
value of the aggregate of the outstanding shares of Common Stock or in excess of
9.9% in value of the aggregate of the outstanding shares of Common Stock of the
Company. The Company's Charter further prohibits (i) any person from
beneficially or constructively owning shares of Common Stock that would result
in the Company being "closely held" under Section 856(h) of the Internal Revenue
Code of 1986, as amended (the "Code") or otherwise cause the Company to fail to
qualify as a REIT, and (ii) any person from transferring shares of Common Stock
if such transfer would result in shares of Common Stock being owned by fewer
than 100 persons. If any transfer of shares of Common Stock occurs which, if
effective, would result in any transfer or ownership limitations, then that
number of shares of Common Stock the beneficial or constructive ownership of
which otherwise would cause such person to violate such limitations (rounded to
the nearest whole shares) shall be automatically transferred to a trustee as
trustee of a trust for the exclusive benefit of one or more charitable
beneficiaries, and the intended transferee shall not acquire any rights in such
shares. Subject to certain limitations, the Board of Directors may increase or
decrease the ownership limitations or waive the limitations for individual
investors. See "Description of Capital Stock -- Repurchase of Shares and
Restriction on Transfer."
Every owner of more than 5% (or such lower percentage as required by the
Code or the regulations promulgated thereunder) of the Company's Common Stock,
within 30 days after the end of each taxable year, is required to give written
notice to the Company stating the name and address of such owner, the number of
shares of Common Stock of the Company beneficially owned and a description of
the manner in which such shares are held. Each such owner shall provide to the
Company such additional information as the Company may request in order to
determine the effect, if any, of such beneficial ownership on the Company's
status as a REIT and to ensure compliance with the ownership limitations.
These provisions may inhibit market activity and the resulting opportunity
for the holders of the Company's Common Stock to receive a premium for their
stock that might otherwise exist in the absence of such provisions. Such
provisions also may make the Company an unsuitable investment vehicle for any
person seeking to obtain ownership of more than 9.9% of the Company's Common
Stock. Further, a violation of the ownership limitations of the Common Stock of
the Company could result in the Company's loss of the REIT status. A loss of
REIT status could have a material adverse affect on the Company. See "-- Failure
to Maintain REIT Status May Subject Company to Corporate Level Tax."
DEFAULT OF MANAGER UNDER SECURITIES PURCHASE AGREEMENT; RESTRICTIVE COVENANTS
In connection with the private financing of the Manager and the Company,
the Company, the Manager and MDC REIT Holdings, LLC. ("Holdings") entered into a
Securities Purchase Agreement dated as of February 11, 1997 (the "Securities
Purchase Agreement") with the institutional investors therein (the "Investors")
providing for, among other things, the purchase by the Investors of senior
secured notes of the Manager due February 11, 2002 (the "Notes"). Pursuant to
the Securities Purchase Agreement, the Company must comply with various
covenants, including covenants restricting the Company's investment, hedging and
leverage policies, leverage ratio and indebtedness levels, and business and tax
status. These restrictions may limit the Company's ability to adequately respond
to changing market conditions, even when such changes may be in the best
interest of the Company, which could have a material adverse affect on the
Company's financial condition and results of operations. See "Certain
Transactions -- Discussion of Securities Purchase Agreement."
If the Manager defaults on its obligations with respect to the Notes, such
default may result in a default and termination of the Management Agreement, in
which case the operations of the Company could be materially and adversely
affected pending either the engagement of a new manager or the development
internally of the resources necessary to manage the operation of the Company. In
addition, Holdings has pledged 1,600,000 shares of its Common Stock of the
Company to secure the Manager's obligations under the Securities Purchase
Agreement. Upon a default under the Securities Purchase Agreement, the pledged
shares will be transferred to the holders of the Notes, who will then have
certain demand registration rights. See "-- Shares Eligible for Future Sale."
16
<PAGE> 18
LIMITATIONS ON ACQUISITION AND CHANGE IN CONTROL
The Charter and Bylaws of the Company contain a number of provisions, and
the Board of Directors has taken certain actions, that could impede a change of
control in the Company. See "Certain Provisions of Maryland Law and the
Company's Charter and Bylaws -- Certain Anti-Takeover Provisions." These
provisions include the following:
Staggered Board of Directors. The Board of Directors of the Company has
three classes of directors. The staggered terms for directors may adversely
affect the stockholders' ability to change control of the Company, even if a
change in control were in the interest of some, or a majority, of the
stockholders.
Capital Stock. The Charter authorizes the Board of Directors to create new
classes and series of securities and to establish the preferences and rights of
any such classes and series. The issuance of securities by the Board of
Directors pursuant to this Charter provision could have the effect of delaying
or preventing a change of control of the Company, even if a change of control
were in the interest of some, or a majority, of stockholders. See "Description
of Capital Stock."
Statutory Provisions. Under the Maryland General Corporation Law (the
"MGCL"), unless exempted by action of the Board of Directors, certain "business
combinations" between a Maryland corporation and a stockholder holding 10% or
more of the corporation's voting securities (an "Interested Stockholder") are
subject to certain conditions, including approval by a super-majority vote of
all voting stock excluding those held by the Interested Stockholder or affiliate
thereof, and may not occur for a period of five years after the stockholder
becomes an Interested Stockholder. Accordingly, certain business combinations
may be impeded or prohibited, even if such a combination may be in the interest
of some, or a majority, of the Company's stockholders. The MGCL also provides
that "control shares" may be voted only upon approval of two-thirds of the
outstanding stock of the corporation excluding the control shares and shares
held by affiliates of the corporation. Under certain circumstances, the
corporation also may redeem the control shares for cash and, in the event that
control shares are permitted to vote, the other stockholders of the corporation
are entitled to appraisal rights. See "Certain Provisions of Maryland Law and
the Company's Charter and Bylaws -- Business Combinations -- Control Share
Acquisitions."
These provisions may inhibit market activity and the resulting opportunity
for stockholders of the Company to receive a premium for their shares that might
otherwise exist if any person were to attempt to assemble a block of shares of
Common Stock in excess of the number of shares permitted under the Charter. Such
provisions also may make the Company an unsuitable investment vehicle for any
person seeking to obtain ownership of more than 9.9% of the outstanding shares
of Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
A substantial number of shares of Common Stock outstanding prior to this
Offering and issuable upon exercise of outstanding options will be eligible for
sale in the public market following the closing of this Offering, and such sales
could have an adverse effect on the price of the Company's Common Stock. On the
date of this Prospectus, the 5,000,000 Shares offered hereby (assuming no
exercise of the Underwriters' over-allotment option) will be immediately
eligible for sale in the public market. In addition upon the expiration of
lock-up agreements 180 days after the date of this Prospectus, 1,614,000 shares
of Common Stock held by the current stockholders of the Company will become
eligible for sale in the public market, subject in some cases to the volume
restrictions of Rule 144 promulgated under the Securities Act of 1933 (the
"Securities Act"). In addition, the holders of such shares of Common Stock are
entitled to certain rights with respect to the registration of such shares under
the Securities Act. An increase in the number of shares of Common Stock of the
Company sold in the public market could have an adverse effect on the market
price of the Company's Common Stock. See "Shares Eligible for Future Sale."
DILUTION TO STOCKHOLDERS PURCHASING IN OFFERING
The initial offering price is higher than the book value per share of
Common Stock. Investors purchasing shares of Common Stock in this Offering will
therefore incur immediate dilution of $1.46 per share. See "Dilution."
17
<PAGE> 19
THE COMPANY
American Residential Investment Trust, Inc. is a mortgage REIT which
currently invests in residential adjustable-rate Mortgage Securities. Following
this Offering, AMREIT will also invest in Mortgage Loans. The Company has
developed tailored underwriting guidelines for Mortgage Loans to be originated
by Correspondents. The Company will then acquire Mortgage Loans directly from
those Correspondents. The Company finances its acquisitions of Mortgage Assets
with equity and secured borrowings. AMREIT expects generally to maintain an
equity-to-assets ratio of approximately 8% to 12% and to earn interest on the
portion of its Mortgage Asset portfolio financed with equity and to earn a net
interest spread on the leveraged portion of its Mortgage Asset portfolio. The
Company is structured to qualify as a REIT, and therefore will generally not be
subject to federal taxes at the corporate level on the net income it distributes
to its stockholders. The Company is similar to a bank or savings and loan in its
business purpose, however, it does not collect deposits or incur the overhead
costs related to generating retail Mortgage Loans and it is not subject to a
number of the regulations governing banks and savings and loans. The Company
believes its REIT structure is the most efficient form in which to invest in
adjustable-rate Mortgage Assets.
AMREIT was incorporated on February 6, 1997, and began operations on
February 11, 1997 as a result of a private equity funding from the Manager. The
Manager was created for the purpose of managing the day-to-day operations of the
Company, subject to direction by the Company's Board of Directors. The Manager
and the Company were financed by McCown De Leeuw & Co., TCW/Crescent Mezzanine,
L.L.C., certain of their respective affiliates and members of the management
team of the Company. The Manager and its affiliates own 1,614,000 shares of
Common Stock of the Company which will constitute approximately 25% of the
outstanding shares of Common Stock of the Company immediately after the closing
of this Offering. In addition, David E. De Leeuw and George E. McCown, the
principles of McCown De Leeuw & Co., currently serve on the Board of Directors
of the Company. Mr. De Leeuw will continue as a director after the closing of
this Offering.
The Company's management team is lead by John Robbins and Jay Fuller,
former executive officers and founders of AMRES Mortgage. The management team
led AMRES Mortgage from a start-up company to one with originations of
approximately $9.7 billion and a servicing portfolio of approximately $16.1
billion in 1993, its last full year of independent operations. In 1994, AMRES
Mortgage was sold to The Chase Manhattan Corporation for approximately $330
million.
The Company was incorporated in Maryland on February 6, 1997. The principal
executive offices of the Company and the Manager are located at 445 Marine View
Avenue, Suite 230, Del Mar, California 92014. The telephone number is (619)
350-5000.
18
<PAGE> 20
USE OF PROCEEDS
The proceeds of this Offering, assuming an offering price of $15.00 per
share, will be as follows:
<TABLE>
<CAPTION>
5 MILLION 5.8 MILLION
SHARES SHARES(1)
--------- -----------
(IN MILLIONS)
<S> <C> <C>
Total proceeds.......................................... $75.0 $86.2
Expenses................................................ 1.2 1.3
Underwriting discount and commissions................... 4.9 5.6
----- -----
Net proceeds available for investment......... $68.9 $79.3
</TABLE>
- ---------------
(1) Assumes exercise by the Underwriters of an option to purchase shares to
cover over-allotments.
The net proceeds of this Offering, together with borrowings, will be used
primarily to purchase Mortgage Assets and otherwise for general corporate
purposes. The Company has not specifically identified any Mortgage Assets in
which to invest the net proceeds of this Offering. Pending the purchase of the
Mortgage Assets, the net proceeds of this Offering may be invested in short term
investments consistent with the applicable REIT Provisions of the Code. The
Company intends to increase its investment in Mortgage Assets by borrowing
against existing Mortgage Assets and using the net proceeds therefrom to acquire
additional Mortgage Assets. The Company's borrowings generally will be secured
by the Mortgage Assets owned by the Company. The Company may, but does not
expect to, require up to twelve months to fully implement its financing strategy
and increase its investment in Mortgage Assets to the desired level. Until such
level is achieved, the net interest income on the Company's Mortgage Asset
portfolio is expected to be lower than would be the case if its financing
strategy were fully implemented.
Management believes that cash flow from operations, the net proceeds of
this Offering and funds available pursuant to financing facilities and credit
arrangements will be sufficient to meet the Company's cash requirements for at
least one year following the closing of this Offering. Thereafter, if the
Company's cash resources are insufficient to satisfy the Company's liquidity
requirements, the Company may be required to sell additional equity or debt
securities. There is no assurance that additional financing will be available to
the Company on favorable terms, or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DIVIDEND POLICY AND DISTRIBUTIONS
The Company intends to distribute substantially all of its taxable income
(which does not ordinarily equal net income as calculated in accordance with
GAAP) to its stockholders in each year so as to comply with the REIT Provisions
of the Code. The Company intends to declare regular quarterly dividends. The
dividend policy is subject to revision at the discretion of the Board of
Directors. All distributions will be made by the Company at the discretion of
the Board of Directors and will depend on the taxable income of the Company, the
financial condition of the Company, maintenance of REIT status and such other
factors as the Board of Directors deems relevant. On July 17, 1997 and May 1,
1997, the Company declared dividends of $0.27 and $0.09, respectively, per share
of Common Stock for the quarter ended June 30, 1997 and the period ended March
31, 1997, respectively. There can be no assurance that the Company will generate
sufficient income in the future to declare comparable levels of dividends, or to
declare dividends at all. See "Risk Factors -- Limited Operating History Does
Not Predict Future Performance" "Risk Factors -- Additional Risk
Factors -- Future Revisions in Policies and Strategies at the Discretion of the
Board of Directors" and "Federal Income Tax Consequences -- Requirements for
Qualification as a REIT -- Distribution Requirement."
Distributions to stockholders will generally be taxable as ordinary income,
although a portion of such distributions may be designated by the Company as
capital gain or may constitute a tax-free return of capital. The Company will
annually furnish to each of its stockholders a statement setting forth
distributions paid during the preceding year and their characterization as
ordinary income, capital gains, or return on capital. See "Business -- Certain
Accounting Policies and Procedures" and "Federal Income Tax Consequences --
Taxation of Stockholders."
19
<PAGE> 21
CAPITALIZATION
The capitalization of the Company, as of June 30, 1997, and as adjusted to
reflect the sale of the Shares offered hereby, is as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------
AS
ACTUAL ADJUSTED(1)(2)
-------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Reverse repurchase agreements...................................... $209,539 $209,539
Stockholders' equity:
Preferred Stock, par value $.01 per share; 1,000,000 shares
authorized; no shares issued and outstanding.................. -- --
Common Stock, par value $.01 per share; 3,000,000 shares
authorized; 1,614,000 shares issued and outstanding, actual;
6,614,000 shares issued and outstanding as adjusted(3)........ 16 66
Additional paid-in capital....................................... 20,149 89,024
Cumulative dividends declared.................................... (146) (146)
Retained earnings................................................ 584 584
-------- --------
Total stockholders' equity............................... $ 20,603 $ 89,528
-------- --------
Total capitalization..................................... $230,142 $299,067
======== ========
</TABLE>
- ---------------
(1) After deducting offering expenses estimated to be $1,200,000 payable by the
Company, and assumes no exercise of the Underwriters' over-allotment option
to purchase up to an additional 750,000 shares of Common Stock. Assumes an
initial public offering price of $15.00 per share of Common Stock. See
"Underwriting."
(2) Excludes 315,200 shares of Common Stock reserved for issuance pursuant to
options outstanding as of June 30, 1997 under the Incentive Plan.
(3) The Company's authorized Common Stock and Preferred Stock as of June 30,
1997, was 3,000,000 and 1,000,000 shares, respectively. The Company's
authorized Capital Stock will be increased to 25,000,000 shares prior to the
closing of this Offering all of which will initially be designated Common
Stock. See "Description of Capital Stock" and Note 8 of Notes to Financial
Statements.
20
<PAGE> 22
DILUTION
The pro forma net tangible book value of the Company, as of June 30, 1997,
was approximately $20.6 million or $12.77 per share of Common Stock. Pro forma
net tangible book value per share of Common Stock is equal to the Company's
total tangible assets less its total liabilities, divided by the number of
outstanding shares of Common Stock. After giving effect to the sale of the
5,000,000 Shares offered by the Company hereby (at an assumed initial public
offering price of $15.00 per share and after deducting the estimated
underwriting discount and commissions and offering expenses), the pro forma net
tangible book value of the Company at June 30, 1997 would have been
approximately $89.5 million or $13.54 per share of Common Stock. This represents
an immediate increase in such net tangible book value of $0.77 per share of
Common Stock to existing stockholders and an immediate dilution of $1.46 per
share of Common Stock to new investors purchasing Shares in this Offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of Common Stock..... $15.00
Pro forma net tangible book value per share of Common Stock as of
June 30, 1997.................................................. 12.77
Increase per share of Common Stock attributable to this
Offering....................................................... 0.77
-----
Pro forma net tangible book value per share of Common Stock
immediately after the closing of this Offering.................... 13.54
------
Dilution per share of Common Stock to new investors................. $ 1.46
======
</TABLE>
The following table summarizes, on a pro forma basis, as of June 30, 1997,
the differences between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price paid per share of
Common Stock by the existing holders of Common Stock and by the new investors at
an assumed initial public offering price of $15.00 per share of Common Stock
(See "Underwriting"):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 1,614,000 24.4% $20,175,000 21.2% $ 12.50
New Investors..................... 5,000,000 75.6 75,000,000 78.8 $ 15.00
--------- ----- ----------- -----
Total................... 6,614,000 100.0% $95,175,000 100.0%
========= ===== =========== =====
</TABLE>
The foregoing tables exclude 315,200 shares of Common Stock reserved for
issuance pursuant to options outstanding as of June 30, 1997 under the Company's
Incentive Plan.
21
<PAGE> 23
SELECTED FINANCIAL DATA
The following selected statement of operations and balance sheet data for
the period from February 11, 1997 (inception) through June 30, 1997, and as of
June 30, 1997 have been derived from the Company's financial statements audited
by KPMG Peat Marwick LLP, independent auditors whose reports with respect
thereto appear elsewhere herein. Such selected financial data should be read in
conjunction with those financial statements and the notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" also included elsewhere herein. The following selected financial
data for the period ended March 31 and the quarter ended June 30, 1997 have been
derived from the financial statements of the Company and include adjustments,
consisting only of normal recurring adjustments, which Management considers
necessary for a fair presentation of such financial information for those
periods. Results for the periods ended June 30, 1997 are not necessarily
indicative of results for the year ending December 31, 1997.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
FEBRUARY 11, 1997 FEBRUARY 11, 1997
TO QUARTER ENDED TO
JUNE 30, 1997 JUNE 30, 1997 MARCH 31, 1997
----------------- ------------- -----------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income.................................. $ 3,640 $ 3,334 $ 306
Interest expense................................. 2,916 2,766 150
------ ------ -----
Net interest income.............................. 724 568 156
------ ------ -----
General and administrative expenses.............. 140 130 10
------ ------ -----
Net income....................................... $ 584 $ 438 $ 146
====== ====== =====
Net income per share of Common Stock(1).......... $ 0.35 $ 0.26 $0.09
Dividends per share of Common Stock(2)........... $ 0.09 $ -- $0.09
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, 1997 MARCH 31, 1997
------------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Mortgage Assets.................................................. $ 228,620 $152,883
Total assets..................................................... 231,518 161,302
Reverse repurchase agreements.................................... 209,539 141,068
Total liabilities................................................ 210,915 141,354
Stockholders' equity............................................. 20,603 19,948
</TABLE>
- ---------------
(1) See Note 1 to the Financial Statements for information regarding the
calculation of this item.
(2) The level of quarterly dividends is determined by the Board of Directors
based upon its consideration of a number of factors and should not be deemed
indicative of taxable income for the quarter in which declared or future
quarters, or of income calculated in accordance with GAAP. See "Dividend
Policy and Distributions."
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements that inherently involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth in the following section and in "Risk
Factors." The following discussion should be read in conjunction with the
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
OVERVIEW
All of the Company's income to date has been interest income generated from
its Mortgage Assets and its cash balances ("earning assets"). The Company funds
its acquisitions of earning assets with both its equity capital and with
borrowings. For that portion of the Company's earning assets funded with equity
capital ("equity-funded lending"), net interest income is derived from the
average yield on earning assets. Due to the adjustable-rate nature of its
earning assets, Management expects that income from this source will tend to
increase as interest rates rise and will tend to decrease as interest rates
fall.
For that portion of the Company's earning assets funded with borrowings
("spread lending"), resulting net interest income is a function of the volume of
spread lending and the difference between the Company's average yield on earning
assets and the cost of borrowed funds and interest rate hedging agreements.
Income from spread lending may initially decrease following an increase in
interest rates and then, after a lag period, be restored to its former level as
earning assets yields adjust to market conditions. Income from spread lending
may likewise increase following a fall in interest rates, but then decrease as
earning assets yields adjust to the new market conditions after a lag period.
See "Risk Factors -- Interest Rate Fluctuations May Adversely Affect Net
Interest Income" and "Business -- Funding."
The Company seeks to generate growth in net income in a variety of ways,
including through (i) issuing new Common Stock and increasing the size of the
earning assets when opportunities in the mortgage market are likely to allow
growth in net income per share of Common Stock, (ii) seeking to improve
productivity by increasing the size of the earning assets at a rate faster than
operating expenses increase, (iii) changing the mix of Mortgage Asset types
among the earning assets in an effort to improve returns, and (iv) increasing
the efficiency with which the Company uses its equity capital over time by
increasing the Company's use of debt when prudent and by issuing subordinated
debt, preferred stock or other forms of debt and equity. There can be no
assurance, however, that the Company's efforts will be successful or that the
Company will increase or maintain its income level. See "Risk Factors -- Limited
Operating History Does Not Predict Future Performance."
Interest Income and the Earning Asset Yield
On average, the Company had $196 million in earning assets during the
quarter ended June 30, 1997. The Company's sole source of income during fiscal
1997 for both equity-funded lending and spread lending was the interest income
earned from these earning assets. As a residential mortgage REIT, the Company
expects to continue to rely on interest income as its primary source of income
in the future. At June 30, 1997, the weighted average net coupon on the
Company's Mortgage Assets was 7.78% per annum based on the amortized cost of the
Mortgage Assets.
The annualized mortgage principal repayment rate for the Company was 29% in
the quarter ended June 30, 1997. The Company adjusts its rate of premium
amortization monthly based on actual principal repayments received. As a result,
premium amortization accelerates as the rate of principal repayment increases.
This lowers the earning assets yields and reportable net income. See "Risk
Factors -- Increased Levels of Mortgage Loan Prepayments May Adversely Affect
Net Interest Income."
The Company may acquire new Mortgage Assets with coupons that are initially
low relative to prevailing short term interest rates. As a result, the overall
earning assets yields may be temporarily lower during periods of rapid growth in
the Company's Mortgage Assets.
23
<PAGE> 25
Borrowings
To date, the Company's debt has consisted entirely of borrowings
collateralized by a pledge of the Company's Mortgage Assets. These borrowings
appear on the balance sheet as reverse repurchase agreements. The size of the
market for borrowings of this type is generally measured in the industry in the
trillions of dollars and institutions with high quality pledgable assets such as
banks, savings and loans, brokerage firms, federal agencies and the Federal
Reserve Bank are the largest U.S. borrowers in this market. The Company has
established uncommitted borrowing facilities with 10 lenders in this market in
amounts aggregating at least $500 million. The Company also has in place a line
of credit that it may use to fund certain cash flow shortages. The Company
intends to expand its uncommitted reverse repurchase agreements following this
Offering. There can be no assurance, however, that the Company will be able to
obtain debt financing in the future under these facilities or otherwise.
Further, the Company's current borrowing facilities may be collateralized only
by Mortgage Securities and may not be used to finance acquisitions of Mortgage
Loans pursuant to the Direct Purchase Program. See "Risk Factors -- Failure to
Implement Company's Leverage Strategy May Adversely Affect Results of
Operations" and "Business -- Fundings."
With the Company's current asset/liability strategy, changes in the
Company's cost of funds are expected to be closely correlated with changes in
the two-month LIBOR interest rate, although the Company may choose to extend or
shorten the maturity of its liabilities at any time.
The term to maturity of the Company's borrowings has ranged from one day to
six months, with a weighted average term to maturity of 62 days at quarter
ending June 30, 1997. The weighted average cost of funds for all of the
Company's borrowings was 5.69% per annum as of June 30, 1997.
Net Interest Income from Equity-Funded Lending and Spread Lending
For the purpose of analyzing net interest income, the Company focuses on
the two component activities with respect to its earning assets: equity-funded
lending and spread lending. Each of these two components must be considered
separately when analyzing changes in interest rates, asset/liability strategy,
growth, and other factors.
When analyzing the profitability of equity-funded lending and spread
lending, the Company does not assign specific Mortgage Assets to each type of
lending, but rather assumes that one portion of aggregate earning assets is
funded with equity and another portion of aggregate earning assets is funded
with borrowings.
Management believes equity-funded lending has a large influence on the
Company's profitability relative to financial institutions which have (i) lower
equity-to-assets ratios, (ii) intangible capital, or (iii) significant amounts
of non-earning assets or net working capital on their books.
Liquidity of Mortgage Assets
Liquidity is the Company's ability to convert its Mortgage Assets to cash.
The liquidity of the Company's Mortgage Assets enables the Company to borrow
funds to purchase additional Mortgage Assets and allows the Company to pledge
additional Mortgage Assets to secure existing borrowings should the value of
pledged Mortgage Assets decline. The Company will typically pledge its least
liquid Mortgage Assets for secured borrowings so that the Company's pool of
unpledged Mortgage Assets is made up of its most liquid Mortgage Assets. Unused
borrowing capacity will vary over time as the market value of the Company's
Mortgage Assets varies and due to other factors.
The Company's Mortgage Assets generate liquidity on an ongoing basis
through mortgage principal repayments and net income held prior to payment as
dividends. Should the Company's needs ever exceed these ongoing sources of
liquidity, Management believes that the Company's Mortgage Assets and interest
rate agreements could be sold in most circumstances to raise cash. There can be
no assurance, however, that such Mortgage Assets could be sold on terms
favorable to the Company, or at all. See "Risk Factors -- Investments in
Mortgage Assets May be Illiquid."
24
<PAGE> 26
Asset/Liability Management and Effect of Changes in Interest Rates
Management continually reviews the Company's asset/liability strategy with
respect to interest rate risk, mortgage prepayment risk, credit risk and the
related issues of capital adequacy and liquidity. The net effect of changes in
interest rates, relative changes in one- and six-month LIBOR rates, changes in
short term interest rates relative to long term interest rates, changes in
mortgage principal repayment rates, changes in the market value of Mortgage
Assets and interest rate agreements and other factors cannot be determined in
advance. The Company seeks attractive stockholder returns while seeking to
maintain a strong balance sheet and pattern of net income which is stable and
growing over time.
Inflation
Management believes that interest rates and other factors influence the
Company's performance to a greater extent than inflation. Changes in interest
rates do not necessarily correlate with inflation rates or changes in inflation
rates. The Company's financial statements are prepared in accordance with GAAP
and the Company's dividends are determined by the Company's net income as
calculated for tax purposes.
Seasonality
The level of prepayments of the Company's Mortgage Assets is subject to the
same seasonal influences as the residential real estate industry with
prepayments generally being higher in the summer months and lower in the winter
months. Likewise, management anticipates that any originations under the Direct
Purchase Program would parallel these seasonal trends.
RESULTS OF OPERATIONS
Total net income for the Company increased by 200% from approximately
$146,000 in the period ended March 31, 1997, to approximately $438,000 in the
quarter ended June 30, 1997. The growth in net income was directly attributable
to an increase in net interest income. Net interest income grew by 264% between
the period ended March 31, 1997 and the quarter ended June 30, 1997, from
approximately $156,000 to approximately $568,000, respectively. This increase in
net interest income was partially offset by an increase in general and
administrative expenses. From the period ended March 31, 1997 to the quarter
ended June 30, 1997, general and administrative expenses increased from
approximately $10,000 to approximately $130,000.
The growth in net interest income between the period ended March 31, 1997
and the quarter ended June 30, 1997 was due to the increase in the Company's
Mortgage Assets. The Company commenced operations on February 11, 1997, but did
not complete the initial purchase of Mortgage Assets until March 24, 1997.
Therefore, the Company did not earn interest income from Mortgage Assets nor
incur premium amortization or reverse repurchase agreement expense until late in
the period ended March 31. Similarly, the increase in general and administrative
expenses between the period ended March 31, 1997 and the quarter ended June 30,
1997 is the result of the Company not starting operations until the middle of
the period ended March 31.
The Company experienced higher than expected levels of repayments in the
quarter ended June 30, 1997. The annualized mortgage principal repayment rate
for the Company was 29% in the quarter ending June 30, 1997. Although the
Company does not expect repayment rates to continue at such levels, there can be
no assurance that the Company will be able to achieve or maintain lower
repayment rates. Accordingly, the Company's financial condition and results of
operations could be materially adversely affected if prepayments continue at
higher than anticipated levels. See "Business -- Risk Management -- Interest
Rate Risk Management."
The Company was in the process of investing the net proceeds of its initial
sale of privately placed Common Stock through May 15, 1997. Accordingly, the
full impact of the Company's use of proceeds was not realized in operations
until the middle of the quarter ended June 30, 1997. See "Risk
Factors -- Limited Operating History Does Not Predict Future Performance."
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity needs result from the long term
investment in Mortgage Assets. Generally, reverse repurchase agreement
borrowings and the issuance of Common Stock provide the Company funding for its
investment needs. To a lesser extent, the Company may use funds available under
its line of credit. Pursuant to the line of credit, the Company may borrow the
lesser of $25 million and the outstanding principal and interest receivable
balance with one reverse repurchaser, for a period of up to 36 days, at an
interest rate equal to LIBOR plus 0.6%. The line of credit has no set expiration
date. See "Business -- Funding."
During the period from February 11, 1997 (commencement of operations)
through June 30, 1997, net cash provided by operating activities was $259,000.
Net cash provided by operating activities was negatively impacted by an increase
in accrued interest receivable. There were no Mortgage Assets held at February
11, 1997 and, therefore, the total accrued interest receivables at June 30, 1997
negatively affected cash. Net cash for the period was positively affected by an
increase in accrued interest payable.
Net cash used in investing activities for the period from February 11, 1997
through June 30, 1997 was $229.7 million. Net cash used for the period was
negatively affected by the purchase of Mortgage Assets and positively affected
by principal repayments.
For the period from February 11, 1997 through June 30, 1997, net cash
provided by financing activities was $229.6 million. Net cash provided was
primarily affected by borrowing from reverse repurchase agreements and net
proceeds received from the issuance of Common Stock in the Company's private
placement.
At June 30, 1997 the Company had uncommitted reverse repurchase facilities
to provide over $500 million to finance investments in Mortgage Assets.
Management believes that cash flow from operations, the proceeds of this
Offering and funds available pursuant to reverse repurchase financing facilities
and other credit arrangements will be sufficient to meet the Company's cash
requirements for at least one year following the closing of this Offering.
Thereafter, if the Company's cash resources are insufficient to satisfy the
Company's liquidity requirements, the Company may be required to sell additional
equity or debt securities. There is no assurance that such financing will be
available to the Company on favorable terms, or at all. See "Risk
Factors -- Failure to Implement Company's Leverage Strategy May Adversely Affect
Results of Operations."
RECENT DEVELOPMENTS
For the quarter ended June 30, 1997, the Company generated net income of
approximately $438,000 and net income per share of Common Stock of $0.26. From
the commencement of operations on February 11, 1997 through June 30, 1997, the
Company generated net income of approximately $584,000 and net income per share
of Common Stock of $0.35. At June 30, 1997, the Company held Mortgage Assets
that had a carrying value of approximately $229 million. All Mortgage Assets
held at June 30, 1997, were Agency Securities backed by adjustable-rate single
family residential Mortgage Loans.
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BUSINESS
GENERAL
AMREIT was incorporated in Maryland on February 6, 1997. The Company is a
mortgage REIT which currently invests in residential adjustable-rate Mortgage
Securities and which intends to invest in Mortgage Loans. The Company finances
its acquisitions of Mortgage Assets with equity and secured borrowings. AMREIT
expects generally to maintain an equity-to-assets ratio of approximately 8% to
12%, to earn interest on the portion of its Mortgage Asset portfolio financed
with equity and to earn a net interest spread on the leveraged portion of its
Mortgage Asset portfolio. The Company is structured as a REIT, thereby generally
eliminating federal taxes at the corporate level on income it distributes to
stockholders.
RESIDENTIAL MORTGAGE INDUSTRY
The residential mortgage market has experienced considerable growth over
the past 15 years with total residential mortgage debt outstanding growing from
approximately $965 billion in 1980 to approximately $3.9 trillion in 1996
according to the Mortgage Market Statistical Annual for 1997. In addition, the
total residential mortgage debt securitized into Mortgage Securities has grown
from approximately $110 billion in 1980 to approximately $1.9 trillion in 1996.
Management believes that the current size of the residential mortgage market
will provide the Company with opportunities with respect to the purchase of
Mortgage Assets.
INVESTMENTS
AMREIT currently acquires adjustable-rate residential Mortgage Securities
in the capital markets. While the Company expects that a majority of its
Mortgage Assets will continue to be Mortgage Securities, it anticipates that it
will increasingly invest in adjustable-rate Mortgage Loans, including Mortgage
Loans acquired directly from originators through the Direct Purchase Program.
Under the Direct Purchase Program, the Company believes that its management team
can enhance the overall yield of the Mortgage Asset portfolio by acquiring
relatively higher yielding Mortgage Loans and avoiding the cost of using
intermediaries. The Company has not yet specifically identified any Mortgage
Assets in which to invest the proceeds of this Offering. See "Risk
Factors -- Inability to Acquire Mortgage Assets with Favorable Interest Rates
and Terms May Adversely Affect Net Interest Income" and "Use of Proceeds."
The Company will only acquire those Mortgage Assets which the Company
believes it has the expertise to evaluate and manage and which are consistent
with the Company's balance sheet guidelines and risk management objectives. The
Company also considers (i) the amount and nature of anticipated cash flows from
the Mortgage Assets, (ii) the Company's ability to pledge the Mortgage Asset to
secure collateralized borrowings, (iii) the increase in the Company's capital
requirement resulting from the purchase and financing of the Mortgage Assets, as
determined pursuant to the Company's Capital Policy, and (iv) the costs of
financing, hedging, managing, servicing, securitizing and reserving for the
Mortgage Asset. Prior to the acquisition of Mortgage Assets, potential returns
on capital employed are assessed over the life of the Mortgage Assets and in a
variety of interest rate, yield spread, financing cost, credit loss and
prepayment scenarios.
The Company finances acquisitions of Mortgage Assets with short term
borrowings which generally mature in six months or less. Upon maturity, the
Company refinances the Mortgage Assets with new short term borrowings which then
bear interest at the new market rate. Accordingly, the Company's interest
expense changes rapidly with changes in the market interest rates. In order to
maintain a margin between the Company's interest expense and the interest income
generated by Mortgage Assets, the Company generally acquires Mortgage Assets
with interest rates that also adjust with changing market interest rates.
Accordingly, the Company expects that substantially all of the Mortgage Assets
acquired by it will be adjustable-rate rather then fixed-rate Mortgage Assets.
The Board of Directors of the Company can revise the Company's investment
policies in its sole discretion subject to approval by a majority of the
Company's directors which
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are not employees or officers of the Company. See "Risk Factors -- Policies and
Strategies May Be Revised at the Discretion of the Board of Directors."
Capital Markets Program
The Company has purchased and will continue to purchase Mortgage Securities
in the capital markets. These Mortgage Assets generally have a higher level of
liquidity than the Mortgage Loans to be acquired under the Direct Purchase
Program and are expected to provide a relatively stable flow of interest income
with relatively low levels of credit risk compared to such Mortgage Loans. The
Mortgage Securities to be acquired by the Company will be backed by a pool of
adjustable-rate Mortgage Loans. These Mortgage Securities entitle the holder to
receive a pass-through of principal and interest payments on the underlying pool
of Mortgage Loans and will be Agency Securities or Privately Issued Securities.
From the commencement of operations on February 11, 1997 through June 30,
1997, the Company acquired Mortgage Securities that had a carrying value at June
30, 1997 of approximately $229 million. All Mortgage Securities held by the
Company at June 30, 1997 were Agency Securities evidencing an interest in
adjustable-rate single family residential Mortgage Loans. See Note 2 of Notes to
Financial Statements.
Direct Purchase Program
Management intends to leverage its expertise in the residential Mortgage
Loan industry to develop a program for the purchase of Mortgage Loans by the
Company directly from Correspondents. Under the Direct Purchase Program, the
Company will (i) identify segments of the residential Mortgage Loan market that
meet its general criteria for potential originations, (ii) develop tailored
underwriting guidelines for Mortgage Loans to be generated in each market
segment, (iii) acquire Mortgage Loans originated by Correspondents directly from
such Correspondents, hence avoiding certain loan broker or other intermediary
fees, and (iv) arrange for the servicing of the Mortgage Loans by entities
experienced in servicing the particular types of Mortgage Loans involved.
The Company has not acquired any Mortgage Loans under the Direct Purchase
Program, and there can be no assurance that the program will be successfully
implemented or that the Mortgage Assets acquired through the program will be
higher yielding than Mortgage Securities. See "Risk Factors -- Inability to
Acquire Mortgage Assets with Favorable Interest Rates and Terms May Adversely
Affect Net Interest Income."
Tailored Mortgage Loan Products. Under the Direct Purchase Program, the
Manager will identify segments of the residential Mortgage Loan market that it
believes have the potential for generating Mortgage Loans with higher yields
than other Mortgage Loans with generally comparable risks. These segments
generally are present where there is less competition among Mortgage Loan
originators and, hence, fewer resources available to borrowers. Management has
identified a number of such segments and expects that new opportunities in other
market segments will become available as the Mortgage Loan market continues to
change. These emerging segments typically will include Mortgage Loans that are
not readily available from large, nationally-based loan originators due to
factors related to the loan underwriting process itself (such as the need to
value a complex, mixed use property) or a limited secondary market for resale of
such types of Mortgage Loans.
Management has identified the following segments of the residential
Mortgage Loan market for its initial tailored Mortgage Loan products:
- Small Multifamily Home Mortgage Loans. A small multifamily home Mortgage
Loan will be secured by a first lien on a 5-unit to 20-unit residential
property. The Company's underwriting guidelines for small multifamily
home Mortgage Loans will place emphasis on the appraised value, the
existence and terms of underlying leases, a cash flow analysis, the
condition of the mortgaged property and favorable credit reports.
- Manufactured Housing Mortgage Loans. A manufactured housing Mortgage Loan
will be secured by a first lien on an owner occupied manufactured housing
unit (excluding mobile homes) permanently
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affixed to a foundation and the underlying lot. The underwriting of
manufactured housing Mortgage Loans will place emphasis on appraised
value (relying on comparable sales), condition of the property, the
quality of the borrower's income and favorable credit reports.
- Mixed Use Mortgage Loans. A mixed use Mortgage Loan will be secured by a
first lien on a combined commercial and up-to-twelve-unit residential
property. The qualifying commercial uses of the properties will be
generally limited to retail, professional, light industrial or office
use. The underwriting for mixed use Mortgage Loans will place emphasis on
appraised value (relying on comparable sales), condition of the property
(and environmental compliance), cash flow analysis and credit reports
(including credit reports on commercial tenants).
- Rural Home Mortgage Loans. A rural home Mortgage Loan will be secured by
a first lien on a residential property in a rural area where agricultural
use is present but limited to noncommercial use. The underwriting of
rural home Mortgage Loans will place emphasis on appraised value (relying
on comparable sales), condition of the property, quality of the
borrower's income and favorable credit reports. Rural home Mortgage Loan
amounts will generally be higher with respect to the appraised value of
the residence and the first five acres and lower with respect to any
additional acreage.
- Mini-Ranch Home Mortgage Loans. A mini-ranch home Mortgage Loan will be
secured by a first lien on a residential ranch property. The underwriting
of mini-ranch home Mortgage Loans will place emphasis on appraised value
(relying on comparable sales), condition of the property, the quality of
the borrower's income (primarily non-ranch income) and favorable credit
reports. Mini-ranch home Mortgage Loan amounts will generally be higher
with respect to the appraised value of the residence and the first five
acres, and lower with respect to any additional acreage.
- Condominium/Resort Mortgage Loans. A condominium/resort Mortgage Loan
will be secured by a first lien on a vacation property, including those
located in ski, golf and other recreational resort areas. The
underwriting of condominium/resort Mortgage Loans will place emphasis on
appraised value (relying on comparable sales with same complex
comparables preferred), same complex rental history, the quality of the
borrower's income and favorable credit reports.
The Manager has created tailored underwriting guidelines for Mortgage Loans
in the Company's initial target market segments. Such Mortgage Loan underwriting
guidelines will set forth the various characteristics (such as combinations of
loan-to-value levels and credit ranking of borrowers) for Mortgage Loans that
the Company is prepared to purchase from Correspondents. These Mortgage Loans
generally will be nonconforming, primarily as a result of the property type,
and, to a lesser extent, the borrower's credit characteristics. See "Risk
Factors -- Value of Mortgage Loans May be Adversely Affected by Characteristics
of Underlying Property and Borrower Credit."
Management intends to draw upon its experience in the residential mortgage
industry to build a network of Correspondents with expertise in market segments
targeted by the Company. The Manager will make arrangements for the Company to
acquire Mortgage Loans through the Manager's relationships with these
Correspondents. Management has already identified and is working with a number
of Correspondents to generate Mortgage Loans products for the Direct Purchase
Program although it has not yet begun acquiring Mortgage Loans through this
program.
The Company anticipates that in the future a substantial portion of its
Mortgage Assets will consist of Mortgage Loans acquired pursuant to the Direct
Purchase Program. These Mortgage Loans will have certain distinct risk
characteristics and generally lack standardized terms, which may complicate
their structure. The underlying properties themselves may be unique and more
difficult to value than typical residential real estate properties. Although the
Company intends to seek geographic diversification of the properties which are
collateral for the Company's Mortgage Loans, it does not intend to set specific
diversification requirements (whether by state, zip code or other geographic
measure). Concentration in any one area will increase exposure of the Company's
Mortgage Assets to the economic and natural hazard risks associated with that
area. Further, certain properties securing Mortgage Loans may be contaminated by
hazardous substances resulting in reduced property values. If the Company
forecloses on a defaulted Mortgage Loan collateralized
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by such property, the Company may be subject to environmental liabilities
regardless of whether the Company was responsible for the contamination. The
results of the Direct Loan Program may also be affected by various factors, many
of which are beyond the control of the Company, such as (i) local and other
economic conditions affecting real estate value, (ii) the ability of tenants to
make lease payments, (iii) the ability of a property to attract and retain
tenants, (iv) interest rate levels and the availability of credit to refinance
such Mortgage Loans at or prior to maturity, and (v) increased operating costs,
including energy costs, real estate taxes and costs of compliance with
regulations.
Other Products. In addition to the tailored Mortgage Loan products
described above, the Company may also acquire conforming Mortgage Loans and
nonconforming jumbo Mortgage Loans from Correspondents and purchase Mortgage
Loans on a bulk basis. Conforming Mortgage Loans meet underwriting guidelines
with respect to principal balance, loan repayment schedule and borrower credit
history as defined by certain government-sponsored agencies. These Mortgage
Loans will consist of (i) conventional Mortgage Loans that comply with
requirements for inclusion in certain programs sponsored by the FHLMC or FNMA,
(ii) Mortgage Loans insured by the Federal Housing Administration ("FHA") and
(iii) Mortgage Loans partially guaranteed by the Department of Veterans Affairs
("VA"), that comply with requirements for inclusion in a pool of Mortgage Loans
guaranteed by the GNMA. The nonconforming Mortgage Loans will be conventional
Mortgage Loans that vary in one or more respects from the requirements for
participation in FHLMC or FNMA programs. The Company expects that substantially
all of the nonconforming Mortgage Loans it purchases outside its target market
segments will be nonconforming primarily because they have original principal
balances which exceed the requirements for FHLMC or FNMA programs and, to a
lesser extent, because they vary in certain other respects from the requirements
of such programs, including the requirements relating to creditworthiness of the
borrowers. The Company may, when opportunities arise, acquire Mortgage Loans on
a bulk basis.
The Company does not expect to acquire or retain residual interests issued
by REMICs. Such residual interests, if acquired by a REIT, would generate excess
inclusion income. See "Federal Income Tax Consequences -- Taxation of
Stockholders."
Pricing. For Mortgage Loans to be acquired from Correspondents on a "flow"
basis (i.e., on a periodic basis shortly after the Mortgage Loans are funded),
the Company expects to review the prices at which it is purchasing such Mortgage
Loans daily and to adjust the prices frequently. Mortgage Loans acquired on a
bulk basis will typically be priced on a negotiated basis with Correspondents or
pursuant to a bidding process. In each case, different prices will be
established for the various types of Mortgage Loans to be acquired based on
current market conditions, with price adjustments for any "buy-ups" and
"buy-downs" (i.e., where the gross margin is higher or lower than the standard
margin set forth in the Company's pricing specifications).
Underwriting. In developing the tailored underwriting guidelines for
Mortgage Loans to be acquired under the Direct Purchase Program, the Company
will create a matrix of specific underwriting standards based on various
combinations of the underwriting characteristics described below. Each
Correspondent will generally be required to represent and warrant that all
Mortgage Loans originated by it and sold to the Company have been underwritten
in accordance with the Company's specific underwriting standards as well as
standards consistent with those used by mortgage lenders generally.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related mortgaged property as collateral. In general, a prospective
borrower applying for a Mortgage Loan is required to fill out a detailed
application designed to provide to the underwriting officer pertinent credit
information. As part of the description of the borrower's financial condition,
the borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an authorization
to apply for a credit report which summarizes the borrower's credit history with
local merchants and lenders and any record of bankruptcy. In most cases, an
employment verification is obtained from an independent source (typically the
borrower's employer) which verification reports, among other things, the length
of employment with that organization, the current salary, and whether it is
expected that the borrower will continue such employment in the future. If a
prospective borrower is self-employed, the borrower may be required to submit
copies of signed tax returns. The borrower
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may also be required to authorize verification of deposits at financial
institutions where the borrower has demand or savings accounts.
The Company may elect to have the borrower's credit report reviewed, and a
credit score produced, by an independent credit-scoring firm, such as Fair,
Issac and Company ("FICO"). The Company has not engaged FICO or discussed any
such engagement with FICO. Credit scores estimate, on a relative basis, which
borrowers are most likely to default on Mortgage Loans. Lower scores imply
higher default risks relative to higher scores. FICO scores are empirically
derived from historical credit bureau data and represent a numerical weighing of
a borrower's credit characteristics over a two year period. A FICO score is
generated through the statistical analysis of a number of credit-related
characteristics or variables. Common characteristics include the following: the
number of credit lines (trade lines), payment history, past delinquencies,
severity of delinquencies, current levels of indebtedness, types of credit and
length of credit history. Attributes are the specific values of each
characteristic. A scorecard (the model) is created with weights or points
assigned to each attribute. An individual loan applicant's credit score is
derived by summing together the attribute weights for that applicant.
In determining the adequacy of the mortgaged property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. The appraisal is based on the
market value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the home. The value of
the property being financed, as indicated by the appraisal, must be such that it
currently supports, and is anticipated to support in the future, the outstanding
Mortgage Loan balance.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available to meet (i) the borrower's
monthly obligations on the proposed Mortgage Loan (determined on the basis of
the monthly payments due in the year of origination) and other expenses related
to the mortgaged property (such as property taxes and hazard insurance), and
(ii) monthly housing expenses and other financial obligations and monthly living
expenses. The underwriting standards applied by the Correspondent may be
permitted to vary in appropriate cases where factors such as low loan-to-value
ratios or other favorable credit issues exist.
Because certain types of Mortgage Loans which will be acquired by the
Company under the Direct Purchase Program will be recently developed, they may
involve additional uncertainties not present in traditional types of Mortgage
Loans. The Company expects that these types of Mortgage Loans may be
underwritten primarily upon the basis of loan-to-value ratios or favorable
credit factors rather than on the borrower's credit standing or income ratios.
See "Risk Factors -- Value of Mortgage Loans May Be Adversely Affected by
Characteristics of Underlying Property and Borrower Credit."
Quality Control. The Company has developed a quality control program to
monitor the quality of Mortgage Loan underwriting at the time of acquisition and
on an ongoing basis. All Mortgage Loans purchased by the Company will be subject
to this quality control program. A legal document review of each Mortgage Loan
acquired will be conducted to verify the accuracy and completeness of the
information contained in the mortgage notes, security instruments and other
pertinent documents in the file. A sample of Mortgage Loans originated under the
Direct Purchase Program will normally be submitted to a third party, nationally
recognized underwriting review firm for a compliance check of underwriting and
review of income, asset and appraisal information. For purposes of this
compliance check, Mortgage Loans will be selected by focusing on Mortgage Loans
with higher risk characteristics. In addition, Management expects to conduct
post-acquisition audits to monitor ongoing documentation and servicing
compliance.
Servicing. Management expects to acquire certain of its Mortgage Loans on a
"servicing released" basis (i.e., the Company will acquire both the Mortgage
Loans and the rights to service them) and to act as the servicer of such
Mortgage Loans while they are in the Company's Mortgage Asset portfolio.
Management believes this strategy will have the effect of increasing the yield
to the Company from the Mortgage Loans above what it would otherwise be. The
Company will contract with a subservicer for a fixed dollar fee per Mortgage
Loan per year or a percentage of the outstanding mortgage balance and the right
to hold escrow account balances and retain certain ancillary charges. Management
expects to arrange for servicing of the
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Mortgage Loans originated through the Direct Purchase Program with servicing
entities that have particular expertise and experience in the types of Mortgage
Loans being acquired. Management does not expect to acquire mortgage servicing
rights with respect to Mortgage Loans beneficially owned by others.
FUNDING
The Company employs a debt financing strategy to increase its investment in
Mortgage Assets. By using the Company's Mortgage Assets as collateral to borrow
funds, the Company is able to purchase Mortgage Assets with significantly
greater value than its equity. The Company has a targeted ratio of
equity-to-assets of between 8% and 12%, which is generally greater than the
levels of many other companies that invest in Mortgage Assets, including many
commercial banks, savings and loans, FNMA and FHLMC. The Company has borrowing
arrangements with ten financial institutions consisting primarily of large
investment banking firms. At June 30, 1997, the Company had borrowed funds under
reverse repurchase agreements with five of these firms. The Company intends to
expand its uncommitted reverse repurchase agreements following this Offering.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company's financing strategy is designed to maintain a cushion of
equity sufficient to provide required liquidity to respond to the effects under
its borrowing arrangements of interest rate movements and changes in market
value of its Mortgage Assets. However, a major disruption of the reverse
repurchase or other markets relied on by the Company for short term borrowings
would have a material adverse effect on the Company unless the Company was able
to arrange alternative sources of financing on comparable terms. The Company
intends to finance its acquisition of Mortgage Assets primarily through reverse
repurchase agreements and, to a lesser extent, through lines of credit,
securitizations and other financings.
At June 30, 1997, total borrowings outstanding were $209.5 million, with
Mortgage Assets valued at $221.0 million pledged to secure such borrowings.
These borrowings are carried on the balance sheet at historical cost, which
approximates market value. All of the borrowings were pursuant to reverse
repurchase agreements. At June 30, 1997, the weighted average term to maturity
was 62 days and the weighted average borrowing rate was 5.69% per annum. Under
the reverse repurchase agreements outstanding at June 30, 1997, the original
aggregate "haircut," or the percentage by which the market value of the pledged
collateral must exceed the borrowing amount, was 4.4%. The Company anticipates
that, upon repayment of each borrowing, the collateral will immediately be used
for borrowing pursuant to a new agreement. However, there can be no assurance
that the Company would be able to borrow additional funds. See "Risk
Factors -- Failure to Implement Company's Leverage Strategy May Adversely Affect
Results of Operations."
The Company expects that all of its borrowing agreements will require the
Company to pledge cash or additional Mortgage Assets in the event the market
value of existing collateral declines. To the extent that cash reserves are
insufficient to cover such deficiencies in collateral, the Company may be
required to sell Mortgage Assets to reduce the borrowings. The Company's current
borrowing facilities may be collateralized only by Mortgage Securities and may
not be used to finance acquisitions of Mortgage Loans pursuant to the Direct
Purchase Program. See "Risk Factors -- Failure to Implement Company's Leverage
Strategy May Affect Results of Operations."
Reverse Repurchase Agreements
The Company finances its portfolio of Mortgage Assets primarily through a
form of borrowing known as reverse repurchase agreements. In a reverse
repurchase agreement transaction, the Company agrees to sell a Mortgage Asset
and simultaneously agrees to repurchase the same Mortgage Asset one to six
months later at a higher price with the price differential representing the
interest expense. These transactions constitute collateralized borrowings for
the Company, based on the market value of the Company's Mortgage Assets. The
Company generally will retain beneficial ownership of the Mortgage Security,
including the right to distributions on the collateral and the right to vote.
Upon a payment default under such agreements, the lending party may liquidate
the collateral.
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The Company intends to enter into reverse repurchase agreements primarily
with national broker/dealers, commercial banks and other lenders which typically
offer such financing. The Company does not intend at the present time to enter
into commitment agreements under which the lender would be required to enter
into new reverse repurchase agreements during a specified period of time. The
Manager and the Company will monitor the need for such commitment agreements and
may enter into such commitment agreements in the future if deemed favorable to
the Company. At June 30, 1997 the Company had uncommitted reverse repurchase
facilities to provide over $500 million to finance investments in Mortgage
Assets. See "Risk Factors -- Failure to Implement Company's Leverage Strategy
May Adversely Affect Results of Operations."
In the event of the insolvency or bankruptcy of the Company, the creditor
under reverse repurchase agreements may be allowed to avoid the automatic stay
provisions of the Bankruptcy Code and to foreclose on the collateral agreements
without delay. In the event of the insolvency or bankruptcy of a lender during
the term of a reverse repurchase agreement, the lender may be permitted to
repudiate the contract, and the Company's claim against the lender for damages
therefrom may be treated simply as one of the unsecured creditors. Should this
occur, the Company's claims would be subject to significant delay and, if
received, may be substantially less than the damages actually suffered by the
Company.
To reduce its exposure to the credit risk of reverse repurchase agreement
lenders, the Company intends to enter into such agreements with several
different parties and to follow credit exposure policies approved by the Board
of Directors, which include (i) conducting a financial review of each potential
lender, (ii) imposing minimum equity and credit rating (if rated) requirements
on such lenders, and (iii) limiting the percentage of Mortgage Assets that are
the subject of reverse repurchase agreements with a single lender to 45% of the
Company's total Mortgage Assets. Any exceptions to these policies must be
approved by both the Chief Executive Officer and the Chief Operating Officer.
The Company will monitor the financial condition of its reverse repurchase
agreement lenders on a regular basis. Notwithstanding these measures, no
assurance can be given that the Company will be able to avoid such third party
risks.
Lines of Credit
The Company has in place a line of credit facility that it may use to fund
portions of cash flow shortages which may result from prepayments on Mortgage
Loans underlying its Mortgage Securities. Generally, the Company's reverse
repurchase agreements, which are collateralized by the Company's Mortgage
Securities, demand immediate receipt of additional collateral to the extent that
the value of the Mortgage Securities is reduced as a result of prepayments.
However, the federal government agencies that issue the Mortgage Securities do
not deliver the proceeds from such prepayments for periods ranging from 15 to 36
days following the announcement of such prepayments. Accordingly, the Company
may be required to draw on its line of credit for the period between the date
the prepayments are announced and the Company is required to surrender
additional collateral and the date it receives the proceeds from the
prepayments. The line of credit is secured by the proceeds of such prepayments.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Securitizations
The Company intends to securitize from time to time Mortgage Loans acquired
through the Direct Purchase Program as part of its overall financing strategy.
Securitization is the process of pooling Mortgage Loans and issuing equity
securities, such as mortgage pass-through, or debt securities, such as
Collateralized Mortgage Obligations ("CMOs"). The Company intends to securitize
its Mortgage Loans primarily by issuing structured debt. Under this approach,
for accounting purposes the Mortgage Loans so securitized remain on the balance
sheet as assets and the debt obligations (i.e., the CMOs) appear as liabilities.
A structured debt securitization is generally expected to result in substituting
one type of debt financing for another, as proceeds from the structured debt
issuance are applied against preexisting borrowings (i.e., advances under the
warehouse line of credit or borrowings under repurchase agreements). The
structured debt securities issued will constitute non-recourse, long term
financing, the payments on which correspond to the payments on the Mortgage
Loans serving as collateral for the debt. Such financings are not subject to a
margin
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<PAGE> 35
call if a rapid increase in rates would reduce the value of the underlying
Mortgage Loans and, hence, reduce the liquidity risk to the Company for the
Mortgage Loans so financed.
In addition to securitizing its Mortgage Loans, the Company also plans from
time to time to "re-securitize" portions of its Mortgage Securities portfolio.
In a re-securitization transaction, Mortgage Securities rather than Mortgage
Loans are used as collateral to create new Mortgage Securities. Only those
Mortgage Securities originally issued with (or subsequently downgraded to) a
rating below the two highest rating categories would benefit from
resecuritization. While the Company's investment strategy does not contemplate
purchasing such lower rated Mortgage Securities, the Company anticipates that it
may acquire such types of Mortgage Securities from time to time in connection
with securitizing its own Mortgage Loans as described above. A re-securitization
would typically be carried out when the Mortgage Loans underlying the Company's
Mortgage Securities improve in credit quality through seasoning, as values rise
on the underlying properties, or when the credit quality of a junior class of
Mortgage Security improves due to prepayment of more senior classes. Such
transactions can result in improved credit ratings, higher market values and
lowered borrowing costs. The Company has not engaged in any securitization or
resecuritization transactions to date and there can be no assurances that the
Company will be able to securitize or otherwise finance its Mortgage Loans
acquired pursuant to the Direct Purchase Program.
CAPITAL GUIDELINES
The Company's capital management goal is to strike a balance between the
under-utilization of leverage, which could reduce potential returns to
stockholders, and the over-utilization of leverage, which could reduce the
Company's ability to meet its obligations during periods of adverse market
conditions. For this purpose, the Company has established a "Capital Policy"
which limits Management's ability to acquire additional Mortgage Assets during
times when the actual capital base of the Company is less than a required amount
defined in the Capital Policy. In this way, Management believes the use of
balance sheet leverage can be better controlled. For purposes of the Capital
Policy, the actual capital base, is equal to the market value of total Mortgage
Assets less the book value of total collateralized borrowings. In addition, when
the actual capital base falls below the Capital Policy requirement, management
is required to submit to the Board of Directors a plan for bringing the actual
capital base into compliance with the Capital Policy. It is anticipated that in
most circumstances this goal will be achieved over time without specific
Management action through the natural process of mortgage principal repayments
and increases in the market values of Mortgage Assets as their coupon rates
adjust upwards to market levels. Management anticipates that the actual capital
base is likely to exceed the Capital Policy requirement during periods following
new equity offerings and during periods of falling interest rates and that the
actual capital base is likely to fall below the Capital Policy requirement
during periods of rising interest rates. The Board of Directors has the
discretion to modify or waive the Company's policies and restrictions without
stockholder consent. See "Risk Factors -- Policies and Strategies May Be Revised
at the Discretion of the Board of Directors."
The Company assigns to each Mortgage Asset a specified amount of capital to
be maintained against it by aggregating three component requirements of the
Capital Policy. The first component of the Company's Capital Policy is the
current aggregate over-collateralization amount or "haircut" the lenders require
the Company to hold as capital. The Company is required to pledge as collateral
Mortgage Assets with a market value that exceeds the amount it borrows. The
haircut for each Mortgage Asset is determined by the lender based on the risk
characteristics and liquidity of that Mortgage Asset. For example, haircut
levels on individual borrowings could range from 3% for Agency Securities to 20%
for certain Mortgage Loans acquired through the Direct Purchase Program.
The second component of the Company's Capital Policy is the "liquidity
capital cushion." The Company expects that substantially all of its borrowing
agreements will require the Company to deposit additional collateral in the
event the market value of existing collateral declines. The liquidity capital
cushion is an additional amount of capital in excess of the haircut maintained
by the Company designed to assist the Company meet the demands of the lenders
for additional collateral should the market value of the Company's Mortgage
Assets decline. Alternatively, the Company might sell Mortgage Assets to reduce
the borrowings. See "Risk Factors -- Investments in Mortgage Assets May Be
Illiquid."
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<PAGE> 36
The third component of the Company's capital requirement is the "capital
cushion" assigned to each Mortgage Asset based on Management's assessment of the
Mortgage Asset's credit risk. This represents an assessment of the risk of
delinquency, default or loss on individual Mortgage Assets.
Finally, the Board of Directors establishes, subject to revision from time
to time, a minimum equity to total assets ratio for the Company pursuant to its
Capital Policy. The Board of Directors reviews on a periodic basis various
analyses prepared by Management of the risks inherent in the Company's balance
sheet, including an analysis of the effects of various scenarios on the
Company's net cash flow, net income, dividends, liquidity and net market value.
Should the Board of Directors determine, in its discretion, that the minimum
required capital base is either too low or too high, the Board of Directors will
raise or lower the capital requirement accordingly.
The Company expects that its aggregate minimum equity capital required
under the Capital Policy will range between 8% to 12% of the total market value
of the Company's Mortgage Assets. This percentage will fluctuate over time, and
may fluctuate out of the expected range, as the composition of the balance sheet
changes, haircut levels required by lenders change, the market value of the
Mortgage Assets change and as the capital cushion percentages set by the Board
of Directors are adjusted over time. The Company will actively monitor and
adjust, if necessary, its Capital Policy, both on an aggregate portfolio level
as well as on an individual pool or Mortgage Loan basis. In monitoring its
Capital Policy, the Company expects to take into consideration current market
rate conditions and a variety of interest rate scenarios, performance of hedges,
performance of Mortgage Assets, credit risk, prepayments and Mortgage Asset
restructuring of Mortgage Assets, general economic conditions, potential
issuance of additional equity, pending acquisitions or sales of Mortgage Assets,
Mortgage Loan securitizations and general availability of financing. There can
be no assurance that the Company's capital will be sufficient to protect the
Company against adverse effects from interest rate adjustments or the obligation
to sell Mortgage Assets on unfavorable terms or at a loss. See "Risk
Factors -- Interest Rate Fluctuations May Adversely Affect Net Interest Income."
RISK MANAGEMENT
Prior to acquiring Mortgage Assets, Management gives consideration to
balance sheet management and risk diversification issues. A specific Mortgage
Asset which is being evaluated for potential acquisition is deemed more or less
valuable to the Company to the extent it serves to increase or decrease certain
interest rate or prepayment risks which may exist in the balance sheet, to
diversify or concentrate credit risk, and to meet the cash flow and liquidity
objectives Management may establish for the balance sheet from time to time.
Accordingly, an important part of the Mortgage Asset evaluation process is a
simulation, using the Company's risk management model, of the addition of
proposed Mortgage Assets and its associated borrowings and hedgings to the
balance sheet and an assessment of the impact of this proposed acquisition of
Mortgage Assets would have on the risks in, and returns generated by, the
Company's balance sheet as a whole over a variety of scenarios.
Interest Rate Risk Management
To the extent consistent with its election to qualify as a REIT, the
Company will implement certain processes and will follow a hedging program
intended to protect the Company against significant unexpected changes in
prepayment rates and interest rates.
Prepayment Risk Management Process. The Company will seek to minimize the
effects on earnings caused by faster than anticipated prepayment rates by
purchasing Mortgage Assets with prepayment penalties or which are fully-indexed
and have previously experienced periods of rising or falling interest rates. In
particular, the Company intends to include prepayment penalties in the
underwriting guidelines for the tailored Mortgage Loan products in the Direct
Purchase Program. See "Risk Factors -- Increased Levels of Mortgage Loan
Prepayments May Adversely Affect Net Interest Income."
During the quarter ended June 30, 1997, the Company received $10.4 million
in principal payments on its Mortgage Assets. The annualized rate of principal
repayment the Company experienced was 29%. The amortized cost of the Company's
Mortgage Assets at June 30, 1997 was equal to 103.8% of the face value of
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<PAGE> 37
the Mortgage Assets. The smaller the level of net premium, the less risk there
is that fluctuations in prepayment rates will affect earnings in the long run.
See "Risk Factors -- Increased Levels of Mortgage Loan Prepayments May Adversely
Affect Net Interest Income" and "Management Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
Other Processes. The Company manages its Mortgage Asset portfolio to offset
the potential adverse effects from (i) lifetime and periodic rate adjustment
caps on its Mortgage Assets, (ii) the differences between interest rate
adjustment indices of its Mortgage Assets and related borrowings, and (iii) the
differences between interest rate adjustment periods of its Mortgage Assets and
related borrowings. The Company generally purchases Mortgage Assets which are
fully indexed and have previously experienced periods of rising and falling
interest rates. The Company also attempts to structure its acquisitions so that
the Mortgage Assets purchased by the Company have interest rate adjustment
indices and adjustment periods that, on an aggregate basis, correspond closely
to the interest rate adjustment indices and adjustment periods of its
anticipated borrowings. In addition, the Company structures its short term
borrowing agreements to have a range of different maturities (although the
majority will be six months or less). As a result, the Company expects to be
able to adjust the average maturity of its borrowings on an ongoing basis by
changing the mix of maturities as borrowings come due and are renewed. In this
way, the Company intends to reduce the differences between adjustment periods of
Mortgage Assets and related borrowings.
At June 30, 1997, the Company's weighted average Mortgage Assets and
liabilities were matched within a two-month period in terms of adjustment
frequency and speed of adjustment to market conditions. All of the Company's
Mortgage Assets at June 30, 1997, had coupon rates that adjust to market levels
at least annually, with a weighted average term to reset of approximately four
months. All of the Company's borrowings at June 30, 1997, will either mature or
adjust to a market interest rate level within four months of such date. The
borrowings had a weighted average term to expiration of 62 days at June 30,
1997. Changes in coupon rates earned on Mortgage Assets highly correlated with
changes in LIBOR rates and CMT rates. The rates paid on borrowing generally
correlate with the changes in either LIBOR or FED fund rates (subject to the
effects of periodic and lifetime caps). There can be no assurance that the
Company's processes will protect the Company against interest rate fluctuations
which may adversely affect the Company's net interest income and results of
operations. See "Risk Factors -- Interest Rate Fluctuations May Adversely Affect
Net Interest Income."
Hedging. The Company recognizes the need to hedge specific interest rate
risks associated with its Mortgage Asset portfolio and will seek the hedging
instrument most appropriate for the specific risk. Currently, all of the
Company's Mortgage Assets are subject to both lifetime interest rate caps and
periodic interest rate caps. The Company actively hedges the lifetime cap risks
associated with its Mortgage Assets. The Company has entered into hedging
transactions with respect to lifetime interest rate caps in order to reduce the
negative impact to the Company's earnings which might otherwise result from a
significant rise in interest rates. The Company may enter into additional types
of hedging transactions in the future if Management believes there exists a
significant risk to earnings. These types of hedging transactions may include
hedging against risks associated with (i) periodic interest rate adjustment
caps, and (ii) Mortgage Assets denominated in different interest rate indices,
such as U.S. Treasury bills and Eurodollars. Management intends to monitor and
evaluate the results of its hedging strategy and to adjust its hedging strategy
as it deems is in the best interest of the Company.
The cost of the interest rate cap agreements at June 30, 1997 was
approximately $502,000. Cap premiums are amortized from the purchase date
through the effective date of the cap on a straight-line basis. During the
quarter ended June 30, 1997, the cap amortization expense was approximately
$40,000. There was no income from the caps during this period and there were no
sales or termination of caps. During the quarter ended June 30, 1997, net cap
expense equaled approximately 0.02% of the average balance of the Company's
Mortgage Assets and 0.02% of the average balance of the Company's interest
bearing liabilities. For such periods, the net cap expense was approximately 7%
of net interest income. At June 30, 1997, the range of strike rates was 7.52% to
9.95% and the weighted average strike rate was 8.11%. Some of the Company's
interest rate cap agreements have strike rates and/or notional face amounts
which vary over time. The cap
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<PAGE> 38
agreements do not become effective until the first half of 1998. All of the
interest rate caps reference the one month LIBOR.
Mortgage derivative securities can also be effective hedging instruments in
certain situations as the value and yields of some of these investments tend to
increase as interest rates rise and tend to decrease in value and yields as
interest rates decline, while the experience for others is the converse. As part
of its hedging program the Company will monitor on an ongoing basis the
prepayment risks which arise in fluctuating interest rate environments and
consider alternative methods and costs of hedging such risks, which may include
the use of mortgage derivative securities. The Company intends to limit its
purchases of mortgage derivative securities to investments that qualify as
Qualified REIT Assets so that income from such investments will constitute
qualifying income for purposes of the 95% and 75% Gross Income Tests. The
Company does not currently intend to but may in the future also enter into
interest rate swap agreements, buy and sell financial futures contracts and
options on financial futures contracts and trade forward contracts as a hedge
against future interest rate changes; however, the Company will not invest in
these instruments unless the Company and the Manager are exempt from the
registration requirements of the Commodities Exchange Act or otherwise comply
with the provisions of that act. The REIT Provisions of the Code may restrict
the Company's ability to purchase hedges and may severely restrict the Company's
ability to employ other strategies. In all its hedging transactions, the Company
will contract only with counterparties that the Company believes are sound
credit risks. See "Federal Income Tax Consequences -- Requirements for
Qualification as a REIT -- Gross Income Tests."
Hedging involves transaction and other costs, and such costs increase as
the period covered by the hedging protection increases and also increase in
periods of rising and fluctuating interest rates. For example, in a typical
interest rate cap agreement, the cap purchaser makes an initial lump sum cash
payment to the cap seller in exchange for the seller's promise to make cash
payments to the purchaser on fixed dates during the contract term if prevailing
interest rates exceed the rate specified in the contract. Because of the cost
involved, the Company may be prevented from effectively hedging its interest
rate risks, without significantly reducing the Company's return on equity.
Certain of the federal income tax requirements that the Company must
satisfy to qualify as a REIT limit the Company's ability to fully hedge its
interest rate and prepayment risks. The Company monitors carefully, and may have
to limit, its asset/liability management program to assure that it does not
realize excessive hedging income, or hold hedging assets having excess value in
relation to total assets, which would result in the Company's disqualification
as a REIT or, in the case of excess hedging income, the payment of a penalty tax
for failure to satisfy certain REIT income tests under the Code, provided such
failure was for reasonable cause. In addition, asset/liability management
involves transaction costs which increase dramatically as the period covered by
the hedging protection increases. Therefore, the Company may be prevented from
effectively hedging its interest rate and prepayment risks. See "Federal Income
Tax Consequences -- Requirements for Qualification as a REIT."
In particular, income from hedging the Company's variable rate borrowings
(other than with hedging instruments that are Qualified REIT Assets) qualifies
for the 95 percent of income test, but not for the 75 percent of income test,
for REIT qualification. The Company must limit its income from such hedging or
the sale of hedging contracts, along with other types of income that qualifies
for the 95 percent of income test, but not for the 75 percent of income test, to
less than 25 percent of the Company's gross revenues. In addition, hedging
instruments, such as swaps, caps, floors, collars, and financial futures
contracts, are securities for purposes of the quarterly asset tests for REIT
qualification. The Company must ascertain that securities, including the hedging
instruments (other than hedging instruments that are Qualified REIT Assets),
issued by a single issuer do not account for 5 percent or more of the value of
the Company's assets as of the last day of each calendar quarter. The Company
does not expect to encounter material problems complying with these tests.
Although Management believes it has developed a cost-effective interest
rate risk management program to provide a level of protection against interest
rate risks, developing an effective program is complex and no program can
completely insulate the Company from the effects of interest rate changes.
Further, the cost of
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<PAGE> 39
hedging transactions and the federal tax laws applicable to REITs may limit the
Company's ability to fully hedge its interest rate risks. See "Risk
Factors -- Failure to Successfully Manage Interest Rate Risks May Adversely
Affect Results of Operations" and "Federal Income Tax
Consequences -- Requirements for Qualification as a REIT."
Interest Rate Sensitivity Gap. The interest rate sensitivity gap is a tool
used by financial institutions such as banks and savings and loans to analyze
the possible effects of interest rate changes on net income over time. Time gap
analysis ignores many important factors, however, in the Company's case, it
ignores, among other things, the effect of the Company's hedging activities, the
effect of the periodic and lifetime caps on the Company's Mortgage Assets, and
the effect of changes in mortgage principal repayment rates. Nevertheless, the
gap analysis can provide some useful information on the interest rate risk
profile of a financial institution.
A negative cumulative gap over a particular period means that the amount of
liabilities that will have an expense rate adjusting to prevailing market
conditions during that period will be greater than the amount of Mortgage Assets
that will have an earning rate adjustment. Thus a negative gap implies that
increasing interest rates would result in a falling level of net interest income
during the time period in question, as the cost of funds on the liabilities
would adjust more quickly to the interest rate increase than would the interest
income from the Mortgage Assets. A negative gap also implies that falling
interest rates would result in an increasing level of net interest during the
period in question.
Credit Risk Management
The Company will review credit risks and other risks of loss associated
with each investment and determine the appropriate allocation of capital to
apply to such investment under its Capital Policy. In addition, the Company will
attempt to diversify its Mortgage Asset portfolio to avoid undue geographic,
issuer, industry and certain other types of concentrations. The Company will
attempt to obtain protection against some risks from sellers and servicers
through representations and warranties and other appropriate documentation. The
Board of Directors will monitor the overall portfolio risk and increase the
allowance for loan losses when it believes appropriate.
The risks presented by each Mortgage Loan acquired under the Direct
Purchase Program will be unique and must be analyzed separately. In order to
reduce the credit risks associated with acquisitions of these Mortgage Loans,
the Company will (i) employ a quality control program, (ii) acquire Mortgage
Loans that represent a broad range of moderate risks as opposed to a
concentrated risk, (iii) monitor the credit quality of newly acquired and
existing Mortgage Assets, and (iv) periodically adjust the Mortgage Loan loss
allowances. The Company also expects to arrange for servicing of Mortgage Loans
acquired pursuant to the Direct Purchase Program with servicing entities that
have particular expertise and experience in the types of Mortgage Loans being
acquired. See "Risk Factors -- Value of Mortgage Loans May be Adversely Affected
by Characteristics of Underlying Property and Borrower Credit."
With respect to its Mortgage Securities, the Company will be exposed to
levels of credit and special hazard risk, depending on the nature of the
underlying Mortgage Loans and the nature and level of credit enhancements
supporting such Mortgage Securities. Most of the Mortgage Securities acquired by
the Company will have protection from normal credit losses. At June 30, 1997,
100% of the Company's Mortgage Assets were Agency Securities.
Management may decide to sell Mortgage Assets from time to time for a
number of reasons including, without limitation, to dispose of Mortgage Assets
as to which credit risk concerns have arisen, to reduce interest rate risk, to
substitute one type of Mortgage Asset for another to improve yield or to
maintain compliance with the 55% requirement under the Investment Company Act,
and generally to re-structure the balance sheet when Management deems such
action advisable. The REIT Provisions of the Code limit in certain respects the
ability of the Company to sell Mortgage Assets. See "Federal Income Tax
Consequences -- Requirements of Qualifications as a REIT -- Gross Income Tests"
and "Federal Income Tax Consequences -- Taxation of the Company."
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<PAGE> 40
CERTAIN ACCOUNTING POLICIES AND PROCEDURES
Mortgage Security Accounting Treatment
Because the Company's Mortgage Securities are classified for accounting
purposes as "available for sale" accounting treatment, unrealized fluctuations
in market values of the Mortgage Securities do not impact GAAP or taxable income
but rather are reflected on the balance sheet by changing the carrying value of
the Mortgage Assets and reflecting the change in stockholders' equity under "Net
Unrealized Losses on Assets Available for Sale." As a result of this
mark-to-market accounting treatment, the book value and book value per share of
the Company are likely to fluctuate far more than if the Company used historical
amortized cost accounting. As a result, comparisons with companies that use
historical cost accounting for some or all of their balance sheet may be
misleading.
Unrealized changes in the estimated net market value of Mortgage Assets
have one direct effect on the Company's potential net income and dividends:
positive mark-to-market changes will increase the Company's equity base and
allow the Company to increase its spread lending activities while negative
changes will tend to limit spread lending growth under the Company's Capital
Policy. A very large negative change in the net market value of Mortgage Assets
and interest rate agreements might impair the Company's liquidity position,
requiring the Company to sell Mortgage Assets with the likely result of realized
losses upon sale. See "Risk Factors -- Failure to Implement Company's Leverage
Strategy May Adversely Affect Results of Operations."
Taxable Income and GAAP Income
Income as calculated for tax purposes ("taxable income") differs from
income as calculated according to generally accepted accounting principles
("GAAP income") for various reasons. Interest income differs due to different
methods of calculating the rate of amortization of the premium or discount when
Mortgage Assets are acquired at a price above or below the stated principal
amount of the Mortgages Loans. Credit losses differ between tax and GAAP methods
of accounting because the Company takes credit provisions in order to build a
credit allowance for GAAP whereas only actual credit losses are deducted in
calculating taxable income. General and administrative expenses differ due to
differing treatment of leasehold amortization and other items. The Company's
largest expense is the cost of borrowed funds. Interest expense is calculated in
the same manner for GAAP and tax purposes.
These distinctions are important to the Company's stockholders as dividends
are based on taxable income. The Company generally will not pay federal taxes so
long as it meets the REIT Provisions of the Code and distributes dividends to
stockholders in an amount equal to its taxable income. See "Federal Income Tax
Consequences -- Requirements of Qualifications as a REIT."
Taxable Income and Dividends
The Company intends to declare and pay dividends equal to its taxable
income over time. The Company's current practice is to declare quarterly
dividends per share immediately following the regular March, June, September,
and December meetings of the Board of Directors. In general, the Company has
endeavored to declare a quarterly dividend per share of Common Stock which would
result in the distribution of most or all of the taxable income earned in that
quarter. See "Risk Factors -- Limited Operating History Does Not Predict Future
Performance" and "Dividend Policy and Distributions."
COMPETITION
The Company's net interest income will depend, in large part, on the
Company's ability to acquire Mortgage Assets on acceptable terms and at
favorable spreads over the Company's borrowing costs. As a result of this
Offering, the Company will seek to acquire approximately $600 million or more of
additional Mortgage Assets. There can be no assurance that the Company will be
able to acquire sufficient Mortgage Assets at spreads above the Company's cost
of funds. In acquiring Mortgage Assets, the Company will compete with investment
banking firms, savings and loan associations, banks, mortgage bankers, insurance
companies, mutual funds, other lenders, GNMA, FNMA, FHLMC and other entities
purchasing Mortgage
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<PAGE> 41
Assets, many of which have greater financial resources than the Company. In
addition, there are several REITs similar to the Company, and others may be
organized in the future. The effect of the existence of additional REITs may be
to increase competition for the available supply of Mortgage Assets suitable for
purchase by the Company. As it relates to the Direct Purchase Program, the
Company competes on the basis of product type. The Company will face competition
from leaders already established in these markets. There can be no assurance
that the Company will be able to successfully compete with these leaders.
The availability of Mortgage Loans meeting the Company's criteria is
dependent upon, among other things, the size of and level of activity in the
residential real estate lending market. The size and level of activity in the
residential real estate lending market depend on various factors, including the
level of interest rates, regional and national economic conditions and inflation
and deflation in residential property values. To the extent the Company is
unable to acquire sufficient number of Mortgage Loans meeting its criteria, the
Company's results of operations will be adversely affected. See "Risk Factors
-- Inability to Acquire Mortgage Assets with Favorable Interest Rates and Terms
May Adversely Affect Net Interest Income."
EMPLOYEES
Currently, the Manager employs the four executive officers of the Company
and three additional employees. Each of the executive officers has between 10
and 24 years and they have an average of 19 years of experience in the
residential mortgage industry and worked together previously as a management
team. The Manager is currently in the process of recruiting employees to support
the Direct Purchase Program. At the closing of this Offering, each employee of
the Manager will also become an employee of the Company. The Company anticipates
that at least through the end of 1997 employees hired by the Manager will also
be employees of the Company.
FACILITIES
The Company's and the Manager's executive offices are located at 445 Marine
View Avenue, Suite 230, Del Mar, California. The Company and the Manager
currently occupy approximately 4,000 square feet of space and the Manager has a
right of first refusal on an additional 2,000 square feet at its current
location beginning March 1998. The Manager leases facilities pursuant to a lease
expiring in March 2000. Management believes that these facilities are adequate
for the Company's and the Manager's foreseeable needs.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any property of the Company is subject.
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MANAGEMENT OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Company was incorporated on February 6, 1997. The following table
presents certain information concerning the directors and executive officers of
the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION(1)
---------------------------------- --- ----------------------------------
<S> <C> <C>
John M. Robbins(2)................ 50 Chairman of the Board, Chief
Executive Officer and Director
Jay M. Fuller(2).................. 47 President, Chief Operating Officer
and Director
Mark A. Conger.................... 38 Senior Vice President and Chief
Financial Officer
Rollie O. Lynn.................... 43 Senior Vice President, Capital
Markets
David E. De Leeuw(2)(3)(4)(6)..... 53 Director
George E. McCown(2)(5)............ 62 Director
</TABLE>
In addition, the following individuals have been elected directors of the
Company effective immediately following the closing of this Offering:
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------------------- --- ----------------------------------
<S> <C> <C>
H. James Brown, Ph.D.(3)(6)....... 56 Director
Ray McKewon(4)(6)................. 49 Director
Richard T. Pratt, Ph.D.(3)(6)..... 60 Director
Mark J. Riedy, Ph.D.(4)(6)........ 55 Director
</TABLE>
- ---------------
(1) Each executive officer and director holds the same position with the
Manager. See "The Manager."
(2) Each of Mr. Robbins, Mr. Fuller, Mr. De Leeuw and Mr. McCown and the private
equity firm of McCown De Leeuw & Co., of which Messrs. McCown and De Leeuw
are principles, was a founder of the Company.
(3) Member of the Audit Committee. See "Board Committees."
(4) Member of the Compensation Committee. See "Board Committees."
(5) Mr. McCown will resign as a director of the Company upon the closing of this
Offering.
(6) The directors who will be in office after the closing of this Offering and
who are not officers or employees of either the Company or the Manager are
deemed Independent Directors of the Company. See "-- Action by Independent
Directors."
JOHN M. ROBBINS has served as Chairman of the Board of Directors and Chief
Executive Officer and Director of the Company since its formation in February
1997. Prior to joining the Company Mr. Robbins was Chairman of the Board of
AMRES Mortgage from 1990 until 1994 and President of AMRES Mortgage from the
time he co-founded it in 1983 until 1994. He also served as Executive Vice
President of Imperial Savings Association from 1983 to 1987. Mr. Robbins has
worked in the mortgage banking industry since 1973. Mr. Robbins has served two
terms on the Board of Governors and the Executive Committee of the Mortgage
Association of America, and has served on FNMA's National Advisory Board. Mr.
Robbins also serves as a director of Pacific Research & Engineering Corporation,
Garden Fresh Restaurant Corporation, National Bankcard and University of San
Diego.
JAY M. FULLER has served as President, Chief Operating Officer and Director
of the Company since its formation in February 1997. Prior to joining the
Company Mr. Fuller served as President of Victoria Mortgage from 1995 to 1996.
Mr. Fuller was an Executive Vice President and Chief Administration Officer of
AMRES Mortgage from 1985 to 1994 and Senior Vice President from 1983 to 1985. In
these capacities, at various times, Mr. Fuller was responsible for, among other
things, Mortgage Loan originations and servicing for AMRES Mortgage. Mr. Fuller
has worked in the mortgage banking industry continuously since 1975. Mr. Fuller
currently serves as President of Friends of Santa Fe Christian Schools.
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<PAGE> 43
MARK A. CONGER has served as Senior Vice President and Chief Financial
Officer of the Company since its formation in February 1997. In addition, Mr.
Conger has been the sole proprietor of his own business. Mr. Conger was a Senior
Vice President, Finance, of AMRES Mortgage from 1992 to 1994 responsible for the
areas of accounting, treasury and corporate planning. He was a Vice President of
AMRES Mortgage from 1987 to 1992 responsible for corporate planning and human
resources. Prior to joining AMRES Mortgage, Mr. Conger was an Assistant Vice
President, Accounting, for Imperial Savings Association from 1985 to 1987 and an
auditor for Peat Marwick from 1981 to 1985. Mr. Conger has worked in the
mortgage banking industry for nine years. Mr. Conger received a Bachelor of
Science degree from the University of Missouri in 1981 and is a Certified Public
Accountant.
ROLLIE O. LYNN has served as Senior Vice President, Capital Markets,
responsible for the areas of portfolio management for the Company since its
formation in February 1997. Prior to joining the Company Mr. Lynn served as Vice
President, Capital Markets, of Long Beach Mortgage Company responsible for
managing, hedging and trading the firm's subprime residential Mortgage Loans.
Prior to joining Long Beach Mortgage, Mr. Lynn served as Vice President,
Secondary Marketing, of AMRES Mortgage from 1991 to 1994, as Vice President,
Capital Markets, of Imperial Savings from 1988 to 1992, and as Vice President of
Great American First Savings Bank of San Diego from 1985 to 1988. Mr. Lynn has
worked in the mortgage banking business continuously since 1977. Mr. Lynn
received two Bachelor of Arts degrees in 1976 from California State University
at Chico. Mr. Lynn is a licensed real estate broker in the State of California.
DAVID E. DE LEEUW has served as a Director of the Company since its
formation in February 1997. Mr. De Leeuw is a co-founder and a Managing Partner
of McCown De Leeuw & Co., a private equity firm that buys and builds
middle-market companies in partnership with management teams. Prior to
co-founding McCown De Leeuw & Co. in 1984, Mr. De Leeuw was employed by Citibank
as Vice President and Deputy Head of the Merger and Acquisition Department and
as Head of the Leveraged Acquisition Unit. Mr. De Leeuw currently serves as a
Vice-Chairman of Vans, Inc., and a director of Nimbus CD International, Inc. and
FiberMark, Inc.
GEORGE E. MCCOWN has served as a Director of the Company since its
formation in February 1997. Mr. McCown is a co-founder and a Managing Partner of
McCown De Leeuw & Co., a private equity firm that buys and builds middle-market
companies in partnership with management teams. Prior to co-founding McCown De
Leeuw & Co. in 1984, Mr. McCown spent 18 years at Boise-Cascade Corporation in a
series of general management positions in the paper, packaging, building
materials and real estate divisions. Mr. McCown is Chairman of BMC West
Corporation, Vice Chairman of Vans, Inc. and a director of Nimbus CD
International, Inc. and FiberMark, Inc.
In addition to the directors of the Company set forth above, the following
individuals have been elected directors of the Company to become effective upon
the closing of this Offering:
H. JAMES BROWN, PH.D. has served since 1996, as the President and Chief
Executive Officer of the Lincoln Institute of Land Policy, an educational
institution formed to study and teach land policy, including land economics and
land taxation. Prior to 1996, Dr. Brown was a professor at the Kennedy School of
Government at Harvard University from 1970 to 1996. During his tenure at Harvard
University, Dr. Brown served as a director of the Joint Center Housing Studies,
chairman of the City and Regional Planning Program and as a Director of the
State, Local and Intergovernmental Center at Harvard University and MIT/Harvard
University Joint Center for Urban Studies. In addition, Dr. Brown has served as
a Managing Partner of Strategic Property Investments, Inc., a company
specializing in real estate asset management from 1988 to 1991. Dr. Brown also
serves as a director of BMC West Corporation and Pelican Companies, Inc.,
(distributors and retailers of building materials).
RAY MCKEWON is a co-founder and Executive Vice President of Accredited Home
Lenders, a mortgage banking firm founded in 1990 which specializes in sub-prime
credit grade lending. From 1980 to 1990, Mr. McKewon was a managing partner of
the Enterprise Management Company, a venture capital firm that he co-founded and
which provided capital to companies including Dura Pharmaceuticals, Cytotech
(sold to Quidel), Impulse Enterprise, McKewon & Timmins (sold to First
Affiliated), Garden Fresh Restaurants, Intelligent Images (merged into and
renamed Darox) and Sunward Technology (merged into Read-Rite).
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<PAGE> 44
RICHARD T. PRATT, PH.D. currently serves as Chairman of Richard T. Pratt
Associates, a position he has held since 1992, performing consulting activities,
including strategic studies for the Federal Home Loan Mortgage Corporation,
on-site consulting for the Housing Section Perform Project in Russia and
Kazakhstan for the U.S. Agency for International Development and various
strategic consultations for private sector institutions. Dr. Pratt is also a
Professor of Finance at the David Eccles School of Business at the University of
Utah, a position he has held since 1966. From 1983 to 1991, Dr. Pratt served as
the Chairman of Merrill Lynch Mortgage, Inc., a subsidiary of Merrill Lynch &
Company. From 1991 to 1994, Dr. Pratt served as Managing Director of the
Financial Institutions Group of Merrill Lynch. Dr. Pratt also serves as a member
of the Board of Directors of Avigen, a Development Level Gene Therapy Company.
Dr. Pratt was Chairman of the Federal Home Loan Mortgage Corporation from 1981
to 1983, and as Chairman of the Federal Savings and Loan Insurance Corporation
from 1981 to 1983.
MARK J. RIEDY, PH.D. is currently employed as an Ernest W. Hahn Professor
of Real Estate Finance at the University of San Diego. In such capacity, he
teaches courses in real estate finance. Prior to his employment at the
University, Dr. Riedy served as President and Chief Executive Officer of the
National Council of Community Bankers in Washington, D.C. from 1988 to 1992.
From 1987 to 1988, Dr. Riedy served as President and Chief Operating Officer of
the J. E. Robert Companies. Dr. Riedy was President, Chief Operating Officer and
Director of the Federal National Mortgage Association from 1985 to 1986.
TERM OF OFFICE
Effective upon the closing of the Offering, the Board of Directors of the
Company will be divided into three classes. Each class of Directors will consist
of two or three directors who will serve for a one, two or three year period
until the annual meeting or until their successors are elected and qualified.
Thereafter, Directors will serve staggered three year terms. The initial
classification of the directors is as follows:
<TABLE>
<CAPTION>
TERM OF
DIRECTOR CLASS OFFICE
-------------------------------------------- ----- -------
<S> <C> <C>
Dr. Brown................................... I 1998
Mr. McKewon................................. I 1998
Mr. De Leeuw................................ II 1999
Dr. Pratt................................... II 1999
Mr. Robbins................................. III 2000
Mr. Fuller.................................. III 2000
Dr. Riedy................................... III 2000
</TABLE>
Officers are elected by and serve at the discretion of the Board of
Directors.
BOARD COMMITTEES
The Board of Directors has recently appointed a compensation committee (the
"Compensation Committee") which will make recommendations to the Board
concerning salaries and incentive compensation for officers and employees of the
Company. Upon the closing of this Offering the Compensation Committee will
consist of Mr. De Leeuw, Mr. McKewon and Dr. Riedy. The Board of Directors also
has appointed an audit committee (the "Audit Committee") which will review the
results and scope of the audit and another accounting related serves. Upon the
closing of this Offering, the Audit Committee will consist of Dr. Brown, Mr. De
Leeuw and Dr. Pratt.
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<PAGE> 45
ACTION BY INDEPENDENT DIRECTORS
The Company's Bylaws require that a majority of the members of its Board of
Directors must be Independent Directors who are not officers or employees of the
Company. In addition to approval by the Board of Directors, the following
actions require approval by a majority of the Independent Directors:
- termination of the Management Contract between the Company and the
Manager;
- revisions to the Company's investment policies; and
- amendment of the Company's Bylaws.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS.
To date, the Company has had no compensation committee or other committee
performing an equivalent function. No officer or employee of the Company has
participated in deliberations by the Company's Board of Directors concerning
executive officer compensation.
After the closing of this Offering, Mr. McKewon will be a director of the
Company and a member of the compensation committee. Mr. McKewon is an executive
officer and director of Accredited Home Lenders. Mr. Robbins serves as a
Director of Accredited Home Lenders. The Company may acquire Mortgage Loans
pursuant to the Direct Purchase Program from Accredited Home Lenders.
DIRECTOR COMPENSATION
Each independent director of the Company will be paid annual compensation
of $15,000 with an additional $1,000 paid for attendance of a regularly
scheduled meeting and $500 for attendance of a special or committee meeting. All
directors will be reimbursed for any expenses related to attendance at meetings
of the Board of Directors or committees of the Board of Directors. In addition
to cash compensation, it is currently anticipated that each independent director
of the Company, except to Mr. De Leeuw, will receive an initial grant of options
to purchase 7,500 shares of the Common Stock of the Company at fair market value
which will vest over a three year period (one-third every twelve months).
Thereafter, following the Annual Meeting of Stockholders, the Company
anticipates making annual grants to each independent director, except for Mr. De
Leeuw, of options to purchase 2,500 shares of the Company's Common Stock which
will vest after one year.
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by the MGCL, the Company's Charter obligates the Company to
indemnify its present and former directors and officers and to pay or reimburse
reasonable expenses for such individuals in advance of the final disposition of
a proceeding to the maximum extent permitted from time to time by Maryland law.
The MGCL permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities, unless it is established that (a) the act or omission of the
director or officer was material to the matter giving rise to such proceeding
and (i) was committed in bad faith or (ii) was the result of active and
deliberate dishonesty, (b) the director or officer actually received an improper
personal benefit in money, property or services, or (c) in the case of any
criminal proceeding, the director or officer had reasonably cause to believe
that the act or omission was unlawful. The Bylaws implement the provisions
relating to indemnification contained in the Company's Charter. Maryland law
permits the charter of a Maryland corporation to include a provision limiting
the liability of its directors and officers to the corporation and its
stockholders for money damages, except to the extent that (i) the person
actually received an improper benefit or profit in money, property or services,
or (ii) a judgment or other final adjudication is entered in a proceeding based
on a finding that the person's action, or failure to act, was the result of
active and deliberate dishonesty and was material to the cause of action
adjudicated in the proceeding. The Company's Charter contains a provision
providing for elimination of the liability of its directors or officers to the
Company or its stockholders for money damages to the maximum extent permitted by
Maryland law from time to time. In
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<PAGE> 46
addition, the Underwriters are indemnified against certain liabilities by the
Company under the Underwriting Agreement relating to the Offering. See
"Underwriting."
The Company will maintain officers' and directors' insurance for the
benefit of its officers and directors. The Company intends to enter into
indemnity agreements with each of its officers and directors pursuant to which
the Company will indemnify its officers and directors to the fullest extent
allowed by law.
BENEFITS OF THIS OFFERING TO MANAGEMENT
No additional fees will be payable to the Manager solely as a result of
this Offering, however, investment of the net proceeds of this Offering will
result in an increase in the Company's Mortgage Assets and thus an increase in
the management fees to be paid to the Manager. At the discretion of the
Manager's board of directors, the Manager may elect to pay a portion of such
fees to the Company's management team as a bonus. In addition, certain options
held by the management team will vest in full in the event the Company completes
additional public or private offerings which generate proceeds that, when
combined with the net proceeds of this Offering, exceed $150 million. See
"-- Option Grants."
EXECUTIVE COMPENSATION
None of the Company's executive officers received compensation from the
Company or any of its affiliates in 1996. The following table sets forth
information with respect to the estimated compensation for 1997 for the four
executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1997 LONG-TERM
COMPENSATION
1997 ANNUAL AWARDS
COMPENSATION --------------
(ESTIMATED) SECURITIES
------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY(1) BONUS OPTIONS
------------------------------------------ --------- ----- --------------
<S> <C> <C> <C>
John M. Robbins........................... $ 266,250 (2) 220,000(3)
CEO, Chairman of the Board of Directors
Jay M. Fuller............................. 221,875 (2) 220,000(3)
President and Chief Operating Officer
Mark A. Conger............................ 133,125 (2) 30,400(3)
Senior Vice President and Chief
Financial Officer
Rollie O. Lynn............................ 88,750 (2) 26,400(3)
Senior Vice President, Capital Markets
</TABLE>
(1) Includes cash compensation paid or estimated to be paid to employees of the
Company and the Manager. Based on amounts actually paid from February 11,
1997 through July 31, 1997 and estimated payments from August 1, 1997
through December 31, 1997 based on current salary levels. All salary amounts
are currently paid by the Manager. After the closing of this Offering, all
base salary amounts will be paid directly by the Company and reimbursed to
the Company by the Manager. See "The Manager."
(2) Bonuses during years 1997 and 1998 will be paid solely in the discretion of
the Board of Directors of the Company. Thereafter, bonuses will be paid as a
percentage of salary if certain financial objectives agreed upon by
management of the Company and the Board of Directors are achieved. See
"-- Employment Contracts and Termination of Employment and Change of Control
Arrangements". All bonus amounts are to be paid by the Manager. The Company
currently estimates that each executive officer may be paid a bonus in 1997
equal to between 75% and 100% of his annualized base salary.
(3) Includes options to purchase 80,000, 80,000, 16,000 and 14,400 shares of
Common Stock to be issued to Mr. Robbins, Mr. Fuller, Mr. Conger and Mr.
Lynn, respectively, at the closing of this Offering pursuant to their
employment agreements. See "-- Employment Contracts and Termination of
Employment and Change of Control Arrangements."
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<PAGE> 47
OPTION GRANTS
None of the executive officers of the Company were granted options to
purchase the Company's Common Stock in 1996. The following table sets forth
information concerning stock options granted to the executive officers in 1997.
Each of the stock options is exercisable to purchase Common Stock of the
Company.
OPTION/SAR GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS IN 1997 POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL EXERCISE ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS OR PRICE APPRECIATION FOR
UNDERLYING GRANTED TO BASE OPTION TERM
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED (#)(1) 1997 (2) ($/SH) DATE 5%($)(3) 10%($)(3)
- --------------------------------- -------------- ------------ ------ --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John M. Robbins.................. 140,000(4) 26.5% $12.50 2/11/07 $1,100,568 $2,789,052
80,000(5) 15.2 15.00(6) (7) 754,672 1,912,488
Jay M. Fuller.................... 140,000(4) 26.5 12.50 2/11/07 1,100,568 2,789,052
80,000(5) 15.2 15.00(6) (7) 754,672 1,912,488
Mark A. Conger................... 14,400(8) 2.7 12.50 2/11/07 113,201 286,874
16,000(5) 3.0 15.00(6) (7) 150,934 382,498
Rollie O. Lynn................... 12,000(8) 2.3 12.50 2/11/07 94,334 239,062
14,400(5) 2.7 15.00(6) (7) 135,841 344,248
</TABLE>
- ---------------
(1) Options issued by the Company to date provide for acceleration of vesting at
such time as the Company receives cumulative gross proceeds from all public
or private offerings of at least $150,000,000. In addition, the options
accelerate and become fully vested upon the consummation of a transaction
resulting in a change of control of the Company.
(2) Based on currently outstanding options and options to be issued upon the
closing of this Offering. See "-- Employment Contracts and Termination of
Employment and Change of Control Arrangements."
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed
5% and 10% rates of stock price appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future price of the Common Stock. The
potential realizable value set forth in the table is based on the fair
market value of the Common Stock on the date of grant, as determined by the
Board of Directors.
(4) Includes options to purchase 140,000 shares of Common Stock and SAR's with
respect to an additional 140,000 shares of Common Stock granted in tandem
with such options. The SARs are for 35% of the difference between the fair
market value of the Common Stock at the time the related option is exercised
and the exercise price, up to a maximum of $20. Options and tandem SARs are
each vested and exercisable as to 20% of the shares of Common Stock with an
additional 20% to vest and become exercisable on February 11 of 1998, 1999,
2000 and 2001.
(5) Options to be granted upon the closing of this Offering. The exercise price
will equal the initial public offering price. These options will vest 20% on
the closing of this Offering with an additional 20% on each anniversary of
the closing of this Offering for four years.
(6) Based on an assumed initial public offering price of $15.00. See
"Underwriting."
(7) Options will expire 10 years after the closing of this Offering.
(8) Options to purchase Common Stock of the Company are vested and exercisable
as to 20% of the shares of Common Stock with an additional 20% to vest and
become exercisable on each of February 11, 1998, 1999, 2000 and 2001.
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<PAGE> 48
1997 STOCK INCENTIVE PLAN
The Company's 1997 Stock Incentive Plan (the "Incentive Plan") provides for
the grant of incentive stock options, nonqualified stock options and stock
appreciation rights ("SARs"). The Incentive Plan was adopted on February 11,
1997 (the "Effective Date"), and a total of 315,200 shares of Common Stock have
been reserved for issuance under the Incentive Plan. As of August 1, 1997, a
total of 315,200 shares of Common Stock were subject to outstanding options
under the Incentive Plan at an exercise price of $12.50 per share of Common
Stock. In addition, SARs with respect to an additional 280,000 shares were
outstanding at an exercise price of $12.50 per share of Common Stock. The SARs
were granted in tandem with options and provide the participant with the right
to receive payment equal to 35% of the difference between the fair market value
of a share of Common Stock on the date of the option exercise and the fair
market value of a share of Common Stock on the date of grant. Payment upon the
exercise of the SAR may be made in cash, shares of Common Stock, or any
combination thereof. The Company does not intend to issue any additional options
or SARs under the Incentive Plan.
1997 STOCK OPTION PLAN
The Board of Directors has reserved a total of 354,800 of Common Stock for
issuance under the Company's 1997 Stock Option Plan (the "Option Plan"). The
Option Plan permits the grant of options intended to qualify as incentive stock
options ("ISOs") within the meaning of section 422 of the Internal Revenue Code
of 1986, as amended, as well as nonstatutory stock options. Options to purchase
212,800 shares of Common Stock are reserved for issuance upon the closing of
this Offering and options to purchase 142,000 shares of Common Stock will remain
available for future grant under the Option Plan. Options may be granted to
employees (including officers and directors who are also employees), consultants
and directors and prospective employees, consultants, and directors although
only employees (including officers and directors who are also employees) may
receive ISOs. The exercise price per share of a nonstatutory stock option must
equal at least 85% of the fair market value of a share of Common Stock on the
date of grant, and in the case of an incentive stock option, must be no less
than the fair market value of a share of Common Stock on the date of grant. In
addition, the exercise price for any option granted to an optionee who owns 10%
or more of the total combined voting power of the Company or any parent or
subsidiary of the Company must equal at least 110% of the fair market value of a
share of Common Stock on the date of grant. Generally, options granted under the
Option Plan are immediately exercisable and must be exercised within ten years,
and shares subject to an option generally will vest over four years from the
date of grant. In the event of certain "change in control" transactions
involving the Company, shares subject to options granted under the Option Plan
will become fully vested and exercisable. In addition, the acquiring company may
assume or substitute for such outstanding options.
1997 EMPLOYEE STOCK PURCHASE PLAN
A total of 20,000 shares of Common Stock have been reserved for issuance
under the Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan"),
none of which have yet been issued. The Purchase Plan permits eligible employees
to purchase Common Stock at a discount through accumulated payroll deductions.
Employees (including officers and directors who are also employees) are
generally eligible to participate in the Purchase Plan if they are customarily
employed for more than 20 hours per week and five months per calendar year. The
Purchase Plan is implemented through sequential offering periods, each of which
is approximately six months in duration. However, the initial offering period
under the Purchase Plan will commence on the closing of this Offering and will
end on July 31, 1998. Participants will purchase shares of Common Stock on the
last day of each offering period. The price at which shares are purchased under
the Purchase Plan is equal to 85% of the fair market value of a share of Common
Stock on the first day of the offering period or the last day of the offering
period, whichever is lower. Employees may end their participation in the
Purchase Plan at any time during an offering period and participation ends
automatically upon the participant's termination of employment.
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<PAGE> 49
1997 OUTSIDE DIRECTORS STOCK OPTION PLAN.
A total of 60,000 shares of Common Stock have been reserved for issuance
under the Company's 1997 Outside Directors Stock Option Plan (the "Directors
Plan"). Prior to the closing of this Offering, no options have been granted
under the Directors Plan. The Directors Plan provides for the automatic grant of
nonstatutory stock options to directors of the Company who are not employees of
the Company or any parent or subsidiary of the Company or McCown De Leeuw & Co.
("Outside Directors"). On the closing of this Offering, each Outside Director
automatically will be granted under the Directors Plan an option to purchase
7,500 shares of Common Stock, and thereafter, each new Outside Director elected
after the closing of this Offering automatically will be granted on the date of
his or her initial election an option to purchase 7,500 shares of Common Stock
("initial options"). Shares of Common Stock subject to initial options will vest
in three equal annual increments following the date of grant. In addition, each
Outside Director, other than an Outside Director who has served on the Board of
Directors for less than six months, will thereafter be granted automatically an
option to purchase 2,500 shares of Common Stock at each annual meeting of the
stockholders provided the Outside Director continues to serve in such capacity
following the annual meeting ("annual options"). Shares of Common Stock subject
to annual options will become fully vested one year after the date of grant. The
exercise price per share of Common Stock for options granted under the Directors
Plan will be equal to the fair market value of a share of Common Stock on the
date of grant. Options granted under the Directors Plan must be exercised within
ten years from the date of grant. In the event of certain "change in control"
transactions involving the Company, shares subject to options granted under the
Directors Plan will become fully vested and exercisable. In addition, the
acquiring company may assume or substitute for such outstanding options.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
The Manager has entered into Employment and Non-Competition Agreements with
Mr. Robbins and Mr. Fuller effective as of February 11, 1997 (the "Employment
Agreements"). The Employment Agreements are for a term of five years, commencing
on February 11, 1997, and provide for a minimum monthly base salary of not less
than $25,000 in the case of Mr. Robbins and $20,833 in the case of Mr. Fuller.
The Employment Agreements also provide for one year's salary to be paid upon
termination of either of such employees without cause. Bonus payments in 1997
and 1998 will be at the discretion of the Board of Directors of the Manager.
Subsequent to 1998, the Employment Agreements provide for payment of a bonus of
up to 100% base salary if certain financial targets and objectives are achieved.
Upon the closing of this Offering, each of Messrs. Robbins and Fuller will be
granted options to purchase 80,000 shares of the Company's Common Stock at an
exercise price equal to the initial public offering price.
Mr. Robbins and Mr. Fuller each purchased stock of the Manager which is
subject to repurchase by the Manager in the event the executive officer
terminates his employment with the Company and the Manager. See "Certain
Transactions."
The Manager has also entered into letter agreements with Mr. Conger and Mr.
Lynn which provide for a base compensation of $150,000 and $100,000 per year,
respectively. In addition, the agreements provide for bonus payments after 1998
of up to 75% of the employee's base salary if certain financial targets and
objectives are achieved. Mr. Conger and Mr. Lynn were each issued Contingent
Warrants to purchase up to 34,299 shares of the common stock of the Manager at
an exercise price of $0.01 per share (the "Contingent Warrants"). The Contingent
Warrants expire on February 11, 2007, and are exercisable only to the extent
that certain letters of credit which collateralize debt of the Manager are
reduced from their current principal amounts. Mr. Conger and Mr. Lynn were also
issued percentage interests in Holdings initially equal to 1.5% each. These
interests may also vary based upon the extent to which such letters of credit
continue to be outstanding. See "Certain Transactions." Upon the closing of this
Offering, Mr. Conger and Mr. Lynn will be granted options to purchase 16,000
shares and 14,400 shares of the Company's Common Stock, respectively, at an
exercise price equal to the initial public offering price.
All options and SARs granted to date and to be granted at the closing of
this Offering pursuant to the Incentive Plan and the Option Plan contain
provisions pursuant to which unvested portions of outstanding
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<PAGE> 50
options become immediately exercisable and vested upon a change of control of
the Company, as defined under the relevant plan.
Each of the officers of the Manager has modified his Employment Agreement
with the Manager to allow each such person to become an employee of the Company
upon the closing of this Offering. The Manager will reimburse the Company on a
dollar for dollar basis for the actual cost to the Company of paying the base
salaries of such officers. See "The Manager -- The Management Agreement."
FIDUCIARY OBLIGATIONS
Generally, under applicable state corporate law, a director of a company is
required to first offer to the company corporate opportunities learned of solely
as a result of his or her service as a member of the board of directors.
Maryland law provides that in order for a contract or other transaction between
a corporation and any of its directors or in which a director has a material
financial interest not to be void or voidable (i) the contract or transaction
must be fair and reasonable to the corporation or (ii) the fact of such interest
must be disclosed or known to the board or committee that authorizes, approves
or ratifies the contract or transaction and such authorization, approval or
ratification must be by a vote of the majority of disinterested directors.
The Company's policy is that the approval of the Board of Directors (with
any interested director abstaining) is required for any director, officer,
securityholder or affiliate of the Company (i) to engage for their own account
in realizing upon a corporate opportunity learned of solely as a result of their
service to or representation of the Company or (ii) to have any direct or
indirect pecuniary interest in any investment to be acquired or disposed of by
the Company or in any transaction to which the Company is a party or has an
interest.
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<PAGE> 51
THE MANAGER
The Manager was created for the purpose of managing the day-to-day
operations of the Company, subject to direction by the Company's Board of
Directors. The Manager and the Company were financed by McCown De Leeuw & Co.,
TCW/Crescent Mezzanine, L.L.C., certain of their respective affiliates and
members of the management team of the Company. The Manager and its affiliates
own 1,614,000 shares of the Common Stock of the Company, which will constitute
approximately 25% of the outstanding shares of the Common Stock of the Company
immediately after the closing of this Offering. In addition, David E. De Leeuw
and George E. McCown, the principals of McCown De Leeuw & Co., currently serve
on the Board of Directors of the Company, one of whom will continue as a
director after the closing of this Offering.
The Manager funded the Company at its formation with a $20 million
investment through an intermediary entity. See "-- Relationship between the
Manager and the Company." Currently, the Manager derives substantially all of
its income from the Company, a majority of which is from dividends and incentive
fees. In addition, the executive officers of the Company are also the executive
officers of the Manager and also beneficially own an interest in the Manager.
Most of the same parties who currently beneficially own the Company also
beneficially own the Manager. See "Management of the Company -- Conflicts of
Interest," "Certain Transactions" and "Principal Stockholders." Management has
expertise in the acquisition and management of Mortgage Assets, mortgage
finance, asset/liability management and the management of corporations in the
real estate lending business. Each of the executive officers of the Manager has
between 10 and 24 years and they have an average of 19 years of experience in
the residential mortgage industry and worked together previously as a management
team. However, Management has limited experience in managing a REIT and limited
experience with certain tailored Mortgage Loan products, and there can be no
assurance that the past experience of Management will be appropriate to the
business of the Company. At the closing of this Offering, each employee of the
Manager will become an employee of the Company. The Manager is currently in the
process of recruiting employees to support the Direct Purchase Program.
DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGER
The following table represents certain information concerning the Directors
and Executive Officers of the Manager:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------ --- ----------------------------------------------------
<S> <C> <C>
John M. Robbins (1) 50 Chairman of the Board and Chief Executive Officer
Jay M. Fuller (1) 47 President, Chief Operating Officer and Director
Mark A. Conger (1) 37 Senior Vice President and Chief Financial Officer
Rollie O. Lynn (1) 43 Senior Vice President, Capital Markets
David E. De Leeuw (1) 53 Director
George E. McCown (1) 62 Director
Jean-Marc Chapus 38 Director
</TABLE>
- ---------------
(1) See "Management of the Company -- Directors and Executive Officers of the
Company."
JEAN-MARC CHAPUS serves as a Director of the Manager. Mr. Chapus is
currently Managing Director and Portfolio Manager of Trust Company of the West,
a diversified investment management firm, and President of TCW/Crescent
Mezzanine Partners, L.L.C., a private investment fund. From 1991 to 1995, Mr.
Chapus served as a Managing Director and principal of Crescent Capital
Corporation, with primary responsibility for the firm's private lending and
private placement activities. From 1986 to 1991, Mr. Chapus was a First Vice
President at Drexel Burnham Lambert Incorporated in the firm's High Yield and
Corporate Finance Departments. Mr. Chapus is currently a director of Starwood
Lodging Corporation and FirstAmerica Automotive, Inc. Mr. Chapus received his
A.B. in Economics from Harvard College in 1981 and his Masters in Business
Administration from Harvard Business School in 1986.
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THE MANAGEMENT AGREEMENT
Term of the Management Agreement and Termination Fee
The Company has entered into a Management Agreement with the Manager for an
initial term of two years beginning February 11, 1997. The Management Agreement
is renewed automatically for successive one year periods unless a notice of
non-renewal is timely delivered by the Company. The Company may elect to prevent
the automatic renewal of the Management Agreement only by vote of both a
majority of the Board of Directors and a majority of the directors who are
Independent Directors followed by delivery of a written notice of non-renewal to
the Manager at least 60 days prior to the end of the then-current period of the
Management Agreement. The Management Agreement shall terminate at the expiration
of the then-current period in which such notice of non-renewal is delivered.
Upon non-renewal of the Management Agreement without cause, a termination fee
will be payable to the Manager in an amount equal to the greater of (i) the fair
value of the Management Agreement as established by an independent appraiser, or
(ii) three times the total of the base and incentive compensation fees paid to
the Manager for the four most recently completed calendar quarters ending on or
prior to the date of termination. In addition, the Company has the right to
terminate the Management Agreement at any time upon the happening of certain
specified events, after notice and opportunity to cure, including a material
breach by the Manager of any provision contained in the Management Agreement.
Upon such a termination for cause, no termination fee will be payable to the
Manager.
Administrative Services Provided by the Manager
The Manager will be responsible for the day-to-day operations of the
Company and will perform such services and activities relating to the assets and
operations of the Company as may be appropriate, including:
(i) serving as the Company's consultant with respect to formulation of
investment criteria and preparation of policy guidelines;
(ii) assisting the Company in developing criteria for Mortgage Asset
purchase commitments that are specifically tailored to the Company's long
term investment objectives and making available to the Company its
knowledge and experience with respect to Mortgage Loan underwriting
criteria;
(iii) representing the Company in connection with the purchase of, and
commitment to purchase, Mortgage Assets, including the formation of
Mortgage Asset purchase commitment criteria;
(iv) arranging for the issuance of Mortgage Securities from pools of
Mortgage Loans and providing the Company with supporting services in
connection with the creation of Mortgage Securities;
(v) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the performance of the
Manager;
(vi) monitoring and providing to the Board of Directors on an ongoing
basis price information and other data, which price information and other
data shall be obtained from certain nationally recognized dealers and other
entities that maintain markets in Mortgage Assets as selected by the Board
of Directors from time to time, and providing advice to the Board of
Directors to aid the Board of Directors in the selection of such dealers
and other entities;
(vii) administering the day-to-day operations of the Company and
performing and supervising the performance of such other administrative
functions necessary in the management of the Company as may be agreed upon
by the Manager and the Board of Directors, including the collection of
revenues and the payment of the Company's expenses, debts and obligations
and maintenance of appropriate computer services to perform such
administrative functions;
(viii) designating a servicer and/or subservicer for those Mortgage
Loans sold to the Company by originators that have elected not to service
such Mortgage Loans and arranging for the monitoring and administering of
such servicer;
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(ix) counseling the Company in connection with policy decisions to be
made by the Board of Directors;
(x) evaluating and recommending hedging strategies to the Board of
Directors and, upon approval by the Board of Directors, facilitating the
implementation and monitoring the performance of these strategies;
(xi) supervising compliance with REIT Provisions of the Code and
Investment Company Act status, including setting up a system to monitor
hedging activities on a periodic basis for such compliance;
(xii) establishing quality control procedures for the Mortgage Assets
of the Company, including audits of loan underwriting files and the hiring
of any agents with such particular knowledge and expertise as may be
appropriate to perform any such quality control procedures, and
administering, performing and supervising the performance of the quality
control procedures of the Company and performing and supervising the
performance of such other functions related thereto necessary or advisable
to assist in the performance of such procedures and the attainment of the
purposes thereof;
(xiii) upon request by and in accordance with the directions of the
Board of Directors, investing or reinvesting any money of the Company;
(xiv) conducting, or causing to be conducted, a legal document review
of each Mortgage Loan acquired to verify the accuracy and completeness of
the information contained in the Mortgage Loans, security instruments and
other pertinent documents in the mortgage file;
(xv) providing the Company with data processing, legal and
administrative services to the extent required to implement the business
strategy of the Company;
(xvi) providing all actions necessary for compliance by the Company
with all federal, state and local regulatory requirements applicable to the
Company in respect of its business activities, including preparing or
causing to be prepared all financial statements required under applicable
regulations and contractual undertakings and all reports and documents, if
any, required under the Securities Exchange Act of 1934, as amended;
(xvii) providing all actions necessary to enable the Company to make
required federal, state and local tax filings and reports and generally
enable the Company to maintain its status as a REIT, including soliciting
stockholders for required information to the extent provided in the REIT
Provisions of the Code;
(xviii) communicating on behalf of the Company with the holders of the
equity and debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies and
to maintain effective relations with such holders; and
(xix) performing such other services as may be required from time to
time for management and other activities relating to the assets of the
Company as the Board of Directors shall reasonably request or the Manager
shall deem appropriate under the particular circumstances.
Except in certain circumstances, the Manager may not assign its rights and
duties under the Management Agreement, in whole or in part, without the written
consent of the Company and the consent of a majority of the Company's directors
who are not affiliated with the Manager.
Servicing of the Mortgage Loans
The Company expects to acquire certain of its Mortgage Loans on a servicing
released basis and to act as the servicer of such Mortgage Loans while they are
in the Company's Mortgage Asset portfolio. The Company will contract with a
subservicer for a fixed dollar fee per Mortgage Loan per year or a percentage of
the outstanding mortgage balance and the right to hold escrow account balances
and retain certain ancillary charges. The Manager will monitor the servicing of
the Mortgage Loans. Such monitoring will include, but not be limited to the
following: (i) serving as the Company's consultant with respect to the servicing
of Mortgage Loans; (ii) collection of information and submission of reports
pertaining to the Mortgage Loans and to
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<PAGE> 54
moneys remitted to the Manager or the Company by any servicer, (iii) periodic
review and evaluation of the performance of each servicer to determine its
compliance with the terms and conditions of the applicable subservicing or
servicing agreement and, if deemed appropriate, recommending to the Company the
termination of such agreement, (iv) acting as a liaison between servicers and
the Company and working with servicers to the extent necessary to improve their
servicing performance, (v) review of and recommendations as to fire losses,
easement problems and condemnation, delinquency and foreclosure procedures with
regard to the Mortgage Loans, (vi) review of servicer's delinquency, foreclosure
and other reports on Mortgage Loans, (vii) supervising claims filed under any
mortgage insurance policies, and (viii) enforcing the obligation of any servicer
to repurchase Mortgage Loans from the Company. The Manager may enter into
subcontracts with other parties, including its affiliates, to provide any such
services for the Manager.
Management Fees
The Manager will receive an annual base management fee payable monthly in
arrears of an amount representing the monthly portion of the per annum
percentage of "gross mortgage assets" of the Company and its subsidiaries. The
Company will pay to the Manager the following management fees and incentive
compensation:
- 1/8 of 1% per year, to be paid monthly, of the principal amount of
Agency Securities;
- 3/8 of 1% per year, to be paid monthly, of the principal amount of all
other Mortgage Assets; and
- 25% the amount by which the Company's net income (calculated prior to
deduction of this incentive compensation fee) exceeds the annualized
return on equity equal to an averaged Ten Year U.S. Treasury Rate plus
2%.
The term "gross mortgage assets" means for any month the aggregate book
value of the consolidated Mortgage Assets of the Company and its subsidiaries,
before allowances for depreciation or bad debts or other similar noncash
allowances, computed at the end of such month prior to any dividend distribution
made during each month.
The incentive compensation calculation and payment will be made quarterly
in arrears. The term "Return on Equity" is calculated for any quarter by
dividing the Company's Net Income for the quarter by its Average Net Worth for
the quarter. For such calculations, the "Net Income" of the Company means the
net income of the Company determined in accordance with GAAP before the
Manager's incentive compensation, the deduction for dividends paid and net
operating loss deductions arising from losses in prior periods. A deduction for
the Company's interest expenses for borrowed money is taken when calculating Net
Income. "Average Net Worth" for any period means (i) $20,165,000 plus (ii) the
arithmetic average of the sum of the gross proceeds from any offering of its
equity securities by the Company, before deducting any underwriting discounts
and commissions and other expenses and costs relating to the offering, plus the
Company's retained earnings (without taking into account any losses incurred in
prior periods and excluding amounts reflecting taxable income to be distributed
as dividends and amounts reflecting valuation allowance adjustments) computed by
taking the daily average of such values during such period. The definition
"Return on Equity" is used only for purposes of calculating the incentive
compensation payable, and is not related to the actual distributions received by
stockholders. The incentive compensation payments to the Manager will be made
before any income distributions are made to the stockholders of the Company.
The Manager's base fee shall be calculated by the Manager within 15 days
after the end of each month, and such calculation shall be promptly delivered to
the Company. The Company is obligated to pay the amount of the final base fee in
excess of the amount paid to Manager at the beginning of the month pursuant to
the Manager's good faith estimate within 30 days after the end of each month.
The Company shall pay the incentive fee with respect to each fiscal quarter
within 15 days following the delivery to the Company of the Manager's written
statement setting forth the computation of the incentive fee for such quarter.
The Manager shall compute the annual incentive fee within 45 days after the end
of each fiscal year, and any required adjustments shall be paid by the Company
or the Manager within 15 days after the delivery of the Manager's written
computation to the Company.
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<PAGE> 55
Although no additional fees will be payable to the Manager solely as a
result of this Offering, investment of the proceeds of this Offering will result
in an increase in the Company's Mortgage Assets and thus an increase in the
management fees to be paid to the Manager.
Expenses
The Company will pay all operating expenses except those specifically
required to be borne by the Manager under the Management Agreement. The
operating expenses required to be borne by the Manager include the compensation
and other employment costs of the Manager's officers in their capacities as such
and the cost of office space and out-of-pocket costs, equipment and other
personnel required for performance of the Company's day-to-day operations. The
expenses that will be paid by the Company will include issuance and transaction
costs incident to the acquisition, disposition and financing of investments,
regular legal and auditing fees and expenses, the fees and expenses of the
Company's directors, premiums for directors' and officers' liability insurance,
premiums for fidelity and errors and omissions insurance, subservicing expenses,
the costs of printing and mailing proxies and reports to stockholders, and the
fees and expenses of the Company's custodian and transfer agent, if any. The
Company, rather than the Manager, will also be required to pay expenses
associated with litigation and other extraordinary or non-recurring expenses.
Expense reimbursements will be made monthly.
Salary Reimbursements
The Company will employ certain employees of the Manager involved in the
day-to-day operations of the Company, including the Company's executive
officers, so that such employees may maintain certain benefits that are
available only to employees of the Company under the Internal Revenue Code of
1986, as amended. These benefits include the ability to receive incentive stock
options under the 1997 Stock Option Plan and to participate in the Company's
Employee Stock Purchase Plan. In order to receive the aggregate benefits of the
Management Agreement originally negotiated between the Company and the Manager,
the Company will pay the base salaries of such employees and will be reimbursed
monthly by the Manager for all costs incurred with respect to such payments.
Limits of Responsibility
Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to render the services called for thereunder and will
not be responsible for any action of the Company's Board of Directors in
following or declining to follow its advice or recommendations. The Manager, its
directors, officers, stockholders and employees will not be liable to the
Company, any issuer of Mortgage Securities, any subsidiary of the Company, the
Unaffiliated Directors, the Company's stockholders or any subsidiary's
stockholders for acts performed in accordance with and pursuant to the
Management Agreement, except by reason of acts or omissions constituting bad
faith, willful misconduct, gross negligence or reckless disregard of their
duties under the Management Agreement. The Manager is a newly formed company and
does not have significant assets other than its interest in the Management
Agreement. Consequently, there can be no assurance that the Company would be
able to recover any damages for claims it may have against the Manager. The
Company has agreed to indemnify the Manager, and its respective directors,
officers, stockholders and employees with respect to all expenses, losses,
damages, liabilities, demands, charges and claims arising from any acts or
omissions of the Manager made in good faith in the performance of its duties
under the Management Agreement and not constituting bad faith, willful
misconduct, gross negligence or reckless disregard of its duties. The Management
Agreement does not limit or restrict the right of the Manager or any of its
officers, directors, employees or Affiliates to engage in any business or to
render services of any kind to any other person, including the purchase of, or
rendering advice to others purchasing Mortgage Assets which meet the Company's
policies and criteria, except that the Manager and its officers, directors or
employees will not be permitted to provide for any such services to any
residential mortgage REIT, other than the Company or another REIT sponsored by
the Manager or its Affiliates, which has operating policies and strategies
different in one or more material respects from those of the Company, as
confirmed by a majority of
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the Unaffiliated Directors of the Company. See "Risk Factors -- Conflicts of
Interest; Management also Employed by and Owns Securities of Manager."
RELATIONSHIP BETWEEN THE MANAGER AND THE COMPANY
In addition to the contractual relationship between the Manager and the
Company, the Manager also has limited rights in the shares of the Company's
Common Stock held by Holdings, an intermediate holding company. The Manager
contributed $20 million to Holdings which used the funds to acquire the shares
of the Company's Common Stock. In exchange for its contribution to Holdings, the
Manager received a senior right to receive distributions equal to 5% of the
capital contributed by the Manager, compounded quarterly to the extent unpaid.
After payment of the preference amount in full, the Manager has a right to
receive approximately 50% of any remaining distributions in repayment of its
capital contribution. The Manager has also been appointed to oversee the
day-to-day operations of Holdings. However, after payment in full of its
preference amount and return of its capital contribution, the Manager will have
no further rights to distributions from Holdings. Holdings' sole asset is its
shares of the Company's Common Stock and its sole source of income is dividends
declared by the Company.
CERTAIN TRANSACTIONS
DISCUSSION OF SECURITIES PURCHASE AGREEMENT
The following summary of certain terms from the Securities Purchase
Agreement (as defined below) between Manager and the Company does not purport to
be complete and is subject to and qualified in its entirety by the Securities
Purchase Agreement, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. When particular provisions or
terms used in the Securities Purchase Agreement are referred to, the actual
provisions (including definitions of terms) are incorporated by reference to
such agreement.
In connection with the private financing of the Manager and the Company in
February 1997, the Company, the Manager and Holdings entered into a Securities
Purchase Agreement, dated as of February 11, 1997 (the "Securities Purchase
Agreement"), with the institutional investors therein named (the "Investors")
providing for, among other things, the purchase by the Investors of senior
secured notes due February 11, 2002 (the "Notes") issued by the Manager.
Covenants
The Securities Purchase Agreement contains various covenants of the Company
and the Manager setting forth requirements respecting financial reporting, and
minimum acceptable financial ratio compliance and limitations on operating
activities, among other things, which will apply so long as the Notes remain
outstanding. The following is a general summary of certain covenants affecting
the activities of the Company (as opposed to the Manager).
Limitation on Restricted Payments. The Company shall not make any
investment except "Permitted REIT Investments," as defined in the Securities
Purchase Agreement; provided, however, that any Multifamily Mortgage Assets,
Commercial Mortgage Assets, Derivative Mortgage Securities, Fixed Rate Mortgage
Assets and REMIC residual interests to be acquired, together with any
investments to be made in Permitted REIT Subsidiaries, will not constitute
Permitted REIT Investments to the extent that the aggregate fair market value
thereof on any date, when aggregated with the aggregate fair market value of all
other Multifamily Mortgage Assets, Commercial Mortgage Assets, Derivative
Mortgage Securities, Fixed Rate Mortgage Assets, REMIC residual interests and
investments in Permitted REIT Subsidiaries held on such date, would exceed 5% of
the total fair market value on such date of the Mortgage Assets then held.
Limitation on Transactions with Affiliate. Neither the Company nor the
Manager shall sell, lease, transfer or otherwise dispose of any of its
properties or assets to or purchase any property or assets from, or enter into
any contract, agreement, understanding, loan, advance or guarantee with, or for
the benefit of, an
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<PAGE> 57
affiliate of either company (an "Affiliate Transaction"), unless (i) such
Affiliate Transaction is on terms that are no less favorable to such company
than those that could have been obtained in a comparable transaction by such
company from an unrelated person, and (ii) with respect to any Affiliate
Transaction (or series of related Affiliate Transactions) involving or having a
potential value of more than $100,000, in addition to compliance with clause
(i), such Affiliate Transaction shall also be approved by a majority of the
disinterested members of the board of directors of the Manager, and (iii) with
respect to any Affiliate Transaction (or series of related Affiliate
Transactions) involving or having a potential value of more than $2,500,000, in
addition to compliance with clauses (i) and (ii), the board of directors of the
Manager shall have obtained an opinion of a nationally recognized investment
banking firm or appraiser to the effect that such transaction is fair, from a
financial point of view, to such company; provided, however, that the board of
directors of the Manager need not obtain such an opinion in connection with
immaterial modifications of the Management Agreement.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company shall not, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
restriction on the ability of the Company to (a) pay dividends or make any other
distributions on its Common Stock or any other interest or participation in, or
measured by its profits, or pay any indebtedness owed to the Manager, (b) make
loans or advances to the Manager or (c) transfer any of its properties or assets
to the Manager, except for certain limited encumbrances or restrictions
specified in the Securities Purchase Agreement.
Limitation on Capital Expenditures. The Company shall not make or incur
capital expenditures in any fiscal year in an aggregate amount in excess of
$100,000.
Limitation on Business and Tax Status. The Company shall not engage in any
business or activity other than the business of investing in and disposing of
Permitted REIT Investments. Prior to the consummation of a Qualified Public
Equity Offering (which this Offering will constitute), the Company shall not
invest in or hold any B/C Mortgages (i.e., below "A" or "A-") unless the
aggregate fair market value of the investments by the Company in B/C Mortgages
does not exceed 20% of the aggregate fair market value of all of the assets of
the Company. At all times, the Company shall operate and qualify as a REIT under
Section 856 et seq. of the Code, the income of which is taxed pursuant to
Section 857 of the Code.
Leverage Ratio and Indebtedness of the Company. During each calendar month,
the Company shall cause the average of the fifteen REIT Leverage Ratios
calculated on each of the last fifteen days of such calendar month,
respectively, to be less than or equal to the REIT Leverage Ratio Limit. "REIT
Leverage Ratio" means, on any date, the ratio of (a) the total consolidated
indebtedness of the Company on such date (subject to certain exceptions) to (b)
the fair market value (as determined in good faith by the Board of Directors of
the Company) of all the assets of the Company on such date (other than any such
assets upon which there is a lien that secures any such Permitted REIT
Indebtedness). "REIT Leverage Ratio Limit" means (i) 0.925 during all calendar
months other than the calendar months described in clauses (ii) and (iii) of
this definition, (ii) 0.935 during the sixty days immediately preceding the
anticipated closing date of a Qualified Public Equity Offering and (iii) 0.935
during the first sixty days following such anticipated closing date, if any such
anticipated Qualified Public Equity Offering of REIT is not consummated on or
prior to such anticipated closing date.
The Company shall not, directly or indirectly, incur any indebtedness other
than Permitted REIT Indebtedness, which is defined as any and all forms of
obligations of the Company accounted for as liabilities under GAAP, including
without limitation notes, bonds and Reverse Repurchase Agreements; provided that
such obligations have a maturity of greater than thirty (30) days and either (x)
bear a variable interest rate that resets at least once every six months or (y)
bear a fixed rate of interest and have a maturity of not more than one year;
provided, further that either: (a)(i) under the agreement pursuant to which any
such obligation is incurred, such obligation is secured primarily by Permitted
REIT Investments and the amount of such obligation may not exceed the fair
market value of the collateral as determined under such agreement or (ii) such
obligations are REMIC regular interests or other forms of structured securities
(x) that, in any case, are obligations with recourse limited solely to the
collateral securing such obligations and (y) as to which the fair market value
of the Company's equity interest in the entity issuing such security does not
exceed 5% of the
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fair market value of the collateral securing such obligations on the date of
incurrence of such obligations; or (b) the obligations constitute one of the
following: (i) trade debt incurred in the ordinary course of business; (ii)
indebtedness secured by permitted liens; (iii) capitalized lease obligations in
an aggregate amount not to exceed at any one time outstanding $500,000; or (iv)
indebtedness of the Company in an amount not exceeding $1,000,000 at any time
outstanding incurred solely for the purchase or financing of fixed or capital
assets acquired by the Company.
Investment, Hedging and Leverage Policy. At least once during each fiscal
year, the Board of Directors of the Company shall adopt a statement of policy
regarding investment of the assets of the Company, the duration of the Company's
assets and liabilities, hedging activities to be conducted by the Company, the
range of leverage ratios to be maintained by the Company and the types of
indebtedness that may be incurred by the Company, which statement of policy
shall be at least as detailed as the similar statement of policy initially
adopted and delivered to the Investors; provided, however, that any material
difference between any policy to be so adopted and the then most recently
adopted policy must be approved by Investors holding a majority interest in the
Notes. At least once during each fiscal year, the Manager shall engage a
professional services firm, which is not an affiliate of the Manager or the
Company, to issue a report (a "REIT Compliance Report") addressed to each of the
Manager, Holdings, the Company and the Investors stating whether the Company has
complied in all material respects with the then most recently adopted policy.
The Company shall not permit to exist, on a general portfolio average basis, a
repricing differential between the Company's assets and liabilities of greater
than 180 days.
Board of Director Observation Rights. Each of the Investors shall have the
right to have one representative present (whether in person or by telephone) at
all meetings of the Board of Directors (and committees thereof) of the Manager
and the Company; provided that such representative shall not be entitled to vote
at such meetings.
Events of Default. The Securities Purchase Agreement provides for certain
Events of Default including, among other things, breach of a covenant by the
Manager or the Company (subject to a 30-day cure period in certain instances)
and failure by the Company to pay dividends for two consecutive quarters
beginning in October 1997. Upon an Event of Default, the Notes can be
accelerated and the shares of Common Stock of the Company pledged to secure the
Notes can be sold to satisfy the debt. See "Risk Factors -- Additional Risk
Factors -- Default of Manager Under Securities Purchase Agreement; Restrictive
Covenants."
Amendment and Waiver. The Securities Purchase Agreement can be amended, and
waivers of terms and provisions given, by the Investors holding a majority
interest in the Notes.
OTHER TRANSACTIONS
On February 11, 1997, in connection with the founding of the Company,
Holdings, Mr. Robbins and Mr. Fuller each purchased 1.6 million, 8,000 and 6,000
shares, respectively, of the Company's Common Stock at a price of $12.50 per
share in cash.
The Company and the Manager entered into a Management Agreement pursuant to
which the Company pays base fees and incentive compensation to the Manager. The
executive officers and directors of the Company are also executive officers and
directors of the Manager. See "The Manager -- The Management Agreement."
On February 11, 1997, in connection with the founding of the Manager, the
Manager issued the following securities to the Company's officers, directors,
beneficial holders of 5% or more of the Company's Common Stock and their
Affiliates:
- The Manager issued 1,000,000 shares of its common stock to entities
affiliated with McCown De Leeuw & Co. and 127,032 shares to each of Mr.
Robbins and Mr. Fuller. The shares of Manager's common stock were issued
at a purchase price of $0.01 and paid in cash.
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- The Manager issued 12% senior secured notes in the principal amount of
$25,000,000 (the "Notes") to entities affiliated with TCW/Crescent
Mezzanine, L.L.C. The Notes were issued at a purchase price equal to
$994.56 per $1,000 principal amount, paid in cash.
- The Manager issued warrants to purchase up to 666,667 shares of its
common stock to entities affiliated with TCW/Crescent Mezzanine, L.L.C.
The warrants were purchased at a price of $0.20 per warrant share paid in
cash and have an exercise price of $0.01. The warrants expire on February
11, 2007; the Company paid TCW/Crescent Mezzanine, L.L.C. a fee of
approximately $500,000 in connection with the sale and issuance of the
Notes and these warrants.
- The Manager issued warrants to purchase up to 17,149, 51,448, 34,299, and
34,299 shares of its common stock to entities affiliated with
TCW/Crescent Mezzanine, L.L.C., entities affiliated with McCown De Leeuw
& Co., Mr. Conger and Mr. Lynn, respectively. The warrants have an
exercise price of $0.01. The warrants expire on February 11, 2007. The
warrants are not currently exercisable and will become exercisable only
to the extent that certain letters of credit issued for the benefit of
the Manager are reduced over a period of four years.
The shares of the Manager's common stock held by Mr. Robbins and Mr. Fuller
are subject to a right of repurchase by the Manager which lapses after the
earlier of February 11, 2002 and the closing of a public offering by the Company
which generates proceeds to the Company, which, when aggregated with the
proceeds of all other public offerings, equals $150 million or more. The
purchase price for the shares of the Manager's common stock in the event of a
repurchase shall be (i) equal to the book value of the securities in the event
that the executive officer's employment is terminated without cause or in the
event that the executive officer resigns for good cause, (ii) fair market value
of the securities in the case of death, and (iii) a nominal amount in all other
circumstances.
In connection with the founding of the Manager and the Company, on February
11, 1997, Holdings issued 0.75%, 2.25%, 1.5% and 1.5% ownership interests to
entities affiliated with TCW/Crescent Mezzanine, L.L.C., entities affiliated
with McCown De Leeuw & Co., Mr. Conger and Mr. Lynn, respectively.
The Manager and MDC Management Company II, L.P., ("MDC"), an affiliate of
McCown De Leeuw & Co., have entered into an advisory services agreement pursuant
to which MDC will provide financial and management services to the Manager.
Under the terms of the advisory services agreement, the Manager has accrued an
initial fee obligation of $500,000 with an additional annual fee of $250,000 to
be paid to MDC. The annual payments will begin in March 1998 and continue for a
minimum of five years. The initial fee will be paid only after the Manager has
retired certain debt and preferred equity obligations.
The Company intends to enter into indemnity agreements with each of its
officers and directors. For a description of the limitations of liability
applicable to the Company's officers and directors, see "Management of the
Company -- Limitation of Liability and Indemnification."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of August
10, 1997, and as adjusted to reflect the sale of Common Stock being offered
hereby, by (i) each person known to the Company to beneficially own more than 5%
of the Company's Common Stock, (ii) each director, (iii) each executive officer
and (iv) all directors and executive officers as a group. Unless otherwise
indicated in the footnotes to the table, the beneficial owners named have, to
the knowledge of the Company, sole voting and investment power with respect to
the shares beneficially owned, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
------------------------
AFTER
NUMBER OF SHARES BEFORE OFFERING
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING (1)
- ---------------------------------------------------------- ------------------ ---------- -----------
<S> <C> <C> <C>
MDC REIT Holdings, LLC (2)................................ 1,600,000 99.1% 28.5%
John M. Robbins (3)....................................... 52,000 3.1 *
Jay M. Fuller (3)......................................... 50,000 3.0 *
Mark A. Conger (4)........................................ 6,080 * *
Rollie O. Lynn (5)........................................ 5,280 * *
David E. De Leeuw (6)..................................... -- -- --
George E. McCown (6)...................................... -- -- --
All Directors and Executive Officers as a group
(6 persons) (3)(6)(7)................................... 113,360 6.2 1.7
</TABLE>
- ---------------
* Less than 1%
(1) Assuming no exercise of the Underwriters' over-allotment option.
(2) The address for MDC REIT Holdings, L.L.C. is 445 Marine View Avenue, Suite
230, Del Mar, CA 92014. The Manager is the managing member of Holdings
pursuant to an operating agreement. Accordingly, the Manager may be deemed
to have voting control of the shares of the Company's Common Stock held by
Holdings with respect to ordinary and usual matters. See "The Manager."
Transactions which could result in the disposition of the shares of the
Company's Common Stock require the approval of the members of Holdings
having membership interests which constitute more than 80% of all
membership interests. No single member or group of affiliated members of
Holdings holds 80% of the membership interests of Holdings. The shares of
the Company's Common Stock held by the LLC have been pledged as collateral
to certain entities affiliated with TCW/Crescent Mezzanine, L.L.C. See
"Risk Factors -- Additional Risk Factors -- Default of Manager Under
Securities Purchase Agreement; Restrictive Covenants."
(3) Includes 44,000 shares of Common Stock of the Company issuable upon
exercise of options within 60 days of August 10, 1997, including shares
issuable upon options to be issued at the closing of this Offering. Mr.
Robbins and Mr. Fuller are directors of the Manager. They each disclaim
beneficial ownership of the shares of the Company's Common Stock held by
Holdings. See Note 2 above.
(4) Includes 6,080 shares of Common Stock of the Company issuable upon exercise
of options within 60 days of August 10, 1997, including shares issuable
upon options to be issued at the closing of this Offering.
(5) Includes 5,280 shares of Common Stock of the Company issuable upon exercise
of options within 60 days of August 10, 1997, including shares issuable
upon options to be issued at the closing of this Offering.
(6) Mr. De Leeuw and Mr. McCown are directors of the Manager. They each
disclaim beneficial ownership of the shares of the Company's Common Stock
held by Holdings. See Note 2 above.
(7) Includes 99,360 shares of Common Stock of the Company issuable upon
exercise of options within 60 days of August 10, 1997, including shares
issuable upon the exercise of options to be issued at the closing of this
Offering.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The following summary is a description of provisions of the Company's
Charter and Bylaws with respect to the Company's Capital Stock. This summary
does not purport to be complete and is qualified by reference to the Charter and
Bylaws. Under the Company's Charter and Bylaws, the total number of shares of
all classes of capital stock that the Company has authority to issue is
25,000,000 shares, par value $0.01 per share, initially consisting of 25,000,000
shares of Common Stock. The Board of Directors is authorized to classify or
reclassify any unissued portion of the authorized shares of capital stock to
provide for the issuance of shares in other classes or series, including
Preferred Stock in one or more series. The Company has no current intention to
issue shares of any class or series other than Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Holders of Common
Stock do not have cumulative voting rights in the election of directors, which
means that holders of more than 50% of the shares of Common Stock voting for the
election of directors can elect all of the directors if they choose to do so and
the holders of the remaining shares cannot elect any directors. Subject to
preferential rights with respect to any outstanding shares of preferred stock,
holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor. The
shares of Common Stock are not convertible into any other class or series.
Holders of Common Stock do not have preemptive rights, which means they have no
right to acquire any additional shares of Common Stock that may be issued by the
Company at a subsequent date. The outstanding shares of Common Stock are, and
the Shares to be outstanding upon completion of this Offering will be, fully
paid and nonassessable. The Shares have been approved for listing on the New
York Stock Exchange, subject only to official notice of issuance.
ADDITIONAL CLASSES AND SERIES OF STOCK
The Board of Directors is authorized to establish one or more classes and
series of stock, including series of preferred stock, from time to time, and to
establish the number of shares in each class or series and to fix the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption of such class or series, without any further vote or action by the
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which the Company's
securities may be listed or traded. The issuance of additional classes or series
of capital stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action of the stockholders. The
issuance of additional classes or series of capital stock with voting and
conversion rights may adversely affect the voting power of the holders of
capital stock of the Company, including the loss of voting control to others.
The ability of the Board of Directors to issue additional classes or series of
capital stock, while providing flexibility in connection with possible
acquisitions or other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding voting stock of the Company, even
where such an acquisition may be beneficial to the Company or its stockholders.
REGISTRATION RIGHTS
Upon the closing of this Offering the beneficial holders of approximately
1,600,000 shares of Common Stock are entitled to certain rights with respect to
the registration of such shares under the Securities Act. Subject to certain
limitations, if the Company registers any of its securities under the Securities
Act, either for its own account or the account of other security holders, such
holders are entitled to written notice of the registration and are entitled to
include such shares therein, provided, among other conditions, that the
underwriters of any offering have the right to limit the number of such shares
included in the registration. All fees, costs and expenses of such registrations
(other than the underwriting discount and commissions and legal expenses of such
holders) will generally be borne by the Company. In addition, beginning 180 days
after the
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closing of this Offering, certain of such beneficial holders may require, on up
to six occasions, the Company to use its best efforts to file a registration
statement under the Securities Act at the Company's expense with respect to
their shares of Common Stock, subject to certain conditions and limitations.
Further, such holders may require the Company, at the Company's expense, to
register their shares on Form S-3 when such form becomes available to the
Company, subject to certain conditions and limitations.
REPURCHASE OF SHARES AND OWNERSHIP LIMITATIONS
Two of the requirements of qualification for the tax benefits accorded by
the REIT provisions of the Code are that (1) during the last half of each
taxable year not more than 50% in value of the outstanding shares may be owned
directly or indirectly by five or fewer individuals (the "50%/5 stockholder
test") and (2) there must be at least 100 stockholders on 335 days of each
taxable year of 12 months.
In order that the Company may meet these requirements at all times, the
Charter prohibits any person from acquiring or holding, directly or indirectly,
shares of Common Stock in excess of 9.9% in value of the aggregate of the
outstanding shares of Common Stock or in excess of 9.9% in value of the
aggregate of the outstanding shares of Common Stock of the Company. For this
purpose, the term "ownership" is defined in accordance with the REIT Provisions
of the Code and the constructive ownership provisions of Section 544 of the
Code, as modified by Section 856(h)(1)(B) of the Code.
For purposes of the 50%/5 stockholder test, the constructive ownership
provisions applicable under Section 544 of the Code attribute ownership of
securities owned by a corporation, partnership, estate or trust proportionately
to its stockholders, partners or beneficiaries, attribute ownership of
securities owned by family members and partners to other members of the same
family, treat securities with respect to which a person has an option to
purchase as actually owned by that person, and set forth rules as to when
securities constructively owned by a person are considered to be actually owned
for the application of such attribution provisions (i.e., "reattribution").
Thus, for purposes of determining whether a person holds shares of Common Stock
in violation of the ownership limitations set forth in the Charter, many types
of entities may own directly more than the 9.9% limit because such entities'
shares are attributed to its individual stockholders. For example, it is
contemplated that Holdings and perhaps other corporate investors will own in
excess of 9.9% of the Common Stock outstanding immediately after closing of this
Offering. On the other hand, a person will be treated as owning not only shares
of Common Stock actually or beneficially owned, but also any shares of Common
Stock attributed to such person under the attribution rules described above.
Accordingly, under certain circumstances, shares of Common Stock owned by a
person who individually owns less than 9.9% of the shares of Common Stock
outstanding may nevertheless be in violation of the ownership limitations set
forth in the Charter. Ownership of shares of the Company's Common Stock through
such attribution is generally referred to as constructive ownership. The 100
stockholder test is determined by actual, and not constructive, ownership. The
Company will have greater than 100 stockholders of record.
The Charter further provides that if any transfer of shares of Common Stock
occurs which, if effective, would result in any person beneficially or
constructively owning shares of Common Stock in excess or in violation of the
above transfer or ownership limitations, then that number of shares of Common
Stock the beneficial or constructive ownership of which otherwise would cause
such person to violate such limitations (rounded to the nearest whole shares)
shall be automatically transferred to a trustee (the "Trustee") as trustee of a
trust (the "Trust") for the exclusive benefit of one or more charitable
beneficiaries (the "Charitable Beneficiary"), and the intended transferee shall
not acquire any rights in such shares. Shares of Common Stock held by the
Trustee shall be issued and outstanding shares of Common Stock. The intended
transferee shall not benefit economically from ownership of any shares held in
the Trust, shall have no rights to dividends, and shall not possess any rights
to vote or other rights attributable to the shares held in the Trust. The
Trustee shall have all voting rights and rights to dividends or other
distributions with respect to shares held in the Trust, which rights shall be
exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend
or other distribution paid to the intended transferee prior to the discovery by
the Company that shares of Common Stock have been transferred to the Trustee
shall be paid with respect to such shares to the Trustee by the intended
transferee upon demand and any dividend or other distribution authorized but
unpaid
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<PAGE> 63
shall be paid when due to the Trustee. The Board of Directors of the Company
may, in their discretion, waive these requirements on owning shares in excess of
the ownership limitations.
Within 20 days of receiving notice from the Company that shares of Common
Stock have been transferred to the Trust, the Trustee shall sell the shares held
in the Trust to a person, designated by the Trustee, whose ownership of the
shares will not violate the ownership limitations set forth in the Charter. Upon
such sale, the interest of the Charitable Beneficiary in the shares sold shall
terminate and the Trustee shall distribute the net proceeds of the sale to the
intended transferee and to the Charitable Beneficiary as follows. The intended
transferee shall receive the lesser of (1) the price paid by the intended
transferee for the shares or, if the intended transferee did not give value for
the shares in connection with the event causing the shares to be held in the
Trust (e.g., in the case of a gift, devise or other such transaction), the
Market Price (as defined below) of the shares on the day of the event causing
the shares to be held in the Trust, and (2) the price per share received by the
Trustee from the sale or other disposition of the shares held in the Trust. Any
net sales proceeds in excess of the amount payable to the intended transferee
shall be immediately paid to the Charitable Beneficiary. In addition, shares of
Common Stock transferred to the Trustee shall be deemed to have been offered for
sale to the Company, or its designee, at a price per share equal to the lesser
of (i) the price per share in the transaction that resulted in such transfer to
the Trust (or, in the case of a devise or gift, the Market Price at the time of
such devise or gift) and (ii) the Market Price on the date the Company, or its
designee, accepts such offer. The Company shall have the right to accept such
offer until the Trustee has sold shares held in the Trust. Upon such a sale to
the Company, the interest of the Charitable Beneficiary in the shares sold shall
terminate and the Trustee shall distribute the net proceeds of the sale to the
intended transferee.
The term "Market Price" on any date shall mean, with respect to any class
or series of outstanding shares of the Company's stock, the Closing Price (as
defined below) for such shares on such date. The "Closing Price" on any date
shall mean the last sale price for such shares, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, for such shares, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange ("NYSE") or, if such shares
are not listed or admitted to trading on the NYSE, as reported on the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which such shares are listed or
admitted to trading or, if such shares are not listed or admitted to trading on
any national securities exchange, the last quoted price, or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or, if such system is no longer in use, the principal other
automated quotation system that may then be in use or, if such shares are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in such shares
selected by the Board of Directors or, in the event that no trading price is
available for such shares, the fair market value of the shares, as determined in
good faith by the Board of Directors.
Every owner of more than 5%, in the case of 2,000 or more stockholders of
record and 1% in the case of more than 200 but fewer than 2,000 stockholders of
record, of all classes or series of the Company's stock, within 30 days after
the end of each taxable year, is required to give written notice to the Company
stating the name and address of such owner, the number of shares of each class
and series of stock of the Company beneficially owned and a description of the
manner in which such shares are held. Each such owner shall provide to the
Company such additional information as the Company may request in order to
determine the effect, if any, of such beneficial ownership on the Company's
status as a REIT and to ensure compliance with the ownership limitations.
Subject to certain limitations, the Board of Directors may increase or
decrease the ownership limitations. In addition, to the extent consistent with
the REIT Provisions of the Code, the Board of Directors may waive the ownership
limitations for and at the request of certain purchasers in this Offering or
subsequent purchasers.
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The provisions described above may inhibit market activity and the
resulting opportunity for the holders of the Company's Common Stock to receive a
premium for their shares that might otherwise exist in the absence of such
provisions. Such provisions also may make the Company an unsuitable investment
vehicle for any person seeking to obtain ownership of more than 9.9% of the
outstanding shares of Common Stock.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company will act as the transfer agent and
registrar with respect to the Common Stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this Offering, the Company will have outstanding
6,614,000 shares of Common Stock. Of the outstanding shares, the 5,000,000
shares of Common Stock to be sold in this Offering will be freely tradable
without restriction or further registration under the Securities Act unless
purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act.
The remaining 1,614,000 shares of Common Stock to be outstanding after the
closing of this Offering will be "restricted securities" as that term is defined
in Rule 144, none of which will become eligible for sale under Rule 144 until
February 11, 1998. As described below, Rule 144 permits resales of restricted
securities subject to certain restrictions.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who beneficially owned shares for at least one
year, including any person who may be deemed an "affiliate" of the Company,
would be entitled to sell within any three month period a number of such shares
that does not exceed the greater of 1% of the shares of the Company's Common
Stock then outstanding or the average weekly trading volume in the Company's
Common Stock during the four calendar weeks preceding the date on which notice
of the sale is filed with the Commission. A person who is not deemed to have
been an "affiliate" of the Company at any time during the three months preceding
a sale and who has beneficially owned shares for at least two years would be
entitled to sell such shares under Rule 144 without regard to the volume
limitation described above.
Beginning 180 days after the closing of this Offering, the beneficial
holders of the approximately 1.6 million shares of Common Stock currently
outstanding may require the Company to register such shares of sale in the
public market. See "Description of Capital Stock -- Registration Rights."
The Company and its stockholders have agreed with the Underwriters that,
for a period of 180 days following the closing of this Offering, they will not
sell, contract to sell or otherwise dispose of any shares of Common Stock or
rights to acquired such shares (other than pursuant to employee plans or the
DRP) without the prior written consent of PaineWebber Incorporated.
In addition, upon the closing of this Offering, the Company will have
outstanding options to purchase 558,000 shares of Common Stock and will have
reserved an aggregate of 172,000 additional shares of Common Stock for grant of
future options under the Option Plan and the Directors Plan. The Company has
also reserved 20,000 shares of Common Stock for issuance under the Purchase
Plan. The Company intends to file Registration Statements on form S-8 covering
the shares that have been reserved for issuance under these plans, thus
permitting the resale of such shares in the public market after such stock
options have been exercised.
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FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING DISCUSSION SUMMARIZES THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES THAT MAY BE RELEVANT TO A PROSPECTIVE HOLDER OF SHARES OF STOCK OF
THE COMPANY. THIS DISCUSSION IS BASED ON CURRENT LAW. THE FOLLOWING DISCUSSION
IS NOT EXHAUSTIVE OF ALL POSSIBLE TAX CONSEQUENCES. IT DOES NOT GIVE A DETAILED
DISCUSSION OF ANY STATE, LOCAL OR FOREIGN TAX CONSEQUENCES, NOR DOES IT DISCUSS
ALL OF THE ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A
PROSPECTIVE STOCKHOLDER IN LIGHT OF SUCH STOCKHOLDER'S PARTICULAR CIRCUMSTANCES
OR TO CERTAIN TYPES OF STOCKHOLDERS (INCLUDING INSURANCE COMPANIES, CERTAIN
TAX-EXEMPT ENTITIES, FINANCIAL INSTITUTIONS, BROKER/DEALERS, FOREIGN
CORPORATIONS AND PERSONS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES)
SUBJECT TO SPECIAL TREATMENT UNDER FEDERAL INCOME TAX LAWS.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK OF THE COMPANY SHOULD CONSULT
WITH HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC CONSEQUENCES TO HIM OR
HER OF THE PURCHASE, OWNERSHIP AND SALE OF STOCK IN AN ENTITY ELECTING TO BE
TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND THE POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
GENERAL
The Code provides special tax treatment for organizations that qualify and
elect to be taxed as REITs. The discussion below summarizes the material
provisions applicable to the Company as a REIT for federal income tax purposes
and to its stockholders in connection with their ownership of shares of stock of
the Company. However, it is impractical to set forth in this Prospectus all
aspects of federal, state, local and foreign tax law that may have tax
consequences with respect to an investor's purchase of the Company's Common
Stock. The discussion of various aspects of federal taxation contained herein is
based on the Code, administrative regulations, judicial decisions,
administrative rulings and practice, all of which are subject to change. In
brief, if certain detailed conditions imposed by the Code are met, entities that
invest primarily in real estate assets, including Mortgage Loans, and that
otherwise would be taxed as corporations are, with certain limited exceptions,
not taxed at the corporate level on their taxable income that is currently
distributed to their stockholders. This treatment eliminates most of the "double
taxation" (at the corporate level and then again at the stockholder level when
the income is distributed) that typically results from the use of corporate
investment vehicles. A qualifying REIT, however, may be subject to certain
excise and other taxes, as well as normal corporate tax, on Taxable Income that
is not currently distributed to its stockholders. See "-- Taxation of the
Company."
The Company plans to make an election to be taxed as a REIT under the Code
commencing with its taxable year ending December 31, 1997.
OPINION OF SPECIAL COUNSEL
Jeffers, Wilson, Shaff & Falk, LLP ("Special Tax Counsel"), special tax and
ERISA counsel to the Company, has advised the Company in connection with this
Offering of the Company's Common Stock and the Company's election to be taxed as
a REIT. Based on existing law and certain representations made to Special Tax
Counsel by the Company and assuming that the Company operates in the manner
described in this Prospectus, in the opinion of Special Tax Counsel, commencing
with the Company's taxable year ending December 31, 1997, the Company has been
organized in conformity with the requirements for qualification as a REIT under
the Code and the Company's actual and proposed method of operation described in
this Prospectus and as represented by the Company to Special Tax Counsel will
enable the Company to qualify as a REIT. However, whether the Company will in
fact so qualify will depend on actual operating results and compliance with the
various tests for qualification as a REIT relating to its income, assets,
distributions,
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ownership and certain administrative matters, the results of which may not be
reviewed by Special Tax Counsel. Moreover, certain aspects of the Company's
method of operations have not been considered by the courts or the Service.
There can be no assurance that the courts or the Service will agree with this
opinion. In addition, qualification as a REIT depends on future transactions and
events that cannot be known at this time. Accordingly, Special Tax Counsel is
unable to opine whether the Company will in fact qualify as a REIT under the
Code in all events. In the opinion of Special Tax Counsel, the section of the
Prospectus entitled "Federal Income Tax Consequences" identifies and fairly
summarizes the federal income tax consequences that are likely to be material to
holders of the Common Stock of the Company, and, to the extent such summaries
involve matters of law, such statements of law are correct under the Code.
Special Tax Counsel's opinions are based on various assumptions and on the
factual representations of the Company concerning its business and assets.
Accordingly, no assurance can be given that the actual results of the Company's
operation for any one taxable year will satisfy such requirements. See
"Termination or Revocation of REIT Status" below.
The opinions of Special Tax Counsel are based upon existing law including
the Internal Revenue Code of 1986, as amended, existing Treasury Regulations,
Revenue Rulings, Revenue Procedures, proposed regulations and case law, all of
which is subject to change either prospectively or retroactively. Moreover,
relevant laws or other legal authorities may change in a manner that could
adversely affect the Company or its stockholders. Special Tax Counsel's opinions
also are based in part on the opinion of special Maryland counsel, Piper &
Marbury, L.L.C., that the Company is duly organized and existing under Maryland
law.
In the event that the Company does not qualify as a REIT in any year, it
will be subject to federal income tax as a domestic corporation and its
stockholders will be taxed in the same manner as stockholders of ordinary
corporations. To the extent that the Company would, as a consequence, be subject
to potentially significant tax liabilities, the amount of earnings and cash
available for distribution to its stockholders would be reduced. See
"Termination or Revocation of REIT Status" below.
REQUIREMENTS FOR QUALIFICATION AS A REIT
To qualify for tax treatment as a REIT under the Code, the Company must
meet certain tests which are described immediately below.
Stock Ownership Tests
For all taxable years after the first taxable year for which a REIT
election is made, the Company's shares of stock must be transferable and must be
held by a minimum of 100 persons for at least 335 days of a 12 month year (or a
proportionate part of a short tax year). The Company must also use the calendar
year as its taxable year. In addition, at all times during the second half of
each taxable year, no more than 50% in value of the shares of any class of the
stock of the Company may be owned directly or indirectly by five or fewer
individuals. In determining whether the Company's shares are held by five or
fewer individuals, the attribution rules of Sections 544 of the Code apply. For
a description of these attribution rules, see "Description of Capital Stock."
The Company's Articles of Amendment and Restatement impose certain repurchase
provisions and transfer restrictions to avoid more than 50% by value of any
class of the Company's stock being held by five or fewer individuals (directly
or constructively) at any time during the last half of any taxable year. Such
repurchase and transfer restrictions will not cause the stock not to be treated
as "transferable" for purposes of qualification as a REIT. The Company intends
to satisfy both the 100 stockholder and 50%/5 stockholder individual ownership
limitations described above for as long as it seeks qualification as a REIT. See
"Description of Capital Stock." The Company uses the calendar year as its
taxable year for income tax purposes.
Asset Tests
On the last day of each calendar quarter at least 75% of the value of the
Company's assets must consist of Qualified REIT Assets, government securities,
cash and cash items (the "75% of assets test"). The Company
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expects that substantially all of its assets will be Qualified REIT Assets.
Qualified REIT Assets include interests in real property, interests in Mortgage
Loans secured by real property and interests in REMICs.
On the last day of each calendar quarter, of the investments in securities
not included in the 75% of assets test, the value of any one issuer's securities
may not exceed 5% by value of the Company's total assets and the Company may not
own more than 10% of any one issuer's outstanding voting securities. Hedging
contracts (other than those which are Qualified REIT Assets) and certain types
of other Mortgage Assets may be treated as securities of the entity issuing such
agreements or interests. The Company will take measures to prevent the value of
such contracts, interests or assets issued by any one entity to exceed 5% of the
value of the Company's assets as of the end of each calendar quarter. Moreover,
pursuant to its compliance guidelines, the Company intends to monitor closely
(on not less than a quarterly basis) the purchase and holding of the Company's
assets in order to comply with the above assets tests. In particular, as of the
end of each calendar quarter the Company intends to limit and diversify its
ownership of hedging contracts and other mortgage securities that do not
constitute Qualified REIT Assets to less than 25%, in the aggregate, by value of
its portfolio, to less than 5% by value as to any single issuer, and to less
than 10% of the voting stock of any single issuer (collectively the "25% of
assets limits"). If such limits are ever exceeded, the Company intends to take
appropriate remedial action to dispose of such excess assets within the 30 day
period after the end of the calendar quarter, as permitted under the Code.
When purchasing mortgage-related securities, the Company may rely on
opinions of counsel for the issuer or sponsor of such securities given in
connection with the offering of such securities, or statements made in related
offering documents, for purposes of determining whether and to what extent those
securities (and the income therefrom) constitute Qualified REIT Assets (and
income) for purposes of the 75% of assets test (and the source of income tests
discussed below). If the Company invests in a partnership, the Company will be
treated as receiving its share of the income and loss of the partnership and
owning a proportionate share of the assets of the partnership and any income
from the partnership will retain the character that it had in the hands of the
partnership. If the Company forms a taxable affiliate to conduct mortgage
origination and other activities, the Company will obtain an opinion of counsel
that the proposed organization and ownership of an interest in the taxable
affiliate will not adversely affect the Company's status as a REIT.
Where a failure to satisfy any of the asset tests discussed above results
from an acquisition of securities or other property during a quarter, the
failure can be cured by disposition of sufficient non-qualifying assets within
30 days after the close of such quarter. The Company intends to maintain
adequate records of the value of its assets to determine its compliance with the
asset tests, and intends to take such action as may be required to cure any
failure to satisfy the test within 30 days after the close of any quarter.
Gross Income Tests
The Company must meet three separate income-based tests for each year in
order to qualify a REIT.
1. The 75% Test. At least 75% of the Company's gross income (the "75% of
income test") for the taxable year must be derived from the following sources:
(i) rents from real property; (ii) interest (other than interest based in whole
or in part on the income or profits of any person) on obligations secured by
mortgages on real property or on interests in real property; (iii) gains from
the sale or other disposition of interests in real property and real estate
mortgages other than gain from stock in trade, inventory or property held
primarily for sale to customers in the ordinary course of the Company's trade or
business ("dealer property"); (iv) dividends or other distributions on shares in
other REITs and, provided such shares are not dealer property, gain from the
sale of such shares; (v) abatements and refunds of real property taxes; (vi)
income from the operation, and gain from the sale, of property acquired at or in
lieu of a foreclosure of the mortgage secured by such property or as a result of
a default under a lease of such property ("foreclosure property"); (vii) income
received as consideration for entering into agreements to make loans secured by
real property or to purchase or lease real property (including interests in real
property and interests in mortgages on real property) (for example, commitment
fees); and (viii) income attributable to stock or debt instruments acquired with
the proceeds from the sale of stock or certain debt obligations ("new capital")
of the Company received during the oneyear period beginning on the day such
proceeds were received ("qualified temporary
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investment income"). The investments that the Company intends to make (as
described under "Description of Mortgage Assets") will give rise primarily to
mortgage interest qualifying under the 75% of income test.
2. The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least an additional 20% of the Company's gross income
for the taxable year must be derived from those sources, or from dividends,
interest or gains from the sale or disposition of stock or other securities that
are not dealer property (the "95% of income test"). Income attributable to
mortgage warehouse participations, Mortgage Securities (other than Qualified
REIT Assets) that the Company holds directly, dividends on stock, interest on
any other obligations not secured by real property, and gains from the sale or
disposition of stock or other securities that are not Qualified REIT Assets will
constitute qualified income for purposes of the 95% of income test only, but
will not be qualified income for purposes of the 75% of income test. Income from
mortgage servicing contracts, loan guarantee fees (or other contracts under
which the Company would earn fees for performing services) and hedging (other
than from Qualified REIT Assets) will not qualify for either the 95% or 75% of
income tests. The Company intends to severely limit its acquisition of any
assets or investments the income from which does not qualify for purposes of the
95% of income test. Moreover, in order to help ensure compliance with the 95% of
income test and the 75% of income tests, the Company intends to limit
substantially all of the assets that it acquires to Qualified REIT Assets. The
policy of the Company to maintain REIT status may limit the type of assets,
including hedging contracts, that the Company otherwise might acquire.
For purposes of determining whether the Company complies with the 75% of
income test and the 95% of income test detailed above, gross income does not
include gross income from "prohibited transactions." A "prohibited transaction"
is one involving a sale of dealer property, other than foreclosure property. Net
income from "prohibited transactions" is subject to a 100% tax. See "-- Taxation
of the Company."
3. The 30% of Income Limit. For the 1997 taxable year, the Company must
also derive less than 30% of its gross income from the sale or other disposition
of (i) Qualified REIT Assets held for less than four years, other than
foreclosure property or property involuntarily or compulsorily converted through
destruction, condemnation or similar events, (ii) stock or securities held for
less than one year (including hedges) and (iii) property in a prohibited
transaction (together the "30% of income limit"). As a result of the Company's
having to closely monitor such gains, the Company may have to hold Mortgage
Loans and Mortgage Securities although the Company might otherwise have opted
for the disposition of such assets for short term gains, in order to ensure that
it maintains compliance with the 30% of income limit. Effective with the 1998
taxable year, the 30% of income limit has been repealed from the Code and will
no longer apply. The Company expects to make the election to treat any real
property taken by the Company in foreclosure, or in lieu of foreclosure, of a
Mortgage Loan as foreclosure property.
The Company intends to maintain its REIT status by carefully monitoring its
income, including income from hedging transactions, futures contracts and sales
of Mortgage Assets to comply with the 75% of income test, the 95% of income test
and, for the 1997 taxable year, the 30% of income limit. See "-- Taxation of the
Company" for a discussion of the potential tax cost of the Company's selling
certain Mortgage Securities on a regular basis. In order to help insure its
compliance with the REIT requirements of the Code, the Company has adopted
guidelines the effect of which will be to limit the Company's ability to earn
certain types of income, including income from hedging, other than hedging
income from Qualified REIT Assets. See "Business -- Risk Management -- Interest
Rate Risk Management."
If the Company fails to satisfy one or both of the 75% or 95% of income
tests for any year, it may face either (a) assuming such failure was for
reasonable cause and not willful neglect, a 100% tax on the greater of the
amounts of income by which it failed to comply with the 75% test of income or
the 95% of income test, reduced by estimated related expenses or (b) loss of
REIT status. There can be no assurance that the Company will always be able to
maintain compliance with the gross income tests for REIT qualification despite
the Company's periodic monitoring procedures. Moreover, there is no assurance
that the relief provisions for a failure to satisfy either the 95% or the 75% of
income tests will be available in any particular circumstance.
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Distribution Requirement
The Company must distribute to its stockholders on a pro rata basis each
year an amount equal to (i) 95% of its Taxable Income before deduction of
dividends paid and excluding net capital gain, plus (ii) 95% of the excess of
the net income from foreclosure property over the tax imposed on such income by
the Code, less (iii) any "excess noncash income" (the "95% distribution test").
See "Dividend Policy and Distributions." The Company intends to make
distributions to its stockholders in amounts sufficient to meet this 95%
distribution requirement. Such distributions must be made in the taxable year to
which they relate or, if declared before the timely filing of the Company's tax
return for such year and paid not later than the first regular dividend payment
after such declaration, in the following taxable year. A nondeductible excise
tax, equal to 4% of the excess of such required distributions over the amounts
actually distributed will be imposed on the Company for each calendar year to
the extent that dividends paid during the year (or declared during the last
quarter of the year and paid during January of the succeeding year) are less
than the sum of (i) 85% of the Company's "ordinary income," (ii) 95% of the
Company's capital gain net income plus, and (iii) income not distributed in
earlier years.
The Service has ruled that if a REIT's dividend reinvestment plan allows
stockholders of the REIT to elect to have cash distributions reinvested in
shares of the REIT at a purchase price equal to at least 95% of fair market
value on the distribution date, then such cash distributions qualify under the
95% distribution test. The Company expects that the terms of its DRP will comply
with this ruling. See "Dividend Reinvestment Plan."
If the Company fails to meet the 95% distribution test as a result of an
adjustment to the Company's tax returns by the Service, the Company by following
certain requirements set forth in the Code, may pay a deficiency dividend within
a specified period which will be permitted as a deduction in the taxable year to
which the adjustment is made. The Company would be liable for interest based on
the amount of the deficiency dividend. A deficiency dividend is not permitted if
the deficiency is due to fraud with intent to evade tax or to a willful failure
to file timely tax return.
RECORDKEEPING REQUIREMENTS
A REIT is required to maintain records regarding the actual and
constructive ownership of its shares, and other information, and within 30 days
after the end of its taxable year, to demand statements from persons owning
above a specified level of the REIT's shares (e.g., if the Company has over 200
but fewer than 2,000 stockholders of record, from persons holding 1% or more of
the Company's outstanding shares of stock and if the Company has 200 or fewer
stockholders of record, from persons holding 1/2% or more of the stock)
regarding their ownership of shares. The Company must maintain, as part of the
Company's records, a list of those persons failing or refusing to comply with
this demand. Stockholders who fail or refuse to comply with the demand must
submit a statement with their tax returns setting forth the actual stock
ownership and other information. The Company also is required to maintain
permanent records of its assets as of the last day of each calendar quarter. The
Company intends to maintain the records and demand statements as required by
these regulations.
TERMINATION OR REVOCATION OF REIT STATUS
The Company's election to be treated as a REIT will be terminated
automatically if the Company fails to meet the requirements described above. In
that event, the Company will not be eligible again to elect REIT status until
the fifth taxable year which begins after the year for which the Company's
election was terminated unless all of the following relief provisions apply: (i)
the Company did not willfully fail to file a timely return with respect to the
termination taxable year, (ii) inclusion of incorrect information in such return
was not due to fraud with intent to evade tax, and (iii) the Company establishes
that failure to meet requirements was due to reasonable cause and not willful
neglect. The Company may also voluntarily revoke its election, although it has
no intention of doing so, in which event the Company will be prohibited, without
exception, from electing REIT status for the year to which the revocation
relates and the following four taxable years.
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If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company would be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders of the Company with
respect to any year in which the Company fails to qualify as a REIT would not be
deductible by the Company nor would they be required to be made. Failure to
qualify as a REIT would result in the Company's reduction of its distributions
to stockholders in order to pay the resulting taxes. If, after forfeiting REIT
status, the Company later qualifies and elects to be taxed as a REIT again, the
Company could face significant adverse tax consequences.
TAXATION OF THE COMPANY
In any year in which the Company qualifies as a REIT, it generally will not
be subject to federal income tax on that portion of its taxable income or net
capital gain which is distributed to its stockholders. The Company will,
however, be subject to tax at normal corporate rates upon any net income or net
capital gain not distributed. The Company intends to distribute substantially
all of its taxable income to its stockholders on a pro rata basis in each year.
See "Dividend Policy and Distributions."
In addition, the Company will also be subject to a tax of 100% of net
income from any prohibited transaction and will be subject to a 100% tax on the
greater of the amount by which it fails either the 75% or 95% of income tests,
reduced by approximated expenses, if the failure to satisfy such tests is due to
reasonable cause and not willful neglect and if certain other requirements are
met. The Company may be subject to the alternative minimum tax on certain items
of tax preference.
If the Company acquires any real property as a result of foreclosure, or by
a deed in lieu of foreclosure, the Company may elect to treat such real property
as "foreclosure property." Net income from the sale of foreclosure property is
taxable at the maximum federal corporate rate, currently 35%. Income from
foreclosure property will not be subject to the 100% tax on prohibited
transactions. The Company will determine whether to treat such real property as
foreclosure property on the tax return for the fiscal year in which such
property is acquired.
The Company may securitize Mortgage Loans and sell such Mortgage Loans
through a taxable subsidiary. However, if the Company itself were to sell such
Mortgage Securities on a regular basis, there is a substantial risk that they
would be deemed "dealer property" and that all of the profits from such sales
would be subject to tax at the rate of 100% as income from prohibited
transactions. The Company therefore intends to make any such sales through a
taxable subsidiary. The taxable subsidiary will form mortgage pools and create
mortgage backed securities. See "Taxable Subsidiaries" The taxable subsidiary
will not be subject to this 100% tax on income from prohibited transactions,
which is only applicable to REITs.
The Company will also be subject to a nondeductible 4% excise tax if it
fails to make timely dividend distributions for each calendar year. See
"Requirements for Qualification as a REIT -- Distribution Requirements." The
Company intends to declare its fourth regular annual dividend during the final
quarter of the year and to make such dividend distribution no later than 31 days
after the end of the year in order to avoid imposition of the excise tax. Such a
distribution would be taxed to the stockholders in the year that the
distribution was declared, not in the year paid. Imposition of the excise tax on
the Company would reduce the amount of cash available for distribution to the
Company's stockholders.
TAXABLE SUBSIDIARIES
The Company may, in the future, cause the creation and sale of Mortgage
Securities through a taxable corporation. The Company and one or more persons or
entities will own all of the capital stock of that taxable corporation,
sometimes referred to as a "taxable subsidiary." In order to ensure that the
Company will not violate the prohibition on ownership of more than 10% of the
voting stock of a single issuer and the prohibition on investing more than 5% of
the value of its assets in the stock or securities of a single issuer, the
Company will own only shares of nonvoting preferred stock of that taxable
subsidiary corporation and will not own any of the taxable subsidiary's common
stock. The Company will monitor the value of its investment in the taxable
subsidiary on a quarterly basis to limit the risk of violating any of the tests
that comprise the 25% of assets limits. In addition, the dividends that the
taxable subsidiary pays to the Company will not qualify as income
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from Qualified REIT Assets for purposes of the 75% of income test, and in all
events would have to be limited, along with the Company's other interest,
dividends, gains on the sale of securities, hedging income, and other income not
derived from Qualified REIT Assets to less than 25% of the Company's gross
revenues in each year. The taxable subsidiary will not elect REIT status, will
be subject to income taxation on its net earnings and will generally be able to
distribute only its net after-tax earnings to its stockholders, including the
Company, as dividend distributions. If the taxable subsidiary creates a taxable
mortgage pool, such pool itself will constitute a separate taxable subsidiary of
the taxable subsidiary. The taxable subsidiary would be unable to offset the
income derived from such a taxable mortgage pool with losses derived from any
other activities.
TAXATION OF STOCKHOLDERS
For any taxable year in which the Company is treated as a REIT for federal
income purposes, amounts distributed by the Company to its stockholders out of
current or accumulated earnings and profits will be includible by the
stockholders as ordinary income for federal income tax purposes unless properly
designated by the Company as capital gain dividends. In the latter case, the
distributions will be taxable to the stockholders as long-term capital gains.
Distributions of the Company will not be eligible for the dividends
received deduction for corporations. Stockholders may not deduct any net
operating losses or capital losses of the Company.
Any loss on the sale or exchange of shares of the stock of the Company held
by a stockholder for six months or less will be treated as a long-term capital
loss to the extent of any capital gain dividend received on the stock held by
such stockholders.
If the Company makes distributions to its stockholders in excess of its
current and accumulated earnings and profits, those distributions will be
considered first a tax-free return of capital, reducing the tax basis of a
stockholder's shares until the tax basis is zero. Such distributions in excess
of the tax basis will be taxable as gain realized from the sale of the Company's
shares.
The Company does not expect to acquire or retain residual interests issued
by REMICs. Such residual interests, if acquired by a REIT, would generate excess
inclusion income. Excess inclusion income cannot be offset by net operating
losses of a stockholder. If the stockholder is a Tax-Exempt Entity, the excess
inclusion income is fully taxable as UBTI. If allocated to a foreign
stockholder, the excess inclusion income is subject to Federal income tax
withholding without reduction pursuant to any otherwise applicable tax treaty.
Potential investors, and in particular Tax Exempt Entities, are urged to consult
with their tax advisors concerning this issue.
The Company intends to finance the acquisition of Mortgage Assets by
entering into reverse repurchase agreements, which are essentially loans secured
by the Company's Mortgage Assets. The Company expects to enter into master
repurchase agreements with secured lenders known as "counterparties." Typically,
such master repurchase agreements have cross-collateralization provisions that
afford the counterparty the right to foreclose on the Mortgage Assets pledged as
collateral. If the Service were to successfully take the position that the
cross-collateralization provisions of the master repurchase agreements result in
the Company having issued debt instruments (the reverse repurchase agreements)
with differing maturity dates secured by a pool of Mortgage Loans, a portion of
the Company's income could be characterized as "excess inclusion income."
Special Tax Counsel has advised the Company that it is more likely than not that
the cross-collateralization provisions of the master repurchase agreements will
not cause the Company to realize excess inclusion income. Nevertheless, in the
absence of any definitive authority on this issue, Special Tax Counsel cannot
give complete assurance.
The Company will notify stockholders after the close of the Company's
taxable year as to the portions of the distributions which constitute ordinary
income, return of capital and capital gain. Dividends and distributions declared
in the last quarter of any year payable to stockholders of record on a specified
date in such month will be deemed to have been received by the stockholders and
paid by the Company on December 31 of the record year, provided that such
dividends are paid before February 1 of the following year.
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TAXATION OF TAX-EXEMPT ENTITIES
In general, a Tax-Exempt Entity that is a stockholder of the Company is not
subject to tax on distributions. The Service has ruled that amounts distributed
by a REIT to an exempt employees' pension trust do not constitute UBTI and thus
should be nontaxable to such a Tax-Exempt Entity. Based on that ruling, but
subject to the discussion of excess inclusion income set forth under the heading
"Taxation of Stockholders," Special Tax Counsel is of the opinion that
indebtedness incurred by the Company in connection with the acquisition of real
estate assets such as Mortgage Loans will not cause dividends of the Company
paid to a stockholder that is a Tax-Exempt Entity to be UBTI, provided that the
Tax-Exempt Entity has not financed the acquisition of its stock with
"acquisition indebtedness" within the meaning of the Code. Under certain
conditions, if a tax-exempt employee pension or profit sharing trust were to
acquire more than 10% of the Company's stock, a portion of the dividends on such
stock could be treated as UBTI.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans exempt
from federal income taxation under Code Sections 501(c)(7), (c)(9), (c)(17) and
(c)(20), respectively, income from an investment in the Company will constitute
UBTI unless the organization is able to properly deduct amounts set aside or
placed in reserve for certain purposes so as to offset the UBTI generated by its
investment in the Company. Such entities should review Code Section 512(a)(3)
and should consult their own tax advisors concerning these "set aside" and
reserve requirements.
STATE AND LOCAL TAXES
The Company and its stockholders may be subject to state or local taxation
in various jurisdictions, including those in which it or they transact business
or reside. The state and local tax treatment of the Company and its stockholders
may not conform to the Federal income tax consequences discussed above.
Consequently, prospective stockholders should consult their own tax advisors
regarding the effect of state and local tax laws on an investment in the Common
Stock.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO FOREIGN
HOLDERS
The following discussion summarizes certain United States tax consequences
of the acquisition, ownership and disposition of the Common Stock by an initial
purchaser of the Common Stock that, for United States income tax purposes, is
not a "United States person" (a "Foreign Holder"). For purposes of discussion, a
"United States person" means: a citizen or resident of the United States; a
corporation, partnership, or other entity created or organized in the United
States or under the laws of the United States or of any political subdivision
thereof; or an estate or trust whose income is includible in gross income for
United States income tax purposes regardless of its source. This discussion does
not consider any specific facts or circumstances that may apply to a particular
Foreign Holder prospective investors are urged to consult their tax advisors
regarding the United States tax consequences of acquiring, holding and disposing
of Common Stock, as well as any tax consequences that may arise under the laws
of any foreign, state, local or other taxing jurisdiction.
Dividends
Dividends paid by the Company out of earnings and profits, as determined
for United States income tax purposes, to a Non-United States Holder will
generally be subject to withholding of United States Federal income tax at the
rate of 30%, unless reduced or eliminated by an applicable tax treaty or unless
such dividends are treated as effectively connected with a United States trade
or business conducted by the Foreign Holder. A Foreign Holder eligible for a
reduction in withholding under an applicable treaty must so notify the Company
by completing the appropriate IRS form. Distributions paid by the Company in
excess of its earnings and profits will be treated as a tax-free return of
capital to the extent of the holder's adjusted basis in his Common Stock, and
thereafter as gain from the sale or exchange of a capital asset as described
below. If it cannot be determined at the time a distribution is made whether
such distribution will exceed the Company's earnings and profits (which, under
most circumstances, will correspond to the Company's net income before the
deduction for dividends paid), the distribution will be subject to withholding
at the same rate as dividends.
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Amounts so withheld, however, will be refundable or creditable against the
Foreign Holder's United States tax liability if the Company subsequently
determines that such distribution was, in fact, in excess of the earnings and
profits of the Company. If the receipt of the dividend is treated as being
effectively connected with the conduct of a trade or business within the United
States by a Foreign Holder, the dividend received by such holder will be subject
to the United States Federal income tax on net income that applies to United
States persons generally (and, in addition with respect to foreign corporate
holders and under certain circumstances, the branch profits tax).
For any year in which the Company qualifies as a REIT, distributions to a
Foreign Holder that are attributable to gain from the sales or exchanges by the
Company of "United States real property interests" will be treated as if such
gain were effectively connected with a United States business and will thus be
subject to tax at the normal capital gain rates applicable to United States
stockholders (subject to applicable alternative minimum tax) under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Also, distributions subject to FIRPTA may be subject to a 30% branch
profits tax in the hands of a foreign corporate stockholder not entitled to a
treaty exemption. The Company is required to withhold 35% of any distribution
that could be designated by the Company as a capital gains dividend. This amount
may be credited against the Foreign Holder's FIRPTA tax liability.
Gain on Disposition
A Foreign Holder will generally not be subject to United States Federal
income tax on gain recognized on a sale or other disposition of the Common Stock
unless (i) the gain is effectively connected with the conduct of a trade or
business within the United States by the Foreign Holder, (ii) in the case of a
Foreign Holder who is a nonresident alien individual and holds the Common Stock
as a capital asset, such holder is present in the United States for 183 or more
days (computed in part by reference to days present in the two prior years) in
the taxable year and certain other requirements are met, or (iii) the Foreign
Holder is subject to tax under the FIRPTA rules discussed below. Gain that is
effectively connected with the conduct of a United States Holder will be subject
to the United States Federal income tax on net income that applies to United
States persons generally (and, with respect to corporate holders and under
certain circumstances, the branch profits tax) but will not be subject to
withholding. Foreign Holders should consult applicable treaties, which may
provide for different rules.
Gain recognized by a Foreign Holder upon a sale of its Common Stock will
generally not be subject to tax under FIRPTA if the Company is a "domestically
controlled REIT," which is defined generally as a REIT in which at all times
during a specified testing period less than 50% in value of its shares were held
directly or indirectly by non-U.S. persons. Because only a minority of the
Company's stockholders are expected to be Foreign Holders, the Company
anticipates that it will qualify as a "domestically controlled REIT."
Accordingly, a Foreign Holder should not be subject to U.S. tax from gains
recognized upon disposition of the Common Stock.
Information Reporting and Backup Withholding
Under temporary United States Treasury regulations, United States
information reporting requirements and backup withholding tax will generally not
apply to dividends paid on the Common Stock to a Non-United States Holder at an
address outside the United States. Payments by a United States office of a
broker of the proceeds of a sale of the Common Stock is subject to both backup
withholding at a rate of 31% and information reporting unless the holder
certifies its Foreign Holder status under penalties of perjury or otherwise
establishes an exemption. Information reporting requirements (but not backup
withholding) will also apply to payments of the proceeds of sales of the Common
Stock by foreign offices of United States brokers, or foreign brokers with
certain types of relationships to the United States, unless the broker has
documentary evidence in its records that the holder is a Foreign Holder and
certain other conditions are met, or the holder otherwise establishes an
exemption.
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Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Foreign
Holder's United States Federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service.
These information reporting and backup withholding rules are under review
by the United States Treasury and their application to the Common Stock could be
changed by future regulations.
ERISA CONSIDERATIONS
In considering an investment in the Common Stock of the Company, a
fiduciary of a profit-sharing, pension stock bonus plan, or individual
retirement account, including a plan for self-employed individuals and their
employees or any other employee benefit plan subject to prohibited transaction
provisions of the Code or the fiduciary responsibility provisions of ERISA (an
"ERISA Plan") should consider (a) whether the ownership of Common Stock is in
accordance with the documents and instruments governing such ERISA Plan; (b)
whether the ownership of Common Stock is consistent with the fiduciary's
responsibilities and satisfies the requirements of Part 4 of Subtitle B of Title
I of ERISA (where applicable) and, in particular, the diversification, prudence
and liquidity requirements of Section 404 of ERISA; (c) ERISA's prohibitions in
improper delegation of control over, or responsibility for, "plan assets" and
ERISA's imposition of co-fiduciary liability on a fiduciary who participates in,
permits (by action or inaction) the occurrence of, or fails to remedy a known
breach of duty by another fiduciary; and (d) the need to value the assets of the
ERISA Plan annually.
In regard to the "plan assets" issue noted in clause (c) above, Special Tax
Counsel is of the opinion that, effective as of the date of this closing of this
Offering and the listing of the shares of Common Stock on the NYSE, and based on
certain representations of the Company, the Common Stock should qualify as a
"publicly-offered security," and, therefore, the acquisition of such Common
Stock by ERISA Plans should not cause the Company's assets to be treated as
assets of such investing ERISA Plans for purposes of the fiduciary
responsibility provisions of ERISA or the prohibited transaction provisions of
the Code. Fiduciaries of ERISA Plans and IRA's should consult with and rely upon
their own advisors in evaluating the consequences under the fiduciary provisions
of ERISA and the Code of an investment in Common Stock in light of their own
circumstances.
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UNDERWRITING
The underwriters named below (the "Underwriters"), represented by
PaineWebber Incorporated, Oppenheimer & Co., Inc., EVEREN Securities, Inc. and
Sutro & Co. Incorporated (the "Representatives"), have severally agreed to
purchase, and the Company has agreed to sell, subject to the terms and
conditions set forth in an underwriting agreement (the "Underwriting
Agreement"), the respective number of shares of Common Stock set forth opposite
their names below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER TO BE PURCHASED
--------------------------------------------------------------------- ----------------
<S> <C>
PaineWebber Incorporated.............................................
Oppenheimer & Co., Inc. .............................................
EVEREN Securities, Inc...............................................
Sutro & Co. Incorporated.............................................
---------
Total...................................................... 5,000,000
</TABLE>
In the Underwriting Agreement, the Underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of Common Stock being sold pursuant to the Underwriting Agreement (other
than those covered by the over-allotment option described below) if any shares
of Common Stock are purchased. The Underwriting Agreement provides that the
obligations of the Underwriters to purchase such shares of Common Stock are
subject to certain conditions precedent. The Underwriting Agreement also
provides that in the event of a default by any Underwriter, the purchase
commitments of the nondefaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock in part to the public at the initial public
offering price set forth on the cover page of this Prospectus, and in part to
certain securities dealers (who may include the Underwriters) at such price less
a concession not in excess of $ per share of Common Stock, and the
Underwriters and such dealers may reallow to certain dealers a discount not in
excess of $ per share of Common Stock. After the closing of this
Offering, the public offering price, concessions to selected dealers and the
discount to other dealers may be changed by the Representatives. The Shares are
offered subject to receipt and acceptance by the Underwriters, and to certain
other conditions, including the right to reject orders in whole or in part.
The Company has granted the Underwriters an option exercisable for 30 days
after the date hereof to purchase up to 750,000 additional shares of Common
Stock to cover over-allotments, if any, at the initial public offering price
less the underwriting discount and commissions. If the Underwriters exercise
this option, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of Common Stock as the number of shares of Common Stock to be purchased
by it shown in the foregoing table bears to the shares of Common Stock initially
offered hereby. The Underwriters may purchase such shares of Common Stock only
to cover over-allotments made in connection with this Offering.
The Company has agreed to indemnify the several Underwriters against
certain civil liabilities, including liabilities under the federal securities
laws, or to contribute to payments which the Underwriters may be required to
make in respect thereof.
The Company and the officers and directors of the Company have agreed that,
for a period of 180 days from the date of this Prospectus, they will not,
without the prior written consent of PaineWebber Incorporated, directly or
indirectly, sell, offer to sell, grant any option for the sale of, or otherwise
dispose of any shares of Common Stock or any security convertible into Common
Stock, except upon exercise of the options outstanding or to be issued pursuant
to the Incentive Plan, the Option Plan or the Outside Directors Plan or shares
of Common Stock to be issued pursuant to the Stock Purchase Plan.
PaineWebber Incorporated has in the past performed, and may continue to
perform, investment banking, broker dealer, lending and financial advisory
services for the Company and the Manager, and has received customary
compensation therefor. In connection with this Offering, the Company has agreed
to pay
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PaineWebber Incorporated an advisory fee equal to 0.5% of the gross proceeds of
this Offering for structuring and advisory services rendered in connection with
this Offering. In addition, the Company has a secured repurchase credit facility
and a collateralized line of credit with an affiliate of PaineWebber
Incorporated.
The Representatives have informed the Company that they do not expect the
Underwriters to confirm sales of Common Stock offered by this Prospectus to any
accounts over which they exercise discretionary authority.
Prior to this Offering, there has been no public market for the Common
Stock. Accordingly, the public offering price has been determined by
negotiations between the Company and the Representatives. Among the factors
which were considered in determining the initial public offering price were the
Company's future prospects, the experience of its management, the economic
condition of the financial services industry in general, the general condition
of the equity securities market, the demand for similar securities of companies
considered comparable to the Company and other relevant factors.
The initial public offering price set forth on the cover page of this
Prospectus should not be considered an indication of the actual value of the
Common Stock. The initial public offering price is subject to change as a result
of market conditions and other factors and no assurance can be given that the
Common Stock can be resold at the offering price.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase shares of Common Stock. As
an exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
In addition, if the Representatives over-allot (i.e., if they sell more
shares of Common Stock than are set forth on the cover page of this Prospectus)
and thereby create a short position in the Common Stock in connection with this
Offering, then the Representatives may reduce that short position by purchasing
Common Stock in the open market. The Representatives may also elect to reduce
any short position by exercising all or part of the over-allotment option
described herein.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might otherwise be in the absence of such purchases. The imposition of a
penalty bid might also have an effect on the price of a security to the extent
that it were to discourage resales of the security by purchasers in the
offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
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CERTAIN PROVISIONS OF MARYLAND LAW
AND THE COMPANY'S CHARTER AND BYLAWS
The following summary of material provisions of the MGCL and of the Charter
and the Bylaws of the Company does not purport to be complete and is subject to
and qualified in its entirety by reference to Maryland law and to the Charter
and the Bylaws of the Company, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Charter and the Bylaws of the Company contain certain provisions that
could discourage, impede or impair acquisition of control of the Company by
means of a tender offer, a proxy contest or otherwise. These provisions are
expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
the Company to negotiate first with the Board of Directors. The Company believes
that these provisions increase the likelihood that proposals initially will be
on more attractive terms than would be the case in their absence and increases
the likelihood of negotiations, which might outweigh the potential disadvantages
of discouraging such proposals because, among other things, negotiation of such
proposals might result in improvement of terms. The description set forth below
is a summary only, and is qualified in its entirety by reference to the Charter
and the Bylaws which have been filed as exhibits to the Registration Statement
of which this Prospectus is a part. See "Description of Capital
Stock -- Repurchase of Shares and Restrictions on Transfer" and "Risk
Factors -- Additional Risk Factors -- Limitations on Acquisition and Change in
Control."
STAGGERED BOARD OF DIRECTORS
The Charter and the Bylaws divide the Board of Directors into three classes
of directors, each class constituting approximately one-third of the total
numbers of directors, with the classes serving staggered three-year terms. The
classification of the Board of Directors will make it more difficult for
stockholders to change the composition of the Board of Directors because only a
minority of the directors can be elected at once. The Company believes, however,
that the staggered Board of Directors will help to ensure continuity and
stability of the Company's management and policies. The classification
provisions could also discourage a third party from accumulating the Company's
stock or attempting to obtain control of the Company, even though this attempt
might be beneficial to the Company and some, or a majority, of its stockholders.
Accordingly, under certain circumstances stockholders could be deprived of
opportunities to sell their shares of Common Stock at a higher price than might
otherwise be available.
NUMBER OF DIRECTORS, REMOVAL, FILLING VACANCIES
The Charter and Bylaws provide that, subject to any rights of holders of
preferred stock to elect additional directors under specified circumstances
("Preferred Holders Rights"), the number of directors will be four and may be
changed by a majority of the entire Board of Directors. In addition, the Charter
provides that, subject to any Preferred Holders Rights, and unless the Board of
Directors otherwise determines, any vacancies may be filled by a vote of the
stockholders or a majority of the remaining directors, though less than a
quorum, except vacancies created by the increase in the number of directors,
which only may be filled by a vote of the stockholders or a majority of the
entire Board of Directors. Accordingly, the Board of Directors could temporarily
prevent any stockholder from enlarging the Board of Directors and filling the
new directorship with such stockholder's own nominees. The Charter and the
Bylaws provide that, subject to the rights of any class or series to elect
directors, directors may be removed only for cause upon the affirmative vote of
a majority of holders of all the then outstanding shares of stock entitled to
vote generally in the election of directors, voting together as a single class.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER PROPOSALS
The Charter and the Bylaws establish an advance notice procedure for
stockholders to make nominations of candidates for director or bring other
business before an annual meeting of stockholders of the Company
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(the "Stockholder Notice Procedure"). The Bylaws provide that (i) only persons
who are nominated by, or at the direction of, the Board of Directors, or by a
stockholder who has given timely written notice containing specified information
to the Secretary of the Company prior to the meeting, at which directors are to
be elected, will be eligible for election as directors of the Company and (ii)
at an annual meeting, only such business may be conducted as has been brought
before the meeting by, or at the direction of, the Chairman or the Board of
Directors or by a stockholder who has given timely written notice to the
Secretary of the Company of such stockholder's intention to bring such business
before such meeting. In general, for notice of stockholder nominations or
proposed business (other than business to be included in the Company's Proxy
Statement under the Securities and Exchange Commission's Rule 14a-8) to be
conducted at an annual meeting to be timely, such notice must be received by the
Company not less than 60 days nor more than 90 days prior to the first
anniversary of the previous year's annual meeting. The purpose of requiring
stockholders to give the Company advance notice of nominations and other
business is to afford the Board of Directors a meaningful opportunity to
consider the qualifications of the proposed nominees or the advisability of the
other proposed business and, to the extent deemed necessary or desirable by the
Board of Directors, to inform stockholders and make recommendations about such
nominees or business, as well as to ensure an orderly procedure for conducting
meetings of stockholders. Although the Charter and the Bylaws do not give the
Board of Directors power to block stockholder nominations for the election of
directors or proposals for action, they may have the effect of discouraging a
stockholder from proposing nominees or business, precluding a contest for the
election of directors or the consideration of stockholder proposals if
procedural requirements are not met and deterring third parties from soliciting
proxies for a non-management slate of directors or proposals, without regard to
the merits of such slate or proposals.
RELEVANT FACTORS TO BE CONSIDERED BY THE BOARD OF DIRECTORS
The Charter provides that, in determining what is in the best interest of
the Company in a business combination or certain change of control events, a
director of the Company shall consider the interests of the stockholders of the
Company and, in his or her discretion, also may consider (i) the interests of
the Company's employees, suppliers, creditors and tenants, (ii) the economy of
the nation, (iii) community and societal interests, and (iv) both the long-term
and short-term interests of the Company and its stockholders, including the
possibility that these interests may be best served by the continued
independence of the Company. Pursuant to this provision, the Board of Directors
may consider subjective factors affecting a proposal, including certain
non-financial matters, and on the basis of these considerations may oppose a
business combination or other transaction which, evaluated only in terms of its
financial merits, might be attractive to some, or a majority, of the Company's
stockholders.
RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY
The Board of Directors may create and authorize the Company to issue rights
entitling the holders thereof to purchase from the Company shares of capital
stock or other securities or property. The times at which and terms upon which
such rights are to be issued are within the discretion of the Board of
Directors. The provision is intended to confirm the Board of Directors'
authority to issue share purchase rights which could have terms that would
impede a merger, tender offer or other takeover attempt, or other rights to
purchase securities of the Company or any other entity.
BUSINESS COMBINATIONS
The MGCL prohibits certain "business combinations" (including certain
mergers, consolidations, share exchanges, asset transfers, sales, leases,
issuance or reclassification of equity securities and benefits) involving a
Maryland corporation and an "Interested Stockholder." Interested Stockholders
are all persons (i) who beneficially own 10% or more of the voting power of the
corporation's stock or (ii) an affiliate or associate of the corporation who, at
any time within the two-year period prior to the date in question, was an
Interested Stockholder or an affiliate or an associate thereof. Such business
combinations are prohibited for five years after the most recent date on which
the Interested Stockholder became an Interested Stockholder. Thereafter, any
such business combination must be recommended by the board of directors of such
corporation and
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approved by the affirmative vote of at least (a) 80% of the votes entitled to be
cast by all holders of voting shares of the corporation, and (b) 66 2/3% of the
votes entitled to be cast by all holders of voting shares of the corporation
other than the voting shares held by the Interested Stockholder or an affiliate
or associate of the Interested Stockholder, with whom the business combination
is to be effected, unless, among other things, the corporation's stockholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested Stockholder for its shares. These provisions of Maryland law do not
apply, however, to business combinations that are approved or exempted by the
board of directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder. A Maryland corporation may adopt
an amendment to its charter electing not to be subject to the special voting
requirements of the foregoing legislation. Any such amendment would have to be
approved by the affirmative vote of at least 80% of the votes entitled to be
cast by all holders of outstanding shares of voting stock and 66 2/3% of the
votes entitled to be cast by holders of outstanding shares of voting stock who
are not Interested Stockholders.
CONTROL SHARE ACQUISITIONS
The MGCL provides the "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror or by the officers or directors
who are employees of the company. Control shares are voting shares of stock
which, if aggregated with all other shares of stock previously acquired by such
a person, would entitle the acquiror to exercise voting power in electing
directors within one of the following ranges of voting power: (i) 20% or more
but not less than 33 1/3%; (ii) 33 1/3% or more but less than a majority; or
(iii) a majority of all voting power. Control Shares do not include shares of
stock an acquiring person is entitled to vote as a result of having previously
obtained stockholder approval. A control share acquisition means, subject to
certain exceptions, the acquisition of, ownership of or the power to direct the
exercise of voting power with respect to, control shares. A person who has made
or proposed to make a "control share acquisition," upon satisfaction of certain
conditions (including an undertaking to pay expenses), may compel the board of
directors to call a special meeting of stockholders to be held within 50 days of
demand therefor to consider the voting rights of the shares. If no request for a
meeting is made, the corporation may itself present the question at any
stockholders' meeting. If voting rights are not approved at the meeting or if
the acquiring person does not deliver an acquiring person statement as permitted
by the statute, then, subject to certain conditions and limitations, the
corporation may redeem any or all of the control shares (except those for which
voting rights have previously been approved) for fair value determined, without
regard to voting rights, as of the date of the last control share acquisition or
of any meeting of stockholders at which the voting rights of such shares are
considered and not approved. If voting rights for "control shares" are approved
at a stockholders' meeting and the acquiror becomes entitled to vote a majority
of the shares entitled to vote, all other stockholders may exercise appraisal
rights. The fair value of the stock as determined for purposes of such appraisal
rights may not be less than the highest price per share paid in the control
share acquisition, and certain limitations and restrictions otherwise applicable
to the exercise of dissenters' rights do not apply in the context of a "control
share acquisition." The control share acquisition statute does not apply to
stock acquired in a merger, consolidation or stock exchange if the corporation
is a party to the transaction, or to acquisitions previously approved or
exempted by a provision in the charter or by-laws of the corporation. The
limitation on ownership of shares of Common Stock set forth in the Charter, as
well as the provisions of the MGCL, could have the effect of discouraging offers
to acquire the Company and of increasing the difficulty of consummating any such
offer. See "Description of Capital Stock -- Repurchase of Shares and
Restrictions on Transfer."
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LEGAL MATTERS
Certain legal matters will be passed on for the Company by Gray Cary Ware &
Freidenrich, a professional corporation, San Diego, California as Counsel to the
Company in connection with this Offering. The validity of the Common Stock
offered hereby will be passed on by Piper & Marbury L.L.P., special Maryland
counsel to the Company. Certain tax matters will be passed on by Jeffers,
Wilson, Shaff & Falk, LLP, Irvine, California as Special Tax Counsel to the
Company in connection with this Offering. Certain legal matters will be passed
on for the Underwriters by O'Melveny & Myers LLP, San Francisco, California.
Counsel to the Company, Gray Cary Ware & Freidenrich, Special Tax Counsel and
O'Melveny and Myers LLP have relied as to all matters of Maryland law on the
opinion of special Maryland counsel to the Company.
EXPERTS
The financial statements of American Residential Investment Trust, Inc. as
of June 30, 1997, and for the period from February 11, 1997 (commencement of
operations) through June 30, 1997, have been included herein in reliance on the
report of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-11
under the Securities Act of 1933, as amended, with respect to the Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and such Common Stock, reference
is made to the Registration Statement and the exhibits and schedules filed as
part thereof. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and, in
each instance, if such contract or document is filed as an exhibit, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each statement being qualified in all respects by such
reference to such exhibit. The Registration Statement, including exhibits and
schedules thereto, may be inspected without charge at the Commission's principal
office in Washington, D.C., and copies of all or any part thereof may be
obtained from such office after payment of fees prescribed by the Commission.
The Commission maintains a Website that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the site is http://www.sec.gov.
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GLOSSARY
As used in this Prospectus, the capitalized and other terms listed below
have the meanings indicated.
"AGENCY SECURITIES" means adjustable-rate mortgage participation
certificates issued by FNMA, FHLMC or GNMA. These securities entitle the holder
to receive a pass-through of principal and interest payments on the underlying
pool of Mortgage Loans and are issued or guaranteed by federal government
sponsored agencies.
"CAPITAL CUSHION" is a term defined in the Company's Capital Policy. It
represents the equity reserve amount assigned to each Mortgage Asset which is
adjusted based upon the Company's assessment of the risk of delinquency, default
or loss on such Mortgage Asset.
"CAPITAL POLICY" means the policy established by the Company which limits
Management's ability to acquire additional Mortgage Assets during such times
that the actual capital base of the Company is less than a required amount
defined in the policy. The required amount is the sum of the "haircuts" required
by the Company's secured lenders (the required haircut) and the additional
capital levels called for under the policy which are determined with reference
to the various risks inherent in the Company's Mortgage Assets (the liquidity
capital cushion).
"CODE" means the Internal Revenue Code of 1968, as amended.
"CORRESPONDENTS" means entities which originate Mortgage Loans for resale
to the Company. The Company's Correspondents may include mortgage banks, savings
and loans, credit unions, commercial banks, institutional mortgage brokers' and
other entities.
"COUPON RATE" means, with respect to Mortgage Assets, the annualized cash
interest income actually received from the asset, expressed as a percentage of
the face value of the asset.
"EARNING ASSETS" means the Company's Mortgage Assets and cash balances.
"EQUITY-FUNDED LENDING" means the portion of the Company's earning assets
acquired using the Company's equity capital.
"FEDERAL FUNDS RATE" means the interest rate that is charged by banks with
excess reserves at a Federal Reserve District Bank to banks needing the money to
meet reserve requirements. The Federal Funds Effective Rate is the average rate
that fed funds were traded at over the course of a day. The Fed will act to
ensure that the Fed Funds rate trades within a range of its Fed Funds Target
Rate, which is set at the FOMC meetings.
"FHA" means the United States Federal Housing Administration.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FNMA" means the Federal National Mortgage Association.
"FULLY-INDEXED RATE" means, with respect to adjustable-rate Mortgage
Assets, the rate that would be paid by the borrower ("GROSS") or received by the
Company as owner of the Mortgage Asset ("NET") if the coupon rate on the
adjustable-rate Mortgage Assets were able to adjust immediately to a market rate
without being subject to adjustment periods, periodic caps, or life caps. It is
equal to the current yield of the adjustable-rate Mortgage Assets index plus the
gross or net margin.
"GAAP" means generally accepted accounting principles.
"GNMA" means the Government National Mortgage Association.
"GROSS ASSETS" means for any month the aggregate book value of the
consolidated assets of the Company and its subsidiaries, before reserves for
depreciation or bad debts or other similar noncash reserves, computed at the end
of such month prior to any dividend distribution made during each month.
"HAIRCUT" means the percentage by which the market value of the pledged
collateral is required by a lender to exceed the borrowing amount in connection
with a collateralized borrowing.
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"INTEREST RATE ADJUSTMENT INDICES" means, in the case of Mortgage Assets,
any of the objective indices based on the market interest rates of a specified
debt instrument (such as United States Treasury Bills in the case of the
Treasury Index and United States dollar deposits in London in the case of LIBOR)
or based on the average interest rate of a combination of debt instruments (such
as the 11th District Cost of Funds Index), used as a reference base to reset the
interest rate for each adjustment period on the Mortgage Asset, and in the case
of borrowings, is used herein to mean the market interest rates of a specified
debt instrument (such as reverse repurchase agreements for Mortgage Securities)
as well as any of the objective indices described above that are used as a
reference base to reset the interest rate for each adjustment period under the
related borrowing instrument.
"INTEREST RATE ADJUSTMENT PERIOD" means, in the case of Mortgage Assets,
the period of time set forth in the debt instrument that determines when the
interest rate is adjusted and, with respect to borrowings, is used to mean the
term to maturity of a short-term, fixed-rate debt instrument (such as a 30-day
reverse repurchase agreement) as well as the period of time set forth in a
long-term, adjustable-rate debt instrument that determines when the interest
rate is adjusted.
"LIBOR" means London Inter-bank Offered Rate as it may be defined, and for
a period of time specified, in a Mortgage Asset or borrowing of the Company.
"LIFETIME INTEREST RATE CAP" or "LIFE CAP" means the maximum coupon rate
that may accrue during any period over the term of an adjustable-rate Mortgage
Loan or, in the case of a Mortgage Security, the maximum weighted average coupon
rate that may accrue during any period over the term of such Mortgage Security.
"LIQUIDITY CAPITAL CUSHION" is a term defined in the Company's Capital
Policy. It represents a portion of the capital the Company is required to
maintain as part of this policy in order to continue to make asset acquisitions.
The liquidity capital cushion is that part of the required capital based which
is in excess of the Company's haircut requirements.
"MORTGAGE ASSETS" means Mortgage Securities and Mortgage Loans.
"MORTGAGE LOANS" means adjustable-rate mortgage loans secured by
residential or mixed use properties.
"MORTGAGE SECURITIES" means Agency Securities and Privately Issued
Securities.
"NONCONFORMING MORTGAGE LOANS" means conventional single-family and
multifamily Mortgage Loans that do not conform to one or more requirements of
FHLMC or FNMA for participation in one or more of such agencies' mortgage loss
credit support programs.
"PERIODIC INTEREST RATE CAP" or "PERIODIC CAP" means the maximum change in
the coupon rate permissible under the terms of the loan at each coupon
adjustment date. Periodic caps limit both the speed by which the coupon rate can
adjust upwards in a rising interest rate environment and the speed by which the
coupon rate can adjust downwards in a falling rate environment.
"PRIVATELY ISSUED SECURITIES" means adjustable-rate mortgage participation
certificates issued by certain private institutions. These securities entitle
the holder to receive a pass-through of principal and interest payments on the
underlying pool of Mortgage Loans and are issued or guaranteed by the private
institution.
"REIT" means real estate investment trust.
"REIT PROVISIONS OF THE CODE" means sections 856 through 860 of the Code.
"REMIC" means Real Estate Mortgage Investment Conduit.
"REVERSE REPURCHASE AGREEMENT" means a borrowing device evidenced by an
agreement to sell securities or other assets to a third-party and a simultaneous
agreement to repurchase them at a specified future date and price, the price
difference constituting the interest on the borrowing.
"SPREAD LENDING" means the portion of the Company's earning assets acquired
using borrowed funds.
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"TEN YEAR U.S. TREASURY RATE" for a quarterly period shall mean the
arithmetic average of the weekly per annum Ten Year Average Yields published by
the Federal Reserve Board during such quarter. In the event that the Federal
Reserve Board does not publish a weekly per annum Ten Year Average Yield during
any week in a quarter, then the Ten Year U.S. Treasury Rate for such week shall
be the weekly per annum Ten Year Average Yields published by any Federal Reserve
Bank or by any U.S. Government department or agency selected by the Company for
such week. In the event that the Company determines in good faith that for any
reason the Company cannot determine the Ten Year U.S. Treasury Board for any
quarter as provided above, then the Ten Year U.S. Treasury Rate for such quarter
shall be the arithmetic average of the per annum average yields to maturity
based upon the daily closing bids during such quarter for each of the issues of
actively traded marketable U.S. Treasury fixed interest rate securities (other
than securities which can, at the option of the holder, be surrendered at face
value in payment of any federal estate tax) with a final maturity date not less
than eight nor more than twelve years from the date of each such quotation, as
chosen and for each business day (or less frequently if daily quotations shall
not be generally available) in each such quarterly period in New York City and
quoted to the Company by at least three recognized dealers in U.S. Government
securities selected by the Company.
"VA" means the United States Department of Veterans Affairs.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors......................................................... F-2
Balance Sheet.......................................................................... F-3
Statement of Operations................................................................ F-4
Statement of Stockholders' Equity...................................................... F-5
Statement of Cash Flows................................................................ F-6
Notes to Financial Statements.......................................................... F-7
</TABLE>
F-1
<PAGE> 86
When the transaction referred to in Note 8 of the Notes to Financial
Statements has been consummated, we will be in a position to render the
following report.
/s/ KPMG PEAT MARWICK LLP
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American Residential Investment Trust, Inc.
Del Mar, California:
We have audited the accompanying balance sheet of American Residential
Investment Trust, Inc. (the Company) as of June 30, 1997 and the related
statements of operations, stockholders' equity and cash flows for the period
from February 11, 1997 (commencement of operations) through June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of June 30,
1997, and the results of its operations and its cash flows for the period from
February 11, 1997 (commencement of operations) through June 30, 1997 in
conformity with generally accepted accounting principles.
San Diego, California
July 16, 1997, except as to Note 8 to the financial statements,
which is as of , 1997.
F-2
<PAGE> 87
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
Cash and cash equivalents....................................................... $ 127
Mortgage Assets available-for-sale.............................................. 228,620
Interest rate agreements........................................................ 502
Accrued interest receivable..................................................... 2,259
Other assets.................................................................... 10
--------
$ 231,518
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reverse repurchase agreements................................................... $ 209,539
Accrued interest payable........................................................ 1,088
Accrued expense and other liabilities........................................... 215
Management fee payable.......................................................... 73
--------
Total liabilities..................................................... 210,915
--------
Commitments and contingencies (Note 10)
Stockholders' Equity:
Preferred stock, par value $.01 per share; 1,000,000 shares authorized; no
shares issued and outstanding................................................. --
Common Stock, par value $.01 per share; 3,000,000 shares authorized; 1,614,000
shares issued and outstanding................................................. 16
Additional paid-in capital...................................................... 20,149
Cumulative dividends declared................................................... (146)
Retained earnings............................................................... 584
--------
Total stockholders' equity............................................ 20,603
--------
$ 231,518
========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 88
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 11, 1997
(COMMENCEMENT OF
OPERATIONS) THROUGH
JUNE 30, 1997
-------------------
<S> <C>
INTEREST INCOME
Mortgage Assets........................................................... $ 3,489
Cash and investments...................................................... 151
------
3,640
INTEREST EXPENSE............................................................ 2,916
------
NET INTEREST INCOME......................................................... 724
OTHER EXPENSES
Management fee............................................................ 69
General and administrative expenses....................................... 71
------
140
------
NET INCOME.................................................................. $ 584
======
NET INCOME PER SHARE OF COMMON STOCK........................................ $ 0.35
Dividends per share of Common Stock......................................... $ 0.09
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 89
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
------------------ PAID-IN DIVIDENDS RETAINED
SHARES AMOUNT CAPITAL DECLARED EARNINGS TOTAL
--------- ------ ---------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Initial capital contribution,
February 11, 1997................... 1,614,000 $ 16 $ 20,149 $ -- $ -- $20,165
--------- --- ------- ----- ---- -------
Net income............................ -- -- -- -- 584 584
Dividends declared.................... -- -- -- (146) -- (146)
--------- --- ------- ----- ---- -------
Balance, June 30, 1997................ 1,614,000 $ 16 $ 20,149 $ (146) $ 584 $20,603
--------- --- ------- ----- ---- -------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 90
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 11, 1997
(COMMENCEMENT OF
OPERATIONS) THROUGH
JUNE 30, 1997
-------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 584
Adjustments to reconcile net income to net cash used in operating
activities:
Amortization of mortgage assets premiums............................... 528
Amortization of interest rate cap agreements........................... 40
Increase in accrued interest receivable................................ (2,259)
Increase in other assets............................................... (10)
Increase in accrued interest payable................................... 1,088
Increase in accrued expenses........................................... 288
----------
Net cash provided by operating activities......................... 259
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Mortgage Assets available-for-sale........................... (239,555)
Principal payments on Mortgage Assets available-for-sale.................. 10,407
Purchase of interest rate cap agreements.................................. (542)
----------
Net cash used in investing activities............................. (229,690)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from reverse repurchase agreements......................... 209,539
Net proceeds from stock issuance.......................................... 20,165
Dividends paid............................................................ (146)
----------
Net cash provided by financing activities......................... 229,558
Net increase in cash and cash equivalents................................... 127
Cash and cash equivalents at beginning of period............................ --
----------
Cash and cash equivalents at end of period.................................. $ 127
==========
Supplemental Information
Interest Paid............................................................. $ 1,828
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 91
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM FEBRUARY 11, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH JUNE 30, 1997
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
American Residential Investment Trust, Inc. (the "Company"), a newly formed
Maryland corporation, commenced operations on February 11, 1997. The Company was
formed through a private equity funding from its manager, Home Asset Management
Corporation (the "Manager"). The Company operates as a mortgage real estate
investment trust which will elect to be taxed as a real estate investment trust
("REIT") for Federal income tax purposes, which generally will allow the Company
to pass through income to stockholders without payment of corporate level
federal income tax. The Company was formed for the purpose of investing in
residential adjustable-rate mortgage-backed securities and Mortgage Loans. The
Company has developed tailored mortgage loan products for Mortgage Loans to be
originated by and acquired directly from correspondents. The Company finances
its acquisitions of Mortgage Assets with equity and secured borrowings.
Basis of Financial Statement Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the report amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates.
A summary of the Company's significant accounting policies follows:
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents
include cash on hand and highly liquid investments with original maturities of
three months or less.
Mortgage Assets
The Company's Mortgage Assets consist of interests in Mortgage Loans which
have been securitized by others prior to acquisition by the Company.
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115"), requires the Company to
classify its investments as either trading investments, available-for-sale
investments or held-to-maturity investments. Although the Company generally
intends to hold most of its Mortgage Assets until maturity, it may, from time to
time, sell any of its Mortgage Assets as part of its overall management of its
balance sheet. Accordingly, this flexibility requires the Company to classify
all of its Mortgage Assets as available-for-sale. All Mortgage Assets classified
as available-for-sale are reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
stockholders' equity.
Unrealized losses on Mortgage Assets that are considered other than
temporary, as measured by the amount of decline in fair value attributable to
factors other than temporary, are recognized in income and the cost basis of the
Mortgage Asset is adjusted. The determination of whether unrealized losses are
other than temporary is based on management's assessment of various factors
affecting the Mortgage Assets.
Interest income is accrued based on the outstanding principal amount of the
Mortgage Assets and their contractual terms. Premiums relating to Mortgage
Assets are amortized into interest income over the lives of
F-7
<PAGE> 92
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD FROM FEBRUARY 11, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH JUNE 30, 1997
the Mortgage Assets using the interest method. Gains or losses on the sale of
Mortgage Assets are based on the specific identification method.
Interest Rate Agreements
The Company uses interest rate cap agreements (the "Cap Agreements") for
interest rate risk protection. The Cap Agreements are purchased primarily to
reduce the Company's exposure to rising interest rates which would increase the
cost of liabilities above the maximum yield which could be earned on the
adjustable rate Mortgage Assets. The Company periodically evaluates the
effectiveness of these Cap Agreements under various interest rate scenarios.
The cost of the agreements are amortized over the life of the interest rate
agreements using the straight-line method. The Company has credit risk to the
extent counterparties to the Cap Agreements do not perform their obligations
under the Cap Agreements. In order to lessen this risk and to achieve
competitive pricing, the Company has entered into Cap Agreements only with
counterparties which are investment grade rated.
Income Taxes
The Company has elected to be taxed as a REIT and intends to comply with
the REIT Provisions of the Internal Revenue Code (the "Code") and the
corresponding provisions of State law. Accordingly, the Company will not be
subject to Federal or state income tax to the extent of its distributions to
stockholders. In order to maintain its status as a REIT, the Company is
required, among other requirements, to distribute at least 95% of its taxable
income.
Earnings per Share
Earnings per share are based on the weighted average shares of Common Stock
outstanding plus common equivalent shares outstanding for the period. The
treasury stock method calculation assumes all dilutive stock options and
Warrants are exercised and the funds generated by the exercise are used to buy
back outstanding Common Stock at the average market price during the reporting
period, for primary earnings per share, or at the end of period market price if
higher, for fully diluted earnings per share.
Recent Accounting Developments
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125 (SFAS 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
which supersedes SFAS 122. SFAS 125 provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities. These standards are based on consistent application of a financial
components approach that focuses on control. Under that approach, after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered and derecognizes liabilities when
extinguished. SFAS 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS 125 requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It also requires that servicing assets
and other retained interests in the transferred assets be measured by allocating
the previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of the
transfers. SFAS 125 includes specific provisions to deal with servicing assets
or liabilities. SFAS 125 will be effective for transactions occurring after
December 31, 1996, except for certain transactions which according to Statement
of Financial Accounting
F-8
<PAGE> 93
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD FROM FEBRUARY 11, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH JUNE 30, 1997
Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
125," will be effective if occurring after December 31, 1997.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"). "Earnings per Share",
SFAS 128 supersedes APB Opinion No. 15 ("APB 15"), "Earnings per Share" and
specifies the computation, presentation and disclosure requirements for earnings
per share ("EPS") for entities with publicly held common stock or potential
common stock. SFAS 128 will replace the presentation of primary EPS with a
presentation of basic EPS, and fully diluted EPS with diluted EPS. SFAS 128 will
also require dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. This statement is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. The
Company has determined that this statement will have no significant impact on
the Company's financial position or results of operations.
NOTE 2. MORTGAGE ASSETS
At June 30, 1997, Mortgage Assets consisted of the following Agency
Securities available-for-sale:
<TABLE>
<CAPTION>
FEDERAL HOME FEDERAL NATIONAL
LOAN MORTGAGE MORTGAGE
CORPORATION ASSOCIATION TOTAL
------------- ---------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage Securities available-for-sale, principal....... $ 132,818 $ 87,571 $220,389
Unamortized premium..................................... 4,701 3,530 8,231
-------- ------- --------
Amortized cost.......................................... $ 137,519 $ 91,101 $228,620
======== ======= ========
</TABLE>
At June 30, 1997, all investments in Mortgage Assets consisted of interests
in adjustable rate Mortgage Loans on residential properties. The securitized
interests in pools of adjustable rate mortgages from the Federal Home Loan
Mortgage Corporation and the Federal National Mortgage Association are
guaranteed as to principal and interest. The original maturity of the vast
majority of the Mortgage Assets is over a period of thirty years; the actual
maturity is subject to change based on the prepayments of the underlying
mortgage loans.
At June 30, 1997, the weighted average net coupon on the Mortgage Assets
was 7.78% per annum based on the amortized cost of the assets. All Mortgage
Assets have repricing frequency of one year or less. At June 30, 1997, the
estimated fair value of Mortgage Assets approximated amortized cost.
NOTE 3. INTEREST RATE AGREEMENTS
The amortized cost of the Company's interest rate agreements was $502,000,
net of accumulated amortization of $40,000, at June 30, 1997.
Cap Agreements
The Company had twelve outstanding cap agreements at June 30, 1997.
Potential future earnings from each of these Cap Agreements are based on
variations in the London Interbank Offered Rate ("LIBOR"). The Cap Agreements at
June 30, 1997 have contractually stated notional amounts which vary over the
life of
F-9
<PAGE> 94
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD FROM FEBRUARY 11, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH JUNE 30, 1997
the Cap Agreements. Under these Cap Agreements the Company will receive cash
payments should the agreed-upon reference rate, one month LIBOR, increase above
the strike rates of the Cap Agreements.
All of the adjustable-rate Mortgage Securities and Mortgage Loans are
limited by periodic caps (generally interest rate adjustments are limited to no
more than 1% every six months) and lifetime interest rate caps. At June 30, 1997
the weighted average lifetime cap was 10.324%.
Cap agreements outstanding at June 30, 1997 are as follows:
<TABLE>
<CAPTION>
AVERAGE CAP EXPECTED
NOTIONAL FACE AVERAGE CAP LOW CAP HIGH CAP CAP EXPENSE
YEAR AMOUNT STRIKE RATE STRIKE RATE STRIKE RATE AMORTIZATION
- --------------------------------------- ------------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1997................................... $ -- 0% 0% 0% $ 132
1998................................... 133,903 8.11 7.52 9.95 182
1999................................... 121,284 8.11 7.52 9.95 182
2000................................... 93,179 8.11 7.52 9.95 46
----
Total........................ $ 542
====
</TABLE>
NOTE 4. REVERSE REPURCHASE AGREEMENTS
The Company has entered into reverse repurchase agreements ("Borrowings")
to finance the acquisition of its Mortgage Assets. The maximum aggregate
available under the reverse repurchase agreements at June 30, 1997 of over $500
million. These Borrowings are collateralized by a portion of the Company's
Mortgage Assets. At no time were there more than approximately 45% of the
Borrowings with any one investment banking firm. At June 30, 1997, Mortgage
Assets pledged had an estimated fair value of approximately $221 million.
At June 30, 1997, the Company had approximately $210 million of Borrowings
outstanding with a weighted average borrowing rate of 5.69% and a weighted
average remaining maturity of 62 days. The maximum month end balance and the
average balance outstanding for the period February 11, 1997 through June 30,
1997, was $210 million and $151.3 million, respectively. At June 30, 1997, the
Borrowings had the following characteristics:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------------------------------------------------------
REVERSE
REPURCHASE UNDERLYING WEIGHTED AVERAGE WEIGHTED AVERAGE
LIABILITY COLLATERAL INTEREST RATE MATURITY DATE
---------- ---------- ---------------- -------------------
<S> <C> <C> <C> <C>
PaineWebber...................... $ 21,984 $ 22,588 5.60% July 21, 1997
Morgan Stanley................... 32,012 33,955 5.90 October 6, 1997
Goldman Sachs.................... 85,577 91,863 5.69 September 17, 1997
Freddie Mac...................... 34,316 36,193 5.65 August 21, 1997
Lehman Brothers.................. 35,650 35,980 5.60 July 26, 1997
-------- -------- ----
$209,539 $220,579 5.69% August 31, 1997
======== ======== ====
</TABLE>
At June 30, 1997, the Company had funds available under a $25 million
short-term line of credit at an interest rate equal to LIBOR plus 0.6%, secured
by certain receivables related to the Mortgage Assets. The balance under such
line of credit was zero at June 30, 1997.
F-10
<PAGE> 95
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD FROM FEBRUARY 11, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH JUNE 30, 1997
NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments as of June 30, 1997, is made in accordance with the requirements of
Statement of Financial Accounting Standards ("SFAS") No. 107, Disclosure About
Fair Value of Financial Instruments, and SFAS 119, Disclosures About Derivative
Financial Instruments and Fair Value of Financial Instruments. The estimated
fair value amounts have been determined by the Company's management using
available market information and appropriate valuation methodologies; however,
considerable judgment is necessarily require to interpret market data to develop
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1997
---------------------
CARRYING FAIR
AMOUNT VALUE
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Assets
Cash and cash equivalents............................ $ 127 $ 127
Mortgage Assets available-for-sale................... 228,620 228,620
Interest rate agreements.......................... 502 206
Liabilities
Reserve repurchase agreements........................ $209,539 $209,539
</TABLE>
The following describes the methods and assumptions used by the Company in
estimating fair values.
Cash and Cash Equivalents
The carrying amount for cash and cash equivalents approximates fair value
because these instruments are demand deposits and money market mutual funds and
do not present unanticipated interest rate or credit concerns.
Mortgage Assets Available-for-Sale
The fair value of Mortgage Assets available-for-sale is estimated based on
quoted market prices from dealers and brokers for similar types of Mortgage
Securities.
Interest Rate Agreements
The fair value of interest rate agreements is estimated based on quoted
market prices from dealers and brokers.
Reverse Repurchase Agreements
The fair value of reverse repurchase agreements approximates the carrying
amounts because of the short term maturity of the liabilities.
F-11
<PAGE> 96
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD FROM FEBRUARY 11, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH JUNE 30, 1997
NOTE 6. STOCK OPTION PLANS
The Company has adopted the 1997 Stock Incentive Plan (the "Incentive
Plan") and the 1997 Stock Option Plan (the "Option Plan") for executive officers
and key employees and has adopted the 1997 Outside Directors Option Plan (the
"Directors Plan") for directors who are not employees of the Company.
The Incentive Plan, the Option Plan and the Directors Plan authorize the
Board of Directors (or a committee appointed by the Board of Directors) to grant
incentive stock options ("ISOs"), as defined under section 422 of the Code,
options not so qualified ("NQSOs"), and stock appreciation rights ("Awards") to
such eligible recipients.
The Incentive Plan was adopted on February 11, 1997 (the "Effective Date"),
and a total of 315,200 shares of Common Stock have been reserved for issuance
under the Incentive Plan. During the period ended June 30, 1997, the Company
granted 315,200 options at an exercise price of $12.50 per share, 216,000 of
which were NQSOs and 99,200 of which were ISOs. All stock options granted under
the Incentive Plan vest the earlier of a four year period from the date of grant
or once the Company issues $150 million of new equity, and will expire within
ten years after the date of grant. As of June 30, 1997, the Company also granted
280,000 stock appreciation rights at an exercise price of $12.50 per share.
Stock appreciation rights were granted in tandem with options.
Also, the Company has adopted the 1997 Employee Stock Purchase Plan (the
"Purchase Plan") which permits eligible employees to purchase Common Stock at a
discount through accumulated payroll deductions. No shares were issued under the
Purchase Plan as of June 30, 1997.
The Board of Directors has reserved a total of 354,800, 60,000 and 20,000
shares of Common Stock for issuance under the Company's Stock Option Plan,
Directors Plan and Purchase Plan respectively. Upon the closing of the Company's
initial public offering (the "Offering"), options for 212,800 shares of Common
Stock are reserved for issuance under the Option Plan and 142,000 and 20,000
shares of Common Stock will remain available for future grant under the Option
Plan and the Purchase Plan, respectively. On the effective date of the Offering,
each Outside Director will be granted under the Directors Plan an option to
purchase 7,500 shares of Common Stock.
In November 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock Based Compensation." This
statement establishes financial accounting standards for stock-based employee
compensation plans. SFAS 123 permits the Company to choose either a new fair
value based method or the current APB Opinion 25 Intrinsic value based method of
accounting for its stock-based compensation arrangements. SFAS 123 requires pro
forma disclosures of net income (loss) computed as if the fair value based
method had been applied in financial statements of companies that continue to
follow current practice in accounting for such arrangements under Opinion 25.
SFAS 123 applies to all stock-based employee compensation plans in which an
employer grants shares of its stock or other equity instruments to employees
except for employee stock ownership plans. SFAS 123 also applies to plans in
which the employer incurs liabilities to employees in amounts based on the price
of the employer's stock, i.e., stock option plans, stock purchase plans,
restricted stock plans, and stock appreciation rights. The statement also
specifies the accounting for transactions in which a company issues stock
options or other equity instruments for services provided by nonemployees or to
acquire goods or services from the outside suppliers or vendors.
The Company elected to apply the APB Opinion 25 in accounting for its Plan
and, accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options exercisable under SFAS
No. 123, the Company's net income and income per share for the period February
11, 1997
F-12
<PAGE> 97
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD FROM FEBRUARY 11, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH JUNE 30, 1997
(commencement of operations) through June 30, 1997 would have decreased to the
pro forma amounts indicated below.
<TABLE>
<CAPTION>
FOR THE PERIOD FEBRUARY 11, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH JUNE 30, 1997
--------------------------------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C>
Net income as reported............................................. $ 584
-----
Pro forma net income............................................... $ 47
-----
Income per share as reported....................................... $ 0.35
-----
Pro forma income per share......................................... $ 0.03
-----
</TABLE>
The derived fair value of the options granted during the period February
11, 1997 (commencement of operations) through June 30, 1997 was approximately
$1.9 million, using the Black-Scholes option pricing model with the following
assumptions; risk-free interest rate of 6.0%, expected life of 10 years, and
expected volatility of 20%.
NOTE 7. STOCKHOLDERS' EQUITY
On February 11, 1997, the Company issued 1,614,000 shares of Common Stock
at a price of $12.50 per share. The Company received proceeds of $20,165,000,
net of issuance costs of $10,000.
On July 17, 1997, the Company declared a dividend of $438,000, or $0.27 per
common share. This dividend was paid on July 17, 1997 to holders record of
Common Stock as of June 30, 1997. On May 1, 1997, the Company declared a
dividend of $146,000, or $0.09 per share of Common Stock. This dividend was paid
on May 1, 1997 to common stockholders of record as of March 31, 1997.
NOTE 8. STOCK SPLIT AND AUTHORIZED SHARES
On August 6, 1997, the Company authorized a 0.8-for-one reverse stock split
of all of the Common Stock. All references in the financial statements to the
number of shares, per share amounts and prices of the Company's Common Stock
have been retroactively restated to reflect the decreased number of shares of
Common Stock outstanding. Prior to the effective date of the Offering, the
Company will increase the number of total authorized shares of Capital Stock to
25,000,000 from 4,000,000.
NOTE 9. MANAGEMENT AGREEMENT
Effective February 11, 1997, the Company entered into a Management
Agreement with the Manager for an initial term of two years, to provide
management services to the Company. These services include the purchase,
financing, and administration of Mortgage Loans and Mortgage Securities.
The Manager receives an annual base management fee payable monthly in
arrears of an amount equal to (1) 3/8 of 1% of gross assets of the Company other
than Agency Certificates plus (2) 1/8 of 1% of gross assets composed of Agency
Certificates. A base management fee expense of $69,000 was recorded for the
period from February 11, 1997 (commencement of operations) through June 30,
1997.
The Manager is also entitled to receive as incentive compensation for each
fiscal quarter, an amount equal to 25% of the Net Income of the Company for such
quarter, before deduction of such incentive compensation, in excess of the
amount that would produce an annualized Return on Equity equal to the Ten Year
U.S. Treasury Rate plus 2%. The incentive compensation is calculated for each
fiscal quarter, and paid to the Manager quarterly in arrears before any income
distributions are made to stockholders. No incentive compensation was recorded
for the period from February 11, 1997 (commencement of operation) to June 30,
1997.
F-13
<PAGE> 98
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD FROM FEBRUARY 11, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH JUNE 30, 1997
NOTE 10. COMMITMENTS AND CONTINGENCIES
As of June 30, 1997, the Company had no outstanding commitments to purchase
or sell Mortgage Assets or to purchase, sell or terminate Interest Rate
Agreements. The Company also had no commitments to enter into additional reverse
repurchase agreements or other borrowings.
F-14
<PAGE> 99
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 9
The Company............................ 18
Use of Proceeds........................ 19
Dividend Policy and Distributions...... 19
Capitalization......................... 20
Dilution............................... 21
Selected Financial Data................ 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 23
Business............................... 27
Management of the Company.............. 41
The Manager............................ 50
Certain Transactions................... 55
Principal Stockholders................. 59
Description of Capital Stock........... 60
Shares Eligible for Future Sale........ 64
Federal Income Tax Consequences........ 65
ERISA Considerations................... 74
Underwriting........................... 75
Certain Provisions of Maryland Law and
the Company's Charter and Bylaws..... 77
Legal Matters.......................... 80
Experts................................ 80
Additional Information................. 80
Glossary............................... 81
Index to Financial Statements.......... F-1
</TABLE>
UNTIL , ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
5,000,000 SHARES
LOGO
COMMON STOCK
-----------------
PROSPECTUS
-----------------
PAINEWEBBER INCORPORATED
OPPENHEIMER & CO., INC.
EVEREN SECURITIES, INC.
SUTRO & CO. INCORPORATED
------------------------
, 1997
======================================================
<PAGE> 100
ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the New York Stock Exchange ("NYSE") filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
-----------
<S> <C>
SEC Registration Fee..................................... $ 26,000
NYSE filing fee.......................................... 100,000
Printing and engraving expenses.......................... 125,000
Legal fees and expenses.................................. 350,000
Accounting fees and expenses............................. 125,000
Structuring Fee(1)....................................... 375,000
Blue Sky fees and expenses............................... 5,000
Transfer agent and custodian fees........................ 20,000
Miscellaneous............................................ 74,000
----------
Total.................................................... $ 1,200,000
==========
</TABLE>
- ---------------
(1) $431,250 if the over-allotment option is exercised.
ITEM 32. SALES TO SPECIAL PARTIES
The securities described in Item 33(a) were issued to the Founders of the
Company in exchange for cash.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
(a) Pursuant to the exemption provided by Section 4(2) of the Securities
Act, on February 11, 1997 the Company issued 1,614,000 shares of Common Stock
for an aggregate purchase price of $20,175,000.
(b) Pursuant to the exemption provided by Rule 701 promulgated under the
Securities Act, on February 11, 1997, the Company issued options to purchase
315,200 shares of Common Stock with an exercise price of $12.50 per share.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by the Maryland General Corporate Law ("MGCL"), the Company's
Charter obligates the Company to indemnify its present and former directors and
officers and to pay or reimburse reasonable expenses for such individuals in
advance of the final disposition of a proceeding to the maximum extent permitted
from time to time by Maryland law. The MGCL permits a corporation to indemnify
its present and former directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by them
in connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities, unless it is established that (a)
the act or omission of the director or officer was material to the matter giving
rise to such proceeding and (i) was committed in bad faith or (ii) was the
result of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services, or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. The Bylaws implement the
provisions relating to indemnification contained in the Company's Charter.
Maryland law permits the charter of a Maryland corporation to include a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages, except to the extent that
(i) the person actually received an improper benefit or profit in money,
property or services, or (ii) a judgment or other final adjudication is entered
in a proceeding based on a finding that the person's action, or failure to act,
was the result of active and deliberate dishonesty and was material to the cause
of action adjudicated in the
II-1
<PAGE> 101
proceeding. The Company's Charter contains a provision providing for elimination
of the liability of its directors or officers to the Company or its stockholders
for money damages to the maximum extent permitted by Maryland law from time to
time. In addition, the officers, directors, and controlling persons of the
Company are indemnified against certain liabilities by the Company under the
Underwriting Agreement relating to the Offering. The Company will maintain for
the benefit of its officers and directors, officers' and directors' insurance.
In addition, the Registrant intends to enter into an Indemnity Agreement
(Exhibit 10.14 hereto) with its officers and Directors. The Underwriting
Agreement (Exhibit 1.1) also provides for indemnification by the Underwriters of
the Company, its Directors and officers and persons who control the Company
within the meaning of Section 15 of the Securities Act with respect to certain
liabilities, including liabilities arising under the Securities Act.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not Applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements included in the Prospectus are:
Balance sheet at June 30, 1997
Statement of Operations for the period from February 11, 1997
(commencement of operations) through June 30, 1997
Statement of Stockholders' Equity for the period from February 11, 1997
(commencement of operations) through June 30, 1997
Statement of Cash Flows for the period from February 11, 1997
(commencement of operations) through June 30, 1997
Notes to financial statements
All schedules have been omitted because they are either not applicable,
not required or the information required has been disclosed in the
financial statements and related notes or otherwise in the Prospectus.
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of the Registrant
3.2 Amended and Restated Bylaws of the Registrant
4.1 Registration Rights Agreement dated February 11, 1997
*5.1 Opinion of Piper & Marbury L.L.P.
*8.1 Opinion of Jeffers, Wilson, Shaff & Falk, LLP
10.1 Management Agreement between the Registrant and Home Asset Management Corp.
and Amendment thereto
10.2 Employment and Noncompetition Agreement between Home Asset Management Corp.
dated February 11, 1997 and John Robbins and Amendment thereto
10.3 Employment and Noncompetition Agreement between Home Asset Management Corp.
and Jay Fuller dated February 11, 1997 and Amendment thereto
10.4 Mark Conger Employment Letter dated January 7, 1997 and amendment thereto
10.5 Rollie Lynn Employment Letter dated January 7, 1997 and amendment thereto
</TABLE>
II-2
<PAGE> 102
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------------------------------------------------------------------------
<C> <S>
10.6 1997 Stock Incentive Plan and forms of option agreement and SAR agreement
10.7 1997 Employee Stock Option Plan
10.8 1997 Outside Directors Stock Option Plan
10.9 Employee Stock Purchase Plan
10.10 Securities Purchase Agreement between Registrant, Home Asset Management Corp.
and MDC REIT Holdings, LLC dated February 11, 1997
10.11 Subscription Agreement
10.12 Secured Promissory Note dated June 25, 1997
10.13 Lease Agreement with Louis and Louis dated March 7, 1997
10.14 Form of Indemnity Agreement
+11.1 Statement of Computations of per share earnings
*23.1 Consent of KPMG Peat Marwick LLP
*23.2 Consent of Piper & Marbury L.L.P. (included in Exhibit 5.2)
*23.3 Consent of Jeffers, Wilson, Shaff & Falk, LLP (included in Exhibit 8.1)
+24.1 Power of Attorney
+27.1 Financial Data Schedule
+99.1 Consents to be named as a director pursuant to Rule 438
</TABLE>
- ---------------
* To be filed by amendment.
+ Previously filed.
ITEM 37. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing certificates in such denominations and registered in such names
as required by the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-3
<PAGE> 103
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act, the information omitted from the Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 104
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Amendment No. 1 to
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of San Diego, State of California, on the 24th day
of September, 1997.
AMERICAN RESIDENTIAL INVESTMENT TRUST,
INC.
By: /s/ MARK A. CONGER
------------------------------------
Mark A. Conger
Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- -----------------------------------------------
<S> <C> <C>
By: * JOHN M. ROBBINS Chairman of the Board and September 24, 1997
- ----------------------------------------------- Chief Executive Officer
John M. Robbins (Principal Executive
Officer)
By: /s/ MARK A. CONGER Chief Financial Officer September 24, 1997
- ----------------------------------------------- (Principal Financial and
Mark A. Conger Accounting Officer)
By: * JAY M. FULLER Director September 24, 1997
- -----------------------------------------------
Jay M. Fuller
By: * GEORGE MCCOWN Director September 24, 1997
- -----------------------------------------------
George McCown
By: * DAVID DE LEEUW Director September 24, 1997
- -----------------------------------------------
David De Leeuw
By: /s/ MARK A. CONGER
- -----------------------------------------------
Mark A. Conger, Attorney-in-Fact
</TABLE>
II-5
<PAGE> 105
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ---------------------------------------------------------------------- ------------
<C> <S> <C>
*1.1 Form of Underwriting Agreement
3.1 Articles of Amendment and Restatement of the Registrant
3.2 Amended and Restated Bylaws of the Registrant
4.1 Registration Rights Agreement dated February 11, 1997
*5.1 Opinion of Piper & Marbury L.L.P.
*8.1 Opinion of Jeffers, Wilson, Shaff & Falk, LLP
10.1 Management Agreement between the Registrant and Home Asset Management
Corp. dated February 11, 1997 and Amendment thereto
10.2 Employment and Noncompetition Agreement between Home Asset Management
Corp. and John Robbins dated February 11, 1997 and Amendment thereto
10.3 Employment and Noncompetition Agreement between Home Asset Management
Corp. and Jay Fuller dated February 11, 1997 and Amendment thereto
10.4 Mark Conger Employment Letter dated January 7, 1997 and amendment
thereto
10.5 Rollie Lynn Employment Letter dated January 7, 1997 and amendment
thereto
10.6 1997 Stock Incentive Plan
10.7 Form of 1997 Stock Option Plan
10.8 Form of 1997 Outside Directors Stock Option Plan
10.9 Form of Employee Stock Purchase Plan
10.10 Securities Purchase Agreement between Registrant, Home Asset
Management Corp. and MDC REIT Holdings, LLC dated February 11, 1997
10.11 Form of Subscription Agreement dated February 11, 1997
10.12 Secured Promissory Note dated June 25, 1997
10.13 Lease Agreement with Louis and Louis dated March 7, 1997
10.14 Form of Indemnity Agreement
+11.1 Statement of Computations of per share earnings
*23.1 Consent of KPMG Peat Marwick LLP
*23.2 Consent of Piper & Marbury L.L.P. (included in Exhibit 5.1)
*23.3 Consent of Jeffers, Wilson, Shaff & Falk, LLP (included in Exhibit
8.1)
+24.1 Power of Attorney
+27.1 Financial Data Schedule
+99.1 Consents to be named as a director pursuant to Rule 438
</TABLE>
- ---------------
* To be filed by amendment.
+ Previously filed.
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
American Residential Investment Trust, Inc., a Maryland corporation,
having its principal office in the State of Maryland in Baltimore (hereinafter
referred to as the "Corporation"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The Corporation desires to amend and restate its Charter as
currently in effect and as hereinafter amended:
ARTICLE I
NAME
The name of the corporation (which is hereinafter called the
"Corporation") is:
American Residential Investment Trust, Inc.
ARTICLE II
PURPOSES
(a) The purposes for which and any of which the Corporation is formed
and the business and objects to be carried on and promoted by it are:
(1) To engage in the business of a real estate investment trust
("REIT") as that phrase is defined in the Internal Revenue Code of 1986, as
amended (the "Code"), and to engage in any lawful act or activity for which
corporations may be organized under the Maryland General Corporation Law.
(2) To engage in any one or more businesses or transactions, or
to acquire all or any portion of any entity engaged in any one or more
businesses or transactions, which the Board of Directors may from time to time
authorize or approve, whether or not related to the business described elsewhere
in this Article or to any other business at the time or theretofore engaged in
by the Corporation.
(b) The foregoing enumerated purposes and objects shall be in no way
limited or restricted by reference to, or inference from, the terms of any other
clause of this or any other Article of the Charter of the Corporation, and each
shall be regarded as independent; and they are intended to be and shall be
construed as powers as well as purposes and objects of the Corporation and shall
be in addition to and not in limitation of the general powers of corporations
under the General Laws of the State of Maryland.
1
<PAGE> 2
ARTICLE III
PRINCIPAL OFFICE
The present address of the principal office of the Corporation in the
State of Maryland is:
11 E. Chase Street
Baltimore, Maryland 21202
ARTICLE IV
RESIDENT AGENT
The name and address of the resident agent of the Corporation are:
National Registered Agents, Inc. of MD
11 E. Chase Street
Baltimore, Maryland 21202
Said resident agent is a Maryland corporation.
ARTICLE V
CAPITAL STOCK
A. The total number of shares of Capital Stock of all classes which the
Corporation has authority to issue is twenty-five million (25,000,000) shares of
Capital Stock, par value one cent ($0.01) per share, amounting in aggregate par
value to Two Hundred Fifty Thousand Dollars ($250,000). All of such shares are
initially classified as "Common Stock." The Board of Directors may classify and
reclassify any unissued shares of Capital Stock, whether now or hereafter
authorized, by setting or changing in any one or more respects the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption of such shares of
Capital Stock. All persons who acquire shares of Capital Stock or securities
exercisable for or convertible into shares of Capital Stock shall acquire such
shares subject to the provisions of the Charter (including Article X) and Bylaws
of the Corporation.
B. At the effective time of these Articles of Amendment and Restatement
and without further action on the part of Corporation or the holders of the
stock, each one (1) share of Common Stock of the Corporation outstanding or held
in treasury immediately prior thereto shall be changed and converted into eight
tenths (.80) of a share of fully paid and nonasessable Common Stock of the
Corporation, and at such time each holder of record of Common Stock, shall,
without further action, be and become the holder of eight tenths (.80) of a
share of Common Stock for each one (1) share of Common Stock held of record
immediately prior thereto.
C. The following is a description of the preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the Common Stock of the
Corporation:
2
<PAGE> 3
(1) Each share of Common Stock shall have one vote, and, except
as otherwise provided in respect of any class of Capital Stock hereafter
classified or reclassified, the exclusive voting power for all purposes shall be
vested in the holders of the Common Stock.
(2) Subject to the provisions of law and any preferences of any
class of Capital Stock hereafter classified or reclassified, dividends,
including dividends payable in shares of the Corporation's Capital Stock, may be
paid ratably on the Common Stock of the Corporation at such time and in such
amounts as the Board of Directors may deem advisable.
(3) In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders of the Common
Stock shall be entitled, after payment or provision for payment of the debts and
other liabilities of the Corporation and the amount to which the holders of any
class of Capital Stock hereafter classified or reclassified having a preference
on distributions in the liquidation, dissolution or winding up of the
Corporation shall be entitled, together with the holders of any other class of
Capital Stock hereafter classified or reclassified not having a preference on
distributions in the liquidation, dissolution or winding up of the Corporation,
to share ratably in the remaining net assets of the Corporation.
D. Subject to the foregoing, the power of the Board of Directors to
classify and reclassify any of the shares of Capital Stock shall include,
without limitation, subject to the provisions of the Charter, authority to
classify or reclassify any unissued shares of such Capital Stock into a class or
classes of preferred stock, preference stock, special stock, or other stock, and
to divide and classify shares of any class into one or more series of such
class, by determining, fixing or altering one or more of the following:
(1) The distinctive designation of such class or series and the
number of shares to constitute such class or series; provided that, unless
otherwise prohibited by the terms of such or any other class or series, the
number of shares of any class or series may be decreased by the Board of
Directors in connection with any classification or reclassification of unissued
shares and the number of shares of such class or series may be increased by the
Board of Directors in connection with any such classification or
reclassification, and any shares of any class or series which have been
redeemed, purchased, otherwise acquired or converted into shares of Common Stock
or any other class or series shall become part of the authorized Capital Stock
and be subject to classification and reclassification as provided in this
subparagraph.
(2) Whether or not and, if so, the rates, amounts and times at
which, and the conditions under which, dividends shall be payable on shares of
such class or series, whether any such dividends shall rank senior or junior to
or on a parity with the dividends payable on any other class or series of
Capital Stock, and the status of any such dividends as cumulative, cumulative to
a limited extent or noncumulative and as participating or nonparticipating.
(3) Whether or not shares of such class or series shall have
voting rights in addition to any voting rights provided by law and, if so, the
terms of such voting rights.
(4) Whether or not shares of such class or series shall have
conversion or exchange privileges and, if so, the terms and conditions thereof,
including provision for adjustment
3
<PAGE> 4
of the conversion or exchange rate in such events or at such times as the Board
of Directors shall determine.
(5) Whether or not shares of such class or series shall be
subject to redemption and, if so, the terms and conditions of such redemption,
including the date or dates upon or after which they shall be redeemable and the
amount per share payable in case of redemption, which amount may vary under
different conditions and at different redemption dates; and whether or not there
shall be any sinking fund or purchase account in respect thereof, and if so, the
terms thereof.
(6) The rights of the holders of shares of such class or series
upon the liquidation, dissolution or winding up of the affairs of, or upon any
distribution of the assets of, the Corporation, which rights may vary depending
upon whether such liquidation, dissolution or winding up is voluntary or
involuntary and, if voluntary, may vary at different dates, and whether such
rights shall rank senior or junior to or on a parity with such rights of any
other class or series of Capital Stock.
(7) Whether or not there shall be any limitations applicable,
while shares of such class or series are outstanding, upon the payment of
dividends or making of distributions on, or the acquisition of, or the use of
moneys for purchase or redemption of, any Capital Stock of the Corporation, or
upon any other action of the Corporation, including action under this
subparagraph, and, if so, the terms and conditions thereof.
(8) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such class or
series, not inconsistent with law and the Charter.
E. For the purposes hereof and of any Articles Supplementary hereto
providing for the classification or reclassification of any shares of Capital
Stock or of any other Charter document of the Corporation (unless otherwise
provided in any such Articles or document), any class or series of Capital Stock
of the Corporation shall be deemed to rank:
(1) prior to another class or series either as to dividends or
upon liquidation, if the holders of such class or series shall be entitled to
the receipt of dividends or of amounts distributable on liquidation, dissolution
or winding up, as the case may be, in preference or priority to holders of such
other class or series;
(2) on a parity with another class or series either as to
dividends or upon liquidation, whether or not the dividend rates, dividend
payment dates or redemption or liquidation price per share thereof be different
from those of such others, if the holders of such class or series of stock shall
be entitled to receipt of dividends or amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in proportion to their respective
dividend rates or redemption or liquidation prices, without preference or
priority over the holders of such other class or series; and
(3) junior to another class or series either as to dividends or
upon liquidation, if the rights of the holders of such class or series shall be
subject or subordinate to the rights of the
4
<PAGE> 5
holders of such other class or series in respect of the receipt of dividends or
the amounts distributable upon liquidation, dissolution or winding up, as the
case may be.
ARTICLE VI
DIRECTORS
A. The business and affairs of the Corporation shall be managed under
the direction of the Board of Directors. The number of directors of the
Corporation shall initially be four (4), which number may be increased or
decreased pursuant to the Bylaws of the Corporation, but shall never be less
than the minimum number permitted by the General Laws of the State of Maryland
now or hereafter in force.
B. Effective upon the closing of the initial public offering of the
Capital Stock of the Corporation under the Securities Act of 1933, as amended,
and applicable state securities laws and thereafter, the directors shall be
divided into three classes as follows: (1) the term of office of Class I shall
be until the 1998 annual meeting of stockholders and until their successors
shall be elected and have qualified and thereafter shall be for three years and
until their successors shall be elected and have qualified; (2) the term of
office of Class II shall be until the 1999 annual meeting of stockholders and
until their successors shall be elected and have qualified and thereafter shall
be for three years and until their successors shall be elected and have
qualified; and (3) the term of office of Class III shall be until the 2000
annual meeting of stockholders and until their successors shall be elected and
have qualified and thereafter shall be for three years and until their
successors shall be elected and have qualified. The Board of Directors of the
Corporation shall initially designate the directors within each class, provided,
however, that the number of directors in each class shall be as nearly equal as
possible. If the number of directors is changed, any increase or decrease shall
be apportioned among the classes as determined by the Board of Directors so as
to maintain the number of directors in each class as nearly equal as possible. A
director elected by stockholders shall hold office until the annual meeting for
the year in which his or her term expires and until his or her successor shall
be elected and shall qualify, subject, however, to prior death, resignation,
retirement, disqualification or removal from office.
C. Subject to the rights of the holders of any class of preferred stock
then outstanding, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies on the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office, or other cause shall be filled by the required vote of the stockholders
or by a majority of the remaining directors then in office, whether or not they
constitute a quorum, the directors then in office. A director so chosen by the
stockholders or remaining directors shall hold office for the balance of the
term then remaining. No decrease in the number of directors constituting the
Board of Directors shall affect the tenure of office of any director.
D. Whenever the holders of any one or more series of preferred stock of
the Corporation shall have the right, voting separately as a class, to elect one
or more directors of the Corporation, the Board of Directors shall consist of
such directors so elected in addition to the number of directors fixed as
provided in paragraph A of this Article VI or in the Bylaws.
5
<PAGE> 6
Notwithstanding the foregoing, and except as otherwise may be required by law,
whenever the holders of any one or more series of preferred stock of the
Corporation shall have the right, voting separately as a class, to elect one or
more directors of the Corporation, the terms of the director or directors
elected by such holders shall expire at the next succeeding annual meeting of
stockholders.
E. Subject to the rights of the holders of any class separately entitled
to elect one or more directors, any director, or the entire Board of Directors,
may be removed from office at any time, but only for cause and then only by the
affirmative vote of the holders of at least a majority of the combined voting
power of all classes of shares of Capital Stock entitled to vote in the election
for directors voting together as a single class.
ARTICLE VII
PREEMPTIVE RIGHTS
No holder of any Capital Stock or any other securities of the
Corporation, whether now or hereafter authorized, shall have a preemptive right
to subscribe for or purchase any Capital Stock or any other securities of the
Corporation other than such, if any, as the Board of Directors, in its sole
discretion, may determine and at such price or prices and upon such other terms
as the Board of Directors, in its sole discretion, may determine and at such
price or prices and upon such other terms as the Board of Directors, in its sole
discretion, may fix; and any Capital Stock or other securities which the Board
of Directors may determine to offer for subscription may, as the Board of
Directors in its sole discretion shall determine, be offered to the holders of
any class, series or type of Capital Stock or other securities at the time
outstanding to the exclusion of the holders of any or all other classes, series
or types of Capital Stock or other securities at the time outstanding.
ARTICLE VIII
INDEMNIFICATION
The Corporation shall indemnify (A) its directors and officers, whether
serving the Corporation or at its request any other entity, to the full extent
required or permitted by the General Laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law and (B) other employees and agents whether
serving the Corporation or at its request any other entity, to such extent as
shall be authorized by the Board of Directors or the Corporation's Bylaws and be
permitted by law. The foregoing rights of indemnification shall not be exclusive
of any other rights to which those seeking indemnification may be entitled. The
Board of Directors may take such action as is necessary to carry out these
indemnification provisions and is expressly empowered to adopt, approve and
amend from time to time such Bylaws, resolutions or contracts implementing such
provisions or such further indemnification arrangements as may be permitted by
law. No amendment of the Charter of the Corporation or repeal of any of its
provisions shall limit or eliminate the right to indemnification provided
hereunder with respect to acts or omissions occurring prior to such amendment or
repeal or shall eliminate the rights granted under indemnification agreements
entered into by the Corporation and its directors, officers, employees and
agents.
6
<PAGE> 7
ARTICLE IX
PERSONAL LIABILITY
To the fullest extent permitted by Maryland statutory or decisional law, as
amended or interpreted, no director or officer of this Corporation shall be
personally liable to the Corporation or its stockholders for money damages. No
amendment of the Charter of the Corporation or repeal of any of its provisions
shall limit or eliminate the benefits provided to directors and officers under
this provision with respect to any act or omission which occurred prior to such
amendment or repeal.
ARTICLE X
RESTRICTION ON TRANSFER, ACQUISITION AND REDEMPTION OF SHARES
Section 10.1 Definitions. For the purpose of this Article X, the
following terms shall have the following meanings:
Aggregate Stock Ownership Limit. The term "Aggregate Stock
Ownership Limit" shall mean not more than 9.9 percent in value of the aggregate
of the outstanding shares of Capital Stock. The value of the outstanding shares
of Capital Stock shall be determined by the Board of Directors of the
Corporation in good faith, which determination shall be conclusive for all
purposes hereof.
Beneficial Ownership. The term "Beneficial Ownership" shall mean
ownership of Capital Stock by a Person, whether the interest in the shares of
Capital Stock is held directly or indirectly (including by a nominee), and shall
include interests that would be treated as owned through the application of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The
terms "Beneficial Owner," Beneficially Owns" and "Beneficially Owned" shall have
the correlative meanings.
Business Day. The term "Business Day" shall mean any day, other
than a Saturday or Sunday, that is neither a legal holiday nor a day on which
banking institutions in New York City are authorized or required by law,
regulation or executive order to close.
Charitable Beneficiary. The term "Charitable Beneficiary" shall
mean one or more beneficiaries of the Trust as determined pursuant to Section
10.3.6, provided that each such organization must be described in Section
501(c)(3) of the Code and contributions to each such organization must be
eligible for deduction under each Sections 170(b)(1)(A) (without regard to
clauses (vii) or (viii) thereof), 2055 and 2522 of the Code, provided selecting
such beneficiary or beneficiaries would not violate Section 10.2.1(a) hereof.
Code. The term "Code" shall mean the Internal Revenue Code of
1986, as amended from time to time.
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Common Stock Ownership Limit. The term "Common Stock Ownership
Limit" shall mean not more than 9.9 percent in value of the aggregate of the
outstanding shares of Common Stock of the Corporation. The number and value of
outstanding shares of Common Stock of the Corporation shall be determined by the
Board of Directors of the Corporation in good faith, which determination shall
be conclusive for all purposes hereof.
Constructive Ownership. The term "Constructive Ownership" shall
mean ownership of Capital Stock by a Person, whether the interest in the shares
of Capital Stock is held directly or indirectly (including by a nominee), and
shall include interests that would be treated as owned through the application
of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code. The
terms "Constructive Owner," "Constructively Owns" and "Constructively Owned"
shall have the correlative meanings.
Crescent. The term "Crescent" shall mean TCW/Crescent Mezzanine
Partners, L.P., a Delaware limited partnership, TCW/Crescent Mezzanine Trust, a
Delaware business trust, TCW/Crescent Mezzanine Investment Partners, L.P., a
Delaware limited partnership, Crescent/Mach I Partners, L.P., a Delaware limited
partnership, TCW Shared Opportunity Fund II, L.P., a Delaware limited
partnership, and such Persons to whom Crescent sells, pledges, grants a security
interest in, transfers, gives, assigns, devises or otherwise disposes of Capital
Stock; provided, however, that MDC Management Company II, L.P., a California
limited partnership, and its Affiliates shall not become Crescent by acquiring
any such securities from Crescent.
Excepted Holder. The term "Excepted Holder" shall mean a
stockholder of the Corporation for whom an Excepted Holder Limit is created by
the Charter or by the Board of Directors pursuant to Section 10.2.7.
Excepted Holder Limit. The term "Excepted Holder Limit" shall
mean, provided that the affected Excepted Holder agrees to comply with the
requirements established by the Board of Directors pursuant to Section 10.2.7,
and subject to adjustment pursuant to Section 10.2.8, the percentage limit
established by the Board of Directors pursuant to Section 10.2.7.
Formation Transactions. The term "Formation Transactions" shall
mean the (i) initial issuance of Common Stock to MDC REIT Holdings, LLC, (ii)
initial grant to officers of the Corporation of options to purchase Common
Stock, in each case occurring immediately following, and in connection with the
formation, organization and initial capitalization of the Corporation, (iii) any
sale, pledge, grant of a security interest in, transfer, gift, assignment,
devise or other disposition of Capital Stock to Crescent, any other holders of
the Senior Secured Notes, or any collateral agent acting for the benefit of the
holders of the Senior Secured Notes, (iv) any distribution of Capital Stock by
MDC REIT Holdings, LLC to its members, and (v) any transfer, assignment or other
disposition of Capital Stock to Crescent, any other holders of the Senior
Secured Notes or any collateral agent acting for the benefit of the holders of
the Senior Secured Notes, in each such case upon foreclosure on such Capital
Stock, and any transferees and subsequent transferees thereof.
Initial Date. The term "Initial Date" shall mean February 11,
1997.
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Market Price. The term "Market Price" on any date shall mean,
with respect to any class or series of outstanding shares of Capital Stock, the
Closing Price for such Capital Stock on such date. The "Closing Price" on any
date shall mean the last sale price for such Capital Stock, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, for such Capital Stock, in either case as reported in
the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the NYSE or, if such Capital Stock
is not listed or admitted to trading on the NYSE, as reported on the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which such Capital Stock is listed
or admitted to trading or, if such Capital Stock is not listed or admitted to
trading on any national securities exchange, the last quoted price, or, if not
so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotation System, or, if such system is no longer in
use, the principal other automated quotation system that may then be in use or,
if such Capital Stock is not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in such Capital Stock selected by the Board of Directors of the
Corporation or, in the event that no trading price is available for such Capital
Stock, the fair market value of the Capital Stock, as determined in good faith
by the Board of Directors of the Corporation.
NYSE. The term "NYSE" shall mean the New York Stock Exchange.
Person. The term "Person" shall mean an individual, corporation,
joint venture, limited liability company, unincorporated organization,
partnership, estate, state or political subdivision thereof, government agency,
trust (including a trust qualified under Sections 401(a) or 501(c)(17) of the
Code), a portion of a trust permanently set aside for or to be used exclusively
for the purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint stock company
or other entity, but does not include an Underwriter participating in an
offering of Common Stock, Preferred Stock, and/or convertible securities of the
Corporation, provided that the ownership of such Common Stock, Preferred Stock
and/or convertible securities by such Underwriter would not result in the
Corporation being "closely held" within the meaning of Section 856(h) of the
Code and would not otherwise result in the Corporation's failure to qualify as a
REIT.
Prohibited Owner. The term "Prohibited Owner" shall mean, with
respect to any purported Transfer, any Person who, but for the provisions of
Section 10.2.1, would Beneficially Own or Constructively Own shares of Capital
Stock, and if appropriate in the context, shall also mean any Person who would
have been the record owner of the shares that the Prohibited Owner would have so
owned.
REIT. The term "REIT" shall mean a real estate investment trust
within the meaning of Section 856 of the Code.
Senior Secured Notes. The term "Senior Secured Notes" shall mean
the 12% Senior Secured Notes issued under the Securities Purchase Agreement by
and among Home Asset
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Management Corp., MDC REIT Holdings, LLC, the Corporation and the purchasers
listed on the signature pages thereto.
Transfer. The term "Transfer" shall mean any issuance, sale,
transfer, gift, assignment, devise or other disposition (other than Formation
Transactions), as well as any other event that causes any Person to acquire
Beneficial Ownership or Constructive Ownership, or any agreement to take any
such actions or cause any such events, of Capital Stock (other than Formation
Transactions) or the right to vote or receive dividends on Capital Stock,
including (a) the granting or exercise of any option or warrant (or any
disposition of any option or warrant), (b) any disposition of any securities or
rights convertible into or exchangeable for Capital Stock or any interest in
Capital Stock or any exercise of any such conversion or exchange right and (c)
Transfers of interests in other entities that result in changes in Beneficial or
Constructive Ownership of Capital Stock; in each case, whether voluntary or
involuntary, whether owned of record, Constructively Owned or Beneficially Owned
and whether by operation of law or otherwise, except for transfers of interest
in MDC REIT Holdings, LLC or Home Asset Management Corp. through December 31,
1997. The terms "Transferring" and "Transferred" shall have the correlative
meanings.
Trust. The term "Trust" shall mean any trust provided for in
Section 10.3.1.
Trustee. The term "Trustee" shall mean the Person unaffiliated
with the Corporation, a Prohibited Owner and any Charitable Beneficiary, that is
appointed by the Corporation to serve as trustee of the Trust, and any successor
or trustee appointed by the Trustee.
Underwriter. The term "Underwriter" shall mean a securities firm
or other similar entity only in its capacity as a party of an underwriting
agreement with the Corporation entered into with the intent of such firm or
other entity acquiring securities of the Corporation for resale.
Section 10.2 Capital Stock.
Section 10.2.1 Ownership Limitations. Subject to Section
10.2.10, during the period commencing on the Initial Date:
(a) Basic Restrictions.
(i) (1) No Person, other than an Excepted
Holder, shall Beneficially Own or Constructively Own shares of Capital Stock in
excess of the Aggregate Stock Ownership Limit, (2) no Person, other than an
Excepted Holder, shall Beneficially Own or Constructively Own shares of Common
Stock in excess of the Common Stock Ownership Limit and (3) no Excepted Holder
shall Beneficially Own or Constructively Own shares of Capital Stock in excess
of the Excepted Holder Limit for such Excepted Holder.
(ii) No Person shall Beneficially Own or
Constructively Own shares of Capital Stock to the extent that such Beneficial or
Constructive Ownership of Capital Stock would result in the Corporation being
"closely held" within the meaning of Section 856(h) of the Code (without regard
to whether the ownership interest is held during the last half of a taxable
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year), or otherwise failing to qualify as a REIT (including, but not limited to,
Beneficial Ownership or Constructive Ownership that would result in the
Corporation owning (actually or Constructively) an interest in a tenant that is
described in Section 856(d)(2)(B) of the Code if the income derived by the
Corporation from such tenant would cause the Corporation to fail to satisfy any
of the gross income requirements of Section 856(c) of the Code).
(iii) Any Transfer of shares of Capital Stock
that, if effective, would result in any person Beneficially Owning or
Constructively Owning any shares of Capital Stock in violation of Section
10.2.1(a) or Section 10.2.1(a)(ii) shall be null and void ab initio, and the
purported transferee or purported owner shall acquire no rights to, or economic
interest in, any Capital Stock held in violation of these restrictions.
(iv) Notwithstanding any other provisions
contained herein, any Transfer of shares of Capital Stock (whether or not such
Transfer is the result of a transaction entered into through the facilities of
the NYSE or any other national securities exchange or automated inter-dealer
quotation system) that, if effective, would result in the Capital Stock being
beneficially owned by less than 100 Persons (determined under the principles of
Section 856(a)(5) of the Code) shall be null and void ab initio, and the
intended transferee shall acquire no rights in such shares of Capital Stock.
(b) Transfer in Trust. If, notwithstanding the other
provisions contained in this Article XI, there is a purported Transfer, change
in capital structure or other event such that any person would Beneficially Own
or Constructively Own Shares of Capital Stock in violation of Section
10.2.1(a)(i) or Section 10.2.1(a)(ii), or if effective, any Transfer of shares
of Capital Stock occurs which, if effective, would result in any Person
Beneficially Owning or Constructively Owning shares of Capital Stock in
violation of Section 10.2.1(a)(i) or (ii),
(i) then that number of shares of the
Capital Stock the Beneficial or Constructive Ownership of which
otherwise would cause such Person to violate Section
10.2.1(a)(i) or (ii) (rounded to the nearest whole shares) shall
be automatically transferred to a Trust for the benefit of a
Charitable Beneficiary, as described in Section 10.3, effective
on the close of business on the Business Day prior to the date
of such Transfer or other event, and such Person shall acquire
no rights in such shares; and
(ii) upon the transfer of a share of Capital
Stock to the Trust described in clause (i) of this subsection
10.2.1(b), such share shall have such voting, dividend,
liquidation and other rights, and shall be subject to such terms
and limitations, as set forth in Section 10.3 of this Article
XI.
Section 10.2.2 Remedies for Breach. If the Board of Directors of
the Corporation or any duly authorized committee thereof shall at any time
determine in good faith that a Transfer or other event has taken place that
results in a violation of Section 10.2.1 or that a Person intends to acquire or
has attempted to acquire Beneficial or Constructive Ownership of any shares of
Capital Stock in violation of Section 10.2.1 (whether or not such violation is
intended), the Board of
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Directors or a committee thereof shall take such action as it deems advisable to
refuse to give effect to or to prevent such Transfer or other event, including,
without limitation, causing the Corporation to redeem shares, refusing to give
effect to such Transfer on the books of the Corporation or instituting
proceedings to enjoin such Transfer or other event; provided, however, that any
Transfers or attempted Transfers or other events in violation of Section 10.2.1
shall be null and void and shall automatically result in the transfer to the
Trust described above, and, where applicable, such Transfer (or other event)
shall be void ab initio as provided above irrespective of any action (or
non-action) by the Board of Directors or a committee thereof.
Section 10.2.3 Notice of Restricted Transfer. Any Person who
acquires or attempts or intends to acquire Beneficial Ownership or Constructive
Ownership of shares of Capital Stock that will or may violate Section 10.2.1(a),
or any Person who would have owned shares of Capital Stock that resulted in a
transfer to the Trust pursuant to the provisions of Section 10.2.1(b) shall
immediately give written notice to the Corporation of such event, or in the case
of such proposed or attempted transaction, give at least 15 days prior written
notice, and shall provide to the Corporation such other information as the
Corporation may request in order to determine the effect, if any, of such
Transfer on the Corporation's status as a REIT.
Section 10.2.4 Owners Required to Provide Information. From the
Initial Date:
(a) every owner of more than five percent (or such
lower percentage as required by the Code or the Treasury Regulations promulgated
thereunder) of the outstanding shares of Capital Stock, within 30 days after the
end of each taxable year, shall give written notice to the Corporation stating
the name and address of such owner, the number of shares of Capital Stock
Beneficially Owned and a description of the manner in which such shares are
held. Each such owner shall provide to the Corporation such additional
information as the Corporation may request in order to determine the effect, if
any, of such Beneficial Ownership on the Corporation's status as a REIT and
ensure compliance with the Aggregate Stock Ownership Limit.
(b) each Person who is a Beneficial or Constructive
Owner of Capital Stock and each Person (including the stockholder of record) who
is holding Capital Stock for a Beneficial or Constructive Owner shall provide to
the Corporation such information as the Corporation may request, in good faith,
in order to determine the Corporation's status as a REIT and to comply with
requirements of any taxing authority or governmental authority or to determine
such compliance.
Section 10.2.5 Remedies Not Limited. Nothing contained in this
Section 10.2 shall limit the authority of the Board of Directors of the
Corporation to take such other action as it deems necessary or advisable to
protect the Corporation and the interests of its stockholders in preserving the
Corporation's status as a REIT and to ensure compliance with Section 10.2.1(a)..
Section 10.2.6 Ambiguity. In the case of an ambiguity in the
application of any of the provisions of this Section 10.2, Section 10.3, or any
definition contained in Section 10.1, the Board of Directors of the Corporation
shall have the power to determine the application of the provisions of this
Section 10.2 or Section 10.3 with respect to any situation based on the facts
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known to it. In the event Section 10.2 or 10.3 requires an action by the Board
of Directors and the Charter fails to provide specific guidance with respect to
such action, the Board of Directors shall have the power to determine the action
to be taken so long as such action is not contrary to the provisions of Sections
10.1, 10.2 or 10.3.
Section 10.2.7 Exceptions.
(a) Subject to Section 10.2.1(a)(ii), the Board of
Directors of the Corporation, in its sole discretion, may exempt a Person from
the Aggregate Stock Ownership Limit and the Common Stock Ownership Limit, as the
case may be, and may establish or increase an Excepted Holder Limit for such
Person, if:
(i) the Board of Directors obtains such
representations and undertakings from such Person as are
reasonably necessary to ascertain that no individual's
Beneficial or Constructive Ownership of such shares of Capital
Stock will violate Section 10.2.1(a)(ii);
(ii) such Person does not and represents that
it will not own, actually or Constructively, an interest in a
tenant of the Corporation (or a tenant of any entity owned or
controlled by the Corporation) that would cause the Corporation
to own, actually or Constructively, more than a 9.9 percent
interest (as set forth in Section 856(d)(2)(B) of the Code) in
such tenant and the Board of Directors obtains such
representations and undertakings from such Person as are
reasonably necessary to ascertain this fact (for this purpose, a
tenant from whom the Corporation (or an entity owned or
controlled by the Corporation) derives (and is expected to
continue to derive) a sufficiently small amount of revenue such
that, in the opinion of the Board of Directors of the
Corporation, rent from such tenant would not adversely affect
the Corporation's ability to qualify as a REIT, shall not be
treated as a tenant of the Corporation); and
(iii) such Person agrees that any violation or
attempted violation of such representations or undertakings (or
other action which is contrary to the restrictions contained in
Sections 10.2.1 through 10.2.6) will result in such shares of
Capital Stock being automatically transferred to a Trust in
accordance with Sections 10.2.1(b) and 10.3.
(b) Prior to granting any exception pursuant to
Section 10.2.7(a), the Board of Directors of the Corporation may require a
ruling from the Internal Revenue Service, or an opinion of counsel, in either
case in form and substance satisfactory to the Board of Directors in its sole
discretion, as it may deem necessary or advisable in order to determine or
ensure the Corporation's status as a REIT. Notwithstanding the receipt of any
ruling or opinion, the Board of Directors may impose such conditions or
restrictions as it deems appropriate in connection with granting such exception.
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(c) The Board of Directors may only reduce the
Excepted Holder Limit for an Excepted Holder: (1) with the written consent of
such Excepted Holder at any time, or (2) pursuant to the terms and conditions of
the agreements and understandings entered into with such Excepted Holder in
connection with the establishment of the Excepted Holder Limit for that Excepted
Holder. No Excepted Holder Limit shall be reduced to a percentage that is less
than the Common Stock Ownership Limit.
Section 10.2.8 Increase or Decrease in Aggregate Stock Ownership
and Common Stock Ownership Limits. The Board of Directors may from time to time
increase or decrease the Common Stock Ownership Limit and the Aggregate Stock
Ownership Limit; provided, however, that:
(a) Any decrease may be made only prospectively as
to subsequent holders (other than a decrease as a result of a retroactive change
in existing law, in which case such decrease shall be effective immediately);
(b) Neither ownership limitation may be increased
if, after giving effect to such increase, five Persons could Beneficially Own or
Constructively Own, in the aggregate, more than 50.0% in value of the shares of
Capital Stock then outstanding; and
(c) Prior to the modification of either of the
ownership limitations, the Board of Directors of the Corporation may require
such opinions of counsel, affidavits, undertakings or agreements as it may deem
necessary or advisable in order to determine or ensure the Corporation's status
as a REIT.
Section 10.2.9 Legend. Each certificate for shares of Capital
Stock or securities exercisable or exchangeable for or convertible into shares
of Capital Stock shall bear the following legend:
The securities represented by this certificate are subject to
restrictions on Beneficial and Constructive Ownership and
Transfer for the purpose of the Corporation's maintenance of its
status as a Real Estate Investment Trust under the Internal
Revenue Code of 1986, as amended (the "Code"). Subject to
certain further restrictions and except as expressly provided in
the Corporation's Charter, (i) no Person may Beneficially or
Constructively Own shares of the Corporation's Common Stock in
excess of 9.9 percent (in value or number of shares) of the
outstanding shares of Common Stock of the Corporation unless
such Person is an Excepted Holder (in which case the Excepted
Holder Limit shall be applicable); (ii) no Person may
Beneficially or Constructively Own shares of Capital Stock of
the Corporation in excess of 9.9 percent of the value of the
total outstanding shares of Capital Stock of the Corporation,
unless such Person is an Excepted Holder (in which case the
Excepted Holder Limit shall be applicable); (iii) no
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Person may Beneficially or Constructively Own Capital Stock that
would result in the Corporation being "closely held" under
Section 856(h) of the Code or otherwise cause the Corporation to
fail to qualify as a REIT; and (iv) no Person may Transfer
shares of Capital Stock if such Transfer would result in the
Capital Stock of the Corporation being owned by fewer than 100
Persons. Any Person who Beneficially or Constructively Owns or
attempts to Beneficially or Constructively Own shares of Capital
Stock which causes or will cause a Person to Beneficially or
Constructively Own shares of Capital Stock in excess or in
violation of the above limitations must immediately notify the
Corporation. Attempted transfers of ownership in violation of
these restrictions shall be null and void ab initio. In
addition, if any of the restrictions on transfer or ownership
are violated, the shares of Capital Stock represented hereby may
be automatically transferred to a Trustee of a Trust for the
benefit of one or more Charitable Beneficiaries. In addition,
upon the occurrence of certain events, attempted Transfers in
violation of the restrictions described above may be void ab
initio. All capitalized terms in this legend have the meanings
defined in the Charter of the Corporation, as the same may be
amended from time to time, a copy of which, including the
restrictions on transfer and ownership, will be furnished to
each holder of Capital Stock of the Corporation on request and
without charge.
A full statement or summary of the designations and any
preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption of the stock of each class
which the corporation is authorized to issue and the authority
of the board of directors to set the relative rights and
preferences of any series of capital stock, will be furnished to
any shareholder, without charge, upon request to the secretary
of the corporation at the corporation's principal office.
Section 10.2.10 Settlements Permitted. Nothing contained in this
Article XI or in any provision hereof shall preclude the settlement of any
transaction entered into through the facilities of the NYSE or any other
national securities exchange or automated inter-dealer quotation system.
Although settlement of any transaction is permitted, any transferee in such
transaction shall be subject to all the provisions and limitations set forth in
this Article XI.
Section 10.3 Transfer of Capital Stock in Trust.
Section 10.3.1 Ownership in Trust. Upon any purported Transfer
or other event described in Section 10.2.1(b) that would result in a transfer of
shares of Capital Stock to a Trust, such shares of Capital Stock shall be deemed
to have been transferred to the Trustee as trustee of a Trust for the exclusive
benefit of one or more Charitable Beneficiaries. Such transfer to the Trustee
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shall be deemed to be effective as of the close of business on the Business Day
prior to the purported Transfer or other event that results in the transfer to
the Trust pursuant to Section 10.2.1(b). The Trustee shall be appointed by the
Corporation and shall be a Person unaffiliated with the Corporation, any
Prohibited Owner and any Charitable Beneficiary. Each Charitable Beneficiary
shall be designated by the Trustee as provided in Section 10.3.6.
Section 10.3.2 Status of Shares Held by the Trustee. Shares of
Capital Stock held by the Trustee shall be issued and outstanding shares of
Capital Stock of the Company. The Prohibited Owner shall have no rights in the
shares held by the Trustee. The Prohibited Owner shall not benefit economically
from ownership of any shares held in trust by the Trustee, shall have no rights
to dividends and shall not possess any rights to vote or other rights
attributable to the shares held in the Trust.
Section 10.3.3 Dividend and Voting Rights. The Trustee shall
have all voting rights and rights to dividends or other distributions with
respect to shares of Capital Stock held in the Trust, which rights shall be
exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend
or other distribution paid prior to the discovery by the Corporation that the
shares of Capital Stock have been transferred to the Trustee shall be paid with
respect to such shares of Capital Stock to the Trustee upon demand and any
dividend or other distribution authorized but unpaid shall be paid when due to
the Trustee. Any dividends or distributions so paid over to the Trustee shall be
held in trust for the Charitable Beneficiary. The Prohibited Owner shall have no
voting rights with respect to shares held in the Trust and, subject to Maryland
law, effective as of the date that the shares of Capital Stock have been
transferred to the Trustee, the Trustee shall have the authority (at the
Trustee's sole discretion) (i) to rescind as void any vote cast by a Prohibited
Owner prior to the discovery by the Corporation that the shares of Capital Stock
have been transferred to the Trustee and (ii) to recast such vote in accordance
with the desires of the Trustee acting for the benefit of the Charitable
Beneficiary. Notwithstanding the provisions of this Article XI, until the
Corporation has received notification that shares of Capital Stock have been
transferred into a Trust, the Corporation shall be entitled to rely on its share
transfer and other stockholder records for purposes of preparing lists of
stockholders entitled to vote at meetings, determining the validity and
authority of proxies and otherwise conducting votes of stockholders.
Section 10.3.4 Sale of Shares by Trustee. Within 20 days of
receiving notice from the Corporation that shares of Capital Stock have been
transferred to the Trust, the Trustee of the Trust shall sell the shares held in
the Trust to a person, designated by the Trustee, whose ownership of the shares
will not violate the ownership limitations set forth in Section 10.2.1(a). Upon
such sale, the interest of the Charitable Beneficiary in the shares sold shall
terminate and the Trustee shall distribute the net proceeds of the sale to the
Prohibited Owner and to the Charitable Beneficiary as provided in this Section
10.3.4. The Prohibited Owner shall receive the lesser of (1) the price paid by
the Prohibited Owner for the shares or, if the Prohibited Owner did not give
value for the shares in connection with the event causing the shares to be held
in the Trust (e.g., in the case of a gift, devise or other such transaction),
the Market Price of the shares on the day of the event causing the shares to be
held in the Trust and (2) the price per share received by the Trustee from the
sale or other disposition of the shares held in the Trust. Any net sales
proceeds in excess of the amount payable to the Prohibited Owner shall be
immediately paid to the Charitable
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Beneficiary. If, prior to the discovery by the Corporation that shares of
Capital Stock have been transferred to the Trustee, such shares are sold by a
Prohibited Owner, then (i) such shares shall be deemed to have been sold on
behalf of the Trust and (ii) to the extent that the Prohibited Owner received an
amount for such shares that exceeds the amount that such Prohibited Owner was
entitled to receive pursuant to this Section 10.3.4, such excess shall be paid
to the Trustee upon demand.
Section 10.3.5 Purchase Right in Stock Transferred to the
Trustee. Shares of Capital Stock transferred to the Trustee shall be deemed to
have been offered for sale to the Corporation, or its designee, at a price per
share equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the Trust (or, in the case of a devise or gift, the
Market Price at the time of such devise or gift) and (ii) the Market Price on
the date the Corporation, or its designee, accepts such offer. The Corporation
shall have the right to accept such offer until the Trustee has sold the shares
held in the Trust pursuant to Section 10.3.4. Upon such sale to the Corporation,
the interest of the Charitable Beneficiary in the shares sold shall terminate
and the Trustee shall distribute the net proceeds of the sale to the Prohibited
Owner.
Section 10.3.6 Designation of Charitable Beneficiaries. The
Trustee shall designate one or more nonprofit organizations to be the Charitable
Beneficiary of the interest in the Trust such that (i) the shares of Capital
Stock held in the Trust would not violate the restrictions set forth in Section
10.2.1(a) in the hands of such Charitable Beneficiary and (ii) each such
organization must be described in Section 501(c)(3) of the Code and
contributions to each such organization must be eligible for deduction under
each of Sections 170(b)(1)(A) (without regard to clauses (vii) or (viii)
thereof), 2055 and 2522 of the Code.
ARTICLE XI
DIRECTOR DISCRETION
With respect to any proposed merger, acquisition, business combination
or other similar transaction or proposal, a director of the Corporation, in
determining what is in the best interests of the Corporation, shall consider the
interest of the stockholders of the Corporation and, in his or her discretion,
may consider (i) the interests of the Corporation's employees, suppliers,
creditors and customers, (ii) the economy of the nation, (iii) community and
societal interests and (iv) the long-term as well as short-term interests of the
Corporation and its stockholders, including the possibility that these interests
may be best served by the continued independence of the Corporation. Pursuant to
this provision, the Board of Directors may consider numerous judgmental or
subjective factors affecting a proposal, including certain nonfinancial matters,
and on the basis of these considerations may oppose a business combination or
other transaction which, as an exclusively financial matter, might be attractive
to some, or a majority, of the Corporation's stockholders. If the Board of
Directors determines that any proposed Business Combination (as defined in
Section 3-601 of the Corporations and Associations Article of the Annotated Code
of Maryland) or actual or proposed transaction which would or may involve a
change in control of the Corporation should be rejected, it may take any lawful
action to defeat such transaction, including, but not limited to, any or all of
the following: advising stockholders not to accept the proposal; instituting
litigation against the
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party making the proposal; filing complaints with governmental and regulatory
authorities; acquiring the stock or any of the securities of the Corporation;
selling or otherwise issuing authorized but unissued stock, other securities or
granting options or rights with respect thereto, acquiring a company to create
an antitrust or other regulatory problem for the party making the proposal; and
obtaining a more favorable offer from another individual or entity.
ARTICLE XII
MAJORITY VOTE
Notwithstanding any provision of law requiring the authorization of any
action by a greater proportion than a majority of the total number of shares of
all classes of Capital Stock or of the total number of shares of any class of
Capital Stock, such action shall be valid and effective if authorized by the
affirmative vote of the holders of a majority of the total number of shares of
all classes outstanding and entitled to vote thereon, except as otherwise
provided in the Charter.
ARTICLE XIII
SHARE ISSUANCE
The Board of Directors is hereby empowered to authorize the issuance
from time to time of shares of its Capital Stock of any class, whether now or
hereafter authorized, or securities exercisable or exchangeable for or
convertible into shares of its Capital Stock of any class or classes, whether
now or hereafter authorized, for such consideration as may be deemed advisable
by the Board of Directors and without any action by the stockholders.
ARTICLE XIV
CHARTER AMENDMENTS
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in the Charter, including any amendments changing the terms
or contract rights, as expressly set forth in the Charter, of any of its
outstanding stock by classification, reclassification or otherwise, by a
majority of the directors' adopting a resolution setting forth the proposed
change, declaring its advisability, and either calling a special meeting of the
stockholders entitled to vote on the proposed change, or directing the proposed
change to be considered at the next annual stockholders meeting. Unless
otherwise provided herein, the proposed change will be effective only if it is
adopted upon the affirmative vote of the holders of not less than a majority of
the aggregate votes entitled to be cast thereon (considered for this purpose as
a single class); provided, however, that any amendment to, repeal of or adoption
of any provision inconsistent with Article VI or this Article XIV will be
effective only if it is also advised by at least two-thirds of the Board of
Directors and adopted upon the affirmative vote of the holders of not less than
two-thirds of the aggregate votes entitled to be cast thereon (considered for
this purpose as a single class).
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ARTICLE XV
DIRECTORS' POWERS
The enumeration and definition of particular powers of the Board of
Directors included in the foregoing Articles shall in no way be limited or
restricted by reference to or inference from the terms of any other Article of
the Charter of the Corporation, or construed as or deemed by inference or
otherwise in any manner to exclude or limit any powers conferred upon the Board
of Directors under the General Laws of the State of Maryland now or hereafter in
force.
The Board of Directors of the Corporation shall, consistent with
applicable law, have power in its sole discretion to determine from time to time
in accordance with sound accounting practice or other reasonable valuation
methods what constitutes annual or other net profits, earnings, surplus, or net
assets in excess of capital; to fix and vary from time to time the amount to be
reserved as working capital, or determine that retained earnings or surplus
shall remain in the hands of the Corporation; to set apart out of funds of the
Corporation such reserve or reserves in such amount or amounts and for such
proper purpose or purposes as it shall determine and to abolish any such reserve
or any part thereof; to distribute and pay distributions or dividends in Capital
Stock, cash or other securities or property, out of surplus or any other funds
or amounts legally available therefor, at such times and to the stockholders of
record on such dates as it may, from time to time, determine; and to determine
whether and to what extent and at what times and places and under what
conditions and regulations the books, accounts and documents of the Corporation,
or any of them, shall be open to the inspection of stockholders, except as
otherwise provided by statute or by the Bylaws, and, except as so provided, no
stockholder shall have any right to inspect any book, account or document of the
Corporation unless authorized to do so by resolution of the Board of Directors.
For any stockholder proposal to be presented in connection with an
annual meeting of stockholders of the Corporation, including any proposal
relating to the nomination of a director to be elected to the Board of Directors
of the Corporation, the stockholders must have given timely written notice
thereof in writing to the Secretary of the Corporation in the manner and
containing the information required by the Bylaws. Stockholder proposals to be
presented in connection with a special meeting of stockholders will be presented
by the Corporation only to the extent required by Section 2-502 of the MGCL and
the Bylaws.
ARTICLE XVI
DURATION
The duration of the Corporation shall be perpetual.
ARTICLE XVII
DEFINITIONS
The following terms shall have the meanings provided below when used in
the Charter:
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Board of Directors. The term "Board of Directors" shall mean the board
of directors of the Corporation, as it may be constituted from time to time.
Bylaws. The term "Bylaws" shall mean the Corporation's bylaws adopted by
the Board of Directors, as they may be amended from time to time.
Capital Stock. The term "Capital Stock" shall mean all classes or series
of stock of the Corporation, including, without limitation, Common Stock and
Preferred Stock.
Charter. The term "Charter" shall mean the charter of the Corporation,
as that term is defined in the MGCL.
Corporation. The term "Corporation" shall mean the corporation formed by
these Articles of Incorporation, as they may be amended from time to time.
MGCL. The term "MGCL" shall mean the Maryland General Corporation Law,
as amended from time to time.
* * * *
SECOND:The amendment to and restatement of the Charter of the
Corporation as hereinabove set forth has been duly advised by the Board of
Directors and approved by the stockholders of the Corporation as required by
law.
THIRD: The amendment and restatement of the Charter of the Corporation
increases the authorized stock of the Corporation from 3,000,000 shares of
Common Stock and 1,000,000 shares of Preferred Stock having an aggregate par
value of $40,000.00 to 25,000,000 shares having an aggregate par value of
$250,000.00.
FOURTH:The undersigned President of the Corporation acknowledges these
Articles of Amendment and Restatement to be the corporate act of the Corporation
and as to all matters or facts required to be verified under oath, the
undersigned President of the Corporation acknowledges that to the best of his
knowledge, information and belief, these matters and facts are true in all
material respects and that this statement is made under the penalties for
perjury.
IN WITNESS WHEREOF, the Corporation has caused these Articles to be
signed in its name and on its behalf by its President and attested by its
Secretary on this _____ day of ____________, 1997.
AMERICAN RESIDENTIAL
INVESTMENT TRUST, INC.
By:________________________ By:______________________________________
Clay W. Strittmatter, Jay M. Fuller, President and
Secretary Chief Operating Officer
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EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
(THE "CORPORATION")
ARTICLE I
STOCKHOLDERS
SECTION 1. Annual Meeting. The Corporation shall hold an annual meeting
of its stockholders to elect directors and transact any other business within
its power, either at 10:00 a.m. on the fourth Tuesday of May in each year if not
a legal holiday, or at such other time on such other day falling on or before
the 31st day thereafter as shall be set by the Board of Directors. Except as the
Charter or statute provides otherwise, any business may be considered at an
annual meeting without the purpose of the meeting having been specified in the
notice. Failure to hold an annual meeting does not invalidate the Corporation's
existence or affect any otherwise valid corporate acts. Meetings of stockholders
shall be held at the principal office of the Corporation or at such place in the
United States as is set forth from time to time by the Board of Directors.
SECTION 2. Special Meetings. Special meetings of the stockholders for
any purpose or purposes may be called at any time by the President or a majority
of the Board of Directors in a vote at a meeting or in writing (addressed to the
Secretary of the Corporation) with or without a meeting. Upon written request of
any stockholder or stockholders holding in the aggregate a majority of the
voting power of all stockholders delivered in person or sent by registered mail
to the Secretary of the Corporation, such request to state the purpose or
purposes of the proposed meeting, the Secretary shall call a special meeting of
stockholders to be held at the principal office of the Corporation at such time
as the Secretary may fix, such meeting to be held not less than fourteen (14)
nor more than sixty (60) days after the receipt of such request, and if the
Secretary shall neglect or refuse to call such meeting, for a period of seven
(7) days after the receipt of such request, the stockholder making such request
may thereafter call such meeting by providing notice as provided herein.
SECTION 3. Notices. Notice of the annual meeting and of any special
meeting of stockholders shall, at least fourteen (14) days but not more than
sixty (60) days prior to the date thereof, be given to each stockholder entitled
to vote thereat and each other stockholder entitled to notice of the meeting.
Notice is given to a stockholder when it is personally delivered to it, left at
its residence or usual place of business, or mailed to it at its address as it
appears on the records of the Corporation. Notwithstanding the foregoing
provisions, each person who is entitled to notice waives notice if, before or
after the meeting, such stockholder signs a waiver of notice which is filed with
the records of the stockholders' meeting, or is present at the meeting in person
or by proxy. Every notice of an annual meeting or a special meeting shall state
the time and place of the meeting. If the meeting is a special meeting or notice
of the purpose or purposes is required by
<PAGE> 2
statute, the notice shall also briefly state the purpose or purposes thereof,
and no business, other than that specified in such notice and matters germane
thereto, shall be transacted at the meeting without further notice to
stockholders not present in person or by proxy.
SECTION 4. Quorum; Manner of Acting and Adjournment. Unless statute or
the Charter provides otherwise, at a meeting of stockholders the presence in
person or by proxy of stockholders entitled to cast a majority of all the votes
entitled to be cast at the meeting constitutes a quorum, and a majority of all
the votes cast at a meeting at which a quorum is present is sufficient to
approve any matter which properly comes before the meeting, except that a
plurality of all the votes cast at a meeting at which a quorum is present is
sufficient to elect a director.
Whether or not a quorum is present, a meeting of stockholders convened
on the date for which it was called may be adjourned from time to time without
further notice by a majority vote of the stockholders present in person or by
proxy to a date not more than 120 days after the original record date. Any
business which might have been transacted at the meeting as originally notified
may be deferred and transacted at any such adjourned meeting at which a quorum
shall be present.
SECTION 5. Organization. At every meeting of the stockholders, the
Chairman of the Board, if there be one, shall conduct the meeting or, in the
case of vacancy in office or absence of the Chairman of the Board, one of the
following officers present shall conduct the meeting in the order stated: the
Vice Chairman of the Board, if there be one, the President, the Vice Presidents
in their order of rank and seniority, or a Chairman chosen by the stockholders
entitled to cast a majority of the votes which all stockholders present in
person or by proxy are entitled to cast, shall act as Chairman, and the
Secretary or, in his or her absence, an assistant secretary, or in the absence
of both Secretary and assistant secretaries, a person appointed by the Chairman,
shall act as Secretary.
SECTION 6. Voting. Unless the Charter provides for a greater or lesser
number of votes per share or limits or denies voting rights, each outstanding
share of stock, regardless of class, is entitled to one vote on each matter
submitted to a vote at a meeting of stockholders. In all elections for
directors, each share of stock may be voted for as many individuals as there are
directors to be elected and for whose election the share is entitled to be
voted, but cumulative voting is not permitted.
SECTION 7. Proxies. A stockholder may vote the stock the stockholder
owns of record either in person or by proxy. A stockholder may sign a writing
authorizing another person to act as proxy. Signing may be accomplished by the
stockholder or the stockholder's authorized agent signing the writing or causing
the stockholder's signature to be affixed to the writing by any reasonable
means, including facsimile signature. A stockholder may authorize another person
to act as proxy by transmitting, or authorizing the transmission of, a telegram,
facsimile, or other means of electronic transmission to the person authorized to
act as proxy or to a proxy solicitation firm, proxy support service
organization, or other person authorized by the person who will act as proxy to
receive the transmission. Unless a proxy provides otherwise, it is not valid
more than 11 months after its date. A proxy is revocable by a stockholder at any
time without condition or qualification unless the proxy states that it is
irrevocable and the proxy is coupled with an interest.
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A proxy may be made irrevocable for so long as it is coupled with an interest.
The interest with which a proxy may be coupled includes an interest in the stock
to be voted under the proxy or another general interest in the Corporation or
its assets or liabilities.
SECTION 8. Voting Lists. At each meeting of stockholders, a full, true
and complete list of all stockholders entitled to vote at such meeting, showing
the number and class of shares held by each and certified by the transfer agent
for such class or by the Secretary, shall be furnished by the Secretary.
SECTION 9. Informal Action by Stockholders. Unless otherwise provided by
law, any action required to be taken at a meeting of the stockholders, or any
other action which may be taken at a meeting of the stockholders, may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the stockholders entitled to vote with respect to the
subject matter thereof.
SECTION 10. Meeting by Conference Telephone. Stockholders may
participate in a meeting by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time. Participation in a meeting by these means
constitutes presence in person at a meeting.
SECTION 11. Stockholder Proposals. For any stockholder proposal to be
presented in connection with an annual meeting of stockholders of the
Corporation (other than proposals made under Rule 14a-8 of the Securities
Exchange Act of 1934, as amended), including any proposal relating to the
nomination of a director to be elected to the Board of Directors of the
Corporation, the stockholder putting forth such proposal must have given timely
notice thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not less than 60 days nor more than 90 days
prior to the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is advanced by
more than 30 days or delayed by more than 60 days from such anniversary date,
notice by the stockholder to be timely must be so delivered not earlier than the
90th day prior to such annual meeting and not later than the close of business
on the later of the 60th day prior to such annual meeting or the tenth day
following the day on which public announcement of the date of such meeting is
first made. Such stockholder's notice shall set forth (a) as to each person whom
the stockholder proposes to nominate for election or reelection as a director
all information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); (b) as to any other
business that the stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and of the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is
made, (i) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial
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owner and (ii) the class and number of shares of stock of the Corporation which
are owned beneficially and of record by such stockholder and such beneficial
owner.
ARTICLE II
DIRECTORS
SECTION 1. Number, Classification, Election and Term. The affairs of the
Corporation shall be under the direction and control of a Board of Directors
which shall be initially composed of four (4) members who shall hold office
until its successors are duly chosen and qualified. Effective upon the closing
of the initial public offering of the Capital Stock of the Corporation under the
Securities Act of 1933, as amended, and applicable state securities laws and
thereafter, the directors shall be divided into three Classes, designated Class
I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the total number of directors constituting the entire
Board of Directors. The term of the initial Class I directors shall terminate on
the date of the annual meeting of stockholders held in 1998; the term of the
initial Class II directors shall terminate on the date of the annual meeting of
stockholders held in 1999; and the term of the initial Class III directors shall
terminate on the date of the annual meeting of stockholders held in 2000. At
each annual meeting of stockholders beginning in 1998, successors to the class
of directors whose term expires at that annual meeting shall be elected for a
three-year term. The number of directors may be increased or decreased from time
to time by vote of a majority of the entire Board of Directors; provided,
however, that the number of directors may not exceed the amount allowed by the
MGCL nor be less than the amount required by the MGCL except as permitted by
law. If the number of directors is changed, any increase or decrease shall be
apportioned among the classes so as to maintain the number of directors in each
class as nearly equal as possible. A director elected by stockholders shall hold
office until the annual meeting for the year in which his or her term expires
and until his or her successor shall be elected and shall qualify, subject,
however, to prior death, resignation, retirement, disqualification or removal
from office.
At all times subsequent to the first closing in the Corporation's
initial public offering of its Capital Stock (the "Public Offering"), except in
the case of a vacancy, a majority of the Board of Directors shall be Independent
Directors (as hereinafter defined). For the purposes of these Bylaws,
"Independent Director" shall mean a director of the Corporation who is not an
officer or employee of the Corporation or any subsidiary or affiliate of the
Corporation. Directors need not be stockholders in the Corporation.
Whenever the holders of any one or more series of preferred stock of the
Corporation shall have the right, voting separately as a class, to elect one or
more directors of the Corporation, the Board of Directors shall consist of said
directors so elected in addition to the number of directors fixed as provided
above in the first paragraph of this Section 1. Notwithstanding the foregoing,
and except as otherwise may be required by law, whenever the holders of any one
or more series of preferred stock of the Corporation shall have the right,
voting separately as a class, to elect one or more directors of the Corporation,
the terms of the director or directors elected by such holders shall expire at
the next succeeding annual meeting of stockholders.
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<PAGE> 5
SECTION 2. Function of Directors. The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors. All
the powers of the Corporation are vested in and shall be exercised by or under
the authority of the Board of Directors except as otherwise prescribed by
statute, by the Charter or by these Bylaws.
SECTION 3. Vacancies. Subject to the rights of the holders of any class
of stock separately entitled to elect one or more directors, any vacancy
occurring on the Board of Directors for any cause including by reason of an
increase in the number of directors may, subject to the provisions of Section 5,
be filled by a majority of the remaining members of the Board of Directors,
regardless of whether such majority of the remaining members of the Board of
Directors is less than a quorum; provided, however, that if the Corporation has
completed its Public Offering and, in accordance with Section 1, a majority of
the Board of Directors are required to be Independent Directors, then the
Independent Directors shall nominate replacements for vacancies among the
Independent Directors, which replacements must be elected by a majority of the
directors, including a majority of the Independent Directors. The stockholders
may fill any vacancy occurring on the Board of Directors for any reason, subject
to the requirement for Independent Directors, if applicable. If the stockholders
of any class or series are entitled separately to elect one or more directors, a
majority of the remaining directors elected by that class or series or the sole
remaining director elected by that class or series may fill any vacancy among
the number of directors elected by that class or series. A director elected by
the Board of Directors to fill a vacancy shall be elected to hold office for the
balance of the term remaining or until his successor is elected and qualified.
SECTION 4. Resignations. Any director or member of a committee may
resign at any time. Such resignation shall be made in writing and shall take
effect at the time specified therein, or if no time be specified, at the time of
the receipt by the Chairman of the Board, the President or the Secretary.
SECTION 5. Removal. Any director or the entire Board of Directors may be
removed only in accordance with the Charter.
SECTION 6. Committees of the Board of Directors. The Board of Directors
may appoint from among its members an Executive Committee, an Audit Committee, a
Compensation Committee and other committees composed of one or more directors
and delegate to these committees any of the powers of the Board of Directors,
except the power to authorize dividends of stock, elect directors, issue stock
other than as provided in the next sentence, recommend to the stockholders any
action which requires stockholder approval, amend these Bylaws, or approve any
merger or share exchange which does not require stockholder approval. At least a
majority of all committees of the Board shall be comprised of Independent
Directors. If the Board of Directors has given general authorization for the
issuance of stock providing for or establishing a method or procedure for
determining the maximum number of shares to be issued, a committee of the Board,
in accordance with that general authorization or any stock option or other plan
or program adopted by the Board of Directors, may authorize or fix the terms of
stock subject to classification or reclassification and the terms on which any
stock may be issued, including all terms and conditions required or permitted to
be established or authorized by the Board of Directors.
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Each committee may fix rules of procedure for its business. One-third of
the members of a committee shall constitute a quorum for the transaction of
business and the act of a majority of those present at a meeting at which a
quorum is present shall be the act of the committee. The members of a committee
present at any meeting, whether or not they constitute a quorum, may appoint a
director to act in the place of an absent member; provided, however, that in the
event of the absence or disqualification of any Independent Director, such
appointee shall be an Independent Director. Any action required or permitted to
be taken at a meeting of a committee may be taken without a meeting, if an
unanimous written consent which sets forth the action is signed by each member
of the committee and filed with the minutes of the committee. The members of a
committee may conduct any meeting thereof by conference telephone in accordance
with the provisions of Section 8 of this Article.
Subject to the provisions hereof, the Board of Directors shall have the
power at any time to change the membership of any committee, to fill all
vacancies, to designate alternative members to replace any absent or
disqualified member, or to dissolve any such committee.
SECTION 7. Meetings of the Board of Directors. Meetings of the Board of
Directors, regular or special, may be held at any place in or out of the State
of Maryland as the Board of Directors may from time to time determine or as
shall be specified in the notice of such meeting.
Members of the Board of Directors may participate in a meeting by means
of a conference telephone or similar communications equipment if all persons
participating in the meeting can hear each other at the same time. Participation
in a meeting by such means constitutes presence in person at a meeting.
The first meeting of each newly elected Board of Directors shall be held
as soon as practicable after the annual meeting of the stockholders at which
directors were elected. The meeting may be held at such time and place as shall
be specified in a notice given as hereinafter provided for special meetings of
the Board of Directors, or as shall be specified in a written waiver signed by
all of the directors as provided in this Section 7, except that no notice shall
be necessary if such meeting is held immediately after the adjournment, and at
the site, of the annual meeting of stockholders.
Regular meetings of the Board of Directors may be held without notice at
such time and place as shall from time to time be determined by the Board of
Directors. Special meetings of the Board of Directors may be called at any time
by two (2) or more directors or by a majority of the members of the executive
committee, if one be constituted, in writing with or without a meeting of such
committee, or by the Chairman of the Board of Directors or the President.
Special meetings may be held at such place or places in or out of the
State of Maryland as may be designated from time to time by the Board of
Directors; in the absence of such designation, such meetings shall be held at
such places as may be designated in the notice of meeting.
Notice of the place and time of every special meeting of the Board of
Directors shall be delivered by the Secretary to each director either personally
or by telephone, overnight courier or
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facsimile, or by leaving the same at his residence or usual place of business at
least twenty-four (24) hours before the time at which such meeting is to be held
or, if by first-class mail, at least 72 hours before the time of such meeting.
If mailed, such notice shall be deemed to be given when deposited in the United
States Mail addressed to the director at his post office address as it appears
on the records of the Corporation, with postage thereon paid. Unless the Bylaws
or a resolution of the Board of Directors provides otherwise, the notice need
not state the business to be transacted at, or the purposes of, any special
meeting of the Board of Directors. No notice of any special meeting of the Board
of Directors need be given to any director who attends except where a director
attends a meeting for the express purpose of objecting to the transaction of any
business because the special meeting is not lawfully called or convened, or to
any director who, in writing executed and filed with the records of the meeting
either before or after the holding thereof, waives such notice.
Any meeting of the Board of Directors, regular or special, may adjourn
from time to time to reconvene at the same or some other place, and no notice
need be given of any such adjourned meeting other than by announcement.
SECTION 8. Informal Action by Directors. Unless otherwise provided by
law, any action required to be taken at a meeting of the directors or any other
action which may be taken at a meeting of the directors may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the directors.
SECTION 9. Quorum and Voting. At all meetings of the Board of Directors,
a majority of the entire Board of Directors shall constitute a quorum for the
transaction of business, and the action of a majority of the directors present
at any meeting at which a quorum is present shall be the action of the Board of
Directors unless the concurrence of a greater proportion is required for such
action by law, the Charter or these Bylaws. If a quorum shall not be present at
any meeting of directors, the directors present thereat may, by a majority vote,
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
SECTION 10. Organization. The Chairman of the Board shall preside at
each meeting of the Board of Directors. In the absence or inability of the
Chairman of the Board to preside at a meeting, the President or, in his absence
or inability to act, another director chosen by a majority of the directors
present, shall act as chairman of the meeting and preside thereat. The Secretary
(or, in his absence or inability to act, any person appointed by the chairman of
the meeting) shall act as Secretary of the meeting and keep the minutes thereof.
SECTION 11. Compensation of Directors. Independent Directors shall
receive compensation for their services, and expenses of attendance for
attendance at each regular or special meeting of the Board of Directors, or of
any committee thereof or both, as may be determined from time to time by the
Board of Directors. Nothing herein contained shall be construed to preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefor.
SECTION 12. Investment Policies and Restrictions. The Board of
Directors, including a majority of the Independent Directors, shall approve the
investment policies of the Corporation.
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The investment policies and compliance therewith shall be reviewed by the
Independent Directors at least annually to determine that the policies then
being followed by the Corporation are in the best interest of the stockholders
of the Corporation. Each such determination and the basis therefor shall be set
forth in the minutes of the meeting of the Board of Directors.
It shall be the duty of the Board of Directors to ensure that the
purchase, sale, retention and disposal of the Corporation's assets, and the
investment policies of the Corporation and the limitations thereon or amendment
thereof are at all times in compliance with the restrictions applicable to real
estate investment trusts pursuant to the Internal Revenue Code of 1986, as
amended.
SECTION 13. Presumption of Assent. A director of the Corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his or her dissent or abstention shall be entered in the minutes of the meeting
or unless he or she shall file his or her written dissent to such action with
the person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the Secretary of the
Corporation within 24 hours after the adjournment of the meeting. Such right to
dissent shall not apply to any director who votes in favor of such action or who
failed to make his dissent known at the meeting.
SECTION 14. Advisory Directors. The Board of Directors may by resolution
appoint advisory directors to the Board, who may also serve as directors
emeriti, and shall have such authority and receive such compensation and
reimbursement as the Board of Directors shall provide. Advisory directors or
directors emeriti shall not have the authority to participate by vote in the
transaction of business.
ARTICLE III
OFFICERS
SECTION 1. Officers. The officers of the Corporation shall be a Chairman
of the Board, a President, a Treasurer and a Secretary, who shall be elected by
the Board of Directors to serve during the pleasure of the Board and until their
respective successors are elected and qualified, except as otherwise provided in
any employment agreement between the Corporation and any officer. The Board of
Directors may also appoint one or more Vice Presidents. The same person may hold
any two or more offices except those of President and Vice President.
SECTION 2. Subordinate Officers, Committees and Agents. The Board of
Directors may from time to time elect such other officers and appoint such
committees, employees or other agents as the business of the Corporation may
require, including one or more assistant secretaries, and one or more assistant
treasurers, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these Bylaws, or as the Board of
Directors may from time to time determine. The Board of Directors may delegate
to any officer
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or committee the power to elect subordinate officers and to retain or appoint
employees or other agents.
SECTION 3. Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the stockholders and the Board of Directors at which
he or she is present. Unless otherwise specified by the Board of Directors, the
Chairman of the Board shall also be the Chief Executive Officer of the
Corporation and perform the duties customarily performed by chief executive
officers, and shall perform such other duties as may from time to time be
requested of him or her by the Board of Directors.
SECTION 4. President. Unless otherwise provided by resolution of the
Board of Directors, the President, in the absence of the Chairman of the Board,
shall preside at all meetings of the Board of Directors and of the stockholders
at which he shall be present. The President shall, subject to the control of the
Board of Directors, in general supervise and control all of the business and
affairs of the Corporation. The President may sign, with the Secretary or any
other proper officer of the Corporation thereunto authorized by the Board of
Directors, certificates for shares of the Corporation, any deeds, mortgages,
bonds, contracts, or other instruments which the Board of Directors have
authorized to be executed, except in cases where the signing and execution
thereof shall be expressly delegated by the Board of Directors or by these
Bylaws to some other officer or agent of the Corporation, or shall be required
by law to be otherwise signed or executed; and in general shall perform all
duties incident to the office of president and such other duties as may be
prescribed by the Board of Directors from time to time.
SECTION 5. Vice Presidents. In the absence of the President or in event
of his or her death, inability or refusal to act, or at the request of the Chief
Executive Officer or President, the Vice President or Vice Presidents shall
perform the duties and exercise all the powers of the President and be subject
to all the restrictions upon the President. The Vice President or Vice
Presidents shall perform such other duties as from time to time may be assigned
to him or her or them by the President or by the Board of Directors.
SECTION 6. Secretary. The Secretary shall keep the minutes of the
stockholders' and of the Board of Directors' meetings in one or more books
provided for that purpose, see that all notices are duly given in accordance
with the provisions of these Bylaws or as required by law, be custodian of the
corporate records and of the seal of the Corporation and keep a register of the
post office address of each stockholder which shall be furnished to the
Secretary by such stockholder, have general charge of the stock transfer books
of the Corporation and, in general, perform all duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him or
her by the President, the Chief Executive Officer or the Board of Directors.
SECTION 7. Treasurer. The Treasurer shall have charge and custody of and
be responsible for all funds and securities of the Corporation, receive and give
receipts for moneys due and payable to the Corporation from any source
whatsoever, and deposit all such moneys in the name of the Corporation in such
banks, trust companies or other depositories as shall be selected in accordance
with these Bylaws and in general perform all of the duties incident to the
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office of Treasurer and such other duties as from time to time may be assigned
to him or her by the President, the Chief Executive Officer or by the Board of
Directors.
SECTION 8. Other Officers. The other officers of the Corporation shall
perform such duties as the President may from time to time assign to them.
SECTION 9. Removal. Any officer elected by the Board of Directors may be
removed, either for or without cause, at any time upon the vote of a majority of
the Board of Directors. Any other employee of the Corporation may be removed or
dismissed at any time by the President. The removal of an officer does not
prejudice any of his or her contract rights.
SECTION 10. Resignation. Any officer or agent may resign at any time by
giving written notice to the Board of Directors, or to the President or to the
Secretary of the Corporation. Any such resignation shall take effect at the date
of the receipt of such notice or at any later time specified therein and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
SECTION 11. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or any other cause, shall be filled by
the Board of Directors or by the officer or remaining members of the committee
to which the power to fill such office has been delegated pursuant to Section 2
of this Article, as the case may be, and if the office is one for which these
Bylaws prescribe a term, shall be filled for the unexpired portion of the term.
SECTION 12. Salaries. The salaries, if any, of the officers elected by
the Board of Directors shall be fixed from time to time by the Board of
Directors or by such officer as may be designated by resolution of the Board of
Directors. The salaries or other compensation of any other officers, employees
and other agents shall be fixed from time to time by the officer or committee to
which the power to elect such officers or to retain or appoint such employees or
other agents has been delegated pursuant to Section 2 of this Article. No
officer shall be prevented from receiving such salary or other compensation by
reason of the fact that he is also a director of the Corporation.
ARTICLE IV
STOCK
SECTION 1. Certificates. Each stockholder shall be entitled to a
certificate or certificates which shall represent and certify the number and
kind and class of shares owned by it in the Corporation. Each certificate shall
be signed by the Chairman of the Board or the President or a Vice President and
countersigned by the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer.
The signatures may be either manual or facsimile signatures. In case any
officer who has signed any certificate ceases to be an officer of the
Corporation before the certificate is issued, the certificate may nevertheless
be issued by the Corporation with the same effect as if the officer had
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not ceased to be such officer as of the date of its issue. Each stock
certificate shall include on its face the name of the Corporation, the name of
the stockholder and the class of stock and number of shares represented by the
certificate. If the Corporation has authority to issue stock of more than one
class, the stock certificate shall contain on its face or back a full statement
or summary of the designations and any preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption of the stock of each class which the
Corporation is authorized to issue and if the Corporation is authorized to issue
any preferred or special class in series, the differences in the relative rights
and preferences between the shares of each series to the extent they have been
set, and the authority of the Board of Directors to set the relative rights and
preferences of subsequent series. In lieu of such full statement or summary,
there may be set forth upon the face or back of the certificate a statement that
the Corporation will furnish to any stockholder upon request and without charge,
a full statement of such information. Such request may be made to the Secretary
or to the Corporation's transfer agent. Every stock certificate representing
shares of stock which are restricted as to transferability by the Corporation
shall contain a full statement of the restriction or state that the Corporation
will furnish information about the restriction to the stockholder on request and
without charge. A stock certificate may not be issued until the stock
represented by it is fully paid, except in the case of stock purchased under an
option plan as permitted by law.
SECTION 2. Lost Certificates. The Board of Directors may order a new
certificate or certificates of stock to be issued in place of any certificates
shown to have been lost or destroyed under such terms and conditions as to it
may seem reasonable. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such stolen, lost or
destroyed certificate or certificates, or his legal representative, to advertise
the same in such manner as it shall require and/or to give the Corporation a
bond, with sufficient surety to the Corporation to indemnify it against any loss
or claim which may arise by reason of the issuance of a new certificate.
SECTION 3. Transfer Agents and Registrars. At such time as the
Corporation lists its securities on a national securities exchange or the Nasdaq
National Market, or such earlier time as the Board of Directors may elect, the
Board of Directors shall appoint one or more banks or trust companies in such
city or cities as the Board of Directors may deem advisable, from time to time,
to act as transfer agents and/or registrars of the shares of stock of the
Corporation; and, upon such appointments being made, no certificate representing
shares shall be valid until countersigned by one of such transfer agents and
registered by one of such registrars.
SECTION 4. Transfer of Stock. No transfers of shares of stock of the
Corporation shall be made if (i) void ab initio pursuant to the Charter, or (ii)
the Board of Directors, pursuant to the Charter, shall have refused to transfer
such shares; provided, however, that nothing contained in these Bylaws shall
impair the settlement of transactions entered into on the facilities of the New
York Stock Exchange or any other national securities exchange or automated
inter-dealer quotation system. Permitted transfers of shares of stock of the
Corporation shall be made on the stock records of the Corporation only upon the
instruction of the registered holder thereof, or by his attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary or
with a transfer agent or transfer clerk, and upon surrender of the certificate
or certificates, if issued, for
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such shares properly endorsed or accompanied by a duly executed stock transfer
power and the payment of all taxes thereon. Upon surrender to the Corporation or
the transfer agent of the Corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignment or authority to
transfer, as to any transfers not prohibited by the Charter or by action of the
Board of Directors thereunder, it shall be the duty of the Corporation to issue
a new certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
SECTION 5. Fixing of Record Dates. The Board of Directors may fix, in
advance, a date as the record date for the purpose of determining stockholders
entitled to notice of, or to vote at, any meeting of stockholders, or
stockholders entitled to receive payment of any dividend or the allotment of any
rights, or in order to make a determination of stockholders for any other proper
purpose. Such date, in any case, may not be prior to the close of business on
the day the record date is fixed nor, subject to Section 4 of Article I, more
than ninety (90) days, or in case of a meeting of stockholders, less than ten
(10) days, prior to the date on which the particular action requiring such
determination of stockholders is to be taken.
SECTION 6. Registered Stockholders. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments, if any, a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by law or the Charter.
SECTION 7. Regulations. The Board of Directors may make such additional
rules and regulations, not inconsistent with the Bylaws or the Charter, as it
may deem expedient concerning the issue, transfer and registration of
certificates for shares of stock of the Corporation.
ARTICLE V
SEAL
The Board of Directors may provide a suitable seal for the Corporation,
which may be either facsimile or any other form of seal and shall remain in the
custody of the Secretary. If the Board of Directors so provides, it shall be
affixed to all certificates of the Corporation's stock and to other instruments
requiring a seal. If the Corporation is required to place its corporate seal to
a document, it is sufficient to meet the requirement of any law, rule, or
regulation relating to a corporate seal to place the word "Seal" adjacent to the
signature of the person authorized to sign the document on behalf of the
Corporation.
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ARTICLE VI
SIGNATURES
SECTION 1. Checks, Drafts, Etc. All checks, drafts and orders for the
payment of money, notes and other evidences of indebtedness, issued in the name
of the Corporation, shall, unless otherwise provided by resolution of the Board
of Directors, be signed by the President, a Vice President or an Assistant Vice
President and countersigned by the Treasurer, an Assistant Treasurer, the
Secretary or an Assistant Secretary.
SECTION 2. Stock Transfer. All endorsements, assignments, stock powers
or other instruments of transfer of securities standing in the name of the
Corporation shall be executed for and in the name of the Corporation by the
President or Vice President or by such officer as the Board of Directors may
designate.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Corporation shall be the twelve calendar months
period ending December 31 in each year, unless otherwise provided by the Board
of Directors.
SECTION VIII
INDEMNIFICATION
SECTION 1. Right to Indemnification. To the maximum extent permitted by
Maryland law in effect from time to time, the Corporation, without requiring a
preliminary determination of the ultimate entitlement to indemnification, shall
indemnify and shall pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any individual who is a present or former
director or officer of the Corporation and who is made a party to the proceeding
by reason of his service in that capacity or (b) any individual who, while a
director of the Corporation and at the request of the Corporation, serves or has
served another corporation, partnership, joint venture, trust, employee benefit
plan or any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise and who is made a party to the proceeding by reason of his service in
that capacity. The Corporation may, with the approval of its Board of Directors,
provide such indemnification and advance for expenses to a person who served a
predecessor of the Corporation in any of the capacities described in (a) or (b)
above and to any employee or agent of the Corporation or a predecessor of the
Corporation.
Neither the amendment nor repeal of this Article, nor the adoption or
amendment of any other provision of the Bylaws or charter of the Corporation
inconsistent with this Article, shall
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apply to or affect in any respect the applicability of the preceding paragraph
with respect to any act or failure to act which occurred prior to such
amendment, repeal or adoption.
SECTION 2. Procedure. Any indemnification, or payment of expenses in
advance of the final disposition of any proceeding, shall be made promptly, and
in any event within 60 days, upon the written request of the director or officer
entitled to seek indemnification (the "Indemnified Party"). The right to
indemnification and advances hereunder shall be enforceable by the Indemnified
Party in any court of competent jurisdiction, if (i) the Corporation denies such
request, in whole or in part, or (ii) no disposition thereof is made within 60
days. The Indemnified Party's costs and expenses incurred in connection with
successfully establishing his or her right to indemnification, in whole or in
part, in any such action shall also be reimbursed by the Corporation. It shall
be a defense to any action for advance for expenses that (a) a determination has
been made that the facts then known to those making the determination would
preclude indemnification or (b) the Corporation has not received either (i) an
undertaking as required by law to repay such advances in the event it shall
ultimately be determined that the standard of conduct has not been met or (ii) a
written affirmation by the Indemnified Party of such Indemnified Party's good
faith belief that the standard of conduct necessary for indemnification by the
Corporation has been met.
SECTION 3. Exclusivity, Etc. The indemnification and advance of expenses
provided by the Charter and these Bylaws shall not be deemed exclusive of any
other rights to which a person seeking indemnification or advance of expenses
may be entitled under any law (common or statutory), or any agreement, vote of
stockholders or disinterested directors or other provision that is consistent
with law, both as to action in his or her official capacity and as to action in
another capacity while holding office or while employed by or acting as agent
for the Corporation, shall continue in respect of all events occurring while a
person was a director or officer after such person has ceased to be a director
or officer, and shall inure to the benefit of the estate, heirs, executors and
administrators of such person. All rights to indemnification and advance of
expenses under the Charter of the Corporation and hereunder shall be deemed to
be a contract between the Corporation and each director or officer of the
Corporation who serves or served in such capacity at any time while this Bylaw
is in effect. Nothing herein shall prevent the amendment of this Bylaw, provided
that no such amendment shall diminish the rights of any person hereunder with
respect to events occurring or claims made before its adoption or as to claims
made after its adoption in respect of events occurring before its adoption. Any
repeal or modification of this Bylaw shall not in any way diminish any rights to
indemnification or advance of expenses of such director or officer or the
obligations of the Corporation arising hereunder with respect to events
occurring, or claims made, while this Bylaw or any provision hereof is in force.
SECTION 4. Severability; Definitions. The invalidity or unenforceability
of any provision of this Article VIII shall not affect the validity or
enforceability of any other provision hereof. The phrase "this Bylaw" in this
Article VIII means this Article VIII in its entirety.
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SECTION IX
SUNDRY PROVISIONS
SECTION 1. Books and Records. The Corporation shall keep correct and
complete books and records of its accounts and transactions and minutes of the
proceedings of its stockholders and Board of Directors and of any executive or
other committee when exercising any of the powers of the Board of Directors. The
books and records of the Corporation may be in written form or in any other form
which can be converted within a reasonable time into written form for visual
inspection. Minutes shall be recorded in written form but may be maintained in
the form of a reproduction. The original or a certified copy of the Bylaws shall
be kept at the principal office of the Corporation.
SECTION 2. Voting Upon Shares in Other Corporations. Stock of other
corporations or associations, registered in the name of the Corporation, may be
voted by the President, a Vice President, or a proxy appointed by either of
them. The Board of Directors, however, may by resolution appoint some other
person to vote such shares, in which case such person shall be entitled to vote
such shares upon the production of a certified copy of such resolution.
SECTION 3. Exemption from Control Share Acquisition Statute. The
provisions of Sections 3-701 to 3-709 of the Corporations and Associations
Article of the Annotated Code of Maryland shall not apply to any share of
capital stock of the Corporation now or hereafter outstanding. Such shares of
capital stock are exempted from such Sections to the fullest extent permitted by
Maryland law.
SECTION 4. Annual Statement of Affairs. The President or chief
accounting officer shall prepare annually a full and correct statement of the
affairs of the Corporation, to include a balance sheet and a financial statement
of operations for the preceding fiscal year. The statement of affairs shall be
submitted at the annual meeting of the stockholders and, within 20 days after
the meeting, placed on file at the Corporation's principal office.
SECTION 5. Mail. Except as herein expressly provided, any notice or
other document which is required by these Bylaws to be mailed shall be deposited
in the United States mails, postage prepaid.
SECTION 6 Reliance. Each director, officer, employee and agent of the
Corporation shall, in the performance of his or her duties with respect to the
Corporation, be fully justified and protected with regard to any act or failure
to act in reliance in good faith upon the books of account or other records of
the Corporation, upon the opinion of counsel or upon reports made to the
Corporation by any of its officers or employees or by the adviser, accountants,
appraisers or other experts or consultants selected by the Board of Directors or
officers of the Corporation, regardless of whether such counsel or expert may
also be a director.
SECTION 7. Certain Rights of Directors, Officers, Employees and Agents.
The directors shall have no responsibility to devote their full time to the
affairs of the Corporation.
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Any director or officer, employee or agent of the Corporation, in his or her
personal capacity or in a capacity as an affiliate, employee or agent of any
other person, or otherwise, may have business interests and engage in business
activities similar to or in addition to those of or relating to the Corporation.
SECTION X
AMENDMENTS
These Bylaws may be amended or replaced, or new Bylaws may be adopted,
either (1) by the vote of the stockholders entitled to cast at least a majority
of the votes which all stockholders are entitled to cast thereon at any duly
organized annual or special meeting of stockholders, or (2), with respect to
those matters which are not by statute reserved exclusively to the stockholders,
by vote of a majority of the Board of Directors, including a majority of the
Independent Directors of the Corporation, in office at any regular or special
meeting of the Board of Directors; provided, however, that Section 2 of Article
I and Sections 1 through 14 of Article II of these Bylaws may only be amended or
modified by the vote of at least 66 2/3% of the votes which all stockholders are
entitled to cast thereon. It shall not be necessary to set forth such proposed
amendment, repeal or new Bylaws, or a summary thereof, in any notice of such
meeting, whether annual, regular or special.
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EXHIBIT 4.1
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is entered
into as of February 11, 1997, by and among AMERICAN RESIDENTIAL INVESTMENT
TRUST, INC., a Maryland corporation (the "Company"), and the Holders.
RECITALS
WHEREAS, the Company is issuing new shares of its Common Stock in
connection with a series of transactions pursuant to which Holdings will acquire
substantially all the outstanding stock of the Company, and it is a condition to
the closing of that transaction that the Company and the Holders enter into this
Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants, and conditions set forth in this
Agreement, the parties hereto hereby mutually agree as follows:
1. Certain Definitions. As used in this Agreement, the
following terms shall have the following respective meanings:
"Affiliate" shall mean, with respect to any Person, another
Person that directly, or indirectly through one or more intermediaries, controls
or is controlled by, or is under common control with such Person.
"Collateral Agent" shall mean the collateral agent under the
Collateral Agency Agreement.
"Collateral Agency Agreement" shall mean the Collateral Agency
Agreement dated as of February 11, 1997 by an among Management, Holdings, the
purchasers of the Notes named therein, as beneficiaries, and Bankers Trust
Company, a New York banking corporation, as collateral agent, as such agreement
may be amended, supplemented, restated or modified from time to time.
"Commission" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Company's Common Stock, par value
$.0001 per share.
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"Crescent" shall mean, collectively, TCW/Crescent Mezzanine
Partners, L.P., a Delaware limited partnership, TCW/Crescent Mezzanine
Investment Partners, L.P., a Delaware limited partnership, Crescent/Mach I
Partners, L.P., a Delaware limited partnership, TCW Shared Opportunity Fund II,
L.P., a Delaware limited partnership, and such Persons to whom Crescent sells,
pledges, grants a security interest in, transfers, gives, assigns, devises or
otherwise disposes of Notes, Common Stock or Registrable Securities; provided,
that MDC and its Affiliates shall not become "Crescent" by acquiring any such
securities from Crescent.
"Crescent Initiating Holders" shall mean, with respect to any
registration requested by Crescent, any Holder or Holders of a majority of the
then outstanding Registrable Securities held by Crescent.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Holder" or "Holders" shall mean any Person holding Common Stock
or Registrable Securities and any Person who becomes a party to this Agreement
in the future, holding Common Stock or Registrable Securities and any Person to
whom the registration rights under this Agreement have been transferred in
accordance with Section 2.10.
"Holders of a Majority of the Registrable Securities" shall mean
(a) the Holders of a majority of the Registrable Securities and (b) the Holders
of a majority of the Registrable Securities being sold by the Crescent
Initiating Holders, the L/C Initiating Holders, the Series A Initiating Holders
or the MDC Initiating Holders, as the case may be.
"Holdings" shall mean MDC REIT Holdings, LLC, a Delaware limited
liability company.
"Initiating Holder" shall mean any of the MDC Initiating Holders,
the Crescent Initiating Holders, the Series A Initiating Holders and the L/C
Initiating Holders.
"L/C Holders" shall mean Ernest J. Gallo 1991 Family Trust,
Joseph C. Gallo 1994 Family Trust, Stephanie A. Gallo 1990 Family Trust, Keller
1991 Trust, Lillard Partners, PLF Partners, PK Partners. Josephine B. Haas
Revocable Trust, Saw Island Partners, Martin Anderson and Persons to whom the
L/C Holders have transferred registration rights under this Agreement in
accordance with Section 2.10.
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"L/C Initiating Holders" shall mean any Holder or Holders of not
less than 25% of the then outstanding Registrable Securities held by the L/C
Holders.
"Management" shall mean Home Asset Management Corp. a Delaware
corporation.
"MDC" shall mean MDC Management Company II, L.P., a California
limited partnership, and its Affiliates.
"MDC Initiating Holders" shall mean any Holder or Holders of not
less than 25% of the then outstanding Registrable Securities held by the MDC
Holders.
"MDC Holders" shall mean MDC and its Affiliates.
"Non-MDC Holder" shall mean any holder or holders of Common Stock
other than MDC Holders.
"Notes" shall mean the 12% Senior Secured Notes due February 11,
2002 issued by Management.
"Options" shall mean the options to purchase Common Stock granted
to the Management Holders and to other employees of the Company from time to
time.
"Person" shall mean an individual, partnership, corporation,
limited liability company, trust or unincorporated organization or a government
or agency or political subdivision thereof.
"Pledge Agreement" shall mean the Pledge Agreement dated February
11, 1997 by and between Holdings and the Collateral Agent, pursuant to which
Holdings has pledged to Crescent the Common Stock of the Company owned by
Holdings.
The terms "register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registrable Securities" shall mean shares of the Company's
Common Stock (i) issued or issuable to the Holders now or in the future upon
exercise of Options or rights to acquire shares of Common Stock, (ii) owned by
Holdings, (iii) acquired by members of Holdings upon a distribution by Holdings
to such members, (iv) acquired by the holders of Notes (or the Collateral Agent
acting for their benefit) in connection with a foreclosure upon such Common
Stock under the Pledge Agreement or (v) any securities issued or issuable with
respect to such Common Stock referred to in clauses (i) through (iv) immediately
above by way
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of stock dividends or stock splits or in connection with a combination of
shares, recapitalization, merger, consolidation, other reorganization or
otherwise. Shares of Common Stock or other securities issued with respect to
such Common Stock shall cease to be Registrable Securities (and shall be
excluded from the calculation of the number of outstanding Registrable
Securities) when they have been distributed to the public pursuant to an
offering registered under the Securities Act or sold to the public through a
broker, dealer or market maker in compliance with Rule 144 or Rule 145(d) under
the Securities Act or any successor rules. The foregoing notwithstanding, a
Security will not cease to be a Registrable Security until all stop transfer
instructions and notations and restrictive legends with respect to such security
have been lifted or removed. For purposes of this Agreement, a Person will be
deemed to be a Holder of Registrable Securities whenever such Person has the
right to acquire, directly or indirectly, such securities (upon exercise of
Options or otherwise, so long as such Options or other rights are then
exercisable), regardless of whether such acquisition has actually been effected.
"Registration Expenses" shall mean all expenses incurred by the
Company in complying with Sections 2.1, 2.2 and 2.3 hereof, including, without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Company, reasonable fees and disbursements of a
single special counsel for the Holders and Other Holders (as defined in Section
2.3(a)), blue sky fees and expenses, and accounting and auditing expenses
including the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the Company
which shall be paid in any event by the Company and excluding Selling Expenses).
"registration statement" shall mean a registration statement
under the Securities Act of the Company that covers any Registrable Securities
pursuant to the provisions of this Agreement, including the related prospectus,
all amendments and supplements to such registration statement, including
pre-effective and post-effective amendments, all exhibits thereto and material
incorporated by reference or deemed to be incorporated by reference in such
registration statement.
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts and
selling commissions applicable to the sale.
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"Series A Initiating Holders" shall mean any Holder or Holders of
not less than 25% of the then outstanding Registrable Securities held by the
Series A Holders.
"Series A Holders" shall mean Ernest J. Gallo 1991 Family Trust,
Joseph C. Gallo 1994 Family Trust, Stephanie A. Gallo 1990 Family Trust, Keller
1991 Trust, Lillard Partners, PLF Partners, PK Partners. Josephine B. Haas
Revocable Trust, Saw Island Partners, Martin Anderson and Persons to whom the
Series A Holders have transferred registration rights under this Agreement in
accordance with Section 2.10..
2. Registration Rights.
2.1 Requested Registration. If, (x) following 180 days
after the distribution by Holdings to its members of all or a portion of the
Common Stock owned by it, the Company receives from either the Crescent
Initiating Holders, the MDC Initiating Holders, the Series A Initiating Holders
or the L/C Initiating Holders a written request that the Company effect a
registration under the Securities Act, or (y) following the foreclosure by the
Collateral Agent or Crescent under the Pledge Agreement, the Company receives
from the Collateral Agent or the Crescent Initiating Holders a written request
that the Company effect a registration under the Securities Act, the Company
will:
(a) promptly give written notice of the proposed
registration to all other Holders; and
(b) as soon as practicable, use its reasonable best
efforts to effect such registration (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws, and
appropriate compliance with applicable regulations issued under the Securities
Act) as may be so requested and as would permit or facilitate the sale and
distribution of all or such portion of such Registrable Securities as are
specified in such request, together with all or such portion of the Registrable
Securities of any Holder or Holders joining in such request as are specified in
a written request given within fifteen (15) days after receipt of such written
notice from the Company; provided that (x) the MDC Initiating Holders and the
Crescent Initiating Holders are each entitled to two registrations pursuant to
this Section 2.1, no more than one of which may be effected in any given
12-month period; (y) the Series A Initiating Holders and the L/C Initiating
Holders are each entitled to only one registration pursuant to this Section 2.1
and (z) that the Company shall not be obligated to take any action to effect any
such registration, qualification, or compliance pursuant to this Section 2.1:
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(i) In any particular jurisdiction in which the
Company would be required to execute a general consent to service
of process in effecting such registration, qualification, or
compliance unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities
Act;
(ii) During the period of 180 days following the
effective date of the registration statement pertaining to a
registered public offering of securities of the Company for cash
for its own account (other than a registration relating solely to
a Commission Rule 145 transaction or a registration relating
solely to employee benefit plans); or
(iii) With respect to the MDC Initiating Holders,
after the Company has effected two registrations on behalf of the
MDC Initiating Holders requesting registration pursuant to this
Section 2.1 and such registrations have been declared effective;
with respect to the Crescent Initiating Holders, after the
Company has effected two registrations on behalf of the Crescent
Initiating Holders requesting registrations pursuant to Section
2.1 and such registrations have been declared effective (subject
to paragraph (f)); with respect to the Series A Initiating
Holders, after the Company has effected one registration on
behalf of the Series A Initiating Holders requesting registration
pursuant to Section 2.1 and such registration has been declared
effective (subject to paragraph (f)) and, with respect to the L/C
Initiating Holders, after the Company has effected one
registration on behalf of the L/C Initiating Holders requesting
registration pursuant to Section 2.1 and such registration has
been declared effective (subject to paragraph (f)); or
(iv) Unless the Holder or Holders requesting
registration (together with any other Holders who may participate
in such registration) propose to dispose of Registrable
Securities which they reasonably anticipate will have an
aggregate disposition price (before deduction of underwriting
discounts and expenses of sale) of at least $5,000,000.
Subject to the foregoing clauses (i) through (iv) and to Section
2.1(d), the Company shall file a registration statement covering the Registrable
Securities so requested to be registered as soon as practicable after receipt of
the request of the MDC Initiating Holders, the Crescent Initiating Holders, the
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<PAGE> 7
Series A Initiating Holders or the L/C Initiating Holders, and in no event later
than 90 days after receipt of such request.
(c) Underwriting. If the MDC Initiating Holders, the
Crescent Initiating Holders, the Series A Initiating Holders or the L/C
Initiating Holders intend to distribute the Registrable Securities covered by
their request by means of an underwriting, they shall so advise the Company as a
part of their request made pursuant to this Section 2.1 and the Company shall
include such information in the written notice referred to in Section 2.1(a).
The right of each Holder to registration pursuant to Section 2.1 shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting to the
extent requested (unless otherwise mutually agreed by a majority in interest of
the Holders and such Holder) to the extent provided herein.
The Company shall (together with all Holders proposing to
distribute their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by a majority in interest of the MDC Initiating
Holders, the Crescent Initiating Holders, the Series A Initiating Holders or the
L/C Initiating Holders, as the case may be; however, such selection shall be
subject to the approval of the Company, in its sole and absolute discretion.
Notwithstanding any other provision of this Section 4.1, if the Company and the
underwriter or underwriters determine that marketing factors require the number
of shares to be underwritten to be reduced and so advise the MDC Initiating
Holders, the Crescent Initiating Holders, the Series A Initiating Holders or the
L/C Initiating Holders, as the case may be, in writing, then the MDC Initiating
Holders, the Crescent Initiating Holders, the Series A Initiating Holders or the
L/C Initiating Holders, as the case may be, shall so advise all Holders who have
indicated to the Company that they intend to participate in such underwriting
and the number of Registrable Securities that may be included in the
registration and underwriting shall be allocated as follows:
(i) Registrable Securities held by any person who
is not an MDC Holder, in the case of a registration requested by
the MDC Initiating Holders, who is not Crescent, in the case of a
registration requested by the Crescent Initiating Holders, who is
not a Series A Holder, in the case of a registration requested by
the Series A Initiating Holders, or who is not a L/C Holder, in
the case of a registration requested by the L/C Initiating
Holders, shall first be excluded on a pro rata basis on the basis
of the number of Registrable Securities requested to be included
by such Holders;
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<PAGE> 8
(ii) if further reductions are required, Registered
Securities held by the MDC Holders in the case of a registration
requested by the MDC Initiating Holders or held by Crescent in
the case of a registration requested by Crescent or held by the
Series A Holders in the case of a registration requested by the
Series A Initiating Holders or held by the L/C Holders in the
case of a registration requested by the L/C Initiating Holders
shall be excluded in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities requested to be
included by such Holders.
In the event any Non-MDC Holder is excluded as a result of the
foregoing provisions from a registration (other than a registration requested by
the Crescent Initiating Holders), then such Non-MDC Holder shall be entitled to
sell, on a pro rata basis, the excluded Registrable Securities, prior to any
other Registrable Securities, pursuant to the underwriters' over-allotment
option. Notwithstanding the preceding sentence, if the number of shares
includable by the MDC Holders is reduced in a registration requested by the MDC
Initiating Holders, then the maximum participation by Non-MDC Holders in the
underwriters' over-allotment option shall be limited to the number of shares
that such Holders would have been able to sell if the reduction was pro rata
among all Holders of Registrable Securities having the right to participate in
such registration, regardless of the reduction provisions of clause (i) above.
Except as provided in the last sentence of this paragraph, no
Registrable Securities excluded from the underwriting by reason of the
underwriter's marketing limitation shall be included in such registration. If
any Holder disapproves of the terms of the underwriting, such person may elect
to withdraw therefrom by written notice to the Company, the underwriter and the
MDC Initiating Holders, the Crescent Initiating Holders, the Series A Initiating
Holders or the L/C Initiating Holders, as the case may be. The Registrable
Securities and/or other securities so withdrawn from such underwriting shall
also be withdrawn from such registration; provided, however, that, if by the
withdrawal of such Registrable Securities a greater number of Registrable
Securities held by other Holders may be included in such registration (up to the
maximum of any limitation imposed by the underwriters), then the Company shall
offer to all Holders who have included Registrable Securities in the
registration the right to include additional Registrable Securities in the same
proportion used above in determining the underwriter limitation.
If the underwriter or underwriters have not limited the number of
Registrable Securities to be underwritten, the Company may include securities
for its own account or the account of
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<PAGE> 9
others in such registration if the underwriter or underwriters so agree and if
the number of Registrable Securities that would otherwise have been included in
such registration and underwriting will not thereby be limited.
(d) Delay of Registration. If the Company shall
furnish to the MDC Initiating Holders, the Crescent Initiating Holders, the
Series A Initiating Holders or the L/C Initiating Holders a certificate signed
by the President of the Company stating that, in the good faith discretion of
the Board of Directors of the Company, it would not be in the best interest of
the Company for such registration statement to be filed on or before the date
filing would be required then the Company may defer the filing of the
registration statement for a period or periods not in excess of an aggregate of
90 days, such right to delay a request to be exercised by the Company not more
than once in any calendar year.
(e) Shelf Registration. (i) If any registration
pursuant to this Section 2.1 is requested to be a shelf registration pursuant to
Rule 415 under the Securities Act (a "Shelf Registration"), the Company shall,
within 90 days use all reasonable efforts to file pursuant to Rule 415 under the
Securities Act, a shelf registration statement (a "Shelf Registration
Statement") relating to the Registrable Securities requested to be so
registered. The Company shall keep such Shelf Registration Statement
continuously effective for a period of 90 days following the date on which the
Commission declares such Shelf Registration Statement effective under the
Securities Act (subject to the extension pursuant to Section 2.9 hereof), or
such shorter period ending when all the Registrable Securities covered by such
Shelf Registration Statement have been sold.
(ii) Upon the occurrence of any event that would cause
the Shelf Registration Statement (A) to contain an untrue or alleged untrue
statement of material fact, or any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or (B) not to be effective and usable for resale of Registrable
Securities during the period that such Shelf Registration Statement is required
to be effective and usable, the Company shall promptly file an amendment to the
Shelf Registration Statement, in the case of clause (A), to correct any such
misstatement or omission and, in the case of either clause (A) or (B), use all
reasonable efforts to cause such amendment to be declared effective and such
Shelf Registration Statement to become usable as soon as practicable thereafter.
(f) Effective Registration Statement. A registration
requested pursuant to this Section 2.1 shall not be deemed to have been effected
(i) unless a registration statement with respect thereto has become effective;
provided, however,
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<PAGE> 10
that if such registration statement does not become effective after the Company
has filed it solely by reason of the refusal to proceed by the Holders (other
than a refusal to proceed based upon the advice of counsel relating to a matter
with respect to the Company), then such registration shall be deemed to have
been effected unless the MDC Initiating Holders, the Crescent Initiating
Holders, the Series A Initiating Holders or the L/C Initiating Holders, as the
case may be, shall have elected to pay all Registration Expenses referred to in
Section 2.4 hereof in connection with such registration, (ii) if, after the
registration statement that relates to such registration has become effective,
such registration statement becomes subject to any stop order, injunction or any
order or requirement of the Commission or other governmental agency or court for
any reason and such order, injunction or requirement is not promptly withdrawn
or lifted, or (iii) the conditions to closing specified in the purchase
agreement or underwriting agreement entered into in connection with such
registration are not satisfied, other than by reason of some act or omission by
such Holders.
2.2 Form S-3. After the Company has qualified for the
use of Form S-3, the MDC Initiating Holders, the Crescent Initiating Holders,
the Series A Initiating Holders and the L/C Initiating Holders each shall have
the right to registrations on Form S-3 (but not more than one registration in
any twelve (12) month period shall be requested by each of the MDC Initiating
Holders, the Crescent Initiating Holders, the Series A Initiating Holders or the
L/C Initiating Holders, as the case may be) under this Section 2.2 (requests
shall be in writing and shall state the number of Registrable Securities to be
disposed of and the intended method of disposition of such shares by such Holder
or Holders); provided, however, that the Company shall not be required to effect
a registration pursuant to this Section 2.2 unless (a) the Holder or Holders
requesting registration propose to dispose of Registrable Securities which they
reasonably anticipate will have an aggregate disposition price (before deduction
of underwriting discounts and expenses of sale) of at least $5,000,000 and (b)
such Holder or Holders are not entitled to sell all of their shares within a
three-month period under Rule 144 under the Securities Act.
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The Company shall give notice to all Holders of
Registrable Securities and all other Holders of the receipt of a request for
registration pursuant to this Section 2.2 and shall provide a reasonable
opportunity for all Holders and all other Holders to participate in the
registration. Subject to the foregoing, the Company will use all reasonable
efforts to effect promptly the registration of all Registrable Securities on
Form S-3, as the case may be, to the extent requested by the Holder or Holders
thereof for purposes of disposition.
2.3 Company Registration.
(a) Notice of Registration. If at any time or from
time to time, the Company shall determine to register any of its Common Stock,
for its own account or for the account of others, other than a registration
relating to an initial public offering or a registration relating solely to
employee benefit plans or a registration relating solely to a Commission Rule
145 transaction or registration on any registration form which does not include
substantially the same information about the Company as would be required to be
included in a registration statement covering the sale of Registrable
Securities, the Company will:
(i) promptly give to (A) each Holder and (B) those
other Holders of the Company who have "piggyback" registration
rights ("Other Holders") written notice thereof; and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in
any underwriting involved therein, all the Registrable Securities
specified in a written request or requests by any Holder or
Holders, and all shares of Common Stock specified in a written
request or requests by the Other Holders, provided such written
requests are received by the Company within 20 days following
receipt by such Holders and the Other Holders of such notice from
the Company.
(b) Underwriting. If the registration of which the
Company gives notice is for a registered public offering involving a firm
commitment underwriting, the Company shall so advise the Holders and the Other
Holders as a part of the written notice given pursuant to Section 2.3(a)(i). In
such event, the right of any Holder and the Other Holders to registration
pursuant to this Section 2.3 shall be conditioned upon such Holder's and the
Other Holders' participation in such underwriting and the inclusion of such
Holder's Registrable Securities and such Other Holders' Common Stock in the
underwriting to the extent provided herein. All Holders and Other Holders
proposing to distribute their securities through such underwriting shall
(together with the Company and the other
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<PAGE> 12
holders distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company. Notwithstanding any other
provision of this Section 2.3, if the Company and the underwriter or
underwriters determine that marketing factors require limitation of the number
of shares to be underwritten, the underwriter may exclude from such underwriting
all or some of the shares proposed for registration on the following basis:
(i) shares held by any person who does not have
contractual rights to cause the Company to register such shares
shall first be excluded;
(ii) if further reductions are required, any shares
held by the Other Holders will next be excluded, such reductions
to be allocated as nearly as practicable among each such Other
Holder in the proportion that the number of shares of Common
Stock (on a fully converted basis) held by such Other Holder
bears to the total number of shares of Common Stock (on a fully
converted basis) held by all Other Holders seeking to register
their shares; and
(iii) if further reductions are required,
Registrable Securities and any shares held by the Holders will
next be excluded, such reductions to be allocated pro rata among
such Holders based upon the number of shares of Common Stock
requested to be included by each such Holder.
In the event any Non-MDC Holder is excluded as a result of the
foregoing provisions from a registration, then such Non-MDC Holder shall be
entitled to sell, on a pro rata basis, the excluded Registrable Securities,
prior to any other Registrable Securities, pursuant to the underwriters'
over-allotment option.
Except as provided in the last sentence of this paragraph, no
shares excluded from the underwriting by reason of the underwriter's marketing
limitation shall be included in such registration. If any Holder or Other Holder
disapproves of the terms of any such underwriting, such person may elect to
withdraw therefrom by written notice to the Company and the underwriter. The
Registrable Securities and/or other securities so withdrawn from such
underwriting shall also be withdrawn from such registration; provided, however,
that, if by the withdrawal of such shares a greater number of shares may be
included in such registration (up to the maximum of any limitation imposed by
the underwriters), then the Company shall offer to all Holders and Other Holders
who have included shares in the registration the right to include additional
shares in the same proportion used above in determining the underwriter
limitation.
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2.4 Expenses of Registration. All Registration
Expenses incurred in connection with one registration per year pursuant to
Section 2.1 requested by the MDC Initiating Holders, one registration per year
requested by the Crescent Initiating Holders, one registration requested by the
Series A Initiating Holders and one registration requested by the L/C Initiating
Holders and all Registration Expenses incurred in connection with a registration
pursuant to Section 2.2 or Section 2.3, including the reasonable fees and
expenses of one counsel for the selling Holders collectively, shall be borne by
the Company; and all Selling Expenses shall be borne by the Holders of the
Registrable Securities so registered pro-rata on the basis of the number of
shares so registered.
2.5 Registration Procedures. Whenever the Company is
required to register Registrable Securities pursuant to Sections 2.1, 2.2 or 2.3
hereof, the Company will use all reasonable efforts to effect the registration
to permit the sale of such Registrable Securities in accordance with the
intended method or methods of disposition thereof, and pursuant thereto the
Company will as expeditiously as possible:
(a) prepare and file with the Commission as soon as
practicable a registration statement with respect to such Registrable Securities
as prescribed by Section 2 on a form available for the sale of the Registrable
Securities by the Holders thereof in accordance with the intended method or
methods of distribution thereof and use all reasonable efforts to cause each
such registration statement to become and remain effective; provided, however;
that before filing a registration statement, the Company will furnish the
Holders of Registrable Securities covered by such registration statement, the
underwriters, if any, and any attorney, accountant or other agent required by
any such Holders of Registrable Securities or underwriters (a) copies of all
such documents proposed to be filed, which documents will be subject to the
review and comment of such Holders, their counsel and underwriters, if any, and
(ii) if requested, financial and other information required by the Commission to
be included in such registration statement and all financial and other records,
pertinent corporate documents and properties of the Company customarily reviewed
in connection with an underwritten registration; and shall cause the officers,
directors and employees of the Company, counsel to the Company and independent
certified public accountants to Company, to respond to such inquiries and supply
all information, as shall be necessary, in the opinion of respective counsel to
such Holders and underwriters, to conduct a reasonable investigation within the
meaning of the Securities Act, and will not file any registration statement to
which the Holders of at least a majority of the Registrable Securities covered
by such registration statement or the underwriters, if any, shall reasonably
object;
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<PAGE> 14
(b) prepare and file with the Commission such
amendments, post-effective amendments and prospectus supplements to such
registration statement as may be necessary to keep such registration statement
effective and to comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such registration statement
until the earlier of (i) the period provided in Section 2.1 hereof (as such
period may be extended pursuant to Section 2.9 hereof) or (ii) such time as all
such securities have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof set forth in such registration
statement; provided, that the Company shall be deemed not to have used all
reasonable efforts to keep a registration statement effective during the
applicable period if it voluntarily takes any action that results in the selling
Holders of the Registrable Securities covered thereby not being able to sell
such Registrable Securities during that period;
(c) furnish to each Holder of Registrable Securities
covered by a registration statement and to each underwriter, if any, such number
of copies of such registration statement, each amendment and post-effective
amendment thereto, the prospectus included in such registration statement
(including each preliminary prospectus and any supplement to such prospectus and
any other prospectus filed under Rule 424 of the Securities Act), in each case
including all exhibits, and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller or to be disposed of by such underwriter (the Company
hereby consenting to the use, in accordance with all applicable laws, of each
such registration statement (or amendment or post-effective amendment thereto)
and each such prospectus (or preliminary prospectus or supplement thereto) by
each such seller and the underwriters, if any, in connection with the offering
and sale of the Registrable Securities covered by such registration statement or
prospectus);
(d) use all reasonable efforts to register or qualify
and, if applicable, to cooperate with the selling Holders of Registrable
Securities, the underwriters, if any, and their respective counsel in connection
with the registration or qualification (or exemption from such registration or
qualification) of, the securities to be included in a registration statement for
offer and sale under the securities or blue sky laws of such jurisdictions as
any selling Holder or managing underwriters (if any) shall reasonably request,
to keep each such registration or qualification (or exemption therefrom)
effective during the period such registration statement is required to be kept
effective and to do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdictions of the securities covered by the
applicable registration statement, provided, that the Company will not be
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<PAGE> 15
required to (i) qualify generally to do business in any jurisdiction where it
would not otherwise be required to qualify but for this paragraph or (ii)
consent to general service of process in any such jurisdiction;
(e) cause all such Registrable Securities to be listed
on each securities exchange on which securities of the same class as the
Registrable Securities are then listed and, if not so listed, to be listed on
the NASD automated quotation system and, if listed on the NASD automated
quotation system, use all reasonable efforts to secure designation of all such
Registrable Securities covered by such registration statement as a NASDAQ
"national market system security" within the meaning of Rule 11Aa2-1 under the
Exchange Act or, failing that, to secure NASDAQ authorization for such
Registrable Securities and, without limiting the generality of the foregoing, to
use its reasonable efforts to arrange for at least two market makers to register
as such with respect to such Registrable Securities with the NASD;
(f) provide a transfer agent and registrar for all such
Registrable Securities and a CUSIP number for all such Securities not later than
the effective date of such registration statement;
(g) comply with all applicable rules and regulations of
the Commission and make available to its security holders an earnings statement
satisfying the provisions of Section 11(a) of the Securities Act and Rule 158
thereunder (or any similar rule promulgated under the Securities Act) no later
than 45 days after the end of any 12-month period (or 90 days after the end of
any 12-month period if such period is a fiscal year) (or in each case within
such extended period of time as may be permitted by the Commission for filing
the applicable report with the Commission) (i) commencing at the end of any
fiscal quarter in which Registrable Securities are sold to underwriters in a
firm commitment or best efforts under written offering or (ii) if not sold to
underwriters in such an offering, commencing on the first day of the first
fiscal quarter of the Company after the effective date of a registration
statement, which earnings statement shall cover said 12-month period;
(h) permit any Holder which, in its sole and exclusive
judgment, might be deemed to be an underwriter or a controlling person of the
Company, to participate in the preparation of such registration or comparable
statement and to require the insertion therein of material, furnished to the
Company in writing, which in the reasonable judgment of such Holder and its
counsel should be included;
(i) use all reasonable efforts to prevent the issuance
of any order suspending the effectiveness of a registration statement or
suspending the qualification (or
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<PAGE> 16
exemption from qualification) of any of the securities included therein for sale
in any jurisdiction, and, in the event of the issuance of any stop order
suspending the effectiveness of a registration statement, or of any order
suspending the qualification of any securities included in such registration
statement for sale in any jurisdiction, the Company will use all reasonable
efforts promptly to obtain the withdrawal of such order at the earliest possible
moment;
(j) obtain "cold comfort" letters and updates thereof
(which letters and updates (in form, scope and substance) shall be reasonably
satisfactory to the managing underwriters, if any, and counsel to the selling
Holders of Registrable Securities) from the independent certified public
accountants of the Company (and, if necessary, any other independent certified
public accountants of any subsidiary of the Company or of any business acquired
by the Company for which financial statements and financial data are, or are
required to be, included in the registration statement), addressed to each of
the underwriters, if any, and each selling Holder of Registrable Securities,
such letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters in connection with underwritten
offerings and such other matters as the underwriters, if any, or the Holders of
a Majority of the Registrable Securities being sold may reasonably request;
(k) obtain opinions of independent counsel to the
Company and updates thereof (which counsel and opinions (in form, scope and
substance) shall be reasonably satisfactory to the managing underwriters, if
any, and not objected to by the Holders of a Majority of the Registrable
Securities being sold), addressed to each selling Holder and each of the
underwriters, if any, covering the matters customarily covered in opinions of
issuer's counsel requested in underwritten offerings, such as the effectiveness
of the registration statement and such other matters as may be requested by the
underwriters, if any;
(l) promptly (but in any event, within two business
days) notify the selling Holders of Registrable Securities, their counsel and
the managing underwriters, if any, and confirm such notice in writing:
(i) when a prospectus or any supplement or post-
effective amendment to such prospectus has been filed, and, with respect
to a registration statement or any post-effective amendment thereto,
when the same has become effective;
(ii) of any request by the Commission or any other
Federal or state governmental authority for amendments or supplements to
a registration statement or related prospectus or for additional
information;
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<PAGE> 17
(iii) of the issuance by the Commission of any
stop order suspending the effectiveness of a registration statement or
of any order preventing or suspending the use of any prospectus or the
initiation of any proceedings by any Person for that purpose;
(iv) if at any time the representations and
warranties of the Company contemplated by clause (i) of paragraph (q)
below cease to be true and correct in any material respect,
(v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or
exemption from qualification of a registration statement or any of the
Registrable Securities for offer or sale under the securities or blue
sky laws of any jurisdiction, or the contemplation, initiation or
threatening, of any proceeding for such purpose;
(vi) of the happening of any event that makes any
statement made in such registration statement untrue in any material
respect or that requires the making of any changes in such registration
statement so that it will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made (in the case of any prospectus), not
misleading; and
(vii) of the Company's reasonable determination
that a post-effective amendment to a registration statement would be
appropriate.
(m) if requested by the managing underwriters, if any,
or a Holder of Registrable Securities being sold, promptly incorporate
in a prospectus, supplement or post-effective amendment any information
as the managing underwriters, if any, and the Holders of a Majority of
the Registrable Securities being sold reasonably request to be included
therein relating to the sale of the Registrable Securities, including,
without limitation, information with respect to the number of shares of
Registrable Securities being sold to underwriters, the purchase price
being paid therefor by such underwriters and with respect to any other
terms of the underwritten offering of the Registrable Securities to be
sold in such offering, and make all required filings of such prospectus,
supplement or post-effective amendment promptly following notification
of the matters to be incorporated in such supplement or post-effective
amendment;
(n) furnish to each selling Holder of Registrable
Securities and the managing underwriter, without charge, at least one
signed copy of the registration statement;
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<PAGE> 18
(o) cooperate with the selling Holders of Registrable
Securities and the managing underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing in the Registrable
Securities not bearing any restrictive legends and in a form eligible for
deposit with The Depository Trust Company to be sold and cause such Registrable
Securities to be in such denominations and registered in such names as the
managing underwriters, if any, or holder of Registrable Securities may request
at least three business days prior to any sale of Registrable Securities to the
underwriters;
(p) as promptly as practicable upon the occurrence of
any event contemplated by clause (l)(vi) above, prepare a supplement or
post-effective amendment to the registration statement, or file any other
required documents so that, as thereafter delivered to the purchasers of the
Registrable Securities being sold hereunder, the prospectus will not contain an
untrue statement of a material fact or an omission to state a material fact
required to be stated in a registration statement or prospectus or necessary to
make the statements therein (in the case of the prospectus, in light of the
circumstances under which they were made), not misleading;
(q) enter into such agreements (including underwriting
agreements in customary form, scope and substance) and take all such other
actions in connection therewith as the Holders of a Majority of the Registrable
Securities being sold or the underwriters, if any, reasonably request in order
to expedite or facilitate the registration or the disposition of such
Registrable Securities, and in such connection, whether or not an underwriting
agreement is entered into and whether or not the registration is an underwritten
registration:
(i) make such representations and warranties to
the Holders of such Registrable Securities and the underwriters, if any,
with respect to the business of the Company and the registration
statement, in form, substance and scope as are customary made by issuers
to underwriters in underwritten offerings and confirm the same, if and
when requested;
(ii) if an underwriting agreement is entered into,
cause the same to include the indemnification and contribution
provisions and procedures substantially similar to (and use all
reasonable efforts to assure that such provisions are no less favorable
to the selling Holders of Registrable Securities than) those contained
in Section 2.6 hereof with respect to all parties to be indemnified
pursuant to said Section (or, with respect to the indemnification of
such underwriters, such similar indemnification and contribution
provisions as such underwriters shall customarily require); and
18
<PAGE> 19
(iii) deliver such documents and certificates as
may be requested by the Holders of a Majority of the Registrable
Securities being sold and managing underwriters, if any, to evidence
compliance with clause (i) above and with any conditions contained in
the underwriting agreement or other similar agreement entered into by
the Company;
The above shall be done at each closing under such underwriting
or similar agreement or as and to the extent otherwise reasonably requested by
the Holders of a Majority of the Registrable Securities being sold.
(r) cooperate with each seller of Registrable
Securities covered by any registration statement and each underwriter, if any,
participating in the disposition of such Registrable Securities and their
respective counsel in connection with any filings required to be made with the
NASD;
(s) use all reasonable efforts to take all other steps
necessary to effect the registration of the Registrable Securities covered by
the registration statement contemplated hereby.
Each Holder agrees by the acquisition of such Registrable
Securities that, upon receipt of written notice from the Company of the
happening of any event of the kind described in Section 2.5(l)(ii), 2.5(l)(iii),
2.5(l)(v), 2.5(l)(vi), or 2.5(l)(vii), such Holder will forthwith discontinue
disposition of such Registrable Securities covered by such registration
statement until such Holder's receipt of the copies of the supplemented or
amended registration statement contemplated by Section 2.5(p), or until it is
advised in writing (the "Advice") by the Company that the use of applicable
prospectus may be resumed, and has received copies of any additional or
supplemental filings that are incorporated or deemed to be incorporated by
reference in such prospectus, and, if so directed by the Company, such Holder
shall deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such Holder's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of such
notice. If the Company shall give any such notice, the time periods mentioned in
Section 2.1 hereof shall be extended by the number of days during such periods
from and including the date of the giving of such notice to and including the
date when each seller of Registrable Securities covered by such registration
statement receives (x) the copies of the supplemented or amended prospectus
contemplated by Section 2.5(p) hereof or (y) the Advice, as the case may be.
19
<PAGE> 20
2.6 Indemnification and Contribution.
(a) Company Indemnification. The Company will
indemnify, to the fullest extent permitted by law, each Holder (which term, for
purposes of this Section 2.6, shall be deemed to include Other Holders who
include shares in a registration), its Affiliates, each of its and its
Affiliates' officers, directors, employees, counsel, agents, representatives and
partners, and each person controlling, within the meaning of Section 15 of the
Securities Act or Section 20 the Exchange Act, such Holder or its Affiliates,
participating in any registration, qualification, or compliance effected
pursuant to this Section 2 with respect to Registrable Securities held by such
Holder, each person controlling the Company who is not participating in such
registration, qualification or compliance and each underwriter, if any, and each
person who controls any underwriter, against all claims, losses, damages, costs
(including, without limitation, costs of investigation and reasonable attorneys'
fees and disbursements), expenses and liabilities (or actions in respect thereof
collectively "Losses"), including any of the foregoing incurred in settlement of
any litigation, commenced or threatened, to which they may become subject under
the Securities Act, the Exchange Act, or other federal or state law, arising out
of or based on (i) any untrue statement (or alleged untrue statement) of a
material fact contained in any prospectus, offering circular or other similar
document (including any related registration statement, notification, or the
like) incident to any such registration, qualification or compliance, or based
on any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading
(in the case of the prospectus, in light of the circumstances under which they
were made), or (ii) any violation by the Company of any federal, state, or
common law rule or regulation applicable to the Company in connection with any
such registration, qualification, or compliance, and will reimburse each such
Holder, each of its Affiliates and its and its Affiliates' officers, directors,
employees, counsel, agents, representatives and partners, and each person
controlling such Holder or its Affiliates, each such person controlling the
Company who is not participating in such registration, qualification or
compliance, each such underwriter, and each person who controls any such
underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating or defending any Losses, as incurred, provided
that the Company will not be liable to such Holder in any such case to the
extent that any such Losses arise out of or are based on any untrue statement or
omission, made in reliance on and in conformity with written information
furnished to the Company expressly for use in the registration statement by such
Holder.
(b) Holder Indemnification. Each Holder will, if
Registrable Securities held by such Holder are included in the
20
<PAGE> 21
securities as to which such registration, qualification, or compliance is being
effected, indemnify the Company, each of its directors and officers, each
underwriter, if any, of the Company's securities covered by such a registration
statement, each person who controls the Company or such underwriter within the
meaning of the Securities Act, each other Holder and each Other Holder, and each
of its officers, directors, and partners and each person controlling such other
Holder or Other Holder, against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on (i) any untrue statement
(or alleged untrue statement) by such Holder of a material fact contained in any
such registration statement, prospectus by such Holder, offering circular, or
other similar document, or any omission (or alleged omission) by such Holder to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading in the light of the circumstances under
which they were made, and will reimburse the Company, such other Holders, such
directors, officers, persons, underwriters, or control persons for any legal or
any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability, or action, as incurred, in
each case to the extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular, or other document in
reliance upon and in conformity with written information furnished to the
Company expressly for use in the registration statement by such Holder, or (ii)
any violation by such Holder, in connection with a non-underwritten offering, of
any federal, state, or common law rule or regulation applicable to such Holder
in connection with the distribution of securities pursuant to a registration
statement, and will reimburse the Company, such other Holders, such directors,
officers, persons, or control persons for any legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability, or action, as incurred; provided, however, that
the obligations of each such Holder hereunder shall be limited to an amount
equal to the aggregate proceeds (net of payment of all expenses) received by
such Holder in such offering.
(c) Notice of Actions. Each party entitled to
indemnification under this Section 2.6 (the "Indemnified Party") shall give
notice to the party required to provide indemnification (the "Indemnifying
Party") promptly after such Indemnified Party has received written notice of any
claim as to which indemnity may be sought, and shall permit the Indemnifying
Party to assume the defense (including the payment of all fees and expenses
incurred in connection thereof) of any such claim or any litigation resulting
therefrom, provided that counsel for the Indemnifying Party, who shall conduct
the defense of such claim or litigation, shall be approved by the Indemnified
Party (whose
21
<PAGE> 22
approval shall not unreasonably be withheld). Each Indemnified Party shall have
the right to employ separate counsel in such defense but the fees and expenses
of such counsel shall be at the expense of each such Indemnified Party unless
the representation of both parties by the same counsel would be inappropriate
due to actual or potential conflicts of interest or if the Indemnifying Party
fails to promptly assume the defense. No Indemnified Party shall be liable for
any settlement effected without its written consent. Each Indemnifying Party
agrees, jointly and severally, that it will not, without the Indemnified Party's
prior written consent, consent to entry of any judgment or settle or compromise
any pending or threatened claim, action or proceeding in respect of which
indemnification or contribution may be sought hereunder unless the foregoing
contains an unconditional release, in form and substance reasonably satisfactory
to the Indemnified Party, of the Indemnified Party from all liability and
obligation arising therefrom.
The Indemnifying Party's liability to any Indemnified Party
hereunder shall not be extinguished solely because any other Indemnified Party
is not entitled to indemnity hereunder.
The Indemnification provided for under this Agreement will remain
in full force and effect regardless of any investigation made by or on behalf of
the Indemnified Party or any officer, director or controlling person of such
Indemnified Party, and will survive the Transfer of Registrable Securities. The
failure of any Indemnified Party or Parties to give notice as provided herein
shall relieve the Indemnifying Party of its obligations under this Section 2.6
only to the extent that such failure to give notice shall materially adversely
prejudice the Indemnifying Party in the defense of any such claim or any such
litigation.
(d) Contribution. If the indemnification provided for
in this Section 2.6 is unavailable or insufficient to hold harmless an
Indemnified Party under Section 2.6(a) or (b) above, then each Indemnifying
Party shall contribute to the amount paid or payable by such indemnified party
as a result of the Losses referred to in Section 2.6(a) or (b) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Holders on the other from the offering of the
Shares and the relative fault of the Company on the one hand and the Holders on
the other in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Holders and the parties' relative intent,
knowledge, access to information and
22
<PAGE> 23
opportunity to correct or prevent such untrue statement or omission. The Company
and the Holders agree that it would not be just and equitable if contributions
pursuant to this Section 2.6(d) were to be determined by pro rata allocation or
by any other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this Section 2.6(d). The
amount paid or payable by an Indemnified Party as a result of the Losses
referred to in the first sentence of this Section 2.6(d) shall be deemed to
include any legal or other expenses reasonably incurred by such Indemnified
Party in connection with investigating or defending against any action or claim
which is the subject of this Section 2.6(d). Notwithstanding the provisions of
this Section 2.6(d), no Holder shall be required to contribute any amount in
excess of the proceeds (net of payment of all expenses) received by such Holder
in the registration. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Holders' obligations in this Section 2.6(d) to contribute
are several in proportion to the number of Registrable Securities sold by each
Holder participating in a registration and not joint. Each party entitled to
contribution agrees that upon the service of a summons or other initial legal
process upon it in any action instituted against it in respect of which
contribution may be sought, it shall promptly give written notice of such
service to the party or parties from whom contribution may be sought, but the
omission so to notify such party or parties of any such service shall not
relieve the party from whom contribution may be sought from any obligation it
may have hereunder or otherwise (except as specifically provided in Section
2.6(c) hereof). The indemnity and contribution agreements contained in this
Section 2.6 are in addition to any indemnity that the Indemnifying Parties may
have to the Indemnified Parties.
2.7 Information by Holder. Each Holder of Registrable
Securities included in any registration shall furnish to the Company such
information regarding such Holder and the distribution proposed by such Holder
as the Company may reasonably request in writing and as shall be required in
connection with any registration, qualification or compliance referred to in
this Section 2.
2.8 Rule 144 Reporting. With a view to making
available the benefits of certain rules and regulations of the Commission that
may at any time permit the sale of shares of Common Stock to the public without
registration, after such time as a public market exists for the Common Stock of
the Company, the Company agrees to:
23
<PAGE> 24
(a) Use its best efforts to facilitate the sale of
shares of Common Stock to the public, without registration under the Securities
Act, pursuant to Rule 144 under the Securities Act, provided that this shall not
require the Company to file reports under the Securities Act or the Exchange Act
at any time prior to the Company's being otherwise required to file such
reports;
(b) Make and keep public information available, as
those terms are understood and defined in Rule 144 under the Securities Act at
all times after 90 days after the effective date of the first registration under
the Securities Act filed by the Company for an offering of its securities to the
general public;
(c) File with the Commission in a timely manner all
reports and other documents required of the Company under the Securities Act and
the Exchange Act (at any time after it has become subject to such reporting
requirements);
(d) During any period in which the Company is not
subject to Section 13 or 15(d) of the Exchange Act, make available the
information required to be provided by Rule 144A(d)(4);
(e) So long as a Holder owns any shares of Common Stock
which constitute restricted securities under Rule 144 to furnish to the Holder
forthwith upon request a written statement by the Company as to its compliance
with the reporting requirements of said Rule 144 (at any time after 90 days
after the effective date of the first registration statement filed by the
Company for an offering of its securities to the general public), and of the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements), a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents so filed by the
Company as a Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Holder to sell any such securities
without registration.
2.9 "Market Stand-off" Agreement. Each Holder and the
Company agree not to sell or otherwise transfer or dispose of any Common Stock
or other securities of the Company (other than in a private transaction) held by
it during a period of 180 days (or such shorter period as the Company and the
underwriters may agree upon in connection with an initial public offering)
following the effective date of a registration statement of the Company filed
under the Securities Act in connection with an initial public offering. The
Company may impose stop-transfer instructions with respect to the shares (or
securities) subject to the foregoing restriction until the end of such period.
If a request is made pursuant to this Section 2.9,
24
<PAGE> 25
then the time period during which a Shelf Registration is required to remain
continuously effective for Holders of Registrable Securities pursuant to the
terms of this Agreement shall be extended for 180 days.
2.10 Transfer of Registration Rights. Subject to
compliance with Sections 2 and 3 hereof, the rights granted under this Section 2
may be assigned or otherwise conveyed in whole or in part by any Holder of
Registrable Securities to any transferee; provided that in each case the Company
is given written notice of the transfer, stating the name and address of said
transferee and said transferee's agreement to be bound by the provisions of this
Agreement; provided however, that any Holder of Registrable Securities may
transfer to any partner, member or retired partner or retired member of the
Holder, or to any parent, subsidiary or other person or entity which is an
Affiliate of the Holder, the rights granted under this Section 2, so long as the
Company is given written notice of such transferee's agreement to be bound by
the provisions of this Agreement, without meeting the other conditions set forth
in this Section 2.10.
2.11 Certain Limitations in Connection with Future Grants
of Registration Rights. From and after the date of this Agreement, the Company
shall not enter into any agreement with any holder or prospective holder of any
securities of the Company providing for the granting to such holder of
registration rights unless such agreement:
(a) includes the equivalent of Section 2.9 as a term;
and
(b) contains provisions substantially similar to those
contained in Section 2.3(b) with respect to the allocation of Registrable
Securities to be included in an underwritten public offering if marketing
factors require a limitation on the number of such securities to be included.
Notwithstanding the foregoing, from and after the date of this
Agreement, without the prior written consent of the Holders of a Majority of the
Registrable Securities and the Holders of a Majority of the Registrable
Securities owned by Crescent, the Company shall not enter into any agreement
with any person or persons providing for the granting to such holder of
registration rights superior to those granted to Holders pursuant to Section
2.1, 2.2 or 2.3.
2.12 Covenants of Holders. (a) In the event any shares
of Common Stock are offered or sold by any Holder in a registration, each such
Holder will: (i) advise the Company in writing of any offer, sale or other
disposition by it of any Common Stock in any manner other than as set forth in
the
25
<PAGE> 26
registration statement or any prospectus included therein on or before the
respective dates thereof; (ii) not effect any stabilization activity in
connection with the Company's Common Stock; (iii) not bid for or purchase, for
any account in which it has a beneficial interest, any Common Stock other than
in transactions permitted pursuant to Regulation M under the Exchange Act (if
applicable); and (iv) not, until it has sold all of such shares of Common Stock,
attempt to induce any person to purchase any Common Stock other than in
transactions permitted pursuant to Regulation M.
(b) Each Holder shall, if requested by the Company or the
managing underwriter(s) in connection with any proposed registration and
distribution pursuant to this Agreement, (i) agree to sell the Registrable
Securities on the basis provided in any underwriting arrangements satisfactory
to such Holder entered into in connection therewith and (ii) complete and
execute all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents customary in similar offerings (and the Company
shall use all reasonable efforts to assure that such agreements and documents
contain provisions that are in no event less favorable to such Holder than the
indemnities provided herein).
3. Miscellaneous.
3.1 Governing Law and Jurisdiction. THIS AGREEMENT
AND ALL ISSUES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO PRINCIPLES OF
CONFLICTS OF LAW EXCEPT SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).
TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, EACH OF THE
PARTIES HERETO HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK
STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK OR ANY
FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK IN
RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT, AND IRREVOCABLE ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY,
GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURTS. EACH OF THE
PARTIES HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO
SO UNDER APPLICABLE E LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO
THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY
SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY
SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NOTHING HEREIN SHALL
AFFECT THE RIGHT OF ANY HOLDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY
LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHER PROCEED AGAINST THE COMPANY IN ANY
OTHER JURISDICTION.
3.2 Certain Adjustments. In the event of any increase
or decrease in the number of outstanding shares of the
26
<PAGE> 27
Company resulting from any recapitalization, payment of a Common Stock dividend,
stock split, combination of shares, or any other increase or decrease in the
number of such outstanding shares effected without the Company's receipt of
consideration therefor, any maximum, minimum, or threshold number of shares of
Common Stock or other securities referred to herein shall be proportionately
adjusted to reflect such increase or decrease and any additional securities
issued with respect to the such securities shall become subject to the terms and
conditions of this Agreement.
3.3 Enforcement. The parties expressly agree that the
provisions of this Agreement may be specifically enforced against each of the
parties hereto in any court of competent jurisdiction.
3.4 Successors and Assigns. Except as otherwise
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors, and administrators of
the parties hereto.
3.5 Entire Agreement. This Agreement and each of the
agreements referenced herein, constitute the full and entire understanding and
agreement between the parties with regard to the subject matter hereof and
supersede all prior oral or written (and all contemporaneous oral) agreements or
understandings with respect to the subject matter hereof.
3.6 Notices, etc. All notices and other communications
required or permitted hereunder shall be in writing and shall be mailed by
registered or certified mail, return receipt requested, postage prepaid, or
otherwise delivered by hand, messenger or facsimile transmission, addressed: (a)
if to a party listed on Exhibit A or a transferee of such party, at such party's
address as set forth on Exhibit A, or at such other address as such party or its
transferee shall have furnished to the Company in writing, or if to the
Purchaser:
if to the Company American Residential Investment Trust, Inc.
445 Marine View Avenue, Suite 130
Del Mar, California 92014
with copies to McCown De Leeuw & Co.
101 East 52nd Street, 31st Floor
New York, NY 10022
Facsimile Number (212) 355-6283
Attention: David De Leeuw
27
<PAGE> 28
Gibson, Dunn & Crutcher LLP
One Montgomery Street, 26th Floor
San Francisco, CA 94104-4505
Facsimile Number (415) 986-5309
Attention: Lawrence Calof
or such other address as the Company shall have furnished to the parties listed
on Exhibit A in writing. Notices to Holders shall be sent to the address of such
Holder on the books and records of the Company; provided, that with respect to
any notice sent to Crescent, a copy of such notice shall be sent to Skadden,
Arps, Slate, Meagher & Flom LLP, 300 S. Grand Avenue, Suite 3400, Los Angeles,
California 90071, Telecopy No. (213) 687-5600, Attention: Jeffrey H. Cohen. Each
such notice or other communication shall for all purposes of this Agreement be
treated as effective or as having been given when delivered, if delivered by
hand or by messenger (or overnight courier), 24 hours after confirmed receipt if
sent by facsimile transmission or at the earlier of its receipt or on the fifth
day after mailing as aforesaid.
3.7 Delays or Omissions. No delay or omission to
exercise any right, power or remedy accruing to any party hereto upon any breach
or default of the Company under this agreement, shall impair any such right,
power or remedy of such holder nor shall it be construed to be a waiver of any
such breach or default, or an acquiescence therein, or of or in any similar
breach or default thereunder occurring; nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default theretofore
or thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement, or by law or otherwise afforded to any party, shall be
cumulative and not alternative.
3.8 Counterparts. This Agreement may be executed in
any number of counterparts, each of which may be executed by less than all of
the parties hereto, each of which shall be enforceable against the parties
actually executing such counterparts, and all of which together shall constitute
one instrument.
3.9 Severability. If any provision of this Agreement
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
3.10 Amendments. The provisions of this Agreement
28
<PAGE> 29
may be amended at any time and from time to time, and particular provisions of
this Agreement may be waived, with and only with an agreement or consent in
writing signed by the Company and by the holders of at least a majority of the
Securities (i) held by Crescent and (ii) held by the other Holders.
3.11 Termination. The provisions of this Agreement
shall terminate upon the earlier of (a) the tenth anniversary of the date of
this Agreement or (b) as to any Holder, at such time as the Holder is able to
sell all its remaining Registrable Securities (including any securities that may
become Registrable Securities upon acquisition by any of the Holders pursuant to
distribution by Holdings to its members or a foreclosure by the holders of
Notes, or the Collateral Agent acting for their benefit, under the Pledge
Agreement) in accordance with Rule 144 during a 90-day period.
* * * *
29
<PAGE> 30
IN WITNESS WHEREOF, the foregoing Registration Rights Agreement
is hereby executed as of the date first above written.
AMERICAN RESIDENTIAL INVESTMENT
TRUST, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
MCCOWN DE LEEUW & CO. II, L.P.
By: MDC Management Company II, L.P.,
its General Partner
By: ----------------------------------
Name: David E. De Leeuw
Title: General Partner
MCCOWN DE LEEUW ASSOCIATES, L.P.
By: MDC Management Company II, L.P.,
its General Partner
By: __________________________________
Name: David E. De Leeuw
Title: General Partner
MCCOWN DE LEEUW & CO. OFFSHORE
(EUROPE), L.P.
By: MDC Management Company IIE, L.P.,
its General Partner
By: __________________________________
Name: David E. De Leeuw
Title: General Partner
MCCOWN DE LEEUW & CO. OFFSHORE
(ASIA), L.P.
By: MDC Management Company IIA, L.P.,
its General Partner
By: __________________________________
Name: David E. De Leeuw
Title: General Partner
30
<PAGE> 31
ERNEST J. GALLO 1991 FAMILY TRUST
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
JOSEPH C. GALLO 1994 FAMILY TRUST
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
STEPHANIE A. GALLO 1990 FAMILY TRUST
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
PK PARTNERS
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
JOSEPHINE B. HAAS TRUST
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
KELLER 1991 TRUST
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
LILLARD PARTNERS
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
PLF PARTNERS
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
SAW ISLAND PARTNERS
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
31
<PAGE> 32
-------------------------------------------
Martin Anderson
-------------------------------------------
Jay Fuller
-------------------------------------------
John Robbins
-------------------------------------------
Mark Conger
-------------------------------------------
Rollie Lynn
CRESCENT/MACH I PARTNERS, L.P.
By: TCW ASSET MANAGEMENT COMPANY,
as investment manager and
attorney in fact
By:
---------------------------------------
Name: Jean-Marc Chapus
Title: Managing Director
By:
---------------------------------------
Name: John C. Rocchio
Title: Senior Vice President
TCW/CRESCENT MEZZANINE INVESTMENT
PARTNERS, L.P.
By: TCW/CRESCENT MEZZANINE, L.L.C.,
its general partner or managing owner
By:
---------------------------------------
Name: Jean-Marc Chapus
Title: Managing Director
By:
---------------------------------------
Name: John C. Rocchio
Title: Senior Vice President
32
<PAGE> 33
TCW/CRESCENT MEZZANINE PARTNERS, L.P.
TCW/CRESCENT MEZZANINE TRUST
By: TCW/CRESCENT MEZZANINE, L.L.C.,
its general partner or managing owner
By:
---------------------------------------
Name: Jean-Marc Chapus
Title: Managing Director
By:
---------------------------------------
Name: John C. Rocchio
Title: Senior Vice President
TCW SHARED OPPORTUNITY FUND II, L.P.
By: TCW INVESTMENT MANAGEMENT COMPANY,
its investment advisor
By:
---------------------------------------
Name: Jean-Marc Chapus
Title: Managing Director
By:
---------------------------------------
Name: John C. Rocchio
Title: Senior Vice President
MDC REIT HOLDINGS, LLC
By: HOME ASSET MANAGEMENT CORP.,
its managing member
By:
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Name:
Title:
33
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EXHIBIT 10.1
MANAGEMENT AGREEMENT
MANAGEMENT AGREEMENT, dated as of February 11, 1997, by and among
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC., a Maryland corporation (the
"Company"), and HOME ASSET MANAGEMENT CORP., a Delaware corporation (the
"Manager"), with respect to the following:
W I T N E S S E T H:
WHEREAS, the Company intends to invest in Mortgage Assets and expects
to continue to qualify for the tax benefits accorded by Sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Company desires to retain the Manager to manage the
investments of the Company and to perform certain administrative services for
the Company in the manner and on the terms set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements herein set
forth, the parties hereto agree as follows:
SECTION 1. DEFINITIONS. Capitalized terms used but not defined herein
shall have the respective meanings assigned them below:
(a) "Affiliate" means, with respect to any person, another person that
directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with such person.
(b) "Agency Certificates" means Pass-Through Certificates guaranteed by
FNMA, FHLMC or GNMA.
(c) "Agreement" means this Management Agreement.
(d) "Average Net Worth" for any period means (i) Twenty Million One
Hundred Seventy-Two Thousand and 00/100 Dollars ($20,172,000.00) plus (ii) the
arithmetic average of the sum of the gross proceeds from any sale of the
Company's equity securities after the effective date of this Agreement
(including exercise of warrants and stock options), before deducting any
underwriting discounts and commissions and other expenses and costs relative to
the sale, plus the Company's retained earnings (without taking into account any
losses incurred in prior periods and excluding amounts reflecting taxable income
to be distributed as dividends and amounts reflecting valuation allowance
adjustments) computed by taking the daily average of such values during such
period.
(e) "Board of Directors" means the Board of Directors of the Company.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
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(g) "Company" means New REIT, a Maryland corporation, and its
successors.
(h) "FHLMC" means the Federal Home Loan Mortgage Corporation.
(i) "FNMA" means the Federal National Mortgage Association.
(j) "GAAP" means generally accepted accounting principles.
(k) "GNMA" means Governmental National Mortgage Association.
(l) "Governing Instruments" means the articles or certificate of
incorporation or other charter, as the case may be, and bylaws of the Company
and its subsidiaries.
(m) "Investment Company Act" means the Investment Company Act of 1940,
as amended from time to time.
(n) "Gross Mortgage Assets" means for any month the weighted average
book value of the Mortgage Assets, before reserves for depreciation or bad debts
or other similar noncash reserves, computed at the end of such month.
(o) "Manager" means MDC REIT Management Co., a Delaware corporation.
(p) "Mortgage Assets" means (i) Mortgage Loans and (ii) Mortgage
Securities.
(q) "Mortgage Securities" means Pass-Through Certificates and any other
forms of security backed by or evidencing an interest in Mortgage Loans.
(r) "Mortgage Loans" means loans secured by mortgages on single-family,
multifamily or commercial real estate properties.
(s) "Net Income" means the net income of the Company determined in
accordance with GAAP before the Manager's incentive compensation, the deduction
for dividends paid and any net operating loss deductions arising from losses in
prior periods. The Company's interest expenses for borrowed money shall be
deducted in calculating Net Income.
(t) "Pass-Through Certificates" means securities (or interests therein)
which are Qualified REIT Assets evidencing undivided ownership interests in a
pool of mortgage loans, the holders of which receive a "pass-through" of the
principal and interest paid in connection with the underlying mortgage loans in
accordance with the holders' respective, undivided interests in the pool.
Pass-Through Certificates may evidence interests in loans secured by
single-family, multifamily or commercial, real estate properties.
(u) "Qualified REIT Assets" means Pass-Through Certificates, Mortgage
Loans, Agency Certificates and other assets of the type described in Code
Section 856(c)(6)(B).
(v) "Real Estate Assets" means interests in real property, interests in
mortgages on real property, and regular interests in REMICS as described in Code
Section 856(c)(6)(B).
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(w) "REIT" means Real Estate Investment Trust as defined under Section
856 of the Code.
(x) "REIT Provisions of the Code" means Sections 856 through 860 of the
Code.
(y) "Return on Equity" means return calculated for any quarter by
dividing the Company's Net Income for such quarter by the Company's Average Net
Worth for such quarter.
(z) "Securities Purchase Agreement" means the Securities Purchase
Agreement, dated as of February 11, 1997, among the Manager, MDC Reit Holdings
LLC, the Company and the Purchasers named therein, as amended from time to time.
(aa) "Stockholders" shall mean the owners of the stock of the Company.
(bb) "Stockholders Agreement" means the Stockholders Agreement,
Irrevocable Proxy and Voting Agreement, dated as of February 11, 1997, among
stockholders of the Manager.
(cc) "Ten Year U.S. Treasury Yield" shall mean the average yield to
maturity for actively traded marketable U.S. Treasury fixed interest rate
securities (adjusted to constant maturities of 10 years).
(dd) "Ten Year U.S. Treasury Rate" for a quarterly period shall mean
the arithmetic average of the weekly per annum Ten Year Average Yields published
by the Federal Reserve Board during such quarter. In the event that the Federal
Reserve Board does not publish a weekly per annum Ten Year Average Yield during
any week in a quarter, then the Ten Year U.S. Treasury Rate for such week shall
be the weekly per annum Ten Year Average Yields published by any Federal Reserve
Bank or by any U.S. Government department or agency selected by the Company for
such week. In the event that the Company determines in good faith that for any
reason the Company cannot determine the Ten Year U.S. Treasury Rate for any
quarter as provided above, then the Ten Year U.S. Treasury Rate for such quarter
shall be the arithmetic average of the per annum average yields to maturity
based upon the daily closing bids during such quarter for each of the issues of
actively traded marketable U.S. Treasury fixed interest rate securities (other
than securities which can, at the option of the holder, be surrendered at face
value in payment of any federal estate tax) with a final maturity date not less
than eight (8) nor more than twelve (12) years from the date of each such
quotation, as chosen and for each business day (or less frequently if daily
quotations shall not be generally available) in each such quarterly period in
New York City and quoted to the Company by at least three (3) recognized dealers
in U.S. Government securities selected by the Company.
(ee) "Unaffiliated Directors" shall mean (i) following the date that
the Company becomes subject to the periodic reporting requirements under Section
13 of the Securities Exchange Act of 1934, those members of the Board of
Directors of the Company who are the "Independent Directors" as defined in the
Company's Governing Instruments, and (ii) prior to such date, those directors of
the Manager appointed by Crescent (as defined in the Stockholders Agreement).
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SECTION 2. GENERAL DUTIES OF THE MANAGER.
(a) Administrative Services to be Provided by Manager. Subject to the
oversight of the Board of Directors, the Manager shall provide services to the
Company, and to the extent directed by the Board of Directors, shall provide
similar services to any subsidiary of the Company as follows:
(1) serve as the Company's consultant with respect to
formulation of investment criteria and preparation of policy guidelines
("Guidelines");
(2) assist the Company in developing criteria for
Mortgage Asset purchase commitments that are specifically tailored to the
Company's long-term investment objectives, which shall include making available
to the Company its knowledge and experience with respect to mortgage loan
underwriting criteria;
(3) represent the Company in connection with the purchase
of and commitment to purchase Mortgage Assets, including the formation of
Mortgage Asset purchase commitment criteria;
(4) arrange for the issuance of Mortgage Securities from
pools of Mortgage Loans acquired by the Company and provide to the Company
itself or through another appropriate party supporting services in connection
with the creation of Mortgage Securities including:
(a) serving as consultant with respect to the
structuring of each series of Mortgage Securities;
(b) negotiating the rating requirements with
rating agencies with respect to the rating of each series of Mortgage
Securities;
(c) identifying and reviewing all Mortgage Loans
which may secure or constitute the mortgage pool for each series of Mortgage
Securities;
(d) negotiating all agreements and credit
enhancements with respect to each series of Mortgage Securities;
(e) issuing commitments on behalf of the Company
to purchase Mortgage Loans to be used to secure or constitute the mortgage pool
for each series of Mortgage Securities;
(f) organizing and administering all activities
in connection with the closing of each series of Mortgage Securities, including
all negotiations and agreements with underwriters, trustees, servicers, master
servicers and other parties;
(g) performing such other services as may be
required from time to time for completing the creation of each series of
Mortgage Securities; and
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(h) providing to the Company itself or through
another appropriate party all services in connection with the administration of
each series of Mortgage Securities created by the Company;
(5) furnish reports and statistical and economic research
to the Company regarding the Company's activities and the performance of the
Manager;
(6) monitor and provide to the Board of Directors on an
ongoing basis price information and other data, which price information and data
shall be obtained from certain nationally recognized dealers and other entities
that maintain markets in Mortgage Assets as selected by the Board of Directors
from time to time, and provide advice to the Board of Directors to aid the Board
of Directors in the selection of such dealers and entities;
(7) administer the day-to-day operations of the Company
and perform and supervise the performance of such other administrative functions
necessary in the management of the Company as may be agreed upon by the Manager
and the Board of Directors, including the collection of revenues and the
payments of the Company's expenses, debts and obligations and maintenance of
appropriate computer services to perform such administrative functions;
(8) designate a servicer and/or subservicer for those
Mortgage Loans sold to the Company by originators that have elected not to
service such loans and arrange for the monitoring and administering of such
servicing;
(9) counsel the Company in connection with policy
decisions to be made by the Board of Directors;
(10) evaluate and recommend hedging strategies to the
Board of Directors and, upon approval by the Board of Directors, facilitate the
implementation and monitor the performance of these strategies;
(11) supervise compliance with certain REIT Provisions of
the Code dealing with asset and income tests and Investment Company Act status,
including setting up a system to monitor hedging activities on a periodic basis
for such compliance;
(12) establish quality control procedures for the assets
of the Company, including audits of loan underwriting files, hire any agents
with particular knowledge and expertise as may be appropriate to perform any
such quality control procedures and administer, perform and supervise the
performance of the quality control procedures of the Company and perform and
supervise the performance of such other functions related thereto as may be
necessary or advisable to assist in the performance of such procedures and the
attainment of the purposes thereof;
(13) upon request by and in accordance with the directions
of the Board of Directors, invest or reinvest any money of the Company;
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(14) conduct, or cause to be conducted, a legal document
review of each Mortgage Loan acquired to verify the accuracy and completeness of
the information contained in the mortgage notes, security instruments and other
pertinent documents in the mortgage file;
(15) provide the Company with data processing, legal and
administrative services to the extent required to implement the business
strategy of the Company;
(16) provide all actions necessary for compliance by the
Company with all Federal, state and local regulatory requirements applicable to
the Company in respect of its business activities, including preparing or
causing to be prepared all financial statements required under applicable
regulations and contractual undertakings and all reports and documents, if any,
required under the Securities Exchange Act of 1934, as amended;
(17) provide all actions necessary to enable the Company
to make required Federal, state and local tax filings and reports and generally
enable the Company to maintain its status as a REIT, including soliciting
shareholders for required information to the extent provided in the REIT
Provisions of the Code;
(18) communicate on behalf of the Company with the holders
of the equity and debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies and to
maintain effective relations with such holders; and
(19) perform such other services as may be required from
time to time for management and other activities relating to the assets of the
Company as the Board of Directors shall reasonably request or the Manager shall
deem appropriate under the particular circumstances.
(b) Cooperation of the Company. The Company agrees to take all actions
reasonably required to permit the Manager to carry out its duties and
obligations hereunder. The Company further agrees to make available all
materials reasonably required to enable the Manager to satisfy its obligations
to deliver financial statements and any other information or reports with
respect to the Company pursuant to the Securities Purchase Agreement.
SECTION 3. ADDITIONAL ACTIVITIES OF MANAGER. Nothing herein shall
prevent the Manager or any of its officers, directors, employees or Affiliates
from engaging in other businesses or from rendering services of any kind to any
other person or entity, including the purchase of, or advisory service to others
investing in, any type of real estate investment, including investments which
meet the principal investment objectives of the Company, except that the Manager
and its officers, directors and employees shall not provide any such services to
any residential mortgage REIT other than the Company or another REIT sponsored
by the Manager or its Affiliates which has operating policies and strategies
different in one or more material respects from those of the Company, as
confirmed by a majority of the Unaffiliated Directors. Directors, officers,
employees and agents of the Manager or Affiliates of the Manager may serve as
trustees, directors, officers, employees, agents, nominees or signatories for
the Company or any subsidiary of the Company, to the extent permitted by their
Governing Instruments, as from time to time amended, or by any resolutions duly
adopted by the Board of Directors pursuant to the
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Company's Governing Instruments. When executing documents or otherwise acting in
such capacities for the Company, such persons shall use their respective titles
in the Company.
SECTION 4. BANK ACCOUNTS. At the direction of the Board of Directors,
the Manager may establish and maintain one or more bank accounts in the name of
the Company or any subsidiary of the Company, and may collect and deposit into
any such account or accounts, and disburse funds from any such account or
accounts, under such terms and conditions as the Board of Directors may approve;
and the Manager shall from time to time render appropriate accountings of such
collections and payments to the Board of Directors and, upon request, to the
auditors of the Company or any subsidiary of the Company.
SECTION 5. RECORDS: CONFIDENTIALITY. The Manager shall maintain
appropriate books of account and records relating to services performed
hereunder, and such books of account and records shall be accessible for
inspection by representatives of the Company or any subsidiary of the Company at
any time during normal business hours. Except in the ordinary course of business
of the Company, the Manager shall, and shall use its best efforts to cause each
of its Affiliates to, keep confidential any and all information they (or such
Affiliates) obtain from time to time in connection with the services they (or
such Affiliates) render under this Agreement and shall not disclose any portion
thereof to non-affiliated third parties (other than lenders to, and holders of
stock or warrants of, the Manager) except with the prior written consent of the
Company.
SECTION 6. OBLIGATIONS OF MANAGER.
(a) The Manager shall use its best efforts to provide that each
Mortgage Asset conforms to the purchase criteria of the Company and shall
require each seller or transferor of Mortgage Assets to the Company to make such
representations and warranties regarding such Mortgage Assets as may, in the
judgment of the Manager, be necessary and appropriate. In addition, the Manager
shall take such other action as it deems necessary or appropriate with regard to
the protection of the Company's investments.
(b) The Manager shall refrain from any action which, in its sole
judgment made in good faith, would adversely affect the status of the Company
or, if applicable, any subsidiary of the Company as a REIT or which, in its sole
judgment made in good faith, would violate any material law, rule or regulation
of any governmental body or agency having jurisdiction over the Company or any
such subsidiary or which would otherwise not be permitted by the Company's or
such subsidiary's Governing Instruments. If the Manager is ordered to take any
such action by the Board of Directors, the Manager shall promptly notify the
Board of Directors of the Manager's judgment that such action would adversely
affect such status or violate any such law, rule or regulation or the Governing
Instruments. Notwithstanding the foregoing, the Manager, its directors,
officers, stockholders and employees shall not be liable to the Company, any
subsidiary of the Company, the Unaffiliated Directors or any stockholders of the
Company or any of its subsidiaries for any act or omission by the Manager, its
directors, officers, stockholders or employees except as provided in Section 11
of this Agreement.
(c) The Manager shall cause an annual compliance report to be prepared
for each fiscal year of the Company commencing with fiscal year 1997 by a firm
independent of the
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Manager and its Affiliates and having the proper expertise to determine
compliance with the REIT Provisions of the Code and related matters and shall
deliver each report for a fiscal year to the Company no later than March 31 of
the following year.
SECTION 7. COMPENSATION OF THE MANAGER.
(a) Base Management Fee. For services rendered under this Agreement,
the Company shall pay to the Manager, commencing on the date hereof and payable
as described below, a base management fee equal to the monthly portion of the
per annum percentage of Gross Mortgage Assets of the Company and its
subsidiaries as set forth below:
<TABLE>
<CAPTION>
Type of Gross Mortgage Assets Per Annum Fee
----------------------------- -------------
<S> <C>
Gross Mortgage Assets Consisting of Agency
Certificates 1/8 of 1%
Gross Mortgage Assets other than Agency
Certificates 3/8 of 1%
</TABLE>
On the first day of each month, the Company shall pay to the Manager
an amount equal to the Manager's good-faith estimate of the base management fee
for such month. (For the first month of this Agreement, such amount will be
pro-rated according to the number of days of such month this Agreement is in
effect and will be payable on the date hereof.) The final base management fee
for each month shall be calculated by the Manager within 15 days after the end
of such month, and such calculation shall be promptly delivered to the Company.
The Company shall pay any amount payable pursuant to Section 7(a) for such month
in excess of the estimate already paid within 30 days after the end of such
month. To the extent the estimate paid exceeds the amount due, the excess shall
be credited to the base management fee due in respect of a subsequent month.
(b) Incentive Compensation. In addition to the base management fee, the
Manager shall receive as incentive compensation for each fiscal quarter an
amount equal to 25% of the Net Income of the Company for such fiscal quarter in
excess of the amount that would produce an annualized Return on Equity
(calculated by multiplying the Return on Equity for such fiscal quarter by four)
equal to the Ten Year U.S. Treasury Rate for such fiscal quarter plus 2%. The
incentive compensation calculation and payment shall be made quarterly in
arrears. The Company shall pay the incentive compensation with respect to each
fiscal quarter within 15 days following the delivery to the Company of Manager's
written statement setting forth the computation of the incentive fee for such
quarter. In connection with the Company's annual audit, the Manager shall
compute any final adjustments to the incentive compensation payable under this
Section 7(b) within 45 days after the end of each fiscal year and any required
adjustments shall be paid by the Company or the Manager as appropriate within 15
days after delivery of such computation to the Company by the Manager.
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SECTION 8. EXPENSES OF THE COMPANY.
(a) Expenses of the Manager. Without regard to the compensation
received hereunder by the Manager, the Manager shall bear the following
expenses:
(1) Employment expenses of the personnel employed by the
Manager, including, but not limited to, salaries, wages, payroll taxes, and the
cost of employee benefit plans;
(2) Travel and related expenses of directors, officers
and employees of the Manager and of trustees, directors, or employees of the
Company or any subsidiary of the Company who are also directors, officers or
employees of the Manager, except expenses of such persons who are trustees or
directors of the Company or any subsidiary of the Company incurred in connection
with attending meetings of the Board of Directors or meetings of holders of the
securities of the Company or any subsidiary of the Company or expenses of
persons who are directors, officers, or employees of the Manager incurred in
connection with attending meetings or performing other business activities which
relate solely to the business affairs of the Company or any subsidiary of the
Company;
(3) Rent, telephone, utilities, office furniture,
equipment and machinery (including computers, to the extent utilized) and other
office expenses (such as asset/liability software, modeling software and other
software and hardware) of the Manager needed in order to perform its duties as
set forth in Section 2 herein;
(4) Bookkeeping fees and expenses including any costs of
computer services, other than in connection with communications under Section
8(b)(x), in connection with this function; and
(5) Miscellaneous administrative expenses incurred in
supervising and monitoring the Company's investments or any subsidiary's
investments or relating to performance by the Manager of its functions
hereunder.
(b) Expenses of the Company. The Company or any subsidiary of the
Company shall pay all of its expenses except those which are the responsibility
of the Manager pursuant to Section 8(a) of this Agreement, and without limiting
the generality of the foregoing, it is specifically agreed that the following
expenses of the Company or any subsidiary of the Company shall not be paid by
the Manager:
(1) The cost of the borrowed money;
(2) All taxes applicable to the Company or any subsidiary
of the Company including interest and penalties thereon;
(3) Legal, audit, accounting, underwriting, brokerage,
listing, rating agency, registration and other fees, printing, engraving and
other expenses and taxes incurred in connection with the issuance, distribution,
transfer, registration and stock exchange listing of the Company's or any
subsidiary's equity securities or debt securities;
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(4) Fees and expenses paid to advisors and independent
contractors, consultants, managers, and other agents engaged directly by the
Company or any subsidiary of the Company or by the Manager at the Company's or
such subsidiary's request for the account of the Company or any subsidiary of
the Company (other than the Manager);
(5) Expenses connected with the acquisition, disposition
and ownership of the Company's or any subsidiary's investment assets, including
but not limited to commitment fees, brokerage fees, guaranty fees and hedging
fees, ad valorem taxes, costs of foreclosure, maintenance, repair and
improvement of property and premiums for insurance on property owned by the
Company or any subsidiary of the Company;
(6) The expenses of organizing, modifying or dissolving
the Company or any subsidiary of the Company;
(7) All insurance costs incurred in connection with the
Company or any subsidiary of the Company;
(8) Expenses connected with payments of dividends or
interest or distributions in any other form made or caused to be made by the
Board of Directors to holders of the securities of the Company or any subsidiary
of the Company;
(9) Expenses connected with the structuring of the
issuance of Mortgage Securities by the Company or any subsidiary of the Company,
including but not limited to trustee's fees, insurance premiums, and costs of
required credit enhancements;
(10) All expenses of third parties connected with
communications to holders of equity securities or debt securities of the Company
or any subsidiary of the Company and the other bookkeeping and clerical work
necessary in maintaining relations with holders of such securities and in
complying with the continuous reporting and other requirements of governmental
bodies or agencies, including any costs of computer services in connection with
this function, the cost of printing and mailing certificates for such securities
and proxy solicitation materials and reports to holders of the Company's or any
subsidiary's securities and reports to third parties required under any
indenture to which the Company or any subsidiary of the Company is a party;
(11) Transfer agent's and registrar's fees and charges;
(12) Fees and expenses paid to trustees or directors of
the Company or any subsidiary of the Company, the cost of director and officer
liability insurance and premiums for fidelity and errors and omissions
insurance;
(13) Legal, accounting and auditing fees and expenses
relating to the Company's or any subsidiary's operations;
(14) Any judgment rendered against the Company or any
subsidiary of the Company, or against any trustee or director of the Company or
any subsidiary of the Company in his capacity as such for which the Company or
any subsidiary of the Company is required to indemnify such trustee or director,
or any court or governmental agency;
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(15) Expenses relating to any office or office facilities
maintained by the Company or any subsidiary of the Company exclusive of the
office of the Manager;
(16) Expenses related to the servicing and subservicing of
Mortgage Loans;
(17) Travel and related expenses of personnel of the
Manager when attending meetings or performing other business activities which
relate solely to the Company or any subsidiary of the Company; and
(18) Other miscellaneous expenses of the Company or any
subsidiary of the Company which are not expenses of the Manager under Section
8(a).
SECTION 9. EXPENSE REIMBURSEMENT TO THE MANAGER. Expenses incurred by
the Manager on behalf of the Company shall be reimbursed monthly to the Manager
within 30 days after the end of each month. The Manager shall prepare a
statement documenting the expenses of the Company and those incurred by the
Manager on behalf of the Company during each month, and shall deliver such
statement to the Company within 15 days after the end of each month.
SECTION 10. MONITORING SERVICING. The Manager will monitor and
administer the servicing of the Company's Mortgage Loans constituting or
underlying the Company's Mortgage Assets, other than loans pooled to back
Mortgage Securities not originated by the Company. Such monitoring and
administrative services will include, but not be limited to, the following
activities: serving as the Company's consultant with respect to the servicing of
Mortgage Loans; collection of information and submission of reports pertaining
to the Mortgage Loans and to monies remitted to the Manager or the Company by
servicers; periodic review and evaluation of the performance of each servicer to
determine its compliance with the terms and conditions of the applicable
servicing agreement and, if deemed appropriate, recommending to the Company the
termination of such servicing agreement; acting as a liaison between servicers
and the Company and working with servicers to the extent necessary to improve
their servicing performance; review of and recommendations as to fire losses,
easement problems and condemnation, delinquency and foreclosure procedures with
regard to the Mortgage Loans; review of servicers' delinquency, foreclosure and
other reports on Mortgage Loans; supervising claims filed under any mortgage
insurance policies; and enforcing the obligation of any servicer to repurchase
Mortgage Loans from the Company. The Manager may enter into subcontracts with
other parties, including its Affiliates, to provide any such services for the
Manager; provided, however, that to the extent that the Manager subcontracts
services for which the Manager is responsible for bearing the cost pursuant to
Section 8(a) of this Agreement, the Manager, and not the Company, shall be
responsible for any such costs associated with such subcontract.
SECTION 11. LIMITS OF MANAGER RESPONSIBILITY.
(a) The Manager assumes no responsibility under this Agreement other
than to render the services called for hereunder in good faith and shall not be
responsible for any action of the Board of Directors in following or declining
to follow any advice or recommendations of the
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Manager, including as set forth in Section 6(b) of this Agreement. The Manager,
its directors, officers, stockholders and employees will not be liable to the
Company, any Mortgage Security issuer, any subsidiary of the Company, its
subsidiary's stockholders or the Unaffiliated Directors for any acts or
omissions by the Manager, its directors, officers, stockholders or employees
under or in connection with this Agreement, except by reason of acts or
omissions constituting bad faith, willful misconduct, gross negligence or
reckless disregard of their duties under this Agreement. The Company and its
subsidiaries shall reimburse, indemnify and hold harmless the Manager, its
directors, officers, stockholders and employees of and from any and all
expenses, losses, damages, liabilities, demands, charges and claims of any
nature whatsoever (including, without limitation, attorneys' fees) in respect of
or arising from any acts or omissions of the Manager, its stockholders,
directors, officers and employees made in good faith in the performance of the
Manager's duties under this Agreement and not constituting bad faith, willful
misconduct, gross negligence or reckless disregard of its duties.
(b) The Manager shall reimburse, indemnify and hold harmless the
Company, any subsidiary, or any of their stockholders, trustees, directors,
officers and employees from any and all expenses, losses, damages, liabilities,
demands, charges and claims (including, without limitation, attorneys' fees)
arising out of any intentional misstatements of material fact made by the
Manager in connection with performance of its activities hereunder.
SECTION 12. NO JOINT VENTURE. The Company and the Manager are not
partners or joint venturers with each other, and nothing herein shall be
construed to make them such partners or joint venturers or impose any liability
as such on any of them.
SECTION 13. TERM: TERMINATION: TERMINATION FEE.
(a) This Agreement shall commence on the date set forth in the preamble
and shall continue in force until the second anniversary of such date, and
thereafter it shall be renewed automatically for successive one-year periods
unless a notice of non-renewal is timely delivered as described below. The
Company may elect to prevent the automatic renewal of this Agreement only by
vote of both a majority of the Board of Directors and a majority of the
Unaffiliated Directors followed by delivery of a written notice of non-renewal
to the Manager at least 60 days prior to the end of the then-current period of
this Agreement, which notice shall set forth the date of the Board of Directors'
vote not to renew. This Agreement shall terminate at the expiration of the
then-current period in which such notice of non-renewal is delivered.
(b) In addition to such further liability or obligation of either party
to the other provided in Section 16 of this Agreement, if this Agreement is
terminated without cause (as "cause" is defined in Section 15) by delivery of a
notice of non-renewal pursuant to Section 13(a), the Company, in addition to its
obligations under Section 16, shall pay the Manager a termination fee in an
amount equal to the greater of (i) the fair market value of this Agreement
(without giving effect to the notice of termination under Section 13(a))
determined by an independent appraisal or (ii) three times the total of the
compensation payable to the Manager hereunder for the four most recently
completed calendar quarters ending on or prior to the date of termination of
this Agreement. Such appraisal shall be conducted by a nationally-recognized
appraisal firm mutually agreed upon by the parties and the costs of such
appraisal shall be borne equally by the
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<PAGE> 13
parties. If the parties are unable to agree upon such appraisal firm within 30
days following delivery of the notice of non-renewal, then each party shall, as
soon as reasonably practicable, but in no event more than 45 days following
delivery of the notice of non-renewal, choose a nationally-recognized
independent appraisal firm to conduct an appraisal. In such event, (i) the fair
market value amount shall be deemed to be the average of the appraisals as
conducted by each party's chosen appraiser and (ii) each party shall pay the
costs of its appraiser so chosen. Any appraisal conducted hereunder shall be
performed no later than 45 days following selection of the appraiser or
appraisers. The termination fee payable by the Company shall be paid within 30
days following receipt of the final appraisal to be obtained hereunder.
SECTION 14. ASSIGNMENTS. Except as set forth in this Section 14, this
Agreement shall terminate automatically in the event of its assignment, in whole
or in part, by the Manager (other than the pledge of amounts payable to the
Manager hereunder to secure the Manager's obligations to its lenders), unless
such assignment is consented to in writing by the Company with the consent of a
majority of the Unaffiliated Directors. Any such assignment shall bind the
assignee hereunder in the same manner as the Manager is bound. In addition, the
assignee shall execute and deliver to the Company a counterpart of this
Agreement naming such assignee as Manager. This Agreement shall not be assigned
by the Company without the prior written consent of the Manager, except in the
case of assignment by the Company to a REIT or other organization which is a
successor (by merger, consolidation or purchase of assets) to the Company, in
which case such successor organization shall be bound hereunder and by the terms
of such assignment in the same manner as the Company is bound hereunder.
SECTION 15. TERMINATION BY COMPANY FOR CAUSE. At the option of the
Company, this Agreement shall be and become terminated upon 60 days written
notice of termination from the Board of Directors to the Manager if any of the
following events shall occur (termination for any of such events shall
constitute termination for "cause"):
(a) if a majority of the Unaffiliated Directors determines that the
Manager has violated this Agreement in any material respect and, after notice of
such violation, the Manager has failed to cure such violation within 60 days; or
(b) there is entered an order for relief or similar decree or order
with respect to the Manager by a court having competent jurisdiction in an
involuntary case under the federal bankruptcy laws as now or hereafter
constituted or under any applicable federal or state bankruptcy, insolvency or
other similar laws; or the Manager (i) ceases, or admits in writing its
inability, to pay its debts as they become due and payable, or makes a general
assignment for the benefit of, or enters into any composition or arrangement
with, creditors; (ii) applies for, or consents (by admission of material
allegations of a petition or otherwise) to the appointment of a receiver,
trustee, assignee, custodian, liquidator or sequestrator (or other similar
official) of the Manager or of any substantial part of its properties or assets,
or authorizes such an application or consent, or proceedings seeking such
appointment are commenced without such authorization, consent or application
against the Manager and continue undismissed for 60 days; (iii) authorizes or
files a voluntary petition in bankruptcy, or applies for or consents (by
admission of material allegations of a petition or otherwise) to the application
of any bankruptcy, reorganization, arrangement, readjustment of debt,
insolvency, dissolution, liquidation or other similar law of any
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<PAGE> 14
jurisdiction, or authorizes such application or consent, or proceedings to such
end are instituted against the Manager without such authorization, application
or consent and are approved as properly instituted and remain undismissed for 60
days or result in adjudication of bankruptcy or insolvency; or (iv) permits or
suffers all or any substantial part of its properties or assets to be
sequestered or attached by court order and the order remains undismissed for 60
days. If any of the events specified in Section 15(b) of this Agreement shall
occur, the Manager shall give prompt written notice thereof to the Board of
Directors upon the happening of such event.
SECTION 16. ACTION UPON TERMINATION. From and after the effective date
of termination of this Agreement, pursuant to Sections 13, 14 or 15 of this
Agreement, except as otherwise specified in Section 13(b) of this Agreement, the
Manager shall not be entitled to compensation for further services hereunder,
but shall be paid all compensation accruing to the date of termination,
including accrued and unpaid incentive compensation.
Upon such termination, the Manager shall forthwith:
(a) after deducting any accrued compensation and reimbursement for its
expenses to which it is then entitled, pay over to the Company or any subsidiary
of the Company all money collected and held for the account of the Company or
any subsidiary of the Company pursuant to this Agreement;
(b) deliver to the Board of Directors a full accounting, including a
statement showing all payments collected by it and a statement of all money held
by it, covering the period following the date of the last accounting furnished
to the Board of Directors with respect to the Company or any subsidiary of the
Company; and
(c) deliver to the Board of Directors all property and documents of the
Company or any subsidiary of the Company then in the custody of the Manager.
SECTION 17. RELEASE OF MONEY OR OTHER PROPERTY UPON WRITTEN REQUEST.
The Manager agrees that any money or other property of the Company or any
subsidiary of the Company held by the Manager under this Agreement shall be held
by the Manager as custodian for the Company or such subsidiary, and the
Manager's records shall be appropriately marked clearly to reflect the ownership
of such money or other property by the Company or such subsidiary. Upon the
receipt by the Manager of a written request signed by a duly authorized officer
of the Company requesting the Manager to release to the Company or any
subsidiary of the Company any money or other property then held by the Manager
for the account of the Company or any subsidiary of the Company under this
Agreement, the Manager shall release such money or other property to the Company
or such subsidiary of the Company within a reasonable period of time, but in no
event later than the later to occur of (i) 30 days following such request and
(ii) the earliest time following such request that remittance will not cause the
Manager to violate any law or breach any agreement to which it or the Company is
a party. The Manager shall not be liable to the Company, any subsidiaries of the
Company, the unaffiliated Directors, or the Company's or its subsidiaries'
stockholders for any acts performed or omissions to act by the Company or any
subsidiary of the Company in connection with the money or other property
released to the Company or any subsidiary of the Company in accordance with this
Section 17 and not constituting bad faith, willful misconduct, gross negligence
or reckless disregard of its duties.
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<PAGE> 15
The Company and any subsidiary of the Company shall indemnify the Manager, its
directors, officers, stockholders and employees against any and all expenses,
losses, damages, liabilities, demands, charges and claims of any nature
whatsoever, which arise in connection with the Manager's release of such money
or other property to the Company or any subsidiary of the Company in accordance
with the terms of this Section 17 unless such expenses, losses, damages,
liabilities, demands, charges and claims arise in connection with acts or
omissions which constitute bad faith, willful misconduct, gross negligence or
reckless disregard of its duties. Indemnification pursuant to this provision
shall be in addition to any right of the Manager to indemnification under
Section 11 of this Agreement.
SECTION 18. REPRESENTATIONS AND WARRANTIES.
(a) The Company hereby represents and warrants to the Manager as
follows:
(1) The Company is duly organized, validly existing and in
good standing under the laws of Maryland, has the power to own its assets and to
transact the business in which it is now engaged and is duly qualified and in
good standing under the laws of each jurisdiction where its ownership or lease
of property or the conduct of its business requires such qualification, except
for failures to be so qualified, authorized or licensed that could not in the
aggregate have a material adverse effect on the business operations, assets or
financial condition of the Company and its subsidiaries, taken as a whole. The
Company does not do business under any fictitious business name.
(2) The Company has the power and authority to execute,
deliver and perform this Agreement and all obligations required hereunder and
has taken all necessary action to authorize this Agreement on the terms and
conditions hereof and the execution, delivery and performance of this Agreement
and all obligations required hereunder. Except as shall have been obtained, no
consent of any other person including, without limitation, stockholders and
creditors of the Company, and no license, permit, approval or authorization of,
exemption by, notice or report to, or registration, filing or declaration with,
any governmental authority is required by the Company in connection with this
Agreement or the execution, delivery, performance, validity or enforceability of
this Agreement and all obligations required hereunder. This Agreement has been,
and each instrument or document required hereunder will be, executed and
delivered by a duly authorized officer of the Company, and this Agreement
constitutes, and each instrument or document required hereunder when executed
and delivered hereunder will constitute, the legally valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms.
(3) The execution, delivery and performance of this Agreement
and the documents or instruments required hereunder will not violate any
provision of any existing law or regulation binding on the Company, or any
order, judgment, award or decree of any court, arbitrator or governmental
authority binding on the Company, or the governing instruments of, or any
securities issued by, the Company or of any mortgage, indenture, lease, contract
or other agreement, instrument or undertaking to which the Company is a party or
by which the Company or any of its assets may be bound, the violation of which
would have a material adverse effect on the business operations, assets or
financial condition of the Company and its subsidiaries, taken as
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<PAGE> 16
a whole, and will not result in, or require, the creation or imposition of any
lien on any of its property, assets or revenues pursuant to the provisions of
any such mortgage, indenture, lease, contract or other agreement, instrument or
undertaking (other than the pledge of amounts payable to the Manager hereunder
to secure the Manager's obligations to its lenders).
(b) The Manager hereby represents and warrants to the Company as
follows:
(1) The Manager is duly organized, validly existing and in
good standing under the laws of Delaware, has the corporate power to own its
assets and to transact the business in which it is now engaged and is duly
qualified to do business and is in good standing under the laws of each
jurisdiction where its ownership or lease of property or the conduct of its
business requires such qualification, except for failures to be so qualified,
authorized or licensed that could not in the aggregate have a material adverse
effect on the business operations, assets or financial condition of the Manager
and its subsidiaries, taken as a whole. The Manager does not do business under
any fictitious business name.
(2) The Manager has the corporate power and authority to
execute, deliver and perform this Agreement and all obligations required
hereunder and has taken all necessary corporate action to authorize this
Agreement on the terms and conditions hereof and the execution, delivery and
performance of this Agreement and all obligations required hereunder. Except as
shall have been obtained, no consent of any other person including, without
limitation, stockholders and creditors of the Manager, and no license, permit,
approval or authorization of, exemption by, notice or report to, or
registration, filing or declaration with, any governmental authority is required
by the Manager in connection with this Agreement or the execution, delivery,
performance, validity or enforceability of this Agreement and all obligations
required hereunder. This Agreement has been and each instrument or document
required hereunder will be executed and delivered by a duly authorized officer
of the Manager, and this Agreement constitutes, and each instrument or document
required hereunder when executed and delivered hereunder will constitute, the
legally valid and binding obligation of the Manager enforceable against the
Manager in accordance with its terms.
(3) The execution, delivery and performance of this Agreement
and the documents or instruments required hereunder, will not violate any
provision of any existing law or regulation binding on the Manager, or any
order, judgment, award or decree of any court, arbitrator or governmental
authority binding on the Manager, or the governing instruments of, or any
securities issued by, the Manager or of any mortgage, indenture, lease, contract
or other agreement, instrument or undertaking to which the Manager is a party or
by which the Manager or any of its assets may be bound, the violation of which
would have a material adverse effect on the business operations, assets, or
financial condition of the Manager and its subsidiaries, taken as a whole, and
will not result in, or require, the creation or imposition of any lien on any of
its property, assets or revenues pursuant to the provisions of any such mortgage
indenture, lease, contract or other agreement, instrument or undertaking.
SECTION 19. NOTICES. Unless expressly provided otherwise herein, all
notices, requests, demands and other communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been duly given,
made and received when (1) delivered by
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<PAGE> 17
hand, (2) otherwise delivered against receipt therefore or (3) upon actual
receipt of registered or certified mail, postage prepaid, return receipt
requested. The parses may deliver to each other notice by electronically
transmitted facsimile copies ("FAX") provided that such FAX notice is followed
within twenty-four (24) hours by any type of notice otherwise provided for in
this paragraph. Any notice shall be duly addressed to the parties as follows:
(a) If to the Company:
445 Marine View Avenue
Suite 130A
Del Mar, CA 92014
Attn: John M. Robbins, Jr.
Fax: (619) 756-5324
with a copy given in the manner prescribed above, to:
Lawrence Calof, Esq.
Gibson, Dunn & Crutcher LLP
One Montgomery Street, 31st Floor
San Francisco, CA 94104
Fax: (415) 986-5309
(b) If to the Manager:
445 Marine View Avenue
Suite 130
Del Mar, CA 92014
Attn: Jay Fuller
Fax: (619) 756-5324
with a copy given in the manner prescribed above, to:
Phillip R. Pollock, Esq
Tobin & Tobin
One Montgomery Street, 15th Floor
San Francisco, CA 94104
Fax: (415) 433-3883
Any party may alter the address to which communications or copies are
to be sent by giving notice of such change of address in conformity with the
provisions of this Section 19 for the giving of notice.
SECTION 20. BINDING NATURE OF AGREEMENT: SUCCESSORS AND ASSIGNS. This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, personal representatives, successors and assigns as
provided herein.
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<PAGE> 18
SECTION 21. ENTIRE AGREEMENT. This Agreement contains the entire
agreement and understanding among the parties hereto with respect to the subject
matter hereof, and supersedes all prior and contemporaneous agreements,
understandings, inducements and conditions, express or implied, oral or written,
of any nature whatsoever with respect to the subject matter hereof. The express
terms hereof control and supersede any course of performance and/or usage of the
trade inconsistent with any of the terms hereof. This Agreement may not be
modified or amended other than by an agreement in writing.
SECTION 22. CONTROLLING LAW. This Agreement and all questions relating
to its validity, interpretation, performance and enforcement shall be governed
by and construed, interpreted and enforced in accordance with the laws of the
State of California, notwithstanding any California or other conflict of law
provisions to the contrary.
SECTION 23. SCHEDULES AND EXHIBITS. All Schedules and Exhibits referred
to herein or attached hereto are hereby incorporated by reference into, and made
a part of, this Agreement.
SECTION 24. INDULGENCES, NOT WAIVERS. Neither the failure nor any delay
on the part of a party to exercise any right, remedy, power or privilege under
this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or of any right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence. No waiver shall be effective unless it is
in writing and is signed by the party asserted to have granted such waiver.
SECTION 25. TITLES NOT TO AFFECT INTERPRETATION. The titles of
paragraphs and subparagraphs contained in this Agreement are for convenience
only, and they neither form a part of this Agreement nor are they to be used in
the construction or interpretation hereof.
SECTION 26. EXECUTION IN COUNTERPARTS. This Agreement may be executed
in any number of counterparts, each of which shall be deemed to be an original
as against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
SECTION 27. PROVISIONS SEPARABLE. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
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<PAGE> 19
SECTION 28. GENDER. Words used herein regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context requires.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
By: ________________________________________
John M. Robbins, Jr.,
Chief Executive Officer
HOME ASSET MANAGEMENT CORP.
By: ________________________________________
David E. De Leeuw,
President
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<PAGE> 20
FIRST AMENDMENT TO MANAGEMENT AGREEMENT
This First Amendment to Management Agreement (the "Amendment") is
entered into as of August __, 1997 by and between American Residential
Investment Trust, Inc., a Maryland corporation (the "Company") and Home Asset
Management Corp., a Delaware corporation (the "Manager").
RECITALS
The Company and the Manager entered into that certain
Management Agreement dated as of February 11, 1997 (the "Management Agreement"),
whereunder Manager agreed to manage the investments of the Company and perform
certain administrative services for the Company pursuant to the terms thereof;
For a variety of business reasons, the Company desires to
retain, and the Manager desires to provide, certain of the Manager's employees
to serve as employees of the Company in addition to their service as employees
of the Manager; and
Manager has entered into Employment Agreements with certain
of the employees (the "Employment Agreements") which the Company desires to
employ.
NOW, THEREFORE, in consideration of the mutual promises herein set
forth and for other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereto agree to amend the
Management Agreement as follows:
1. Amendment to Section 7(b).
Section 7(b) of the Management Agreement is hereby amended to
read in its entirety as follows:
"(b) Incentive Compensation. In addition to the base
management fee, the Manager shall receive as incentive compensation for each
fiscal quarter an amount equal to 25% of the Net Income of the Company for such
fiscal quarter in excess of the amount that would produce an annualized Return
on Equity (calculated by multiplying the Return on Equity for such fiscal
quarter by four) equal to the Ten Year U.S. Treasury Rate for such fiscal
quarter plus 2%. The incentive compensation calculation and payment shall be
made quarterly in arrears. The Company shall pay the incentive compensation with
respect to each fiscal quarter within 15 days following the delivery to the
Company of Manager's written statement setting forth the computation of the
incentive fee for such quarter. In connection with the Company's annual audit,
the Manager shall compute any final adjustments to the incentive compensation
payable under this Section 7(b) within 45 days after the end of each fiscal year
and any required adjustments shall be paid by the Company or the Manager as
appropriate within 15 days after delivery of such computation to the Company by
the Manager. For purposes of this Section 7(b), any payments made by the Company
and reimbursed by the Manager pursuant to Sections 8(c)
<PAGE> 21
and 9(b) hereof shall be deemed to have been made directly by the Manager and
not by the Company."
2. Amendment to Section 8.
Section 8 of the Management Agreement is hereby amended to
insert the following as SubSection (c):
"(c) Expenses Associated with Employees of Both the Company
and the Manager. Notwithstanding the provisions set forth in Section 8(a) of
this Agreement, the Company shall be responsible for all compensation and
expenses related to retention by the Company of employees of the Manager to
provide the services set forth in Section 2 of this Agreement, including, but
not limited to, salaries, wages, payroll taxes, and the cost of employee benefit
plans."
3. Amendment to Section 9.
Section 9 of the Management Agreement shall be amended to read
in its entirety as follows:
"SECTION 9. Expense Reimbursements.
(a) Reimbursements to the Manager. Expenses incurred by the
Manager on behalf of the Company shall be reimbursed monthly to the Manager
within 30 days after the end of each month. The Manager shall prepare a
statement documenting the expenses of the Company and those incurred by the
Manager on behalf of the Company during each month, and shall deliver such
statement to the Company within 15 days after the end of each month.
(b) Reimbursements to the Company. All expenditures incurred
by the Company pursuant to Section 8(c) hereof shall be reimbursed monthly by
the Manager within 30 days after the end of each month. The Company shall
prepare a statement documenting such expenses during each month, and shall
deliver such statement to the Manager within 15 days after the end of each
month."
4. Amendment to Employment Agreement.
In furtherance of paragraphs 1 and 2 hereof, Manager shall
cause to be executed such Amendments and addendums to the Employment Agreements
as necessary to carry out the intent and purpose of this Amendment.
5. Full Force and Effect of Management Agreement.
Unless expressly amended by the terms of this Amendment, all
remaining provisions of the Management Agreement shall remain in full force and
effect.
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<PAGE> 22
6. Controlling Law.
This Amendment and all questions relating to its validity,
interpretation, performance and enforcement shall be governed by and construed,
interpreted and enforced in accordance with the laws of the State of California,
notwithstanding any California or other conflict of law provisions to the
contrary.
7. Titles Not to Affect Interpretation.
The titles of paragraphs and subparagraphs contained in this
Amendment are for convenience only, and they neither form a part of this
Amendment nor are they to be used in the construction or interpretation hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first written above.
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
By: __________________________________________________
John M. Robbins, Jr., Chief Executive Officer
HOME ASSET MANAGEMENT CORP.
By: __________________________________________________
David E. De Leeuw, President
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<PAGE> 1
EXHIBIT 10.2
EMPLOYMENT AND NONCOMPETITION AGREEMENT
This EMPLOYMENT AND NONCOMPETITION AGREEMENT is made and entered
into as of February 11, 1997, by and between HOME ASSET MANAGEMENT CORP., a
Delaware corporation ("EMPLOYER"), and John Robbins ("EMPLOYEE").
W I T N E S S E T H:
WHEREAS, Employer desires to employ Employee as an executive
officer of Employer and Employee wishes to accept such employment on the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties, conditions, acknowledgments and agreements
contained herein, Employer and Employee hereby agree as follows:
1. Employment. Employer hereby employs Employee and Employee
hereby accepts employment, upon the terms and conditions hereinafter set forth.
Employee warrants that he is free to enter into and fully perform this
Agreement. Upon execution of this Agreement, Employee shall execute and deliver
Employer's standard confidentiality and trade secrets agreement attached to this
Agreement as Exhibit A.
2. Term. The term of this Agreement (subject to the
provisions of Section 6) shall begin on the date hereof and shall continue for a
period of five years from the date hereof (the "TERM").
3. Compensation.
(a) Salary. For all Employee's services under this Agreement,
Employer shall pay Employee, or cause to be paid, a base salary, subject to
periodic review, at the rate of not less than $25,000 per month, less payroll
and withholding deductions required by law, payable in accordance with
Employer's payroll policy as constituted from time to time. If requested by
Employee, Employer shall consider the adoption of a plan to defer all or a
portion of Employee's cash compensation hereunder.
<PAGE> 2
(b) Other Duties. If Employee is elected or appointed a director
or an officer of Employer or of any parent, subsidiary or affiliate of Employer,
including American Residential Investment Trust, Inc., a Maryland corporation
("NewREIT"), but excluding other portfolio companies of McCown De Leeuw &
Co.(collectively, "Affiliates"), for any periods during his employment by
Employer, Employee will serve in such capacities without compensation in
addition to that specified in this Section 3.
(c) Fringe Benefits. Employee shall have the right, on the same
basis as other employees of Employer occupying positions with responsibility and
salary comparable to that of Employee, to participate in and receive benefits
under and in accordance with the provisions of any future annual or long-term
incentive or bonus plan. In addition, Employee shall be entitled to such health,
life and long-term disability insurance and benefits which are made available to
employees of Employer ("HEALTH BENEFITS"). In addition, Employee shall be
entitled to four weeks paid vacation and reimbursement for travel and
entertainment expenses incurred in connection with his duties hereunder upon
presentation of proper evidence thereof.
(d) Bonus. Bonuses during the first two years of this Agreement
shall be entirely within the discretion of the Board of Directors. Bonuses
thereafter will be subject to achievement of a targeted net income budget
established by management and approved by the Board of Directors of Employer as
set forth below. Employee shall be able to earn up to 100% of his annual salary
as a bonus.
<TABLE>
<CAPTION>
Percent of Target Net Income Achieved Percent of Salary Payable as Bonus
<S> <C>
Less than 75% 0%
75% to 99.9% 33 1/3%
100% to 124.9% 66 2/3%
125% or more 100%
</TABLE>
Bonuses earned pursuant to the table above shall be pro-rated if
results achieved fall between the thresholds above 75%.
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<PAGE> 3
(e) NewREIT Equity Ownership. Employer shall cause NewREIT to
provide the following equity ownership to Employee:
(i) Employee shall be granted options to purchase up to
175,000 shares of Common Stock of NewREIT at an exercise price of $10.00 per
share under NewREIT's 1997 Stock Incentive Plan and pursuant to the stock option
agreements attached hereto as Exhibit B.
(ii) Employee shall also be granted a five-year cash
settlement stock appreciation right under the 1997 Stock Incentive Plan of
NewREIT covering 175,000 shares of NewREIT Common Stock at an exercise price of
$10.00 per share pursuant to the stock appreciation rights agreement attached
hereto as Exhibit C.
(iii) Employee agrees that he will become a party to the
Stockholders Agreement attached hereto as Exhibit D as a condition to the grant
of the options.
(iv) Upon the closing of a Qualified IPO of NewREIT (as
defined in the Stockholders Agreement), Employee shall be granted an additional
option to purchase 100,000 shares (as presently constituted on the date of this
Agreement) of NewREIT at an exercise price equal to the public offering price in
the Qualified IPO. The options granted in connection with a Qualified IPO of
NewREIT shall vest 20% on the closing of the Qualified IPO and 20% on each of
the next four anniversaries of the closing of a Qualified IPO by NewREIT.
(v) Options and stock appreciation rights granted
pursuant to clauses (i) and (ii) above shall become fully vested upon the
closing of the latest public offering of Common Stock of NewREIT pursuant to
which NewREIT will have cumulatively raised from public or private new offerings
of its stock, gross proceeds of at least $150 million. Options and stock
appreciation rights granted pursuant to clauses (i), (ii) and (iv) above shall
become fully vested upon consummation of a Change of Control Transaction (as
defined in the Stockholders Agreement). Vesting of options and stock
appreciation rights shall not be accelerated upon a Qualified IPO by NewREIT
(except as set forth above) and shall not be accelerated upon a termination of
employment.
(vi) Options granted pursuant to the terms of this
Section 3(e) shall be incentive stock options to the extent permitted by law.
The balance of the options shall be non-qualified stock options. To the extent
the terms of the option agreements conflict with the provisions of this Section
3, the option agreements shall control.
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<PAGE> 4
(f) Golden Parachute Limitations. Notwithstanding anything
contained herein to the contrary, in the event that the payments to Employee
contemplated by this Agreement or the agreements referred to herein, either
alone or together with other payments Employee has a right to receive from
Employer or NewREIT, would not be deductible (in whole or in part) by Employer
or NewREIT as a result of such payments constituting a "parachute payment" (as
defined in Section 280G of the Internal Revenue Code, as amended (the "Code")),
such payments shall be reduced to the largest amount as will result in no
portion of such payments not being fully deductible by Employer or NewREIT as
the result of Section 280G of the Code. The determination of a valuation for
purposes of Section 280G of consulting, noncompetition or other agreements
resulting in a reduction in the payments pursuant to the foregoing sentence
shall be made exclusively by independent public accountants selected by mutual
agreement of Employee and Employer. If Employee and Employer are unable to agree
upon a single firm to make such determination, Employee and Employer shall each
select one firm and the firms selected shall appoint a third firm to make the
determination. The fees and expenses of any firm mutually agreed upon by
Employee and Employer shall be borne by Employer. The fees and expenses of firms
selected by Employee and Employer if no agreement is reached shall be borne by
the party selecting such firm, with the fees and expenses of the third firm
selected being shared equally by Employee and Employer. The determination of the
accounting firm or firms shall be conclusive and binding on Employer and
Employee.
4. Position.
(a) Responsibilities. Subject to the provisions of Section 2
hereof and in accordance with the By-laws of Employer, Employee is engaged as
Chairman of the Board and Chief Executive Officer of Employer and, subject to
appointment by the Board of Directors of NewREIT, Chairman of the Board and
Chief Executive Officer of NewREIT. Employee promises to perform and discharge
well and faithfully all duties which may be assigned to him in his capacities
described above by the Board of Directors of Employer or NewREIT from time to
time in accordance with this Agreement, and Employee shall devote his best
talents, efforts and abilities to the performance of his duties hereunder.
Employee shall perform his duties subject to the direction and control of the
Board of Directors of Employer or NewREIT.
(b) Place of employment. Employee's place of employment during
the term of this Agreement shall be in the San Diego metropolitan area, with
such business travel outside the San Diego area as shall be necessary to the
performance of Employee's duties.
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<PAGE> 5
5. Exclusive Services. During the period in which Employee is an
employee of Employer, his services shall be completely exclusive to Employer and
its Affiliates and he shall devote substantially his entire time, attention and
energies to the business of Employer and its Affiliates and the duties to which
Employer shall assign him from time to time. Employee agrees to perform his
services to the best of his ability and to carry out the reasonable policies and
directives of Employer. Notwithstanding the above, Employee may continue to
serve as a member of the board of directors of the companies listed on Exhibit E
hereto and may serve on any additional boards of directors approved by the Board
of Directors of Employer.
6. Termination. Employee's employment hereunder may be terminated
prior to the expiration of the Term specified in Section 2 above as described
below. Employee shall be entitled to the compensation provided in Section 7
hereof in the event his employment is terminated as provided in this Section 6.
(a) Death. Employee's employment hereunder shall
terminate upon his death.
(b) Disability. If, as a result of the Employee's
incapacity due to physical or mental illness, Employee shall have been absent
from his duties hereunder on a full-time basis for 180 consecutive calendar
days, and within 30 days after written Notice of Termination (as defined below)
is given (which may occur no earlier than 30 days before, but at any time after,
the end of such 180-day period), Employee shall not have returned to the
performance of his duties hereunder on a full-time basis, Employer may terminate
the Employee's employment hereunder.
(c) Without Cause. Employer, by appropriate action of
the Board of Directors, may terminate Employee's employment hereunder at any
time without Cause; provided, however, that Employer may terminate the
Employee's employment without Cause (as defined below) during any disability
period only as provided in Section 6(b). A Resignation for Good Reason shall be
deemed a termination without Cause for purposes of this Agreement. Resignation
for Good Reason shall mean Employee's resignation within six months of the
occurrence of any of the following: (i) material diminution of responsibilities
with Employer or NewREIT without the consent of Employee; (ii) relocation of his
principal office outside the San Diego area; (iii) material reduction in the
compensation provided in this Agreement or (iv) termination as Chairman and
Chief Executive officer of Employer and NewREIT.
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<PAGE> 6
(d) Cause. Employer may terminate the Employee's
employment hereunder for Cause. For purposes of this Agreement, "Cause" shall
mean Employee's (i) embezzlement, theft or other misappropriation of any
property of Employer; (ii) gross or willful misconduct resulting in substantial
loss to Employer or substantial damage to the reputation of Employer; (iii) any
act involving moral turpitude which if the subject of a criminal proceeding
could reasonably result in a convection for a felony involving moral turpitude;
(iv) gross or willful neglect of his assigned duties to Employer or NewREIT;
provided that actions taken or not taken in good faith shall not be deemed to
constitute gross or willful neglect; (v) breach of his fiduciary obligations to
Employer or NewREIT or (vi) any chemical dependence certified by a licensed
physician resulting in impairment of Employee's abilities to perform his duties
hereunder or substantial damage to the reputation of Employer.
(e) Notice of Termination. Any termination, during the
term of this Agreement, of the Employee's employment hereunder (other than
termination pursuant to Subsection 6(a) above on account of death) shall be
communicated by a written Notice of Termination to the other party hereto. For
purposes of this Agreement, a "NOTICE OF TERMINATION" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon
and, if applicable, shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Employee's
employment under the provision so indicated. In the case of a Notice of
Termination for Cause, Employee shall have 30 days following receipt of such
notice to correct or cure (if possible) any of the matters referred to in the
notice as the basis for such termination and during such period, Employee shall
be afforded the opportunity to make a presentation to the Board of Directors
regarding the matters referred to in such notice. Upon such correction or cure,
Employer's right to terminate this Agreement for Cause as specified in such
Notice of Termination shall cease as to such matters. Only one such notice need
be given.
(f) Date of Termination. The "DATE OF TERMINATION"
shall, during the Term of this Agreement, mean: (i) if Employee's employment is
terminated by his death, the date of his death; (ii) if Employee's employment is
terminated on account of disability pursuant to Subsection 6(b) above, 30 days
after Notice of Termination is given (provided that Employee shall not, during
such 30-day period, have returned to the performance of his duties on a
full-time basis); (iii) if Employee's employment is terminated by Employer
without Cause pursuant to subsection 6(c) above, the date upon which Notice of
Termination is given; and (iv) if Employee's
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<PAGE> 7
employment is terminated by Employer for Cause pursuant to Subsection 6(d)
above, the date specified in the Notice of Termination.
(g) Resignation. Notwithstanding any other provision
hereof to the contrary, Employee may, at any time during the term of this
Agreement, effective immediately upon the giving of a Notice of Termination,
terminate his employment hereunder. For purposes of this Agreement, a
Resignation For Good Reason shall be deemed to be a termination without Cause.
7. Compensation Upon Termination or During Disability.
(a) Death. If Employee's employment shall be
terminated by reason of his death, Employer shall, within 90 days of death, pay
a lump sum death benefit to such person as he shall designate in a notice filed
with Employer or, if no such person shall be designated, to his estate. The
amount of such death benefit shall be equal to his salary, plus a bonus equal to
the bonus paid to Employee for the previous year multiplied by a fraction, the
numerator of which is the number of days in the current year prior to Employee's
death and the denominator is 365 and any amounts payable pursuant to Section
3(c) to the date of his death which, at the date of death, are accrued and
unpaid.
(b) Disability. During any period that Employee fails
to perform his duties hereunder as a result of incapacity due to physical or
mental illness, Employee shall continue to receive his salary and any amounts
payable pursuant to Section 3(c) until Employee's employment is terminated due
to disability pursuant to Subsection 6(b) hereof. Upon termination due to death
prior to a termination as specified in the preceding sentence, Subsection 7(a)
above shall apply. For periods of time after termination pursuant to Subsection
6(b) hereof, any disability payments which Employee may be entitled to receive
pursuant to any employee benefit plan or arrangement provided by Employer shall
be paid pursuant to the terms of such plan or arrangement.
(c) Without Cause. If Employee's employment shall be
terminated by Employer without Cause, (i) Employer shall, through the Date of
Termination, continue to pay Employee his salary and amounts payable or accrued
pursuant to Section 3(c) and (ii) Employer shall, after the date of Termination,
pay to Employee for a period of one year from the Date of Termination, his
salary (but, subject to applicable law, no additional payments contemplated by
Section 3) in effect on the Date of Termination, such payments to be made in
installments substantially similar to those made to Employee
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<PAGE> 8
prior to the Date of Termination; provided, however, if termination without
Cause occurs within six months of a Change of Control (as defined in the
Stockholders Agreement) Employee shall also be entitled to receive a lump sum
payment equal to his bonus for the immediately preceding year. Employee shall
also continue to participate in the Health Benefits programs of Employer during
the one-year period following the Date of Termination. Payments or other
benefits received by Employee after the Date of Termination but during the
period in which Employer is obligated to continue to make payments to Employee
as provided above which result from or are in connection with any prior or
future employment or business activities of the Employee shall not reduce
Employer's liability hereunder. Failure to renew this Agreement upon expiration
of the Term shall not be deemed to constitute a termination without Cause.
(d) Cause. If Employee's employment shall be
terminated for Cause, Employer shall, through the Date of Termination, continue
to pay Employee his salary and amounts payable pursuant to Section 3(c),
provided, however, that Employee shall not be entitled to receive any bonus upon
a termination for Cause and shall not be entitled to receive any amounts payable
with respect to the period following the Date of Termination.
(e) Resignation. If Employee's employment shall be
terminated by reason of resignation pursuant to Subsection 6(g) hereof, Employer
shall continue to pay Employee his base salary through the Date of Termination,
but Employee shall not be entitled to receive any bonus if he resigns and shall
not be entitled to receive any amounts payable with respect to the period
following the Date of Termination. If Employee's employment is terminated by
reason of Resignation For Good Reason, the provisions of Subsection 7(c) shall
apply.
(f) Effect of Payments. The payments provided
hereunder shall fully discharge Employer's obligations under this Agreement.
Employee acknowledges and agrees that the provisions of this Agreement state his
entire and exclusive rights, entitlements and remedies against Employer and its
successors, assigns, affiliates and representatives for any termination of this
Agreement. As a material inducement to Employer to enter into this Agreement,
Employer represents to Employer that he will make no other claims in any such
event.
8. Noncompetition.
(a) During the period (the "NONCOMPETITION PERIOD") commencing on
the date hereof and ending on the earlier of (i) the fifth anniversary hereof;
(ii) the termination of employment of Employee without Cause or (iii) the
consummation
-8-
<PAGE> 9
of a Change of Control Transaction, Employee shall not, directly or indirectly,
own, manage, operate, join, advise, control or otherwise engage or participate
in or be connected as an officer, employee, partner, creditor, guarantor,
advisor of, or consultant to, any business which may compete against the
business (the "BUSINESS") of Employer and/or its Affiliates, including, without
limitation, the businesses of operating and managing a mortgage real estate
investment trust in the United States (the "MARKET AREA"). Notwithstanding the
foregoing, (x) Employee may work or perform services for Employer and its
Affiliates, (y) Employee may work or perform services for a financial
institution or similar entity which is involved in the mortgage business so long
as such entity is not engaged primarily in managing a real estate investment
trust or originating and selling mortgages and (z) Employee may own securities
in any publicly held corporation, but only to the extent Employee does not own
of record or beneficially more than 1% of the outstanding beneficial ownership
of such corporation. For purposes of the non-competition covenants set forth in
Section 8 hereof, Affiliates of Employer shall not include McCown De Leeuw & Co.
or Crescent or their portfolio companies other than Employer, NewREIT and their
subsidiary companies.
(b) Non-Solicitation of Employees. During the Noncompetition
Period, Employee shall not, either on his own account or for any person, firm or
company, solicit, interfere with, or endeavor to cause any employee of the
Business, Employer or any Affiliate to leave his or her employment or induce or
attempt to induce any such employee to terminate or breach his or her employment
agreement.
(c) Non-Solicitation of Customers. During the Noncompetition
Period, Employee shall not induce or attempt to induce any customer of the
Business, Employer or any Affiliate, to cease doing business in whole or in part
with Employer or any Affiliate.
(d) Payments for Noncompetition Covenants. In consideration of
the noncompetition and non-solicitation covenants contained in Sections 8(a) of
this Agreement, Employer shall pay to Employee an amount equal to 25% of
Employee's monthly salary in effect on the Date of Termination (the
"NONCOMPETITION PAYMENT") for each month during the Noncompetition Period
following the Date of Termination. Each Noncompetition Payment shall be made in
arrears on or before the last day of each month of the Noncompetition Period
following the Date of Termination. Each Noncompetition Payment shall be paid by
Employer by delivery of a check to Employee, or as may otherwise be agreed to by
Employer and Employee. All payments due to Employee under this Section 8(d)
shall be in addition to any payments due to
-9-
<PAGE> 10
Employee under Section 7 above. Notwithstanding the foregoing, if Employer
notifies Employee in writing in a Notice of Termination or within ten business
days of Employee's resignation that it elects not to make the payments provided
in this Section 8(d), then the provisions of Section 8(a) shall cease to be
enforceable against Employee following the Date of Termination, subject,
however, to Employee's fiduciary obligations as an officer of Employer and the
provisions of any Confidentiality and Non-Disclosure Agreements between Employee
and Employer. If Employer does not notify Employee as provided in the
immediately proceeding sentence, then Employer shall be obligated to continue to
make monthly payments hereunder for a minimum of six months. Employer may elect
to terminate monthly payments hereunder upon six months' written notice to
Employee and upon termination of such payments, the provisions of Section 8(a)
shall cease be enforceable against Employee following, subject, however, to
Employee's fiduciary obligations as an officer of Employer and the provisions of
Employee's Confidentiality Agreement previously executed and delivered.
9. Stay of Time. In the event Employee violates the provisions of
Section 8 of this Agreement, the running of the time period of such provisions
so violated shall be automatically suspended upon the date of such violation and
shall resume on the date such violation permanently ceases.
10. Injunctive Relief. The remedy at law for any breach of this
Agreement is and will be inadequate, and in the event of a breach or threatened
breach by Employee of the provisions of this Agreement, Employer or its
Affiliates shall be entitled to seek an injunction restraining Employee from
violating the provisions of this Agreement. Nothing herein contained shall be
construed as prohibiting Employer, its Parent or its Affiliates from pursuing
any other remedies available to it or them for such breach or threatened breach,
including without limitation, the recovery of damages from Employee.
11. Separate Covenants. The non-solicitation provisions of this
Agreement shall be deemed to consist of a series of separate covenants, one for
each line of business carried on by Employer and its Affiliates. The parties
expressly agree that the character and duration of such provisions in this
Agreement are reasonable in light of the circumstances as they exist on the date
upon which this Agreement has been executed. However, should a determination
nonetheless be made by a court of competent jurisdiction at a later date that
the character or duration of such provisions is unreasonable in light of the
circumstances as they then exist, then it is the intention and the agreement of
Employee and Employer that such non-solicitation provisions of this
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<PAGE> 11
Agreement shall be construed by the court in such a manner as to impose only
those restrictions on the conduct of Employee which are reasonable in light of
the circumstances as they then exist and as are necessary to assure Employer and
its Affiliates of the intended benefits of this Agreement. If, in any judicial
proceeding, a court shall refuse to enforce all of the separate covenants deemed
included herein because, taken together they are more extensive than necessary
to assure Employer, its Parent and Affiliates of the intended benefit of such
non-solicitation provisions, it is expressly understood and agreed between the
parties hereto that those of such covenants which, if eliminated, would permit
the remaining separate covenants to be enforced in such proceeding shall, for
the purpose of such proceeding, be deemed eliminated from the provisions hereof.
12. Employer's and Employee's Rights; Indemnification. This
Agreement shall not limit or prejudice in any manner whatsoever the rights which
Employer or Employee would have, in the absence of this Agreement, with respect
to any and all matters arising out of Employee's employment, except for such
matters that are specifically covered by the terms of this Agreement or are
mentioned herein. Employee shall be entitled to indemnification as an officer
and employee of Employer in accordance with the provisions of the Certificate of
Incorporation and Bylaws of Employer and applicable Delaware law.
13. Assignment/Sale. The rights and obligations of Employer under
this Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of Employer and any subsequent assignee. No assignment of
this Agreement by Employer shall relieve Employer of its obligations hereunder.
This Section shall be deemed to apply to any assignment by sale, merger,
consolidation, liquidation or otherwise.
14. Assignment by Employee. Employee may not assign this
Agreement or any of his rights hereunder except with the prior written consent
of Employer. This Agreement shall be binding upon Employee's heirs, executors,
administrators or other legal representatives and their legal assigns.
15. Benefits. If, in the sole and absolute discretion of the
Board of Directors of Employer, Employee is permitted to participate in any
other plan or agreement for eligible employees of Employer which is not
specifically referred to herein, or to receive any other employment benefits, it
is agreed that nothing contained in this Agreement shall affect the right of
Employer to terminate or
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<PAGE> 12
modify any such plan or agreement, or other benefit in whole or in part at any
time and from time to time.
16. Entire Agreement; Modifications. This instrument, together
with the exhibits hereto, contains the entire agreement of the parties with
regard to matters covered herein. Standard policies of Employer applicable to
employees shall govern matters not set forth in this Agreement to the extent
they do not conflict with this Agreement. This Agreement may not be changed or
modified, or released, discharged, abandoned or otherwise terminated, in whole
or in part, except by an instrument in writing approved by the Board of
Directors of Employer, and signed by an officer of Employer and by Employee.
17. Applicable Law. This Agreement and all matters or issues
collateral hereto shall be governed by the laws of the State of California
applicable to contracts made and to be performed entirely within such State.
18. Waiver. A waiver by either party of any of the terms or
conditions of this Agreement in any one instance shall not be deemed or
construed to be a waiver of such term or condition for the future, or of any
subsequent breach thereof. All remedies, rights, undertakings, obligations and
agreements contained in this Agreement shall be cumulative, and none of them
shall be in limitation of any other remedy, right, undertaking, obligation or
agreement of either party.
19. Notices. All notices required to be given hereunder shall be
given in writing, and may be personally delivered (including by facsimile), sent
by overnight courier or deposited with the U.S. postal authorities, return
receipt requested, addressed as follows:
If to Employer: Home Asset Management Corp.
445 Marine View Avenue, Suite 260
Del Mar, CA 92014
Attn: Chairman of the Board
with a copy to: McCown De Leeuw & Co.
101 East 52nd Street, 31st Floor
New York, NY 10022
Telecopy No.: (212) 355-6283
Attn: David De Leeuw
If to Employee John Robbins
17444 Circa Oriente
Rancho Santa Fe, CA 92067
Telecopy No.: (619) 759-1885
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<PAGE> 13
or to such other address as the parties may from time to time designate in
writing. Notices shall be deemed delivered on the day personally delivered or
sent by facsimile (with appropriate confirmation of transmission), or on the
fourth business day following deposit in the U.S. mail, return receipt
requested.
20. Compliance with Laws and Policies. Employee agrees that he
will at all times comply strictly with all applicable laws and all current and
future policies of Employer and its Affiliates.
21. Employer Property. Upon termination or expiration of his
employment hereunder, Employee agrees to return to Employer all property of
Employer, any Parent and any Affiliate of which Employee has had custody and to
deliver to Employer all correspondence, management studies and other materials
and data relating to or connected with his employment hereunder.
22. Paragraph Headings. The paragraph headings in this Agreement
are for convenience only and shall not in any manner affect the interpretation
or construction of this Agreement or any of its provisions.
23. Attorneys Fees. If legal proceedings are required to enforce
this Agreement, the prevailing party shall be entitled to reasonable attorneys
fees.
24. Survival of Certain Provisions. The rights and obligations of
the parties under Sections 8 through 10, 21, 23 and 27 shall survive the
termination of this Agreement.
27. Enforcement. Employer shall have the right to separately
enforce the terms of this Agreement against Employee with respect to any breach
or threatened breach by Employee of the provisions hereof as provided herein.
28. Counterparts. This Agreement may be executed in counterparts,
each of which shall be an original and both of which, taken together, shall
constitute one and the same instrument.
29. Arbitration. Any dispute or claim arising out of or relating
to this Agreement which cannot be settled by negotiation between the parties
shall first be submitted to mediation, conducted in San Diego, California, by a
single, neutral mediator in accordance with the Commercial Mediation Rules of
the American Arbitration Association. In the event such dispute or claim is not
resolved by mediation within 30 days from the inception thereof, then such
dispute or claim shall be submitted to and settled exclusively by final and
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<PAGE> 14
binding arbitration, conducted in San Diego, California in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, as
modified by any other instruments or agreements that the parties hereto may
execute at the time of or prior to the arbitration. The arbitration shall be
conducted by a single neutral arbitrator chosen by mutual agreement between the
parties; provided, however, that if the parties are unable to agree upon an
arbitrator, then the arbitration shall be conducted by a panel of three
arbitrators, Employer and Employee each shall choose one arbitrator, and the
third arbitrator shall be selected by the two arbitrators so chosen. The fees of
the American Arbitration Association and of the arbitrator or arbitrators shall
be borne by Employer.
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<PAGE> 15
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.
HOME ASSET MANAGEMENT CORP.
By:
---------------------------------
David E. De Leeuw,
President
- --------------------------------
John M. Robbins, Jr., Employee
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<PAGE> 16
FIRST AMENDMENT TO
EMPLOYMENT AND NON-COMPETITION AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AND NON-COMPETITION AGREEMENT (the
"Amendment") is entered into as of August ___, 1997 by and between Home Asset
Management Corp., a Delaware corporation ("Employer"), and John M. Robbins
("Employee").
RECITALS
A. Employer and Employee entered into that certain Employment and
Noncompetition Agreement as of February 11, 1997 (the "Employment Agreement");
B. Employer and American Residential Investment Trust, Inc., a
Maryland corporation (the "Company") entered into that certain Management
Agreement, dated February 11, 1997, and the First Amendment to Management
Agreement, dated August __, 1997 (collectively referred to hereinafter as the
"Management Agreement"), whereunder Employer agreed to provide certain
administrative services for the Company;
C. The Company desires to employ, and Employee desires to be
employed by the Company; and
D. Employer and Employee agree to amend the Employment Agreement on
the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises herein
set forth and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Adjustments to Compensation.
Employer shall be entitled to reduce any payments due to Employee
under Paragraph 3 of the Employment Agreement by an amount equal to the total
compensation paid to Employee by the Company pursuant to the terms of the
Management Agreement.
2. Termination by the Company.
If Employee's employment should be terminated by the Company at
any time prior to termination of the Management Agreement, the provisions of
Paragraph 1 of this Amendment shall be of no further force or effect.
3. Continued Employment.
Employee shall continue to be deemed employed by Employer so long
as he continues to provide services to the Company or Employer.
<PAGE> 17
4. Except as expressly modified by this Amendment, all other terms
and provisions of the Employment Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as
of the date first above written.
HOME ASSET MANAGEMENT CORP.
By:
------------------------------------
David E. De Leeuw, President
EMPLOYEE
----------------------------------------
John M. Robbins
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<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT AND NONCOMPETITION AGREEMENT
This EMPLOYMENT AND NONCOMPETITION AGREEMENT is made and
entered into as of February 11, 1997, by and between HOME ASSET MANAGEMENT
CORP., a Delaware corporation ("EMPLOYER"), and Jay Fuller ("EMPLOYEE").
W I T N E S S E T H:
WHEREAS, Employer desires to employ Employee as an executive
officer of Employer and Employee wishes to accept such employment on the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties, conditions, acknowledgments and agreements
contained herein, Employer and Employee hereby agree as follows:
1. Employment. Employer hereby employs Employee and Employee
hereby accepts employment, upon the terms and conditions hereinafter set forth.
Employee warrants that he is free to enter into and fully perform this
Agreement. Upon execution of this Agreement, Employee shall execute and deliver
Employer's standard confidentiality and trade secrets agreement attached to this
Agreement as Exhibit A.
2. Term. The term of this Agreement (subject to the provisions
of Section 6) shall begin on the date hereof and shall continue for a period of
five years from the date hereof (the "TERM").
3. Compensation.
(a) Salary. For all Employee's services under this Agreement,
Employer shall pay Employee, or cause to be paid, a base salary, subject to
period review, at the rate of not less than $20,833 per month, less payroll and
withholding deductions required by law, payable in accordance with Employer's
payroll policy as constituted from time to time. If requested by Employee,
Employer shall consider the adoption of a plan to defer all or a portion of
Employee's cash compensation hereunder.
<PAGE> 2
(b) Other Duties. If Employee is elected or appointed a
director or an officer of Employer or of any parent, subsidiary or affiliate of
Employer, including American Residential Investment Trust, Inc., a Maryland
corporation ("NewREIT"), but excluding other portfolio companies of McCown De
Leeuw & Co.(collectively, "AFFILIATES"), for any periods during his employment
by Employer, Employee will serve in such capacities without compensation in
addition to that specified in this Section 3.
(c) Fringe Benefits. Employee shall have the right, on the
same basis as other employees of Employer occupying positions with
responsibility and salary comparable to that of Employee, to participate in and
receive benefits under and in accordance with the provisions of any future
annual or long-term incentive or bonus plan. In addition, Employee shall be
entitled to such health, life and long-term disability insurance and benefits
which are made available to employees of Employer ("HEALTH BENEFITS"). In
addition, Employee shall be entitled to four weeks paid vacation and
reimbursement for travel and entertainment expenses incurred in connection with
his duties hereunder upon presentation of proper evidence thereof.
(d) Bonus. Bonuses during the first two years of this
Agreement shall be entirely within the discretion of the Board of Directors.
Bonuses thereafter will be subject to achievement of a targeted net income
budget established by management and approved by the Board of Directors of
Employer as set forth below. Employee shall be able to earn up to 100% of his
annual salary as a bonus.
<TABLE>
<CAPTION>
Percent of Target Net Income Achieved Percent of Salary Payable as Bonus
- ------------------------------------- ----------------------------------
<S> <C>
Less than 75% 0%
75% to 99.9% 33 1/3%
100% to 124.9% 66 2/3%
125% or more 100%
</TABLE>
Bonuses earned pursuant to the table above shall be pro-rated
if results achieved fall between the thresholds above 75%.
(e) NewREIT Equity Ownership. Employer shall cause NewREIT to
provide the following equity ownership to Employee:
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<PAGE> 3
(i) Employee shall be granted options to purchase up to
175,000 shares of Common Stock of NewREIT at an exercise price of $10.00 per
share under NewREIT's 1997 Stock Incentive Plan and pursuant to the stock option
agreements attached hereto as Exhibit B.
(ii) Employee shall also be granted a five-year cash
settlement stock appreciation right under the 1997 Stock Incentive Plan of
NewREIT covering 175,000 shares of NewREIT Common Stock at an exercise price of
$10.00 per share pursuant to the stock appreciation rights agreement attached
hereto as Exhibit C.
(iii) Employee agrees that he will become a party to the
Stockholders Agreement attached hereto as Exhibit D as a condition to the grant
of the options.
(iv) Upon the closing of a Qualified IPO of NewREIT (as
defined in the Stockholders Agreement), Employee shall be granted an additional
option to purchase 100,000 shares (as presently constituted on the date of this
Agreement) of NewREIT at an exercise price equal to the public offering price in
the Qualified IPO. The options granted in connection with a Qualified IPO of
NewREIT shall vest 20% on the closing of the Qualified IPO and 20% on each of
the next four anniversaries of the closing of a Qualified IPO by NewREIT.
(v) Options and stock appreciation rights granted pursuant
to clauses (i) and (ii) above shall become fully vested upon the closing of the
latest public offering of Common Stock of NewREIT pursuant to which NewREIT will
have cumulatively raised from public or private new offerings of its stock,
gross proceeds of at least $150 million. Options and stock appreciation rights
granted pursuant to clauses (i), (ii) and (iv) above shall become fully vested
upon consummation of a Change of Control Transaction (as defined in the
Stockholders Agreement). Vesting of options and stock appreciation rights shall
not be accelerated upon a Qualified IPO by NewREIT (except as set forth above)
and shall not be accelerated upon a termination of employment.
(vi) Options granted pursuant to the terms of this Section
3(e) shall be incentive stock options to the extent permitted by law. The
balance of the options shall be non-qualified stock options. To the extent the
terms of the option agreements conflict with the provisions of this Section 3,
the option agreements shall control.
(f) Golden Parachute Limitations. Notwithstanding anything
contained herein to the contrary, in the event that the payments to Employee
contemplated by this Agreement or the
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<PAGE> 4
agreements referred to herein, either alone or together with other payments
Employee has a right to receive from Employer or NewREIT, would not be
deductible (in whole or in part) by Employer or NewREIT as a result of such
payments constituting a "parachute payment" (as defined in Section 280G of the
Internal Revenue Code, as amended (the "Code")), such payments shall be reduced
to the largest amount as will result in no portion of such payments not being
fully deductible by Employer or NewREIT as the result of Section 280G of the
Code. The determination of a valuation for purposes of Section 280G of
consulting, noncompetition or other agreements resulting in a reduction in the
payments pursuant to the foregoing sentence shall be made exclusively by
independent public accountants selected by mutual agreement of Employee and
Employer. If Employee and Employer are unable to agree upon a single firm to
make such determination, Employee and Employer shall each select one firm and
the firms selected shall appoint a third firm to make the determination. The
fees and expenses of any firm mutually agreed upon by Employee and Employer
shall be borne by Employer. The fees and expenses of firms selected by Employee
and Employer if no agreement is reached shall be borne by the party selecting
such firm, with the fees and expenses of the third firm selected being shared
equally by Employee and Employer. The determination of the accounting firm or
firms shall be conclusive and binding on Employer and Employee.
4. Position.
(a) Responsibilities. Subject to the provisions of Section 2
hereof and in accordance with the By-laws of Employer, Employee is engaged as
President and Chief Operating Officer of Employer and, subject to appointment by
the Board of Directors of NewREIT, President and Chief Operating Officer of
NewREIT. Employee promises to perform and discharge well and faithfully all
duties which may be assigned to him in his capacities described above by the
Board of Directors of Employer or NewREIT from time to time in accordance with
this Agreement, and Employee shall devote his best talents, efforts and
abilities to the performance of his duties hereunder. Employee shall perform his
duties subject to the direction and control of the Board of Directors of
Employer or NewREIT.
(b) Place of employment. Employee's place of employment during
the term of this Agreement shall be in the San Diego metropolitan area, with
such business travel outside the San Diego area as shall be necessary to the
performance of Employee's duties.
5. Exclusive Services. During the period in which Employee is
an employee of Employer, his services shall be completely exclusive to Employer
and its Affiliates and he
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<PAGE> 5
shall devote his entire time, attention and energies to the business of Employer
and its Affiliates and the duties to which Employer shall assign him from time
to time. Employee agrees to perform his services to the best of his ability and
to carry out the reasonable policies and directives of Employer.
6. Termination. Employee's employment hereunder may be
terminated prior to the expiration of the Term specified in Section 2 above as
described below. Employee shall be entitled to the compensation provided in
Section 7 hereof in the event his employment is terminated as provided in this
Section 6.
(a) Death. Employee's employment hereunder shall terminate
upon his death.
(b) Disability. If, as a result of the Employee's
incapacity due to physical or mental illness, Employee shall have been absent
from his duties hereunder on a full-time basis for 180 consecutive calendar
days, and within 30 days after written Notice of Termination (as defined below)
is given (which may occur no earlier than 30 days before, but at any time after,
the end of such 180-day period), Employee shall not have returned to the
performance of his duties hereunder on a full-time basis, Employer may terminate
the Employee's employment hereunder.
(c) Without Cause. Employer, by appropriate action of the
Board of Directors, may terminate Employee's employment hereunder at any time
without Cause; provided, however, that Employer may terminate the Employee's
employment without Cause (as defined below) during any disability period only as
provided in Section 6(b). A Resignation for Good Reason shall be deemed a
termination without Cause for purposes of this Agreement. Resignation for Good
Reason shall mean Employee's resignation within six months of the occurrence of
any of the following: (i) material diminution of responsibilities with Employer
or NewREIT without the consent of Employee; (ii) relocation of his principal
office outside the San Diego area; (iii) material reduction in the compensation
provided in this Agreement or (iv) termination as President and Chief Operating
officer of Employer and NewREIT.
(d) Cause. Employer may terminate the Employee's employment
hereunder for Cause. For purposes of this Agreement, "Cause" shall mean
Employee's (i) embezzlement, theft or other misappropriation of any property of
Employer; (ii) gross or willful misconduct resulting in substantial loss to
Employer or substantial damage to the reputation of Employer; (iii) any act
involving moral turpitude which if the subject of a criminal proceeding could
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<PAGE> 6
reasonably result in a conviction for a felony involving moral turpitude; (iv)
gross or willful neglect of his assigned duties to Employer or NewREIT, provided
that actions taken or not taken in good faith shall not be deemed to constitute
gross or willful neglect; (v) breach of his fiduciary obligations to Employer or
NewREIT or (vi) any chemical dependence certified by a licensed physician
resulting in impairment of Employee's abilities to perform his duties hereunder
or substantial damage to the reputation of Employer.
(e) Notice of Termination. Any termination, during the term
of this Agreement, of the Employee's employment hereunder (other than
termination pursuant to Subsection 6(a) above on account of death) shall be
communicated by a written Notice of Termination to the other party hereto. For
purposes of this Agreement, a "NOTICE OF TERMINATION" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon
and, if applicable, shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Employee's
employment under the provision so indicated. In the case of a Notice of
Termination for Cause, Employee shall have 30 days following receipt of such
notice to correct or cure (if possible) any of the matters referred to in the
notice as the basis for such termination and during such period, Employee shall
be afforded the opportunity to make a presentation to the Board of Directors
regarding the matters referred to in such notice. Upon such correction or cure,
Employer's right to terminate this Agreement for Cause as specified in such
Notice of Termination shall cease as to such matters. Only one such notice need
be given.
(f) Date of Termination. The "DATE OF TERMINATION" shall,
during the Term of this Agreement, mean: (i) if Employee's employment is
terminated by his death, the date of his death; (ii) if Employee's employment is
terminated on account of disability pursuant to Subsection 6(b) above, 30 days
after Notice of Termination is given (provided that Employee shall not, during
such 30-day period, have returned to the performance of his duties on a
full-time basis); (iii) if Employee's employment is terminated by Employer
without Cause pursuant to subsection 6(c) above, the date upon which Notice of
Termination is given; and (iv) if Employee's employment is terminated by
Employer for Cause pursuant to Subsection 6(d) above, the date specified in the
Notice of Termination.
(g) Resignation. Notwithstanding any other provision hereof
to the contrary, Employee may, at any time during the term of this Agreement,
effective immediately upon the giving of a Notice of Termination, terminate his
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<PAGE> 7
employment hereunder. For purposes of this Agreement, a Resignation For Good
Reason shall be deemed to be a termination without Cause.
7. Compensation Upon Termination or During Disability.
(a) Death. If Employee's employment shall be terminated by
reason of his death, Employer shall, within 90 days of death, pay a lump sum
death benefit to such person as he shall designate in a notice filed with
Employer or, if no such person shall be designated, to his estate. The amount of
such death benefit shall be equal to his salary, plus a bonus equal to the bonus
paid to Employee for the previous year multiplied by a fraction, the numerator
of which is the number of days in the current year prior to Employee's death and
the denominator is 365, and any amounts payable pursuant to Section 3(c) to the
date of his death which, at the date of death, are accrued and unpaid.
(b) Disability. During any period that Employee fails to
perform his duties hereunder as a result of incapacity due to physical or mental
illness, Employee shall continue to receive his salary and any amounts payable
pursuant to Section 3(c) until Employee's employment is terminated due to
disability pursuant to Subsection 6(b) hereof. Upon termination due to death
prior to a termination as specified in the preceding sentence, Subsection 7(a)
above shall apply. For periods of time after termination pursuant to Subsection
6(b) hereof, any disability payments which Employee may be entitled to receive
pursuant to any employee benefit plan or arrangement provided by Employer shall
be paid pursuant to the terms of such plan or arrangement.
(c) Without Cause. If Employee's employment shall be
terminated by Employer without Cause, (i) Employer shall, through the Date of
Termination, continue to pay Employee his salary and amounts payable or accrued
pursuant to Section 3(c) and (ii) Employer shall, after the date of Termination,
pay to Employee for a period of one year from the Date of Termination, his
salary (but, subject to applicable law, no additional payments contemplated by
Section 3) in effect on the Date of Termination, such payments to be made in
installments substantially similar to those made to Employee prior to the Date
of Termination; provided, however, if termination without Cause occurs within
six months of a Change of Control (as defined in the Stockholders Agreement)
Employee shall also be entitled to receive a lump sum payment equal to his bonus
for the immediately preceding year. Employee shall also continue to participate
in the Health Benefits programs of Employer during the one-year period following
the Date of Termination. Payments or other benefits received by Employee
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<PAGE> 8
after the Date of Termination but during the period in which Employer is
obligated to continue to make payments to Employee as provided above which
result from or are in connection with any prior or future employment or business
activities of the Employee shall not reduce Employer's liability hereunder.
Failure to renew this Agreement upon expiration of the Term shall not be deemed
to constitute a termination without Cause.
(d) Cause. If Employee's employment shall be terminated for
Cause, Employer shall, through the Date of Termination, continue to pay Employee
his salary and amounts payable pursuant to Section 3(c), provided, however, that
Employee shall not be entitled to receive any bonus upon a termination for Cause
and shall not be entitled to receive any amounts payable with respect to the
period following the Date of Termination.
(e) Resignation. If Employee's employment shall be
terminated by reason of resignation pursuant to Subsection 6(g) hereof, Employer
shall continue to pay Employee his base salary through the Date of Termination,
but Employee shall not be entitled to receive any bonus if he resigns and shall
not be entitled to receive any amounts payable with respect to the period
following the Date of Termination. If Employee's employment is terminated by
reason of Resignation For Good Reason, the provisions of Subsection 7(c) shall
apply.
(f) Effect of Payments. The payments provided hereunder
shall fully discharge Employer's obligations under this Agreement. Employee
acknowledges and agrees that the provisions of this Agreement state his entire
and exclusive rights, entitlements and remedies against Employer and its
successors, assigns, affiliates and representatives for any termination of this
Agreement. As a material inducement to Employer to enter into this Agreement,
Employer represents to Employer that he will make no other claims in any such
event.
8. Noncompetition.
(a) During the period (the "NONCOMPETITION PERIOD") commencing
on the date hereof and ending on the earlier of (i) the fifth anniversary
hereof; (ii) the termination of employment of Employee without Cause or (iii)
the consummation of a Change of Control Transaction, Employee shall not,
directly or indirectly, own, manage, operate, join, advise, control or otherwise
engage or participate in or be connected as an officer, employee, partner,
creditor, guarantor, advisor of, or consultant to, any business which may
compete against the business (the "BUSINESS") of Employer and/or its Affiliates,
including, without limitation, the businesses of operating and managing a
mortgage real estate investment trust
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<PAGE> 9
in the United States (the "MARKET AREA"). Notwithstanding the foregoing, (x)
Employee may work or perform services for Employer and its Affiliates, (y)
Employee may work or perform services for a financial institution or similar
entity which is involved in the mortgage business so long as such entity is not
engaged primarily in managing a real estate investment trust or originating and
selling mortgages and (z) Employee may own securities in any publicly held
corporation, but only to the extent Employee does not own of record or
beneficially more than 1% of the outstanding beneficial ownership of such
corporation. For purposes of the non-competition covenants set forth in Section
8 hereof, Affiliates of Employer shall not include McCown De Leeuw & Co. or
Crescent or their portfolio companies other than Employer, NewREIT and their
subsidiary companies.
(b) Non-Solicitation of Employees. During the Noncompetition
Period, Employee shall not, either on his own account or for any person, firm or
company, solicit, interfere with, or endeavor to cause any employee of the
Business, Employer or any Affiliate to leave his or her employment or induce or
attempt to induce any such employee to terminate or breach his or her employment
agreement.
(c) Non-Solicitation of Customers. During the Noncompetition
Period, Employee shall not induce or attempt to induce any customer of the
Business, Employer or any Affiliate, to cease doing business in whole or in part
with Employer or any Affiliate.
(d) Payments for Noncompetition Covenants. In consideration of
the noncompetition and non-solicitation covenants contained in Sections 8(a) of
this Agreement, Employer shall pay to Employee an amount equal to 25% of
Employee's monthly salary in effect on the Date of Termination (the
"NONCOMPETITION PAYMENT") for each month during the Noncompetition Period
following the Date of Termination. Each Noncompetition Payment shall be made in
arrears on or before the last day of each month of the Noncompetition Period
following the Date of Termination. Each Noncompetition Payment shall be paid by
Employer by delivery of a check to Employee, or as may otherwise be agreed to by
Employer and Employee. All payments due to Employee under this Section 8(d)
shall be in addition to any payments due to Employee under Section 7 above.
Notwithstanding the forgoing, if Employer notifies Employee in writing in a
Notice of Termination or within ten business days of Employee's resignation that
it elects not to make the payments provided in this Section 8(d), then the
provisions of Section 8(a) shall cease to be enforceable against Employee
following the Date of Termination, subject, however, to Employee's fiduciary
obligations as an officer of Employer and the provisions of
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<PAGE> 10
any Confidentiality and Non-Disclosure Agreements between Employee and Employer.
If Employer does not notify Employee as provided in the immediately proceeding
sentence, then Employer shall be obligated to continue to make monthly payments
hereunder for a minimum of six months. Employer may elect to terminate monthly
payments hereunder upon six months' written notice to Employee and upon
termination of such payments, the provisions of Section 8(a) shall cease be
enforceable against Employee following, subject, however, to Employee's
fiduciary obligations as an officer of Employer and the provisions of Employee's
Confidentiality Agreement previously executed and delivered.
9. Stay of Time. In the event Employee violates the provisions
of Section 8 of this Agreement, the running of the time period of such
provisions so violated shall be automatically suspended upon the date of such
violation and shall resume on the date such violation permanently ceases.
10. Injunctive Relief. The remedy at law for any breach of
this Agreement is and will be inadequate, and in the event of a breach or
threatened breach by Employee of the provisions of this Agreement, Employer or
its Affiliates shall be entitled to seek an injunction restraining Employee from
violating the provisions of this Agreement. Nothing herein contained shall be
construed as prohibiting Employer, its Parent or its Affiliates from pursuing
any other remedies available to it or them for such breach or threatened breach,
including without limitation, the recovery of damages from Employee.
11. Separate Covenants. The non-solicitation provisions of
this Agreement shall be deemed to consist of a series of separate covenants, one
for each line of business carried on by Employer and its Affiliates. The parties
expressly agree that the character and duration of such provisions in this
Agreement are reasonable in light of the circumstances as they exist on the date
upon which this Agreement has been executed. However, should a determination
nonetheless be made by a court of competent jurisdiction at a later date that
the character or duration of such provisions is unreasonable in light of the
circumstances as they then exist, then it is the intention and the agreement of
Employee and Employer that such non-solicitation provisions of this Agreement
shall be construed by the court in such a manner as to impose only those
restrictions on the conduct of Employee which are reasonable in light of the
circumstances as they then exist and as are necessary to
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<PAGE> 11
assure Employer and its Affiliates of the intended benefits of this Agreement.
If, in any judicial proceeding, a court shall refuse to enforce all of the
separate covenants deemed included herein because, taken together they are more
extensive than necessary to assure Employer, its Parent and Affiliates of the
intended benefit of such non-solicitation provisions, it is expressly understood
and agreed between the parties hereto that those of such covenants which, if
eliminated, would permit the remaining separate covenants to be enforced in such
proceeding shall, for the purpose of such proceeding, be deemed eliminated from
the provisions hereof.
12. Employer's and Employee's Rights; Indemnification. This
Agreement shall not limit or prejudice in any manner whatsoever the rights which
Employer or Employee would have, in the absence of this Agreement, with respect
to any and all matters arising out of Employee's employment, except for such
matters that are specifically covered by the terms of this Agreement or are
mentioned herein. Employee shall be entitled to indemnification as an officer
and employee of Employer in accordance with the provisions of the Certificate of
Incorporation and Bylaws of Employer and applicable Delaware law.
13. Assignment/Sale. The rights and obligations of Employer
under this Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of Employer and any subsequent assignee. No assignment of
this Agreement by Employer shall relieve Employer of its obligations hereunder.
This Section shall be deemed to apply to any assignment by sale, merger,
consolidation, liquidation or otherwise.
14. Assignment by Employee. Employee may not assign this
Agreement or any of his rights hereunder except with the prior written consent
of Employer. This Agreement shall be binding upon Employee's heirs, executors,
administrators or other legal representatives and their legal assigns.
15. Benefits. If, in the sole and absolute discretion of the
Board of Directors of Employer, Employee is permitted to participate in any
other plan or agreement for eligible employees of Employer which is not
specifically referred to herein, or to receive any other employment benefits, it
is agreed that nothing contained in this Agreement shall affect the right of
Employer to terminate or modify any such plan or agreement, or other benefit in
whole or in part at any time and from time to time.
16. Entire Agreement; Modifications. This instrument, together
with the exhibits hereto, contains the entire agreement of the parties with
regard to matters covered herein. Standard policies of Employer applicable to
employees shall govern matters not set forth in this Agreement to the extent
they do not conflict with this Agreement. This
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<PAGE> 12
Agreement may not be changed or modified, or released, discharged, abandoned or
otherwise terminated, in whole or in part, except by an instrument in writing
approved by the Board of Directors of Employer, and signed by an officer of
Employer and by Employee.
17. Applicable Law. This Agreement and all matters or issues
collateral hereto shall be governed by the laws of the State of California
applicable to contracts made and to be performed entirely within such State.
18. Waiver. A waiver by either party of any of the terms or
conditions of this Agreement in any one instance shall not be deemed or
construed to be a waiver of such term or condition for the future, or of any
subsequent breach thereof. All remedies, rights, undertakings, obligations and
agreements contained in this Agreement shall be cumulative, and none of them
shall be in limitation of any other remedy, right, undertaking, obligation or
agreement of either party.
19. Notices. All notices required to be given hereunder shall
be given in writing, and may be personally delivered (including by facsimile),
sent by overnight courier or deposited with the U.S. postal authorities, return
receipt requested, addressed as follows:
If to Employer: Home Asset Management Corp.
445 Marine View Avenue, Suite 260
Del Mar, CA 92014
Attn: Chairman of the Board
with a copy to: McCown De Leeuw & Co.
101 East 52nd Street, 31st Floor
New York, NY 10022
Telecopy No.: (212) 355-6283
Attn: David De Leeuw
If to Employee Jay Fuller
6621 Camino Saucito
Rancho Santa Fe, CA 92067
Telecopy No.: (619) 756-5324
or to such other address as the parties may from time to time designate in
writing. Notices shall be deemed delivered on the day personally delivered or
sent by facsimile (with appropriate confirmation of transmission), or on the
fourth business day following deposit in the U.S. mail, return receipt
requested.
20. Compliance with Laws and Policies. Employee agrees that he
will at all times comply strictly with all
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<PAGE> 13
applicable laws and all current and future policies of Employer and its
Affiliates.
21. Employer Property. Upon termination or expiration of his
employment hereunder, Employee agrees to return to Employer all property of
Employer, any Parent and any Affiliate of which Employee has had custody and to
deliver to Employer all correspondence, management studies and other materials
and data relating to or connected with his employment hereunder.
22. Paragraph Headings. The paragraph headings in this
Agreement are for convenience only and shall not in any manner affect the
interpretation or construction of this Agreement or any of its provisions.
23. Attorneys Fees. If legal proceedings are required to
enforce this Agreement, the prevailing party shall be entitled to reasonable
attorneys fees.
24. Survival of Certain Provisions. The rights and obligations
of the parties under Sections 8 through 10, 21, 23 and 27 shall survive the
termination of this Agreement.
27. Enforcement. Employer shall have the right to separately
enforce the terms of this Agreement against Employee with respect to any breach
or threatened breach by Employee of the provisions hereof as provided herein.
28. Counterparts. This Agreement may be executed in
counterparts, each of which shall be an original and both of which, taken
together, shall constitute one and the same instrument.
29. Arbitration. Any dispute or claim arising out of or
relating to this Agreement which cannot be settled by negotiation between the
parties shall first be submitted to mediation, conducted in San Diego,
California, by a single, neutral mediator in accordance with the Commercial
Mediation Rules of the American Arbitration Association. In the event such
dispute or claim is not resolved by mediation within 30 days from the inception
thereof, then such dispute or claim shall be submitted to and settled
exclusively by final and binding arbitration, conducted in San Diego, California
in accordance with the Commercial Arbitration Rules of the American Arbitration
Association, as modified by any other instruments or agreements that the parties
hereto may execute at the time of or prior to the arbitration. The arbitration
shall be conducted by a single neutral arbitrator chosen by mutual agreement
between the parties; provided, however, that if the parties are unable to agree
upon an arbitrator, then the arbitration shall be conducted by a panel of three
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<PAGE> 14
arbitrators, Employer and Employee each shall choose one arbitrator, and the
third arbitrator shall be selected by the two arbitrators so chosen. The fees of
the American Arbitration Association and of the arbitrator or arbitrators shall
be borne by Employer.
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<PAGE> 15
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
HOME ASSET MANAGEMENT CORP.
By: _____________________________________
David E. De Leeuw,
President
- -------------------------------
Jay M. Fuller, Employee
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<PAGE> 16
FIRST AMENDMENT TO
EMPLOYMENT AND NON-COMPETITION AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AND NON-COMPETITION AGREEMENT (the
"Amendment") is entered into as of August ___, 1997 by and between Home Asset
Management Corp., a Delaware corporation ("Employer"), and Jay M.
Fuller ("Employee").
RECITALS
Employer and Employee entered into that certain Employment
and Noncompetition Agreement as of February 11, 1997 (the "Employment
Agreement");
Employer and American Residential Investment Trust, Inc., a
Maryland corporation (the "Company") entered into that certain Management
Agreement, dated February 11, 1997, and the First Amendment to Management
Agreement, dated August __, 1997 (collectively referred to hereinafter as the
"Management Agreement"), whereunder Employer agreed to provide certain
administrative services for the Company covered by the Employment Agreement;
The Company desires to employ, and Employee desires to be
employed by the Company, in order to provide certain services which Employer
must provide to the Company pursuant to the terms of the Management Agreement;
and
In consideration for Company's employment of Employee to
perform certain obligations of Employer under the Management Agreement, Employer
and Employee agree to amend the Employment Agreement on the terms and conditions
set forth herein.
NOW, THEREFORE, in consideration of the mutual promises herein
set forth and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Adjustments to Compensation.
Employer shall be entitled to reduce any payments due to
Employee under Paragraph 3 of the Employment Agreement by an amount equal to the
total compensation paid to Employee by the Company pursuant to the terms of the
Management Agreement.
2. Termination by the Company.
If Employee's employment should be terminated by the Company
at any time prior to termination of the Management Agreement, the provisions of
Paragraph 1 of this Amendment shall be of no further force or effect.
<PAGE> 17
Except as expressly modified by this Amendment, all other terms and
provisions of the Employment Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
HOME ASSET MANAGEMENT CORP.
By: _______________________________________
David E. De Leeuw, President
EMPLOYEE
-------------------------------------------
Jay M. Fuller
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<PAGE> 1
EXHIBIT 10.4
HOME ASSET MANAGEMENT CORP.
August 5, 1997
Mr. Mark A. Conger
American Residential Investment Trust, Inc.
445 Marine View Avenue, Suite 230
Del Mar, CA 92014
Re: Employment by American Residential Trust, Inc. (the "Company")
Dear Mark:
The purpose of this letter is to advise you that certain payment
obligations of Home Asset Management Corp. ("HAMCO") set forth under the letter
of employment addressed to you dated January 7, 1997 (the "Employment Letter")
have been assumed by the Company pursuant to an amendment to the Management
Agreement between HAMCO and the Company (the "Management Agreement"). Under the
terms of the Management Agreement, should you also be employed by the Company,
HAMCO will be entitled to offset any compensation paid by the Company in
assessing its obligations to you. While your total compensation as set forth
under the Employment Letter will remain unchanged, payment may now be made by
either the Company, HAMCO or both. Employment by the Company shall be deemed
employment by HAMCO under the Employment Letter and any option or other
compensation agreements.
In order to acknowledge you have been informed of this change to your
employment arrangement with HAMCO, please sign this letter where indicated below
and return it to me. Should you have any questions regarding this letter, please
feel free to contact me.
Thank you for your cooperation in these regards.
HOME ASSET MANAGEMENT CORP.
By:______________________________________
Jay M. Fuller, Chief Operating Officer
ACKNOWLEDGED AND AGREED TO:
Dated: August ___, 1997
By:______________________________
Mark A Conger
<PAGE> 1
EXHIBIT 10.5
HOME ASSET MANAGEMENT CORP.
[Address]
August 5, 1997
Mr. Rollie O. Lynn
c/o American Residential Investment Trust, Inc.
445 Marine View Avenue, Suite 230
Del Mar, CA 92014
Re: Employment by American Residential Trust, Inc. (the "Company")
Dear Rollie:
The purpose of this letter is to advise you that certain payment
obligations of Home Asset Management Corp. ("HAMCO") set forth under the letter
of employment addressed to you dated January 7, 1997 (the "Employment Letter")
have been assumed by the Company pursuant to an amendment to the Management
Agreement between HAMCO and the Company (the "Management Agreement"). Under the
terms of the Management Agreement, should you also be employed by the Company,
HAMCO will be entitled to offset any compensation paid by the Company in
assessing its obligations to you. While your total compensation as set forth
under the Employment Letter will remain unchanged, payment may now be made by
either the Company, HAMCO or both. Employment by the Company shall be deemed
employment by HAMCO under the Employment Letter and any option or other
compensation agreements.
In order to acknowledge you have been informed of this change to your
employment arrangement with HAMCO, please sign this letter where indicated below
and return it to me. Should you have any questions regarding this letter, please
feel free to contact me.
Thank you for your cooperation in these regards.
HOME ASSET MANAGEMENT CORP.
By:______________________________________
Jay M. Fuller, Chief Operating Officer
ACKNOWLEDGED AND AGREED TO:
Dated: August ___, 1997
By:_________________________________
Rollie O. Lynn
<PAGE> 1
EXHIBIT 10.6
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
1997 STOCK INCENTIVE PLAN
1. ESTABLISHMENT AND PURPOSE. American Residential Investment
Trust, Inc., a Maryland corporation (the "Company"), hereby establishes its 1997
Stock Incentive Plan as of February 11, 1997. The Plan is designed to enable the
Company to attract, retain and motivate members of the management and certain
other officers and key employees of the Company and its Subsidiaries, by
providing for or increasing their proprietary interest in the Company. The Plan
provides for the grant of options ("Options") that qualify as incentive stock
options ("Incentive Options") under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), as well as Options that do not so qualify
("Non-Qualified Options") and for the grant of stock appreciation rights ("Stock
Appreciation Rights"). Options may also be granted under the Plan in connection
with the acquisition, by purchase, lease, merger, consolidation or otherwise, of
the business and assets of any corporation, firm or association, including
Options granted to employees thereof who become employees of the Company, a
Parent or a Subsidiary.
2. DEFINITIONS.
a. "Board" means the Board of Directors of the
Company.
b. "Change of Control Transaction" means a "Change of
Control Transaction" (as defined in the Amended and Restated
Limited Liability Company Agreement of MDC REIT Holdings, LLC,
dated as of February 11, 1997, by and among the members listed
on Schedule 1 thereto, as amended from time to time) or a
transaction, approved or agreed to by the holders of a
majority of the outstanding shares of Common Stock, in which
all of the business or assets of the Company, or a majority of
the shares of Common Stock, are sold or otherwise transferred
in an arm's-length transaction in which the form and amount of
consideration per share, if any, payable to the holders of
Common Stock is distributed pro rata based upon ownership of
such Common Stock and in which the other significant terms of
the transaction (including, but not limited to,
indemnification or escrow arrangements) apply, in all material
respects, equally to the holders of a majority of the
outstanding shares of Common Stock and to Optionee. The
assumption by such majority stockholders of greater potential
liability in a Change of Control Transaction than the
Optionee shall be deemed to constitute equal treatment.
A change of control
<PAGE> 2
Transaction may take the form of a majority of the outstanding
voting stock of the Company, a merger or consolidation in
which the holders of the outstanding voting stock of the
Company before the transaction do not own a majority of the
outstanding voting stock of the combined entity or a sale of
all the business assets of the Company (other than an
insignificant amount of immaterial assets).
c. "Code" means the Internal Revenue Code of 1986, as
amended.
d. "Committee" means the Committee of the Board
established to direct and administer the Plan as provided in
Section 3 hereof.
e. "Common Stock" shall mean the Company's Common
Stock.
f. "Date of Grant" means the effective date of the
agreement relating to an Option or a Stock Appreciation Right.
g. "Eligible Person" means (i) a person who is
eligible to receive an Incentive Option, which shall include
only persons employed by the Company, a Parent or a
Subsidiary, and (ii) a person who is eligible to receive a
Non-Qualified Option, which shall include any person eligible
to receive an Incentive Option and any director of the Company
or any consultant or other person who may be expected to
contribute to the success of the Company, a Parent or a
Subsidiary, as selected by the Board or the Committee. Any
Eligible Person may receive a Stock Appreciation Right.
h. "Exchange Act" means the Securities Exchange Act
of 1934, as amended.
i. "Exercise Price" means the price at which Stock
may be purchased upon exercise of an Option or the price of
Stock with respect to which the value of a Stock Appreciation
Right is measured.
j. "Fair Market Value." Under this Plan, the "Fair
Market Value" of the Stock shall be defined as the fair market
value of the Common Stock and shall be determined in the
following manner: (i) if the Common Stock is traded on the
Nasdaq National Market or listed on any stock exchange, Fair
Market Value shall be the closing sale price on the relevant
date as reported in the Wall Street Journal (or if there are
no sales for such date, then for the last preceding
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business day on which there were sales); or (ii) if the Common
Stock is not publicly traded, Fair Market Value shall be an
amount per share determined on the basis of the price at which
shares of the Common Stock could reasonably be expected to be
sold in an arms-length transaction, for cash, other than on an
installment basis, to a person not employed by, controlled by,
in control of or under common control with the Company. This
determination shall be made by the Board, giving due
consideration to recent transactions involving shares of the
Common Stock, if any, earnings of the Company to the date of
such determination, the effect of the transfer restrictions to
which the Option shares are subject under law and this Plan,
the absence of a public market for the Common Stock, and such
other matters as the Board deems pertinent. This determination
shall be conclusive and binding on the parties.
k. "Option" means a right granted under the Plan to
purchase Stock.
l. "Option Agreement" means the written agreement
pursuant to which an Option or Stock Appreciation Right is
granted under the Plan.
m. "Optionee" means the person to whom an Option or
Stock Appreciation Right under the Plan has been or is to be
granted.
n. "Parent" means any corporation in an unbroken
chain of corporations ending with the Company each of which,
other than the Company, owns 50% or more of the total combined
voting power of all classes of stock in one of the other
corporations in such chain.
o. "Participant" means each Eligible Person who has
been granted an Option or Stock Appreciation Right.
p. "Plan" means this 1997 Stock Incentive Plan, as
the same may be amended from time to time in accordance with
the terms hereof.
q. "Securities Act" means the Securities Act of 1933,
as amended.
r. "Stock" means shares of the Common Stock of the
Company, and such other stock as may be substituted therefor
in accordance with the adjustment provisions of the Plan.
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s. "Stock Appreciation Right" means a right granted
under the Plan to receive, either in cash or Stock, the
excess, if any, of the Fair Market Value of the Stock on the
date of exercise over the Exercise Price.
t. "Subsidiary" means any corporation in an unbroken
chain of corporations beginning with the Company each of
which, other than the last corporation in the unbroken chain,
owns 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such
chain.
u. "10% Stockholder" means a person who owns Stock
possessing more than ten percent (10% ) of the total combined
voting power of all classes of stock of the Company, a Parent
or a Subsidiary (as interpreted under Section 422 of the
Code). For purposes of determining whether a person is a 10%
Stockholder, the attribution rules of Section 424(d) of the
Code shall apply.
3. ADMINISTRATION. The Plan shall be administered by the Board
or, in the discretion of the Board, by a Committee of not less than two persons
selected by the Board. The Board may from time to time remove members from, or
add members to, the Committee. Vacancies on the Committee, howsoever caused,
shall be filled by the Board. The Committee may select one of its members as its
chairman and shall hold its meetings at such times and places as it may
determine. A majority of its members shall constitute a quorum. The composition
of the Committee shall at all times comply with applicable requirements of the
Code or regulations promulgated under the Exchange Act.
All determinations of the Committee shall be made by not less
than a majority of its members. Any decision or determination reduced to writing
and signed by all of the members of the Committee shall be fully as effective as
if it had been made by a majority vote at a meeting duly called and held. The
Committee may appoint a secretary, shall keep minutes of its meetings and shall
make such rules and regulations for the conduct of its business as it shall deem
advisable.
The interpretation and construction by the Committee of any
provision of the Plan or of any Option or Stock Appreciation Right granted
hereunder shall be final and binding upon Optionees and their respective
successors, unless otherwise determined by the Board, in which case such
determination of the Board shall be final and binding. No member of the Board or
the Committee shall be liable for any action or determination made in good
faith. The Board or the Committee may from time to time adopt rules and
regulations for carrying out the Plan and, subject to the
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<PAGE> 5
provisions of the Plan, may prescribe the form or forms of the instruments
evidencing any Option or Stock Appreciation Right granted under the Plan.
Subject to the provisions of the Plan, the Board or the
Committee shall have full and final authority in its discretion to select the
Eligible Persons to be granted an Option or Stock Appreciation Right, to grant
such Option or Stock Appreciation Right, and to determine the number of shares
to be subject thereto, whether the Option shall be an Incentive Option or a
Non-Qualified Option, the Exercise Price, the terms of exercise (including
establishing performance criteria for the exercise of options), the expiration
date, and such other terms and provisions thereof as it may authorize, each of
which terms may be different for each Option or Stock Appreciation Right.
4. STOCK SUBJECT TO THE PLAN. Subject to adjustment as
provided in Sections 14 and 15 hereof, the maximum number of shares of Stock
which may be issued upon exercise of Options and Stock Appreciation Rights
granted hereunder shall be 394,000 shares (the "Option Shares"). The settlement
of a Stock Appreciation Right for cash shall not reduce the maximum number of
shares of Stock issuable under the Plan. Shares of Stock issued under the Plan
which are repurchased by the Company upon termination of an Optionee's
employment or association with the Company and shares of Stock subject to
Options that expire or are otherwise terminated without exercise shall again
become available for issuance pursuant to Options or Stock Appreciation Rights
granted under the Plan. Shares of Stock delivered by the Company upon exercise
of any Option or Stock Appreciation Right granted hereunder may be authorized
and unissued Stock or previously outstanding Stock which has been reacquired by
the Company. No Option or Stock Appreciation Right shall be exercisable except
in respect of whole shares of Stock. In no event shall Options exercisable for
more than 175,000 shares of Common Stock be granted to an Eligible Person in any
one year.
The term "Vested Option Shares," as used in this Plan, shall
refer to the portion of an Option or Stock Appreciation Right that has become
exercisable but has not yet been exercised. All Vested Option Shares shall
accumulate and be exercisable, in whole or in part, in any subsequent
installment period but in no event later than the tenth anniversary of the date
the Option is granted (the "Termination Date").
5. GRANT OF OPTIONS AND STOCK APPRECIATION RIGHTS. Subject to
the provisions of the Plan, the Board or the Committee shall, from time to time,
select from among the Eligible Persons those persons, who, in the opinion of the
Board or the Committee, are or will be responsible for the continued or
prospective growth, development, financial security and success of the business
of the Company, a Parent or a Subsidiary, to whom
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Options and Stock Appreciation Rights may be granted. No Incentive Options shall
be granted to any Eligible Person who is not an employee of the Company, a
Parent or a Subsidiary.
No Incentive Option shall be granted to any Optionee if, as a
result of the grant of such Incentive Option, during any calendar year, shares
of Stock becoming exercisable for the first time in such calendar year under all
Incentive Options granted to such Optionee will have an aggregate Fair Market
Value of in excess of $100,000. For purposes of making the foregoing
calculation, the aggregate Fair Market Value of Stock shall be determined as of
the Date of Grant of the Incentive Options relating to such Stock.
The Board or the Committee may, under such terms and
conditions as it deems appropriate, grant to any Eligible Employee selected by
the Committee Stock Appreciation Rights, which may or may not be associated with
Options. Upon exercise of a Stock Appreciation Right, the Optionee shall be
entitled to receive payment of an amount equal to the excess of the Fair Market
Value, of the underlying Stock on the date of exercise over the Exercise Price
of the Stock Appreciation Right. If the Option Agreement so provides, such
payment may be made in shares of Stock valued at their fair market value on the
date of exercise or in cash, or partly in shares of Stock and partly in cash, as
the Board or the Committee may designate. The Board or the Committee may further
impose such conditions on the exercise of Stock Appreciation Rights as may be
necessary or desirable to comply with applicable provisions of the Exchange Act
or the Code.
6. EMPLOYMENT OBLIGATIONS FOR OPTIONS AND STOCK APPRECIATION
RIGHTS. As consideration for the granting of any Option or Stock Appreciation
Right hereunder, any Optionee who is also an employee of the Company, a Parent
or a Subsidiary shall agree in the applicable Option Agreement or any other
written agreement between the Optionee and the Company, Parent or Subsidiary, as
the case may be, that, during the period of his or her employment by the
Company, Parent or Subsidiary, he or she shall faithfully and to the best of his
or her ability devote his or her time, energy and skill during all normal
working hours to the service of the Company, Parent or Subsidiary, and the
promotion of its interests, subject to vacations, military service leave, sick
leave and other bona fide absences in accordance with the regular policies and
practices of the Company, Parent or Subsidiary, or any written agreement between
the Optionee and the Company, Parent or Subsidiary. Nothing herein or in any
Option Agreement shall confer upon an Optionee any right with respect to
continued employment or limit his or her or the Parent's, the Company's or the
Subsidiary's rights to terminate his or her employment.
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7. DURATION OF PLAN. Options and Stock Appreciation Rights may
be granted as provided in the Plan at such time or times as may be determined by
the Board or the Committee, but any such grants must be made at or prior to the
close of business on the tenth anniversary date of the effective date of the
Plan (as provided in Section 1). All Options and Stock Appreciation Rights
outstanding on that date shall continue to be administered in accordance with
their respective terms. However, no Option or Stock Appreciation Right shall be
granted under the Plan after such date.
8. OPTION PERIOD. The expiration date of any Option shall be
not later than the tenth anniversary date of the Date of Grant. The expiration
date of any Incentive Option granted to an Optionee who, on the Date of Grant of
the Option, is a 10% Stockholder, shall not be later than the fifth anniversary
of the Date of Grant.
9. OPTION EXERCISE PRICE. The Exercise Price of the Stock
under any Incentive Option, Non-Qualified Option or Stock Appreciation Right
granted hereunder shall be at least 100% of the Fair Market Value of the Stock
at the Date of Grant of the Option or Stock Appreciation Right; provided,
however, that if, at the time an Incentive Option is granted, the Optionee to
whom it is granted is a 10% Stockholder, the Exercise Price for such Option
shall be at least 110% of the Fair Market Value of the Stock at the Date of
Grant of such Option. Subject to the general limitations of the Plan, and with
the consent of the Optionee, the Board or the Committee may make any adjustment
in the Exercise Price, the number of shares subject to, the timing of exercise,
or the term of an Option by cancellation of an outstanding Option and a
subsequent regranting of an Option, or by amendment or substitution of an
outstanding Option. An Option which has been so amended, substituted or
regranted may have a higher or lower Exercise Price, cover a greater or lesser
number of shares of Stock, or have a longer or shorter term than the Option it
replaced, but its Exercise Price shall in no event be less than 100% or 110%, as
the case may be, of the Fair Market Value of the Stock at the date of amendment,
substitution or regrant of the Option.
10. EXERCISE OF OPTIONS AND STOCK APPRECIATION RIGHTS. The
Board or the Committee shall have full authority, in its discretion, to
prescribe in any Option Agreement for an Option or Stock Appreciation Right
granted under the Plan that the subject Option or Stock Appreciation Right will
be exercisable in full at any time or from time to time during the term of the
Option or Stock Appreciation Right, to provide that the Option or Stock
Appreciation Right will be exercisable in such installments and at such times
during the term of the Option or Stock Appreciation Right as the Board or the
Committee may determine, or to specify additional performance based conditions
which the Optionee must
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fulfill in order to exercise the Option or Stock Appreciation Right. The holder
of an Option or Stock Appreciation Right shall not have any of the rights of a
stockholder with respect to the shares covered by the Option or Stock
Appreciation Right until shares are issued to him or her upon the exercise of
the Option or Stock Appreciation Right.
Payment for Stock purchased upon exercise of an Option shall
be made in full at the time of exercise, in cash or by check, bank draft, or
postal or express money order payable, in each case, to the order of the Company
in lawful money of the United States, or if the Option Agreement with respect to
the Option so provides or the Board or the Committee, in its discretion,
otherwise permits the Optionee to do so, an Optionee may deliver shares of Stock
of the Company which he or she has previously acquired, other than the shares of
Stock acquired upon exercise of the Option. Shares of Stock delivered in payment
of the Exercise Price of an Option shall be valued at the Fair Market Value of
the Stock determined as of the date such Option is exercised. Notwithstanding
the foregoing, the Committee may, in its discretion, (i) allow the exercise of
an Option in a broker-assisted or similar cashless exercise transaction in which
the Exercise Price is not received by the Company until immediately after
exercise, and/or (ii) allow the Company to loan the Exercise Price to the
Optionee at the time of exercise, if the exercise will be followed by an
immediate sale of some or all of the underlying shares and a portion of the
sales proceeds is dedicated to full payment of the Exercise Price and any
required withholding amounts.
11. RIGHTS OF REPURCHASE. So long as the Stock is not listed
on any national securities exchange or the Nasdaq National Market, the Company
may reserve for itself (i) a right of first refusal on any sale or disposition
of shares of Stock acquired upon exercise of an Option (provided that if the
Company chooses to repurchase such shares of Stock, it will do so on terms
equivalent to those of a bona fide offer by an intended transferee), and (ii) a
right to repurchase shares of Stock acquired upon exercise of an Option if an
Optionee's employment or association with the Company, a Parent or a Subsidiary
is terminated for any reason, or in other circumstances, at the Fair Market
Value thereof. Unless and until a public market exists for the Stock, each
certificate representing shares of Stock subject to such provisions shall bear a
legend to the effect that such shares are subject to certain repurchase rights
of the Company. In addition, Stock issued upon exercise of an Option or Stock
Appreciation Right shall be subject to all restrictions contained in any
stockholders agreement among the Company and its stockholders as in effect from
time to time.
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12. LIMITATIONS. All Options and Stock Appreciation Rights
granted under the Plan shall be subject to the following limitations:
a. Termination of Employment or Association: If the
Optionee's employment by or association with the Company, a
Parent or a Subsidiary is terminated, whether voluntarily or
involuntarily, for any reason other than death, disability or
for Cause, as defined below, the Option or Stock Appreciation
Right may be exercised by the Optionee, to the extent it is
otherwise exercisable on the effective date of such
termination, during a period not to exceed 90 days after such
termination date or such shorter period as specified in the
applicable Option Agreement, and at the expiration of such
period, the Option or Stock Appreciation Right shall
terminate.
b. Disability of Optionee: If the Optionee's
employment by or association with the Company, a Parent or a
Subsidiary is terminated as a result of the Optionee becoming
disabled while employed by or associated with the Company, a
Parent or a Subsidiary, the Option or Stock Appreciation Right
may be exercised, to the extent it is exercisable on the
effective date of such termination, during a period of six
months after such termination date, and at the expiration of
such period, the Option or Stock Appreciation Right shall
terminate.
c. Death of Optionee: If the Optionee shall die while
employed by or associated with the Company, a Parent or a
Subsidiary, or during the applicable exercise period provided
for in subsection (b) above, the Option shall terminate on the
date of death, except that the portion of the Option or Stock
Appreciation Right exercisable at the date of death may be
exercised by the Optionee's legal representative or
transferees by will or the laws of descent and distribution
during a period of one year following the date of death.
d. Termination for Cause: If the Optionee's
employment by or association with the Company, a Parent or a
Subsidiary is terminated for Cause, the Option or Stock
Appreciation Right shall terminate immediately upon
termination of employment. Employment or association shall be
deemed terminated for Cause if the Optionee is determined by
the Board of Directors of the Company to have willfully
breached his or her duty in the course of employment or
association or to have committed an act of embezzlement,
fraud, dishonesty or deliberate disregard of the rules of the
Company, a
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Parent or a Subsidiary or engaged in any conduct which
constitutes unfair competition with the Company, a Parent or a
Subsidiary.
e. Notwithstanding subsections (a), (b), (c) and (d)
above, an Option or Stock Appreciation Right may not be
exercised after its term has expired.
13. NONTRANSFERABILITY OF OPTIONS. Any Option or Stock
Appreciation Right granted under the Plan shall by its terms be nontransferable
by the Optionee other than by will or according to the laws of descent and
distribution and is exercisable during the Optionee's lifetime only by the
Optionee. Under such rules and regulations as the Board or the Committee may
establish pursuant to the terms of this Plan, a beneficiary may be designated
with respect to an Option or Stock Appreciation Right grant in the event of the
death of an Optionee. If the estate of the Optionee is the beneficiary with
respect to the grant, any rights with respect to such grant may be transferred
to the person or entity (including a trust) entitled thereto under the will of
such Optionee or pursuant to the laws of descent and distribution.
14. ADJUSTMENTS. If outstanding shares of the Stock are
increased or decreased, or are changed into or exchanged for a different number
or kind of shares or securities of the Company, through reorganization,
recapitalization, reclassification, stock dividend, stock split, or reverse
stock split, merger or consolidation, an appropriate and proportionate
adjustment shall be made in the maximum number and/or type of shares or
securities as to which Options or Stock Appreciation Rights may be granted under
the Plan. A corresponding adjustment changing the number and/or type of shares
or securities allocated to unexercised Options or Stock Appreciation Rights, or
portions thereof, which shall have been granted prior to any such change, shall
likewise be made. Any such adjustment in outstanding Options or Stock
Appreciation Rights shall be made without change in the aggregate Exercise Price
applicable to the unexercised portion of such Options or Stock Appreciation
Rights, but a corresponding adjustment in the Exercise Price for each share or
other unit of any security covered by the Option or Stock Appreciation Right
shall be made. Adjustments under this Section 14 shall be made by the Board, and
its determinations as to what adjustments shall be made, and the extent thereof,
shall be final and binding. The grant of an Option or Stock Appreciation Right
pursuant to the Plan shall not affect in any way the right or power of the
Company to make adjustments, reclassifications, reorganizations or changes of
its capital or business structure or to merge, consolidate, dissolve or
liquidate, or to sell or transfer all or any part of its business or assets.
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15. TERMINATING TRANSACTIONS. Upon the dissolution or
liquidation of the Company or the consummation of a Change of Control
Transaction (as defined in that certain Amended and Restated Limited Liability
Company Agreement of MDC REIT Holdings, LLC, dated as of February 11, 1997, by
and among the members listed on Schedule 1 thereto, as amended from time to
time), (any of which shall be deemed hereunder to constitute a "Terminating
Transaction"), the Plan and any Option or Stock Appreciation Right theretofore
granted hereunder shall then terminate, unless provision is made in writing in
connection with such Terminating Transaction for the continuance of the Plan
and/or for the assumption of the Options or Stock Appreciation Rights
theretofore granted, or the substitution for such Options of options covering
the securities of a successor corporation, or a parent or a subsidiary thereof,
with appropriate adjustments as to the number and type of shares covered by, and
the exercise prices of, such options, in which event the Plan and Options or
Stock Appreciation Rights theretofore granted hereunder shall continue in the
manner and under the terms so provided. If the Plan and Options or Stock
Appreciation Rights theretofore granted hereunder terminate pursuant to the
foregoing sentence, either (i) the Plan administrator shall provide, in its
discretion, for the payment in cash or other property for the unexercised
portions of any Optionee's Vested Option Shares, or (ii) all persons entitled to
exercise any unexercised portions of their Vested Option Shares then outstanding
shall have the right, at such time prior to the consummation of the Terminating
Transaction as the Company shall designate, to exercise the unexercised portion
of their Vested Option Shares (but not, in either case, any unvested Options or
Stock Appreciation Rights, unless Optionee's Option Agreement relating thereto
specifically permits the exercise of unvested Options or Stock Appreciation
Rights in such circumstances).
16. GOVERNMENT AND STOCK EXCHANGE REGULATIONS. The Company
shall not be required to issue any shares of Stock upon the exercise of any
Option or Stock Appreciation Right unless and until any then applicable
requirements of the Securities and Exchange Commission or other regulatory
agencies having jurisdiction with respect to such issuance, and of any exchanges
upon which the Stock may be listed, shall have been fully complied with. All
Options and Stock Appreciation Rights issued pursuant to the Plan are subject to
all such requirements.
Upon the exercise of an Option or Stock Appreciation Right at
a time when there is not in effect a registration statement under the Securities
Act relating to the shares of Stock issuable upon exercise thereof and available
for delivery a prospectus meeting the requirements of Section 10(a)(3) of the
Securities Act, or, if the rules or interpretations of the Securities and
Exchange Commission otherwise so require, such shares may be issued only if the
holder represents and warrants
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in writing to the Company that the shares are being acquired for investment and
not with a view to the distribution thereof, and any certificates issued upon
exercise of the Option or Stock Appreciation Right shall bear appropriate
legends setting forth the restrictions on transfer of such shares.
17. WITHHOLDING TAXES. Whenever shares of stock or cash are to
be issued by reason of the exercise of an Option or Stock Appreciation Right,
the Company, in its discretion, may require the Optionee to remit to the
Company, prior to the delivery of any certificate or certificates for such
shares or such cash, all or any part of an amount determined in its discretion
by the Company to be sufficient to satisfy federal, state and local withholding
tax requirements which the Company, or its counsel, determine may be payable
with respect to such exercise. At the discretion of the Board or Committee,
payment of withholding taxes may be made by delivery of Stock(valued at their
respective Fair Market Values as of the date of delivery) to the Company.
18. NO RIGHTS AS STOCKHOLDER. No Optionee or permitted
transferee of an Option or Stock Appreciation Right shall have any rights as a
stockholder with respect to any of the shares of Stock subject to the Option or
Stock Appreciation Right until the date of issuance of a stock certificate for
such shares. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distributions
or other rights for which the record date is prior to the date such stock
certificate is issued, except as provided in Sections 14 and 15, above.
19. AMENDMENT AND TERMINATION OF THE PLAN. The Board may
alter, amend, suspend or terminate the Plan, provided that no such action shall
deprive an Optionee, without his or her consent, of any Option or Stock
Appreciation Right or any of the rights thereunder granted to the Optionee
pursuant to the Plan. Except as herein provided, no such action of the Board,
unless taken with the approval of the stockholders of the Company holding a
majority of its voting power and, if applicable, as required pursuant to Rule
16b-3 under the Exchange Act, Sections 422 and 162(m) of the Code, or other
applicable provisions of or rules under the Code, may:
(a) increase the total number of shares reserved for
issuance under the Plan, other than pursuant to adjustments
under Sections 14 and 15 hereof;
(b) materially increase the benefits accruing to
participants under the Plan;
(c) extend the termination date of the Plan set forth
herein; or
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(d) alter the class of persons eligible to receive
Options or Stock Appreciation Rights under the Plan.
20. NATURE OF PLAN. This Plan is intended to qualify as a
compensatory benefit plan within the meaning of Rule 701 under the Securities
Act. This Plan is intended to constitute an unfunded arrangement for a select
group of management or other key employees.
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EXHIBIT 10.7
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
1997 STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The American Residential Investment
Trust, Inc. 1997 Stock Option Plan (the "PLAN") is hereby established effective
as of August 6, 1997.
1.2 PURPOSE. The purpose of the Plan is to advance the
interests of the Participating Company Group and its stockholders by providing
an incentive to attract, retain and reward persons performing services for the
Participating Company Group and by motivating such persons to contribute to the
growth and profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect
until the earlier of its termination by the Board or the date on which all of
the shares of Stock available for issuance under the Plan have been issued and
all restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed. However, all Options
shall be granted, if at all, within ten (10) years from the earlier of the date
the Plan is adopted by the Board or the date the Plan is duly approved by the
stockholders of the Company.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Whenever used herein, the following
terms shall have their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the
Company. If one or more Committees have been appointed by the Board to
administer the Plan, "BOARD" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of
1986, as amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee
or other committee of the Board duly appointed to administer the Plan and
having such powers as shall be specified by the Board. Unless the powers of
the Committee have been specifically limited, the Committee shall have all of
the powers of the Board granted herein, including, without limitation, the
power to amend or terminate the Plan at any time, subject to the terms of the
Plan and any applicable limitations imposed by law.
(d) "COMPANY" means American Residential
Investment Trust, Inc., a Maryland corporation, or any successor corporation
thereto.
(e) "CONSULTANT" means any person, including an
advisor, engaged by a Participating Company to render services other than as an
Employee or a Director.
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(f) "DIRECTOR" means a member of the Board or of
the board of directors of any other Participating Company.
(g) "DISABILITY" means the inability of the
Optionee, in the opinion of a qualified physician acceptable to the Company, to
perform the major duties of the Optionee's position with the Participating
Company group because of the sickness or injury of the Optionee.
(h) "EMPLOYEE" means any person treated as an
employee (including an officer or a Director who is also treated as an
employee) in the records of a Participating Company and, with respect to any
Incentive Stock Option granted to such person, who is an employee for purposes
of Section 422 of the Code; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(i) "EXCHANGE ACT" means the Securities Exchange
Act of 1934, as amended.
(j) "FAIR MARKET VALUE" means, as of any date,
the value of a share of Stock or other property as determined by the Board, in
its sole discretion, or by the Company, in its sole discretion, if such
determination is expressly allocated to the Company herein, subject to the
following:
(i) If, on such date, there is a public
market for the Stock, the Fair Market Value of a share of Stock shall be the
closing sale price of a share of Stock (or the mean of the closing bid and
asked prices of a share of Stock if the Stock is so quoted instead) as quoted
on the New York Stock Exchange or such other national or regional securities
exchange or market system constituting the primary market for the Stock, as
reported in the Wall Street Journal or such other source as the Company deems
reliable. If the relevant date does not fall on a day on which the Stock has
traded on such securities exchange or market system, the date on which the Fair
Market Value shall be established shall be the last day on which the Stock was
so traded prior to the relevant date, or such other appropriate day as shall be
determined by the Board, in its sole discretion.
(ii) If, on such date, there is no public
market for the Stock, the Fair Market Value of a share of Stock shall be as
determined by the Board without regard to any restriction other than a
restriction which, by its terms, will never lapse.
(k) "INCENTIVE STOCK OPTION" means an Option
intended to be (as set forth in the Option Agreement) and which qualifies as an
incentive stock option within the meaning of Section 422(b) of the Code.
(l) "INSIDER" means an officer or a Director of
the Company or any other person whose transactions in Stock are subject to
Section 16 of the Exchange Act.
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(m) "NONSTATUTORY STOCK OPTION" means an Option
not intended to be (as set forth in the Option Agreement) or which does not
qualify as an Incentive Stock Option.
(n) "OPTION" means a right to purchase Stock
(subject to adjustment as provided in Section 4.2) pursuant to the terms and
conditions of the Plan. An Option may be either an Incentive Stock Option or a
Nonstatutory Stock Option.
(o) "OPTION AGREEMENT" means a written agreement
between the Company and an Optionee setting forth the terms, conditions and
restrictions of the Option granted to the Optionee and any shares acquired upon
the exercise thereof.
(p) "OPTIONEE" means a person who has been
granted one or more Options.
(q) "PARENT CORPORATION" means any present or
future "parent corporation" of the Company, as defined in Section 424(e) of the
Code.
(r) "PARTICIPATING COMPANY" means the Company or
any Parent Corporation or Subsidiary Corporation.
(s) "PARTICIPATING COMPANY GROUP" means, at any
point in time, all corporations collectively which are then Participating
Companies.
(t) "RULE 16b-3" means Rule 16b-3 under the
Exchange Act, as amended from time to time, or any successor rule or
regulation.
(u) "SECURITIES ACT" means the Securities Act of
1933, as amended.
(v) "SERVICE" means an Optionee's employment or
service with the Participating Company Group, whether in the capacity of an
Employee, a Director or a Consultant. The Optionee's Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Optionee renders Service to the Participating Company Group or a change in
the Participating Company for which the Optionee renders such Service, provided
that there is no interruption or termination of the Optionee's Service.
Furthermore, an Optionee's Service with the Participating Company Group shall
not be deemed to have terminated if the Optionee takes any military leave, sick
leave, or other bona fide leave of absence approved by the Company; provided,
however, that if any such leave exceeds ninety (90) days, on the ninety- first
(91st) day of such leave the Optionee's Service shall be deemed to have
terminated unless the Optionee's right to return to Service with the
Participating Company Group is guaranteed by statute or contract.
Notwithstanding the foregoing, unless otherwise designated by the Company or
required by law, a leave of absence shall not be treated as Service for
purposes of determining vesting under the Optionee's Option Agreement. The
Optionee's Service shall be deemed to have terminated either upon an actual
termination of Service or upon the corporation for which the Optionee performs
Service ceasing to be a Participating Company. Subject to the foregoing, the
Company, in its sole discretion, shall determine whether the Optionee's Service
has terminated and the effective date of such termination.
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(w) "STOCK" means the common stock of the
Company, as adjusted from time to time in accordance with Section 4.2.
(x) "SUBSIDIARY CORPORATION" means any present or
future "subsidiary corporation" of the Company, as defined in Section 424(f) of
the Code.
(y) "TEN PERCENT OWNER OPTIONEE" means an
Optionee who, at the time an Option is granted to the Optionee, owns stock
possessing more than ten percent (10%) of the total combined voting power of
all classes of stock of a Participating Company within the meaning of Section
422(b)(6) of the Code.
2.2 CONSTRUCTION. Captions and titles contained herein
are for convenience only and shall not affect the meaning or interpretation of
any provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular.
Use of the term "or" is not intended to be exclusive, unless the context
clearly requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be
administered by the Board. All questions of interpretation of the Plan or of
any Option shall be determined by the Board, and such determinations shall be
final and binding upon all persons having an interest in the Plan or such
Option. Any officer of a Participating Company shall have the authority to act
on behalf of the Company with respect to any matter, right, obligation,
determination or election which is the responsibility of or which is allocated
to the Company herein, provided the officer has apparent authority with respect
to such matter, right, obligation, determination or election.
3.2 ADMINISTRATION WITH RESPECT TO INSIDERS. With
respect to participation by Insiders in the Plan, at any time that any class of
equity security of the Company is registered pursuant to Section 12 of the
Exchange Act, the Plan shall be administered in compliance with the
requirements, if any, of Rule 16b-3.
3.3 POWERS OF THE BOARD. In addition to any other powers
set forth in the Plan and subject to the provisions of the Plan, the Board
shall have the full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the
time or times at which, Options shall be granted and the number of shares of
Stock to be subject to each Option;
(b) to designate Options as Incentive Stock
Options or Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares
of Stock or other property;
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(d) to determine the terms, conditions and
restrictions applicable to each Option (which need not be identical) and any
shares acquired upon the exercise thereof, including, without limitation, (i)
the exercise price of the Option, (ii) the method of payment for shares
purchased upon the exercise of the Option, (iii) the method for satisfaction of
any tax withholding obligation arising in connection with the Option or such
shares, including by the withholding or delivery of shares of stock, (iv) the
timing, terms and conditions of the exercisability of the Option or the vesting
of any shares acquired upon the exercise thereof, (v) the time of the
expiration of the Option, (vi) the effect of the Optionee's termination of
Service with the Participating Company Group on any of the foregoing, and (vii)
all other terms, conditions and restrictions applicable to the Option or such
shares not inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option
Agreement;
(f) to amend, modify, extend, cancel, renew,
reprice or otherwise adjust the exercise price of, or grant a new Option in
substitution for, any Option or to waive any restrictions or conditions
applicable to any Option or any shares acquired upon the exercise thereof;
(g) to accelerate, continue, extend or defer the
exercisability of any Option or the vesting of any shares acquired upon the
exercise thereof, including with respect to the period following an Optionee's
termination of Service with the Participating Company Group;
(h) to prescribe, amend or rescind rules,
guidelines and policies relating to the Plan, or to adopt supplements to, or
alternative versions of, the Plan, including, without limitation, as the Board
deems necessary or desirable to comply with the laws of, or to accommodate the
tax policy or custom of, foreign jurisdictions whose citizens may be granted
Options; and
(i) to correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any Option Agreement and to make all
other determinations and take such other actions with respect to the Plan or
any Option as the Board may deem advisable to the extent consistent with the
Plan and applicable law.
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to
adjustment as provided in Section 4.2, the maximum aggregate number of shares
of Stock that may be issued under the Plan shall be Four Hundred and Forty
Three Thousand Five Hundred (443,500). If any
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outstanding Option for any reason expires or is terminated or canceled or
shares of Stock acquired, subject to repurchase, upon the exercise of an Option
are repurchased by the Company, the shares of Stock allocable to the
unexercised portion of such Option, or such repurchased shares of Stock, shall
again be available for issuance under the Plan. Notwithstanding the foregoing,
at any such time as the offer and sale of securities pursuant to the Plan is
subject to compliance with Section 260.140.45 of Title 10 of the California
Code of Regulations ("SECTION 260.140.45"), the total number of shares of Stock
issuable upon the exercise of all outstanding Options (together with options
outstanding under any other stock option plan of the Company) and the total
number of shares provided for under any stock bonus or similar plan of the
Company shall not exceed thirty percent (30%) (or such other higher percentage
limitation as may be approved by the stockholders of the Company pursuant to
Section 260.140.45) of the then outstanding shares of the Company as calculated
in accordance with the conditions and exclusions of Section 260.140.45.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the
event of any stock dividend, stock split, reverse stock split,
recapitalization, combination, reclassification or similar change in the
capital structure of the Company, appropriate adjustments shall be made in the
number and class of shares subject to the Plan, in the ISO Share Issuance Limit
set forth in Section 4.1 and to any outstanding Options and in the exercise
price per share of any outstanding Options. If a majority of the shares which
are of the same class as the shares that are subject to outstanding Options are
exchanged for, converted into, or otherwise become (whether or not pursuant to
an Ownership Change Event, as defined in Section 8.1) shares of another
corporation (the "NEW SHARES"), the Board may unilaterally amend the
outstanding Options to provide that such Options are exercisable for New
Shares. In the event of any such amendment, the number of shares subject to,
and the exercise price per share of, the outstanding Options shall be adjusted
in a fair and equitable manner as determined by the Board, in its sole
discretion. Notwithstanding the foregoing, any fractional share resulting from
an adjustment pursuant to this Section 4.2 shall be rounded up or down to the
nearest whole number, as determined by the Board, and in no event may the
exercise price of any Option be decreased to an amount less than the par value,
if any, of the stock subject to the Option. The adjustments determined by the
Board pursuant to this Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY AND OPTION LIMITATIONS.
5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted
only to Employees, Consultants, and Directors. For purposes of the foregoing
sentence, "EMPLOYEES," "CONSULTANTS" and "DIRECTORS" shall include prospective
Employees, prospective Consultants and prospective Directors to whom Options
are granted in connection with written offers of an employment or other service
relationship with the Participating Company Group. Eligible persons may be
granted more than one (1) Option.
5.2 OPTION GRANT RESTRICTIONS. Any person who is not an
Employee on the effective date of the grant of an Option to such person may be
granted only a Nonstatutory Stock Option. An Incentive Stock Option granted to
a prospective Employee upon the condition that such person become an Employee
shall be deemed granted effective on the date such person
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commences service with a Participating Company, with an exercise price
determined as of such date in accordance with Section 6.1.
5.3 FAIR MARKET VALUE LIMITATION. To the extent that
options designated as Incentive Stock Options (granted under all stock option
plans of the Participating Company Group, including the Plan) become
exercisable by an Optionee for the first time during any calendar year for
stock having a Fair Market Value greater than One Hundred Thousand Dollars
($100,000), the portion of such options which exceeds such amount shall be
treated as Nonstatutory Stock Options. For purposes of this Section 5.3,
options designated as Incentive Stock Options shall be taken into account in
the order in which they were granted, and the Fair Market Value of stock shall
be determined as of the time the option with respect to such stock is granted.
If the Code is amended to provide for a different limitation from that set
forth in this Section 5.3, such different limitation shall be deemed
incorporated herein effective as of the date and with respect to such Options
as required or permitted by such amendment to the Code. If an Option is
treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option
in part by reason of the limitation set forth in this Section 5.3, the Optionee
may designate which portion of such Option the Optionee is exercising. In the
absence of such designation, the Optionee shall be deemed to have exercised the
Incentive Stock Option portion of the Option first. Separate certificates
representing each such portion shall be issued upon the exercise of the Option.
6. TERMS AND CONDITIONS OF OPTIONS.
Options shall be evidenced by Option Agreements specifying the
number of shares of Stock covered thereby, in such form as the Board shall from
time to time establish. No Option or purported Option shall be a valid and
binding obligation of the Company unless evidenced by a fully executed Option
Agreement. Option Agreements may incorporate all or any of the terms of the
Plan by reference and shall comply with and be subject to the following terms
and conditions:
6.1 EXERCISE PRICE. The exercise price for each Option
shall be established in the sole discretion of the Board; provided, however,
that (a) the exercise price per share for an Incentive Stock Option shall be
not less than the Fair Market Value of a share of Stock on the effective date
of grant of the Option, (b) the exercise price per share for a Nonstatutory
Stock Option shall be not less than eighty-five percent (85%) of the Fair
Market Value of a share of Stock on the effective date of grant of the Option,
and (c) no Option granted to a Ten Percent Owner Optionee shall have an
exercise price per share less than one hundred ten percent (110%) of the Fair
Market Value of a share of Stock on the effective date of grant of the Option.
Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or
a Nonstatutory Stock Option) may be granted with an exercise price lower than
the minimum exercise price set forth above if such Option is granted pursuant
to an assumption or substitution for another option in a manner qualifying
under the provisions of Section 424(a) of the Code.
6.2 EXERCISE PERIOD. Options shall be exercisable at
such time or times, or upon such event or events, and subject to such terms,
conditions, performance criteria, and restrictions as shall be determined by
the Board and set forth in the Option Agreement evidencing such Option;
provided, however, that (a) no Option shall be exercisable after the expiration
of ten (10) years after the effective date of grant of such Option, (b) no
Incentive Stock Option granted
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to a Ten Percent Owner Optionee shall be exercisable after the expiration of
five (5) years after the effective date of grant of such Option, (c) no Option
granted to a prospective Employee, prospective Consultant or prospective
Director may become exercisable prior to the date on which such person
commences Service with a Participating Company, and (d) with the exception of
an Option granted to an officer, Director or Consultant, no Option shall become
exercisable at a rate less than twenty percent (20%) per year over a period of
five (5) years from the effective date of grant of such Option, subject to the
Optionee's continued Service. Subject to the foregoing, unless otherwise
specified by the Board in the grant of an Option, any Option granted hereunder
shall have a term of ten (10) years from the effective date of grant of the
Option.
6.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as
otherwise provided below, payment of the exercise price for the number of
shares of Stock being purchased pursuant to any Option shall be made (i) in
cash, by check, or cash equivalent, (ii) by tender to the Company of shares of
Stock owned by the Optionee having a Fair Market Value (as determined by the
Company without regard to any restrictions on transferability applicable to
such stock by reason of federal or state securities laws or agreements with an
underwriter for the Company) not less than the exercise price, (iii) by the
assignment of the proceeds of a sale or loan with respect to some or all of the
shares being acquired upon the exercise of the Option (including, without
limitation, through an exercise complying with the provisions of Regulation T
as promulgated from time to time by the Board of Governors of the Federal
Reserve System) (a "CASHLESS EXERCISE"), (iv) by the Optionee's promissory note
in a form approved by the Company, (v) by such other consideration as may be
approved by the Board from time to time to the extent permitted by applicable
law, or (vi) by any combination thereof. The Board may at any time or from
time to time, by adoption of or by amendment to the standard forms of Option
Agreement described in Section 7, or by other means, grant Options which do not
permit all of the foregoing forms of consideration to be used in payment of the
exercise price or which otherwise restrict one or more forms of consideration.
(b) TENDER OF STOCK. Notwithstanding the
foregoing, an Option may not be exercised by tender to the Company of shares of
Stock to the extent such tender of Stock would constitute a violation of the
provisions of any law, regulation or agreement restricting the redemption of
the Company's stock. Unless otherwise provided by the Board, an Option may not
be exercised by tender to the Company of shares of Stock unless such shares
either have been owned by the Optionee for more than six (6) months or were not
acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. The Company reserves, at
any and all times, the right, in the Company's sole and absolute discretion, to
establish, decline to approve or terminate any program or procedures for the
exercise of Options by means of a Cashless Exercise.
(d) PAYMENT BY PROMISSORY NOTE. No promissory
note shall be permitted if the exercise of an Option using a promissory note
would be a violation of any law. Any permitted promissory note shall be on
such terms as the Board shall determine at the time the Option is granted. The
Board shall have the authority to permit or require the Optionee to secure
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<PAGE> 9
any promissory note used to exercise an Option with the shares of Stock
acquired upon the exercise of the Option or with other collateral acceptable to
the Company. Unless otherwise provided by the Board, if the Company at any
time is subject to the regulations promulgated by the Board of Governors of the
Federal Reserve System or any other governmental entity affecting the extension
of credit in connection with the Company's securities, any promissory note
shall comply with such applicable regulations, and the Optionee shall pay the
unpaid principal and accrued interest, if any, to the extent necessary to
comply with such applicable regulations.
6.4 TAX WITHHOLDING. The Company shall have the right,
but not the obligation, to deduct from the shares of Stock issuable upon the
exercise of an Option, or to accept from the Optionee the tender of, a number
of whole shares of Stock having a Fair Market Value, as determined by the
Company, equal to all or any part of the federal, state, local and foreign
taxes, if any, required by law to be withheld by the Participating Company
Group with respect to such Option or the shares acquired upon the exercise
thereof. Alternatively or in addition, in its sole discretion, the Company
shall have the right to require the Optionee, through payroll withholding, cash
payment or otherwise, including by means of a Cashless Exercise, to make
adequate provision for any such tax withholding obligations of the
Participating Company Group arising in connection with the Option or the shares
acquired upon the exercise thereof. The Company shall have no obligation to
deliver shares of Stock or to release shares of Stock from an escrow
established pursuant to the Option Agreement until the Participating Company
Group's tax withholding obligations have been satisfied by the Optionee.
6.5 REPURCHASE RIGHTS. Shares issued under the Plan may
be subject to a right of first refusal, one or more repurchase options, or
other conditions and restrictions as determined by the Board in its sole
discretion at the time the Option is granted. The Company shall have the right
to assign at any time any repurchase right it may have, whether or not such
right is then exercisable, to one or more persons as may be selected by the
Company. Upon request by the Company, each Optionee shall execute any
agreement evidencing such transfer restrictions prior to the receipt of shares
of Stock hereunder and shall promptly present to the Company any and all
certificates representing shares of Stock acquired hereunder for the placement
on such certificates of appropriate legends evidencing any such transfer
restrictions.
6.6 EFFECT OF TERMINATION OF SERVICE.
(a) OPTION EXERCISABILITY. Subject to earlier
termination of the Option as otherwise provided herein, an Option shall be
exercisable after an Optionee's termination of Service as follows:
(i) DISABILITY. If the Optionee's
Service with the Participating Company Group is terminated because of the
Disability of the Optionee, the Option, to the extent unexercised and
exercisable on the date on which the Optionee's Service terminated, may be
exercised by the Optionee (or the Optionee's guardian or legal representative)
at any time prior to the expiration of six (6) months (or such longer period of
time as determined by the Board, in its sole discretion) after the date on
which the Optionee's Service terminated, but in any event no later than the
date of expiration of the Option's term as set forth in the Option Agreement
evidencing such Option (the "OPTION EXPIRATION DATE").
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(ii) DEATH. If the Optionee's Service
with the Participating Company Group is terminated because of the death of the
Optionee, the Option, to the extent unexercised and exercisable on the date on
which the Optionee's Service terminated, may be exercised by the Optionee's
legal representative or other person who acquired the right to exercise the
Option by reason of the Optionee's death at any time prior to the expiration of
six (6) months (or such longer period of time as determined by the Board, in
its sole discretion) after the date on which the Optionee's Service terminated,
but in any event no later than the Option Expiration Date. The Optionee's
Service shall be deemed to have terminated on account of death if the Optionee
dies within one (1) month after the Optionee's termination of Service.
(iii) OTHER TERMINATION OF SERVICE. If
the Optionee's Service with the Participating Company Group terminates for any
reason, except Disability or death, the Option, to the extent unexercised and
exercisable by the Optionee on the date on which the Optionee's Service
terminated, may be exercised by the Optionee within one (1) month (or such
longer period of time as determined by the Board, in its sole discretion) after
the date on which the Optionee's Service terminated, but in any event no later
than the Option Expiration Date.
(b) EXTENSION IF EXERCISE PREVENTED BY LAW.
Notwithstanding the foregoing, if the exercise of an Option within the
applicable time periods set forth in Section 6.6(a) is prevented by the
provisions of Section 12 below, the Option shall remain exercisable until one
(1) month after the date the Optionee is notified by the Company that the
Option is exercisable, but in any event no later than the Option Expiration
Date.
(c) EXTENSION IF OPTIONEE SUBJECT TO SECTION
16(b). Notwithstanding the foregoing, if a sale within the applicable time
periods set forth in Section 6.6(a) of shares acquired upon the exercise of the
Option would subject the Optionee to suit under Section 16(b) of the Exchange
Act, the Option shall remain exercisable until the earliest to occur of (i) the
tenth (10th) day following the date on which a sale of such shares by the
Optionee would no longer be subject to such suit, (ii) the one hundred and
ninetieth (190th) day after the Optionee's termination of Service, or (iii) the
Option Expiration Date.
7. STANDARD FORMS OF OPTION AGREEMENT.
7.1 INCENTIVE STOCK OPTIONS. Unless otherwise provided
by the Board at the time the Option is granted, an Option designated as an
"INCENTIVE STOCK OPTION" shall comply with and be subject to the terms and
conditions set forth in the form of Incentive Stock Option Agreement adopted by
the Board concurrently with its adoption of the Plan and as amended from time
to time.
7.2 NONSTATUTORY STOCK OPTIONS. Unless otherwise
provided by the Board at the time the Option is granted, an Option designated
as a "NONSTATUTORY STOCK OPTION" shall comply with and be subject to the terms
and conditions set forth in the form of Nonstatutory Stock Option Agreement
adopted by the Board concurrently with its adoption of the Plan and as amended
from time to time.
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7.3 AUTHORITY TO VARY TERMS. The Board shall have the
authority from time to time to vary the terms of any of the standard forms of
Option Agreement described in this Section 7 either in connection with the
grant or amendment of an individual Option or in connection with the
authorization of a new standard form or forms; provided, however, that the
terms and conditions of any such new, revised or amended standard form or forms
of Option Agreement shall be in accordance with the terms of the Plan.
8. CHANGE IN CONTROL.
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed
to have occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or
exchange in a single or series of related transactions by the stockholders of
the Company of more than fifty percent (50%) of the voting stock of the
Company;
(ii) a merger or consolidation in which
the Company is a party;
(iii) the sale, exchange, or transfer of
all or substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the
Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership
Change Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF CHANGE IN CONTROL ON OPTIONS. In the event
of a Change in Control, any unexercisable or unvested portion of the
outstanding Options shall be immediately exercisable and vested in full as of
the date ten (10) days prior to the date of the Change in Control. The
exercise or vesting of any Option that was permissible solely by reason of this
Section 8.2 shall be conditioned upon the consummation of the Change in
Control. In addition, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as
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the case may be (the "ACQUIRING CORPORATION"), may either assume the Company's
rights and obligations under outstanding Options or substitute for outstanding
Options substantially equivalent options for the Acquiring Corporation's stock.
For purposes of this Section 8.2, an Option shall be deemed assumed if,
following the Change in Control, the Option confers the right to purchase in
accordance with its terms and conditions, for each share of Stock subject to
the Option immediately prior to the Change in Control, the consideration
(whether stock, cash or other securities or property) to which a holder of a
share of Stock on the effective date of the Change in Control was entitled.
Any Options which are neither assumed or substituted for by the Acquiring
Corporation in connection with the Change in Control nor exercised as of the
date of the Change in Control shall terminate and cease to be outstanding
effective as of the date of the Change in Control. Notwithstanding the
foregoing, shares acquired upon exercise of an Option prior to the Change in
Control and any consideration received pursuant to the Change in Control with
respect to such shares shall continue to be subject to all applicable
provisions of the Option Agreement evidencing such Option except as otherwise
provided in such Option Agreement. Furthermore, notwithstanding the foregoing,
if the corporation the stock of which is subject to the outstanding Options
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Change in Control is the surviving or continuing corporation and
immediately after such Ownership Change Event less than fifty percent (50%) of
the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the outstanding Options shall not
terminate unless the Board otherwise provides in its sole discretion.
9. PROVISION OF INFORMATION.
At least annually, copies of the Company's balance sheet and
income statement for the just completed fiscal year shall be made available to
each Optionee and purchaser of shares of Stock upon the exercise of an Option.
The Company shall not be required to provide such information to persons whose
duties in connection with the Company assure them access to equivalent
information.
10. NONTRANSFERABILITY OF OPTIONS.
During the lifetime of the Optionee, an Option shall be
exercisable only by the Optionee or the Optionee's guardian or legal
representative. No Option shall be assignable or transferable by the Optionee,
except by will or by the laws of descent and distribution.
11. COMPLIANCE WITH SECURITIES LAW.
The grant of Options and the issuance of shares of Stock upon
exercise of Options shall be subject to compliance with all applicable
requirements of federal, state and foreign law with respect to such securities.
Options may not be exercised if the issuance of shares of Stock upon exercise
would constitute a violation of any applicable federal, state or foreign
securities laws or other law or regulations or the requirements of any stock
exchange or market system upon which the Stock may then be listed. In
addition, no Option may be exercised unless (a) a registration statement under
the Securities Act shall at the time of exercise of the Option be in
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effect with respect to the shares issuable upon exercise of the Option or (b)
in the opinion of legal counsel to the Company, the shares issuable upon
exercise of the Option may be issued in accordance with the terms of an
applicable exemption from the registration requirements of the Securities Act.
The inability of the Company to obtain from any regulatory body having
jurisdiction the authority, if any, deemed by the Company's legal counsel to be
necessary to the lawful issuance and sale of any shares hereunder shall relieve
the Company of any liability in respect of the failure to issue or sell such
shares as to which such requisite authority shall not have been obtained. As a
condition to the exercise of any Option, the Company may require the Optionee
to satisfy any qualifications that may be necessary or appropriate, to evidence
compliance with any applicable law or regulation and to make any representation
or warranty with respect thereto as may be requested by the Company.
12. INDEMNIFICATION.
In addition to such other rights of indemnification as they
may have as members of the Board or officers or employees of the Participating
Company Group, members of the Board and any officers or employees of the
Participating Company Group to whom authority to act for the Board or the
Company is delegated shall be indemnified by the Company against all reasonable
expenses, including attorneys' fees, actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in connection
with any appeal therein, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Plan, or
any right granted hereunder, and against all amounts paid by them in settlement
thereof (provided such settlement is approved by independent legal counsel
selected by the Company) or paid by them in satisfaction of a judgment in any
such action, suit or proceeding, except in relation to matters as to which it
shall be adjudged in such action, suit or proceeding that such person is liable
for gross negligence, bad faith or intentional misconduct in duties; provided,
however, that within sixty (60) days after the institution of such action, suit
or proceeding, such person shall offer to the Company, in writing, the
opportunity at its own expense to handle and defend the same.
13. TERMINATION OR AMENDMENT OF PLAN.
The Board may terminate or amend the Plan at any time.
However, subject to changes in applicable law, regulations or rules that would
permit otherwise, without the approval of the Company's stockholders, there
shall be (a) no increase in the maximum aggregate number of shares of Stock
that may be issued under the Plan (except by operation of the provisions of
Section 4.2), (b) no change in the class of persons eligible to receive
Incentive Stock Options, and (c) no other amendment of the Plan that would
require approval of the Company's stockholders under any applicable law,
regulation or rule. In any event, no termination or amendment of the Plan may
adversely affect any then outstanding Option or any unexercised portion
thereof, without the consent of the Optionee, unless such termination or
amendment is required to enable an Option designated as an Incentive Stock
Option to qualify as an Incentive Stock Option or is necessary to comply with
any applicable law, regulation or rule.
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<PAGE> 14
14. STOCKHOLDER APPROVAL.
The Plan or any increase in the maximum number of shares of
Stock issuable thereunder as provided in Section 4.1 (the "MAXIMUM SHARES")
shall be approved by the stockholders of the Company within twelve (12) months
of the date of adoption thereof by the Board. Options granted prior to
stockholder approval of the Plan or in excess of the Maximum Shares previously
approved by the stockholders shall become exercisable no earlier than the date
of stockholder approval of the Plan or such increase in the Maximum Shares, as
the case may be.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing American Residential Investment Trust, Inc. 1997 Stock
Option Plan was duly adopted by the Board on August 6, 1997.
_______________________________________
Secretary
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<PAGE> 15
PLAN HISTORY
August 6, 1997 Board adopts Plan, with an initial reserve of
443,500 shares.
August 6, 1997 Stockholders approve Plan, with an initial reserve
of 443,500 shares
<PAGE> 1
EXHIBIT 10.8
AMERICAN RESIDENTIAL TRUST INVESTMENT, INC.
1997 OUTSIDE DIRECTORS STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The American Residential Trust Investment, Inc.
1997 Outside Directors Stock Option Plan (the "PLAN") is hereby established
effective as of the effective date of the initial registration by the Company of
its Stock under Section 12 of the Exchange Act (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of
the Participating Company Group and its stockholders by providing an incentive
to attract and retain highly qualified persons to serve as Outside Directors of
the Company and by creating additional incentive for Outside Directors to
promote the growth and profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier
of its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued and all restrictions on
such shares under the terms of the Plan and the agreements evidencing Options
granted under the Plan have lapsed.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one or more
Committees have been appointed by the Board to administer the Plan, "Board" also
means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended, and any
applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board duly appointed to
administer the Plan and having such powers as shall be specified by the Board.
Unless the powers of the Committee have been specifically limited, the Committee
shall have all of the powers of the Board granted herein, including, without
limitation, the power to amend or terminate the Plan at any time, subject to the
terms of the Plan and any applicable limitations imposed by law.
(d) "COMPANY" means American Residential Trust Investment, Inc., a
Maryland corporation, or any successor corporation thereto.
(e) "CONSULTANT" means any person, including an advisor, engaged by a
Participating Company to render services other than as an Employee or a
Director.
<PAGE> 2
(f) "DIRECTOR" means a member of the Board or the board of directors of
any other Participating Company.
(g) "EMPLOYEE" means any person treated as an employee (including an
officer or a Director who is also treated as an employee) in the records of a
Participating Company; provided, however, that neither service as a Director nor
payment of a director's fee shall be sufficient to constitute employment for
purposes of the Plan.
(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(i) "FAIR MARKET VALUE" means, as of any date, the value of a share
of Stock or other property as determined by the Board, in its sole discretion,
or by the Company, in its sole discretion, if such determination is expressly
allocated to the Company herein, subject to the following:
(1) If, on such date, there is a public market for the Stock,
the Fair Market Value of a share of Stock shall be the closing sale price of a
share of Stock (or the mean of the closing bid and asked prices of a share of
Stock if the Stock is so quoted instead) as quoted on the New York Stock
Exchange or such other national or regional securities exchange or market system
constituting the primary market for the Stock, as reported in the Wall Street
Journal or such other source as the Company deems reliable. If the relevant date
does not fall on a day on which the Stock has traded on such securities exchange
or market system, the date on which the Fair Market Value shall be established
shall be the last day on which the Stock was so traded prior to the relevant
date, or such other appropriate day as shall be determined by the Board, in its
sole discretion.
(2) If, on such date, there is no public market for the Stock,
the Fair Market Value of a share of Stock shall be as determined by the Board
without regard to any restriction other than a restriction which, by its terms,
will never lapse.
(j) "OPTION" means a right to purchase Stock (subject to adjustment
as provided in Section 4.2) pursuant to the terms and conditions of the Plan.
(k) "OPTIONEE" means a person who has been granted one or more
Options.
(l) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee.
(m) "OUTSIDE DIRECTOR" means a Director of the Company who is not
an Employee.
(n) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
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<PAGE> 3
(o) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(p) "PARTICIPATING COMPANY GROUP" means, at any point in time, all
corporations collectively which are then Participating Companies.
(q) "SERVICE" means the Optionee's service with the Participating
Company Group, whether in the capacity of an Employee, a Director or a
Consultant. The Optionee's Service shall not be deemed to have terminated merely
because of a change in the capacity in which the Optionee renders Service to the
Participating Company Group or a change in the Participating Company for which
the Optionee renders such Service, provided that there is no interruption or
termination of the Optionee's Service. The Optionee's Service shall be deemed to
have terminated either upon an actual termination of Service or upon the
corporation for which the Optionee performs Service ceasing to be a
Participating Company.
(r) "STOCK" means the common stock of the Company, as adjusted from
time to time in accordance with Section 4.2.
(s) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
use of the term "or" shall include the conjunctive as well as the disjunctive.
3. ADMINISTRATION. The Plan shall be administered by the Board. All
questions of interpretation of the Plan or of any Option shall be determined by
the Board, and such determinations shall be final and binding upon all persons
having an interest in the Plan or such Option. Any officer of a Participating
Company shall have the authority to act on behalf of the Company with respect to
any matter, right, obligation, determination or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
determination or election.
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be seventy-five thousand (75,000) and shall
consist of authorized but unissued shares or reacquired shares of Stock or any
combination thereof. If an outstanding Option for any reason expires or is
terminated or canceled or shares of Stock acquired, subject to repurchase, upon
the exercise of an Option are repurchased by the Company, the shares of Stock
allocable to the unexercised portion of such Option, or such repurchased shares
of Stock, shall again be available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar
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<PAGE> 4
change in the capital structure of the Company, appropriate adjustments shall be
made in the number and class of shares subject to the Plan, to the "Initial
Option" and "Annual Option" (as defined in Section 6.1), and to any outstanding
Options, and in the exercise price of any outstanding Options. If a majority of
the shares which are of the same class as the shares that are subject to
outstanding Options are exchanged for, converted into, or otherwise become
(whether or not pursuant to an "Ownership Change Event" as defined in Section
8.1) shares of another corporation (the "NEW Shares"), the Board may
unilaterally amend the outstanding Options to provide that such Options are
exercisable for New Shares. In the event of any such amendment, the number of
shares subject to, and the exercise price of, the outstanding Options shall be
adjusted in a fair and equitable manner as determined by the Board, in its sole
discretion. Notwithstanding the foregoing, any fractional share resulting from
an adjustment pursuant to this Section 4.2 shall be rounded down to the nearest
whole number, and in no event may the exercise price of any Option be decreased
to an amount less than the par value, if any, of the stock subject to the
Option.
5. ELIGIBILITY AND TYPE OF OPTIONS.
5.1 PERSONS ELIGIBLE FOR OPTIONS. An Option shall be granted only to a
person who, at the time of grant, is an Outside Director.
5.2 OPTIONS AUTHORIZED. Options shall be nonstatutory stock options;
that is, options which are not treated as incentive stock options within the
meaning of Section 422(b) of the Code.
6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
Option Agreements specifying the number of shares of Stock covered thereby, in
such form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
6.1 AUTOMATIC GRANT OF OPTIONS. Subject to execution by an Outside
Director of the appropriate Option Agreement, Options shall be granted
automatically and without further action of the Board, as follows:
(a) INITIAL OPTION. Each person who (i) is an Outside Director on
the Effective Date, or (ii) first becomes an Outside Director on or after the
Effective Date shall be granted an Option to purchase nine thousand three
hundred and seventy five (9,375 pre-split) shares of Stock on the Effective
Date or the date he or she first becomes an Outside Director, respectively (an
"INITIAL OPTION"). Notwithstanding anything herein to the contrary, an Initial
Option shall not be granted to a Director of the Company who previously did not
qualify as an Outside Director but subsequently becomes an Outside Director as a
result of the termination of his or her status as an Employee.
(b) ANNUAL OPTION. Each Outside Director (including any Director
who previously did not qualify as an Outside Director but who subsequently
becomes an Outside Director) shall be granted on the date of each annual meeting
of the stockholders of the Company which occurs after the Effective Date (an
"ANNUAL MEETING") following which such person
4
<PAGE> 5
remains an Outside Director an Option to purchase three thousand one hundred
and twenty five (3,125) shares of Stock (an "ANNUAL OPTION"). Notwithstanding
the foregoing, an Outside Director who has not served continuously as a Director
of the Company for at least six (6) months as of the date of such Annual Meeting
shall not receive an Annual Option on such date.
(c) RIGHT TO DECLINE OPTION. Notwithstanding the foregoing, any
person may elect not to receive an Option by delivering written notice of such
election to the Board no later than the day prior to the date such Option would
otherwise be granted. A person so declining an Option shall receive no payment
or other consideration in lieu of such declined Option. A person who has
declined an Option may revoke such election by delivering written notice of such
revocation to the Board no later than the day prior to the date such Option
would be granted pursuant to Section 6.1(a) or (b), as the case may be.
6.2 EXERCISE PRICE. The exercise price per share of Stock subject to an
Option shall be the Fair Market Value of a share of Stock on the date the Option
is granted.
6.3 EXERCISE PERIOD. Each Option shall terminate and cease to be
exercisable on the date ten (10) years after the date of grant of the Option
unless earlier terminated pursuant to the terms of the Plan or the Option
Agreement.
6.4 RIGHT TO EXERCISE OPTIONS.
(a) INITIAL OPTIONS. Except as otherwise provided in the Plan or in
the Option Agreement and provided the Optionee's Service has not terminated
prior to the relevant date, each Initial Option shall become vested and
exercisable cumulatively for one-third (1/3) of the shares of Stock initially
subject to the Option on each of the first three (3) anniversaries of the date
on which the Initial Option was granted.
(b) ANNUAL OPTIONS. Except as otherwise provided in the Plan or in
the Option Agreement and provided the Optionee's Service has not terminated
prior to the relevant date, each Annual Option shall become fully vested and
exercisable on the first anniversary of the date on which the Annual Option was
granted.
6.5 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided
below, payment of the exercise price for the number of shares of Stock being
purchased pursuant to any Option shall be made (i) in cash, by check, or cash
equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value not less than the exercise price, (iii) by
the assignment of the proceeds of a sale or loan with respect to some or all of
the shares being acquired upon the exercise of the Option (including, without
limitation, through an exercise complying with the provisions of Regulation T as
promulgated from time to time by the Board of Governors of the Federal Reserve
System) (a "CASHLESS EXERCISE"), or (iv) by any combination thereof.
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<PAGE> 6
(b) TENDER OF STOCK. Notwithstanding the foregoing, an Option may
not be exercised by tender to the Company of shares of Stock to the extent such
tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
(c) CASHLESS EXERCISE. The Company reserves, at any and all times,
the right, in the Company's sole and absolute discretion, to establish, decline
to approve or terminate any program or procedures for the exercise of Options by
means of a Cashless Exercise.
6.6 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value equal to all or any part of the federal,
state, local and foreign taxes, if any, required by law to be withheld by the
Participating Company Group with respect to such Option or the shares acquired
upon exercise thereof. Alternatively or in addition, in its sole discretion, the
Company shall have the right to require the Optionee to make adequate provision
for any such tax withholding obligations of the Participating Company Group
arising in connection with the Option or the shares acquired upon exercise
thereof. The Company shall have no obligation to deliver shares of Stock until
the Participating Company Group's tax withholding obligations have been
satisfied.
7. STANDARD FORM OF OPTION AGREEMENT.
7.1 GENERAL. Each Option shall comply with and be subject to the terms
and conditions set forth in the appropriate form of Nonstatutory Stock Option
Agreement adopted by the Board concurrently with its adoption of the Plan and as
amended from time to time.
7.2 AUTHORITY TO VARY TERMS. Subject to the limitations set forth in
Section 3.2, the Board shall have the authority from time to time to vary the
terms of any of the standard forms of Option Agreement described in this Section
7 either in connection with the grant or amendment of an individual Option or in
connection with the authorization of a new standard form or forms; provided,
however, that the terms and conditions of any such new, revised or amended
standard form or forms of Option Agreement are not inconsistent with the terms
of the Plan.
6
<PAGE> 7
8. CHANGE IN CONTROL.
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if
any of the following occurs with respect to the Company:
(1) the direct or indirect sale or exchange in a single or
series of related transactions by the stockholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(2) a merger or consolidation in which the Company is a party;
(3) the sale, exchange, or change in all or substantially all
of the assets of the Company; or
(4) a liquidation or dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or a
series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the stockholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF CHANGE IN CONTROL ON OPTIONS. In the event of a Change in
Control, any unexercisable or unvested portion of the outstanding Options shall
be immediately exercisable and vested in full as of the date ten (10) days prior
to the date of the Change in Control. The exercise or vesting of any Option that
was permissible solely by reason of this Section 8.2 shall be conditioned upon
the consummation of the Change in Control. In addition, the surviving,
continuing, successor, or purchasing corporation or parent corporation thereof,
as the case may be (the "ACQUIRING CORPORATION"), may either assume the
Company's rights and obligations under outstanding Options or substitute for
outstanding Options substantially equivalent options for the Acquiring
Corporation's stock. For purposes of this Section 8.2, an Option shall be deemed
assumed if, following the Change in Control, the Option confers the right to
purchase in accordance with its terms and conditions, for each share of Stock
subject to the Option immediately prior to the Change in Control, the
consideration (whether stock, cash or other securities or property) to which a
holder of a share of Stock on the effective date of the
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<PAGE> 8
Change in Control was entitled. Any Options which are neither assumed or
substituted for by the Acquiring Corporation in connection with the Change in
Control nor exercised as of the date of the Change in Control shall terminate
and cease to be outstanding effective as of the date of the Change in Control.
Notwithstanding the foregoing, shares acquired upon exercise of an Option prior
to the Change in Control and any consideration received pursuant to the Change
in Control with respect to such shares shall continue to be subject to all
applicable provisions of the Option Agreement evidencing such Option except as
otherwise provided in such Option Agreement. Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the outstanding
Options immediately prior to an Ownership Change Event described in Section
8.1(a)(i) constituting a Change in Control is the surviving or continuing
corporation and immediately after such Ownership Change Event less than fifty
percent (50%) of the total combined voting power of its voting stock is held by
another corporation or by other corporations that are members of an affiliated
group within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the outstanding Options shall not
terminate.
9. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee,
an Option shall be exercisable only by the Optionee or the Optionee's guardian
or legal representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
10. INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board or officers or
employees of the Participating Company Group, members of the Board and any
officers or employees of the Participating Company Group to whom authority to
act for the Board is delegated shall be indemnified by the Company against all
reasonable expenses, including attorneys' fees, actually and necessarily
incurred in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan, or any right granted hereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a judgment
in any such action, suit or proceeding, except in relation to matters as to
which it shall be adjudged in such action, suit or proceeding that such person
is liable for gross negligence, bad faith or intentional misconduct in duties;
provided, however, that within sixty (60) days after the institution of such
action, suit or proceeding, such person shall offer to the Company, in writing,
the opportunity at its own expense to handle and defend the same.
11. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend
the Plan at any time. However, subject to changes in applicable law, regulations
or rules that would permit otherwise, without the approval of the Company's
stockholders, there shall be (a) no increase in the total number of shares of
Stock that may be issued under the Plan (except by operation of the provisions
of Section 4.2), and (b) no other amendment of the Plan that would require
approval of the Company's stockholders under any applicable law, regulation or
rule. In any event, no termination or amendment of the Plan may adversely affect
any then outstanding
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<PAGE> 9
Option, or any unexercised portion thereof, without the consent of the Optionee,
unless such termination or amendment is necessary to comply with any applicable
law, regulation or rule.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing American Residential Trust Investment, Inc. 1997 Outside
Directors Stock Option Plan was duly adopted by the Board on
August 6, 1997.
_______________________________________
Secretary
9
<PAGE> 10
<TABLE>
<S> <C>
August 6, 1997 Board adopts Plan, with an initial reserve of 75,000 shares.
August 6, 1997 Stockholders approve Plan, with an initial reserve of 75,000
shares.
</TABLE>
10
<PAGE> 1
EXHIBIT 10.9
AMERICAN RESIDENTIAL TRUST INVESTMENT, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The American Residential Trust
Investment, Inc. 1997 Employee Stock Purchase Plan (the "PLAN") is hereby
established effective as of the effective date of the initial registration by
the Company of its Stock under Section 12 of the Exchange Act (the "EFFECTIVE
DATE").
1.2 PURPOSE. The purpose of the Plan is to provide
Eligible Employees with an opportunity to acquire a proprietary interest in the
Company through the purchase of Stock. The Company intends that the Plan
qualify as an "employee stock purchase plan" under Section 423 of the Code
(including any amendments or replacements of such section), and the Plan shall
be so construed.
1.3 TERM OF PLAN. The Plan shall continue in effect
until the earlier of its termination by the Board or the date on which all of
the shares of Stock available for issuance under the Plan have been issued.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Any term not expressly defined in the
Plan but defined for purposes of Section 423 of the Code shall have the same
definition herein. Whenever used herein, the following terms shall have their
respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the
Company. If one or more Committees have been appointed by the Board to
administer the Plan, "Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of
1986, as amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board
duly appointed to administer the Plan and having such powers as shall be
specified by the Board. Unless the powers of the Committee have been
specifically limited, the Committee shall have all of the powers of the Board
granted herein, including, without limitation, the power to amend or terminate
the Plan at any time, subject to the terms of the Plan and any applicable
limitations imposed by law.
(d) "COMPANY" means American Residential Trust
Investment, Inc., a Maryland corporation, or any successor corporation thereto.
(e) "COMPENSATION" means, with respect to any
Offering Period, all amounts payable in cash to a Participant during such
Offering Period by a Participating Company
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<PAGE> 2
and includable as "wages" subject to tax under Section 3101(a) of the Code
without applying the dollar limitation of Section 3121(a) of the Code.
Accordingly, Compensation shall include, without limitation, salaries,
overtime, bonuses, commissions, and salaries deferred pursuant to Section
401(k) of the Code. Compensation shall not include reimbursements of expenses,
allowances, long-term disability, workers' compensation or any amount deemed
received without the actual transfer of cash or any amounts directly or
indirectly paid pursuant to the Plan or any other stock purchase or stock
option plan.
(f) "ELIGIBLE EMPLOYEE" means an Employee who
meets the requirements set forth in Section 5 for eligibility to participate in
the Plan.
(g) "EMPLOYEE" means a person treated as an
employee of a Participating Company for purposes of Section 423 of the Code. A
Participant shall be deemed to have ceased to be an Employee either upon an
actual termination of employment or upon the corporation employing the
Participant ceasing to be a Participating Company. For purposes of the Plan,
an individual shall not be deemed to have ceased to be an Employee while such
individual is on any military leave, sick leave, or other bona fide leave of
absence approved by the Company of ninety (90) days or less. In the event an
individual's leave of absence exceeds ninety (90) days, the individual shall be
deemed to have ceased to be an Employee on the ninety-first (91st) day of such
leave unless the individual's right to reemployment with the Participating
Company Group is guaranteed either by statute or by contract. The Company
shall determine in good faith and in the exercise of its discretion whether an
individual has become or has ceased to be an Employee and the effective date of
such individual's employment or termination of employment, as the case may be.
For purposes of an individual's participation in or other rights, if any, under
the Plan as of the time of the Company's determination, all such determinations
by the Company shall be final, binding and conclusive, notwithstanding that the
Company or any governmental agency subsequently makes a contrary determination.
(h) "EXCHANGE ACT" means the Securities Exchange
Act of 1934, as amended.
(i) "FAIR MARKET VALUE" means, as of any date, if
there is then a public market for the Stock, the closing price of a share of
Stock (or the mean of the closing bid and asked prices if the Stock is so
quoted instead) as quoted on the New York Stock Exchange or such other national
or regional securities exchange or market system constituting the primary
market for the Stock, as reported in The Wall Street Journal or such other
source as the Company deems reliable. If the relevant date does not fall on a
day on which the Stock has traded on such securities exchange or market system,
the date on which the Fair Market Value shall be established shall be the last
day on which the Stock was so traded prior to the relevant date, or such other
appropriate day as shall be determined by the Board, in its sole discretion.
If there is then no public market for the Stock, the Fair Market Value on any
relevant date shall be as determined by the Board. Notwithstanding the
foregoing, the Fair Market Value per share of Stock on the Effective Date shall
be deemed to be the public offering price set forth in the final prospectus
filed with the Securities and Exchange Commission in connection with the
initial public offering of the Stock.
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(j) "OFFERING" means an offering of Stock as
provided in Section 6.
(k) "OFFERING DATE" means, for any Offering, the
first day of the Offering Period with respect to such Offering.
(l) "OFFERING PERIOD" means a period established
in accordance with Section 6.1.
(m) "PARENT CORPORATION" means any present or
future "parent corporation" of the Company, as defined in Section 424(e) of the
Code.
(n) "PARTICIPANT" means an Eligible Employee who
has become a participant in an Offering Period in accordance with Section 7 and
remains a participant in accordance with the Plan.
(o) "PARTICIPATING COMPANY" means the Company or
any Parent Corporation or Subsidiary Corporation designated by the Board as a
corporation the Employees of which may, if Eligible Employees, participate in
the Plan. The Board shall have the sole and absolute discretion to determine
from time to time which Parent Corporations or Subsidiary Corporations shall be
Participating Companies.
(p) "PARTICIPATING COMPANY GROUP" means, at any
point in time, the Company and all other corporations collectively which are
then Participating Companies.
(q) "PURCHASE DATE" means, for any Offering
Period (or Purchase Period if so determined by the Board in accordance with
Section 6.2), the last day of such period.
(r) "PURCHASE PERIOD" means a period established
in accordance with Section 6.2.
(s) "PURCHASE PRICE" means the price at which a
share of Stock may be purchased under the Plan, as determined in accordance
with Section 9.
(t) "PURCHASE RIGHT" means an option granted to a
Participant pursuant to the Plan to purchase such shares of Stock as provided
in Section 8, which the Participant may or may not exercise during the Offering
Period in which such option is outstanding. Such option arises from the right
of a Participant to withdraw any accumulated payroll deductions of the
Participant not previously applied to the purchase of Stock under the Plan and
to terminate participation in the Plan at any time during an Offering Period.
(u) "STOCK" means the common stock of the
Company, as adjusted from time to time in accordance with Section 4.2.
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(v) "SUBSCRIPTION AGREEMENT" means a written
agreement in such form as specified by the Company, stating an Employee's
election to participate in the Plan and authorizing payroll deductions under
the Plan from the Employee's Compensation.
(w) "SUBSCRIPTION DATE" means the last business
day prior to the Offering Date of an Offering Period or such earlier date as
the Company shall establish.
(x) "SUBSIDIARY CORPORATION" means any present or
future "subsidiary corporation" of the Company, as defined in Section 424(f) of
the Code.
2.2 CONSTRUCTION. Captions and titles contained herein
are for convenience only and shall not affect the meaning or interpretation of
any provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular.
Use of the term "or" is not intended to be exclusive, unless the context
clearly requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be
administered by the Board. All questions of interpretation of the Plan, of any
form of agreement or other document employed by the Company in the
administration of the Plan, or of any Purchase Right shall be determined by the
Board and shall be final and binding upon all persons having an interest in the
Plan or the Purchase Right. Subject to the provisions of the Plan, the Board
shall determine all of the relevant terms and conditions of Purchase Rights
granted pursuant to the Plan; provided, however, that all Participants granted
Purchase Rights pursuant to the Plan shall have the same rights and privileges
within the meaning of Section 423(b)(5) of the Code. All expenses incurred in
connection with the administration of the Plan shall be paid by the Company.
3.2 AUTHORITY OF OFFICERS. Any officer of the Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election that is the responsibility
of or that is allocated to the Company herein, provided that the officer has
apparent authority with respect to such matter, right, obligation,
determination or election.
3.3 POLICIES AND PROCEDURES ESTABLISHED BY THE COMPANY.
The Company may, from time to time, consistent with the Plan and the
requirements of Section 423 of the Code, establish, change or terminate such
rules, guidelines, policies, procedures, limitations, or adjustments as deemed
advisable by the Company, in its sole discretion, for the proper administration
of the Plan, including, without limitation, (a) a minimum payroll deduction
amount required for participation in an Offering, (b) a limitation on the
frequency or number of changes permitted in the rate of payroll deduction
during an Offering, (c) an exchange ratio applicable to amounts withheld in a
currency other than United States dollars, (d) a payroll deduction greater than
or less than the amount designated by a Participant in order to adjust for the
Company's delay or mistake in processing a Subscription Agreement or in
otherwise effecting a Participant's election under the Plan or as advisable to
comply with the requirements of Section 423 of the
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Code, and (e) determination of the date and manner by which the Fair Market
Value of a share of Stock is determined for purposes of administration of the
Plan.
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to
adjustment as provided in Section 4.2, the maximum aggregate number of shares
of Stock that may be issued under the Plan shall be Twenty Five Thousand
(25,000) and shall consist of authorized but unissued or reacquired shares of
Stock, or any combination thereof. If an outstanding Purchase Right for any
reason expires or is terminated or canceled, the shares of Stock allocable to
the unexercised portion of such Purchase Right shall again be available for
issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the
event of any stock dividend, stock split, reverse stock split,
recapitalization, combination, reclassification or similar change in the
capital structure of the Company, or in the event of any merger (including a
merger effected for the purpose of changing the Company's domicile), sale of
assets or other reorganization in which the Company is a party, appropriate
adjustments shall be made in the number and class of shares subject to the Plan
and each Purchase Right and in the Purchase Price. If a majority of the shares
which are of the same class as the shares that are subject to outstanding
Purchase Rights are exchanged for, converted into, or otherwise become (whether
or not pursuant to an Ownership Change Event) shares of another corporation
(the "NEW SHARES"), the Board may unilaterally amend the outstanding Purchase
Rights to provide that such Purchase Rights are exercisable for New Shares. In
the event of any such amendment, the number of shares subject to, and the
Purchase Price of, the outstanding Purchase Rights shall be adjusted in a fair
and equitable manner, as determined by the Board, in its sole discretion.
Notwithstanding the foregoing, any fractional share resulting from an
adjustment pursuant to this Section 4.2 shall be rounded down to the nearest
whole number, and in no event may the Purchase Price be decreased to an amount
less than the par value, if any, of the stock subject to the Purchase Right.
The adjustments determined by the Board pursuant to this Section 4.2 shall be
final, binding and conclusive.
5. ELIGIBILITY.
5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Each Employee of
a Participating Company is eligible to participate in the Plan and shall be
deemed an Eligible Employee, except the following:
(a) Any Employee who is customarily employed by
the Participating Company Group for less than twenty (20) hours per week; or
(b) Any Employee who is customarily employed by
the Participating Company Group for not more than five (5) months in any
calendar year.
5.2 EXCLUSION OF CERTAIN STOCKHOLDERS. Notwithstanding
any provision of the Plan to the contrary, no Employee shall be granted a
Purchase Right under the Plan if, immediately after such grant, such Employee
would own or hold options to purchase stock of the
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Company or of any Parent Corporation or Subsidiary Corporation possessing five
percent (5%) or more of the total combined voting power or value of all classes
of stock of such corporation, as determined in accordance with Section
423(b)(3) of the Code. For purposes of this Section 5.2, the attribution rules
of Section 424(d) of the Code shall apply in determining the stock ownership of
such Employee.
6. OFFERINGS.
6.1 OFFERING PERIODS. Except as otherwise set forth
below, the Plan shall be implemented by sequential Offerings of approximately
six (6) months duration or such other duration as the Board shall determine.
The first Offering Period shall commence on the Effective Date and end on July
31, 1998. Subsequent Offerings shall commence on or about February 1 and
August 1 of each year and end on or about the next July 31 and January 31,
respectively, occurring thereafter. Notwithstanding the foregoing, the Board
may establish a different term for one or more Offerings or different
commencing or ending dates for such Offerings; provided, however, that no
Offering may exceed a term of twenty-seven (27) months. If the first or last
day of an Offering Period is not a day on which the national securities
exchanges or Nasdaq Stock Market are open for trading, the Company shall
specify the trading day that will be deemed the first or last day, as the case
may be, of the Offering Period.
6.2 PURCHASE PERIODS. If the Board so determines, in its
discretion, each Offering Period may consist of two (2) or more consecutive
Purchase Periods having such duration as the Board shall specify, and the last
day of each such Purchase Period shall be a Purchase Date. If the first or
last day of a Purchase Period is not a day on which the national securities
exchanges or Nasdaq Stock Market are open for trading, the Company shall
specify the trading day that will be deemed the first or last day, as the case
may be, of the Purchase Period.
7. PARTICIPATION IN THE PLAN.
7.1 INITIAL PARTICIPATION. An Eligible Employee may
become a Participant in an Offering Period by delivering a properly completed
Subscription Agreement to the office designated by the Company not later than
the close of business for such office on the Subscription Date established by
the Company for such Offering Period. An Eligible Employee who does not
deliver a properly completed Subscription Agreement to the Company's designated
office on or before the Subscription Date for an Offering Period shall not
participate in the Plan for that Offering Period or for any subsequent Offering
Period unless such Eligible Employee subsequently delivers a properly completed
Subscription Agreement to the appropriate office of the Company on or before
the Subscription Date for such subsequent Offering Period. An Employee who
becomes an Eligible Employee after the Offering Date of an Offering Period
shall not be eligible to participate in such Offering Period but may
participate in any subsequent Offering Period provided such Employee is still
an Eligible Employee as of the Offering Date of such subsequent Offering
Period.
7.2 CONTINUED PARTICIPATION. A Participant shall
automatically participate in the next Offering Period commencing immediately
after the final Purchase Date of each Offering Period in which the Participant
participates provided that such Participant remains an Eligible
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Employee on the Offering Date of the new Offering Period and has not either (a)
withdrawn from the Plan pursuant to Section 12.1 or (b) terminated employment
as provided in Section 13. A Participant who may automatically participate in
a subsequent Offering Period, as provided in this Section, is not required to
deliver any additional Subscription Agreement for the subsequent Offering
Period in order to continue participation in the Plan. However, a Participant
may deliver a new Subscription Agreement for a subsequent Offering Period in
accordance with the procedures set forth in Section 7.1 if the Participant
desires to change any of the elections contained in the Participant's then
effective Subscription Agreement. Eligible Employees may not participate
simultaneously in more than one Offering if the Company establishes concurrent
Offerings.
8. RIGHT TO PURCHASE SHARES.
8.1 GRANT OF PURCHASE RIGHT. Except as set forth below,
on the Offering Date of each Annual Offering Period, each Participant in such
Annual Offering Period shall be granted automatically a Purchase Right
consisting of an option to purchase the lesser of (a) that number of whole
shares of Stock determined by dividing Twelve Thousand Five Hundred Dollars
($12,500) by the Fair Market Value of a share of Stock on such Offering Date or
(b) One Thousand Two Hundred and Fifty (1,250) shares of Stock.
8.2 PRO RATA ADJUSTMENT OF PURCHASE RIGHT.
Notwithstanding the provisions of Section 8.1, if the Board establishes an
Offering Period of less than five and one-half (5-1/2) months or more than six
and one-half (6-1/2) months in duration, then (a) the dollar amount in Section
8.1 shall be determined by multiplying $2,083.33 by the number of months
(rounded to the nearest whole month) in the Offering Period and rounding to the
nearest whole dollar, and (b) the share amount in Section 8.1 shall be
determined by multiplying 1,000 shares by the number of months (rounded to the
nearest whole month) in the Offering Period and rounding to the nearest whole
share.
8.3 CALENDAR YEAR PURCHASE LIMITATION. Notwithstanding
any provision of the Plan to the contrary, no Participant shall be granted a
Purchase Right which permits his or her right to purchase shares of Stock under
the Plan to accrue at a rate which, when aggregated with such Participant's
rights to purchase shares under all other employee stock purchase plans of a
Participating Company intended to meet the requirements of Section 423 of the
Code, exceeds Twenty-Five Thousand Dollars ($25,000) in Fair Market Value (or
such other limit, if any, as may be imposed by the Code) for each calendar year
in which such Purchase Right is outstanding at any time. For purposes of the
preceding sentence, the Fair Market Value of shares purchased during a given
Offering Period shall be determined as of the Offering Date for such Offering
Period. The limitation described in this Section 8.3 shall be applied in
conformance with applicable regulations under Section 423(b)(8) of the Code.
9. PURCHASE PRICE.
The Purchase Price at which each share of Stock may be
acquired in an Offering Period upon the exercise of all or any portion of a
Purchase Right shall be established by the Board; provided, however, that the
Purchase Price shall not be less than eighty-five percent (85%)
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<PAGE> 8
of the lesser of (a) the Fair Market Value of a share of Stock on the Offering
Date of the Offering Period or (b) the Fair Market Value of a share of Stock on
the Purchase Date. Unless otherwise provided by the Board prior to the
commencement of an Offering Period, the Purchase Price for that Offering Period
shall be eighty-five percent (85%) of the lesser of (a) the Fair Market Value
of a share of Stock on the Offering Date of the Offering Period, or (b) the
Fair Market Value of a share of Stock on the Purchase Date.
10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION.
Shares of Stock acquired pursuant to the exercise of all or
any portion of a Purchase Right may be paid for only by means of payroll
deductions from the Participant's Compensation accumulated during the Offering
Period for which such Purchase Right was granted, subject to the following:
10.1 AMOUNT OF PAYROLL DEDUCTIONS. Except as otherwise
provided herein, the amount to be deducted under the Plan from a Participant's
Compensation on each payday during an Offering Period shall be determined by
the Participant's Subscription Agreement. The Subscription Agreement shall set
forth the percentage of the Participant's Compensation to be deducted on each
payday during an Offering Period in whole percentages of not less than one
percent (1%) (except as a result of an election pursuant to Section 10.3 to
stop payroll deductions made effective following the first payday during an
Offering) or more than ten percent (10%). Notwithstanding the foregoing, the
Board may change the limits on payroll deductions effective as of any future
Offering Date.
10.2 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll
deductions shall commence on the first payday following the Offering Date and
shall continue to the end of the Offering Period unless sooner altered or
terminated as provided herein.
10.3 ELECTION TO CHANGE OR STOP PAYROLL DEDUCTIONS.
During an Offering Period, a Participant may elect to increase or decrease the
rate of or to stop deductions from his or her Compensation by delivering to the
Company's designated office an amended Subscription Agreement authorizing such
change on or before the "Change Notice Date." The "CHANGE NOTICE DATE" shall
be the seventh (7th) day prior to the beginning of the first pay period for
which such election is to be effective. However, the Company may change the
Change Notice Date from time to time. A Participant who elects to decrease the
rate of his or her payroll deductions to zero percent (0%) shall nevertheless
remain a Participant in the current Offering Period unless such Participant
withdraws from the Plan as provided in Section 12.1.
10.4 PARTICIPANT ACCOUNTS. Individual bookkeeping
accounts shall be maintained for each Participant. All payroll deductions from
a Participant's Compensation shall be credited to such Participant's Plan
account and shall be deposited with the general funds of the Company. All
payroll deductions received or held by the Company may be used by the Company
for any corporate purpose.
10.5 NO INTEREST PAID. Interest shall not be paid on sums
deducted from a Participant's Compensation pursuant to the Plan.
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11. PURCHASE OF SHARES.
11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date of
an Offering Period, each Participant who has not withdrawn from the Plan and
whose participation in the Offering has not terminated before such Purchase
Date shall automatically acquire pursuant to the exercise of the Participant's
Purchase Right the number of whole shares of Stock determined by dividing (a)
the total amount of the Participant's payroll deductions accumulated in the
Participant's Plan account during the Offering Period and not previously
applied toward the purchase of Stock by (b) the Purchase Price. However, in no
event shall the number of shares purchased by the Participant during an
Offering Period exceed the number of shares subject to the Participant's
Purchase Right. No shares of Stock shall be purchased on a Purchase Date on
behalf of a Participant whose participation in the Offering or the Plan has
terminated before such Purchase Date.
11.2 PRO RATA ALLOCATION OF SHARES. In the event that the
number of shares of Stock which might be purchased by all Participants in the
Plan on a Purchase Date exceeds the number of shares of Stock available in the
Plan as provided in Section 4.1, the Company shall make a pro rata allocation
of the remaining shares in as uniform a manner as shall be practicable and as
the Company shall determine to be equitable. Any fractional share resulting
from such pro rata allocation to any Participant shall be disregarded.
11.3 DELIVERY OF CERTIFICATES. As soon as practicable
after each Purchase Date, the Company shall arrange the delivery to each
Participant, as appropriate, of a certificate representing the shares acquired
by the Participant on such Purchase Date; provided that the Company may deliver
such shares to a broker that holds such shares in street name for the benefit
of the Participant. Shares to be delivered to a Participant under the Plan
shall be registered in the name of the Participant, or, if requested by the
Participant, in the name of the Participant and his or her spouse, or, if
applicable, in the names of the heirs of the Participant.
11.4 RETURN OF CASH BALANCE. Any cash balance remaining
in a Participant's Plan account following any Purchase Date shall be refunded
to the Participant as soon as practicable after such Purchase Date. However,
if the cash to be returned to a Participant pursuant to the preceding sentence
is an amount less than the amount that would have been necessary to purchase an
additional whole share of Stock on such Purchase Date, the Company may retain
such amount in the Participant's Plan account to be applied toward the purchase
of shares of Stock in the subsequent Purchase Period or Offering Period, as the
case may be.
11.5 TAX WITHHOLDING. At the time a Participant's
Purchase Right is exercised, in whole or in part, or at the time a Participant
disposes of some or all of the shares of Stock he or she acquires under the
Plan, the Participant shall make adequate provision for the foreign, federal,
state and local tax withholding obligations of the Participating Company Group,
if any, which arise upon exercise of the Purchase Right or upon such
disposition of shares, respectively. The Participating Company Group may, but
shall not be obligated to, withhold from the Participant's compensation the
amount necessary to meet such withholding obligations.
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11.6 EXPIRATION OF PURCHASE RIGHT. Any portion of a
Participant's Purchase Right remaining unexercised after the end of the
Offering Period to which the Purchase Right relates shall expire immediately
upon the end of the Offering Period.
11.7 REPORTS TO PARTICIPANTS. Each Participant who has
exercised all or part of his or her Purchase Right shall receive, as soon as
practicable after the Purchase Date, a report of such Participant's Plan
account setting forth the total payroll deductions accumulated prior to such
exercise, the number of shares of Stock purchased, the Purchase Price for such
shares, the date of purchase and the cash balance, if any, remaining
immediately after such purchase that is to be refunded or retained in the
Participant's Plan account pursuant to Section 11.4.
12. WITHDRAWAL FROM OFFERING OR PLAN.
12.1 VOLUNTARY WITHDRAWAL FROM THE PLAN. A Participant
may withdraw from the Plan by signing and delivering to the Company's
designated office a written notice of withdrawal on a form provided by the
Company for such purpose. Such withdrawal may be elected at any time prior to
the end of an Offering Period; provided, however, that if a Participant
withdraws from the Plan after a Purchase Date, the withdrawal shall not affect
shares of Stock acquired by the Participant on such Purchase Date. A
Participant who voluntarily withdraws from the Plan is prohibited from resuming
participation in the Plan in the same Offering from which he or she withdrew,
but may participate in any subsequent Offering by again satisfying the
requirements of Sections 5 and 7.1. The Company may impose, from time to time,
a requirement that the notice of withdrawal from the Plan be on file with the
Company's designated office for a reasonable period prior to the effectiveness
of the Participant's withdrawal.
12.2 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's
voluntary withdrawal from the Plan pursuant to Section 12.1, the Participant's
accumulated payroll deductions which have not been applied toward the purchase
of shares of Stock shall be refunded to the Participant as soon as practicable
after the withdrawal, without the payment of any interest, and the
Participant's interest in the Plan or the Offering, as applicable, shall
terminate. Such accumulated payroll deductions to be refunded in accordance
with this Section may not be applied to any other Offering under the Plan.
13. TERMINATION OF EMPLOYMENT OR ELIGIBILITY.
Upon a Participant's ceasing, prior to a Purchase Date, to be
an Employee of the Participating Company Group for any reason, including
retirement, disability or death, or the failure of a Participant to remain an
Eligible Employee, the Participant's participation in the Plan shall terminate
immediately. In such event, the payroll deductions credited to the
Participant's Plan account since the last Purchase Date shall, as soon as
practicable, be returned to the Participant or, in the case of the
Participant's death, to the Participant's legal representative, and all of the
Participant's rights under the Plan shall terminate. Interest shall not be
paid on sums returned pursuant to this Section 13. A Participant whose
participation has been so terminated may again become eligible to participate
in the Plan by again satisfying the requirements of Sections 5 and 7.1.
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14. CHANGE IN CONTROL.
14.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed
to have occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty percent
(50%) of the voting stock of the Company; (ii) a merger or consolidation in
which the Company is a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership
Change Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
14.2 EFFECT OF CHANGE IN CONTROL ON PURCHASE RIGHTS. In
the event of a Change in Control, the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"ACQUIRING CORPORATION"), may assume the Company's rights and obligations under
the Plan. If the Acquiring Corporation elects not to assume the Company's
rights and obligations under outstanding Purchase Rights, the Purchase Date of
the then current Offering Period or Purchase Period, as the case may be, shall
be accelerated to a date before the date of the Change in Control specified by
the Board, but the number of shares of Stock subject to outstanding Purchase
Rights shall not be adjusted. All Purchase Rights which are neither assumed by
the Acquiring Corporation in connection with the Change in Control nor
exercised as of the date of the Change in Control shall terminate and cease to
be outstanding effective as of the date of the Change in Control.
15. NONTRANSFERABILITY OF PURCHASE RIGHTS.
A Purchase Right may not be transferred in any manner
otherwise than by will or the laws of descent and distribution and shall be
exercisable during the lifetime of the Participant only by the Participant.
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16. COMPLIANCE WITH SECURITIES LAW.
The issuance of shares under the Plan shall be subject to
compliance with all applicable requirements of federal, state and foreign law
with respect to such securities. A Purchase Right may not be exercised if the
issuance of shares upon such exercise would constitute a violation of any
applicable federal, state or foreign securities laws or other law or
regulations or the requirements of any securities exchange or market system
upon which the Stock may then be listed. In addition, no Purchase Right may be
exercised unless (a) a registration statement under the Securities Act of 1933,
as amended, shall at the time of exercise of the Purchase Right be in effect
with respect to the shares issuable upon exercise of the Purchase Right, or (b)
in the opinion of legal counsel to the Company, the shares issuable upon
exercise of the Purchase Right may be issued in accordance with the terms of an
applicable exemption from the registration requirements of said Act. The
inability of the Company to obtain from any regulatory body having jurisdiction
the authority, if any, deemed by the Company's legal counsel to be necessary to
the lawful issuance and sale of any shares under the Plan shall relieve the
Company of any liability in respect of the failure to issue or sell such shares
as to which such requisite authority shall not have been obtained. As a
condition to the exercise of a Purchase Right, the Company may require the
Participant to satisfy any qualifications that may be necessary or appropriate,
to evidence compliance with any applicable law or regulation, and to make any
representation or warranty with respect thereto as may be requested by the
Company.
17. RIGHTS AS A STOCKHOLDER AND EMPLOYEE.
A Participant shall have no rights as a stockholder by virtue
of the Participant's participation in the Plan until the date of the issuance
of a certificate for the shares purchased pursuant to the exercise of the
Participant's Purchase Right (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company).
No adjustment shall be made for dividends, distributions or other rights for
which the record date is prior to the date such certificate is issued, except
as provided in Section 4.2. Nothing herein shall confer upon a Participant any
right to continue in the employ of the Participating Company Group or interfere
in any way with any right of the Participating Company Group to terminate the
Participant's employment at any time.
18. LEGENDS.
The Company may at any time place legends or other identifying
symbols referencing any applicable federal, state or foreign securities law
restrictions or any provision convenient in the administration of the Plan on
some or all of the certificates representing shares of Stock issued under the
Plan. The Participant shall, at the request of the Company, promptly present
to the Company any and all certificates representing shares acquired pursuant
to a Purchase Right in the possession of the Participant in order to carry out
the provisions of this Section. Unless otherwise specified by the Company,
legends placed on such certificates may include but shall not be limited to the
following:
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE
CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF
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SHARES UNDER AN EMPLOYEE STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE TRANSFER AGENT FOR THE SHARES
EVIDENCED HEREBY SHALL NOTIFY THE CORPORATION IMMEDIATELY OF ANY TRANSFER OF
THE SHARES BY THE REGISTERED HOLDER HEREOF MADE ON OR BEFORE
_________________________. THE REGISTERED HOLDER SHALL HOLD ALL SHARES
PURCHASED UNDER THE PLAN IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME
OF ANY NOMINEE) PRIOR TO THIS DATE."
19. NOTIFICATION OF SALE OF SHARES.
The Company may require the Participant to give the Company
prompt notice of any disposition of shares acquired by exercise of a Purchase
Right within two years from the date of granting such Purchase Right or one
year from the date of exercise of such Purchase Right. The Company may require
that until such time as a Participant disposes of shares acquired upon exercise
of a Purchase Right, the Participant shall hold all such shares in the
Participant's name (or, if elected by the Participant, in the name of the
Participant and his or her spouse but not in the name of any nominee) until the
lapse of the time periods with respect to such Purchase Right referred to in
the preceding sentence. The Company may direct that the certificates
evidencing shares acquired by exercise of a Purchase Right refer to such
requirement to give prompt notice of disposition.
20. NOTICES.
All notices or other communications by a Participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
21. INDEMNIFICATION.
In addition to such other rights of indemnification as they
may have as members of the Board or officers or employees of the Participating
Company Group, members of the Board and any officers or employees of the
Participating Company Group to whom authority to act for the Board or the
Company is delegated shall be indemnified by the Company against all reasonable
expenses, including attorneys' fees, actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in connection
with any appeal therein, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Plan, or
any right granted hereunder, and against all amounts paid by them in settlement
thereof (provided such settlement is approved by independent legal counsel
selected by the Company) or paid by them in satisfaction of a judgment in any
such action, suit or proceeding, except in relation to matters as to which it
shall be adjudged in such action, suit or proceeding that such person is liable
for gross negligence, bad faith or intentional misconduct in duties; provided,
however, that within sixty (60) days after the institution of such action, suit
or proceeding, such person shall offer to the Company, in writing, the
opportunity at its own expense to handle and defend the same.
13
<PAGE> 14
22. AMENDMENT OR TERMINATION OF THE PLAN.
The Board may at any time amend or terminate the Plan, except
that (a) such termination shall not affect Purchase Rights previously granted
under the Plan, except as permitted under the Plan, and (b) no amendment may
adversely affect a Purchase Right previously granted under the Plan (except to
the extent permitted by the Plan or as may be necessary to qualify the Plan as
an employee stock purchase plan pursuant to Section 423 of the Code or to
obtain qualification or registration of the shares of Stock under applicable
federal, state or foreign securities laws). In addition, an amendment to the
Plan must be approved by the stockholders of the Company within twelve (12)
months of the adoption of such amendment if such amendment would authorize the
sale of more shares than are authorized for issuance under the Plan or would
change the definition of the corporations that may be designated by the Board
as Participating Companies.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing American Residential Trust Investment, Inc. 1997 Employee
Stock Purchase Plan was duly adopted by the Board of Directors of the Company
on August 6, 1997.
____________________________________
Secretary
14
<PAGE> 15
PLAN HISTORY
August 6, 1997 Board adopts the Plan, with an initial reserve of
25,000 shares.
August 6, 1997 Stockholders approve Plan, with an initial reserve
of 25,000 shares.
<PAGE> 16
AMERICAN RESIDENTIAL TRUST INVESTMENT, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
NAME (Please print):____________________________________________________________
(Last) (First) (Middle)
[ ] Original Application for the Offering Period beginning
____________________, 199__.
[ ] Change in Payroll Deduction rate effective with the pay period ending
___________________, 199__.
I hereby elect to participate in the 1997 Employee Stock Purchase Plan
(the "PLAN") of American Residential Trust Investment, Inc. (the "COMPANY") and
subscribe to purchase shares of the Company's Stock in accordance with this
Subscription Agreement and the Plan.
I hereby authorize payroll deductions in the amount of ________
percent (in whole percentages not less than 1% (unless an election to stop
deductions is being made) or more than 10%) of my "COMPENSATION" on each payday
throughout the "OFFERING PERIOD" in accordance with the Plan. I understand
that these payroll deductions will be accumulated for the purchase of shares of
Stock at the applicable purchase price determined in accordance with the Plan.
I understand that, except as otherwise provided by the Plan, I will
automatically purchase shares on each Purchase Date under the Plan unless I
withdraw from the Plan by giving written notice on a form provided by the
Company or unless my employment terminates.
I understand that I will automatically participate in each subsequent
Offering that commences immediately after the last day of an Offering in which
I am participating until I withdraw from the Plan by giving written notice on a
form provided by the Company or my employment terminates.
Shares I purchase under the Plan should be issued in the name(s) set
forth below. (Shares may be issued in the participant's name alone or together
with the participant's spouse as community property or in joint tenancy.)
NAME(S): __________________________________________________________________
ADDRESS: __________________________________________________________________
MY SOCIAL SECURITY NUMBER: ________________________________________________
I agree to make adequate provision for the federal, state, local and
foreign tax withholding obligations, if any, which may arise upon my purchase
of shares under the Plan and/or my disposition of such shares. The Company
may, but will not be obligated to, withhold from my compensation the amount
necessary to meet such withholding obligations.
I agree that, unless otherwise permitted by the Company, until I
dispose of the shares I purchased under the Plan, I will hold such shares in
the name(s) entered above (and not in the name of any nominee) for at least two
years from the first day of the Offering Period in which, and at least one year
from the Purchase Date on which, I acquired such shares. I FURTHER AGREE THAT
I WILL NOTIFY THE CHIEF FINANCIAL OFFICER OF THE COMPANY IN WRITING WITHIN 30
DAYS AFTER ANY TRANSFER OF SUCH SHARES PRIOR TO THE END OF THE PERIODS REFERRED
TO IN THE PRECEDING SENTENCE.
I am familiar with the provisions of the Plan and agree to participate
in the Plan subject to all of its provisions. I understand that the Board of
Directors of the Company reserves the right to terminate the Plan or to amend
the Plan and my right to purchase stock under the Plan to the extent provided
by the Plan. I understand that the effectiveness of this Subscription
Agreement is dependent upon my eligibility to participate in the Plan.
Date: _______________________ Signature:___________________________________
<PAGE> 17
AMERICAN RESIDENTIAL TRUST INVESTMENT, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
NAME (Please print):____________________________________________________________
(Last) (First) (Middle)
I hereby elect to withdraw from the Offering under American
Residential Trust Investment, Inc. 1997 Employee Stock Purchase Plan (the
"PLAN") which began on _________________________, 199__ and in which I am
currently participating (the "CURRENT OFFERING").
ELECT EITHER A OR B BELOW:
[ ] A. I elect to terminate immediately my participation in the
Current Offering and in the Plan.
I request that the Company cease all further payroll
deductions from my Compensation under the Plan (provided that
I have given sufficient notice prior to the next payday). I
request that all payroll deductions credited to my account
under the Plan (if any) not previously used to purchase shares
under the Plan shall not be used to purchase shares on the
last day of the Current Offering. Instead, I request that all
such amounts be paid to me as soon as practicable. I
understand that this election immediately terminates my
interest in the Current Offering and in the Plan.
[ ] B. I elect to terminate my participation in the Current Offering
and in the Plan following my purchase of shares on the last
day of the Current Offering.
I request that the Company cease all further payroll
deductions from my Compensation under the Plan (provided that
I have given sufficient notice prior to the next payday). I
request that all payroll deductions credited to my account
under the Plan (if any) not previously used to purchase shares
under the Plan shall be used to purchase shares on the next
Purchase Date of the Current Offering to the extent permitted
by the Plan. I understand that this election will terminate
my interest in the Current Offering and in the Plan
immediately following such purchase. I request that any cash
balance remaining in my account under the Plan after my
purchase of shares be paid to me as soon as practicable.
I understand that by making this election I am terminating my interest
in the Plan and that no further payroll deductions will be made (provided that
I have given sufficient notice prior to the next payday) unless I elect in
accordance with the Plan to become a participant in another Offering under the
Plan by filing a new Subscription Agreement with the Company.
Date:___________________________ Signature:_________________________________
<PAGE> 1
EXHIBIT 10.10
- -------------------------------------------------------------------------------
HOME ASSET MANAGEMENT CORP., as Issuer,
MDC REIT HOLDINGS, LLC, as Guarantor
and
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
$25,000,000 Principal Amount
of
12% Senior Secured Notes due February 11, 2002
Warrants to Purchase 666,667 Shares of Common Stock
and
Warrants to Purchase a Variable Number of Shares of Common Stock
SECURITIES PURCHASE AGREEMENT
- -------------------------------------------------------------------------------
Dated as of February 11, 1997
<PAGE> 2
TABLE OF CONTENTS
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SECTION 1. PURCHASE AND SALE OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Issue and Sale of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Purchase and Sale of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Registration of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.4 Delivery Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.5 Issue Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.6 Direct Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.7 Lost, Etc. Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.8 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.9 Further Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.10 Other Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2. CLOSING CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.1 Delivery of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.2 Legal Investment; Purchase Permitted by Applicable Laws . . . . . . . . . . . . . . . . . . . . . 10
2.3 Payment of Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.4 Compliance with Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.5 Completion of Other Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.6 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.7 No Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.8 Proceedings Satisfactory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.9 Consents and Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.10 No Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.11 No Material Judgment or Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.12 Initial Escrow Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANIES . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.1 Authorization; Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.2 No Violation or Conflict; No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.3 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.4 No Material Adverse Change; Financial Information . . . . . . . . . . . . . . . . . . . . . . . . 15
3.5 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.6 Third Party Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.7 No Violation of Regulations of Board of Governors of Federal Reserve System . . . . . . . . . . . 16
3.8 Private Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.9 Governmental Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.10 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.11 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.12 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.13 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.14 Labor Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.15 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.16 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.17 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.18 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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3.19 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.20 Authorization; Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.21 No Violation or Conflict; No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.22 Third Party Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 4. REPRESENTATIONS AND WARRANTIES OF EACH PURCHASER . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.1 Purchase for Own Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.2 Accredited Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.3 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.4 Securities Restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.5 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 5. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.1 Payment of Notes; Satisfaction of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.2 Financial Statements and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.3 Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5.4 Limitation on Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5.5 Limitation on Incurrence of Additional Indebtedness and Issuance of Disqualified Stock . . . . . . 30
5.6 Limitation on Transactions With Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.7 Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.8 Limitation on Sale of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.9 Limitation on Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.10 Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries . . . . . . . . . . . 33
5.11 Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.12 Minimum Consolidated Interest Expense Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . 34
5.13 Fiscal Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.14 Limitation on Ranking of Future Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
5.15 Stay, Extension and Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
5.16 Corporate Existence; Merger; Successor Corporation . . . . . . . . . . . . . . . . . . . . . . . . 35
5.17 Limitation on Reit's Business and Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
5.18 Limitation on the Businesses of the Issuer and Holdings . . . . . . . . . . . . . . . . . . . . . 36
5.19 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5.20 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5.21 Ownership of Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5.22 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5.23 Employee Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5.24 ERISA Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5.25 Inconsistent Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.26 Compliance with Laws; Maintenance of Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.27 Inspection of Properties and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.28 Board of Director Observation Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.29 Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.30 Information to Prospective Purchasers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.31 Private Placement Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.32 Impairment of Security Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5.33 Required Escrow Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
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5.34 Maintenance of Letter of Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5.35 Reit Leverage Ratio and Indebtedness of Reit . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.36 Distributions by Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.37 Investment, Hedging and Leverage Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 6. REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
6.1 Optional and Mandatory Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
6.2 Selection of Notes to Be Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
6.3 Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
6.4 Effect of Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6.5 Payment of Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 7. DEFAULTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
7.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
7.2 Acceleration of Notes; Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
7.3 Premium on Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
7.4 Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
7.5 Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
7.6 Rights of Holders to Receive Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
7.7 Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 8. AMENDMENTS AND WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
8.1 With Consent of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
8.2 Revocation and Effect of Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
8.3 Notation on or Exchange of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
8.4 Payment of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 9. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
9.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
9.2 Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 10. GUARANTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
10.1 Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
10.2 Execution and Delivery of each Subsidiary Guaranty . . . . . . . . . . . . . . . . . . . . . . . . 71
10.3 Future Subsidiary Guarantors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
10.4 Certain Bankruptcy Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 11. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
11.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
11.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
11.3 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
11.4 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
11.5 Governing Law; Submission to Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
11.6 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
11.7 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
11.9 Disclosure of Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
</TABLE>
iii
<PAGE> 5
Page
ANNEX A-1 Form of Note
ANNEX A-2 Form of Guaranty
ANNEX B-1 Crescent Warrant Agreement
ANNEX B-2 Contingent Warrant Agreement
ANNEX C Stockholders Agreement
ANNEX D Registration Rights Agreement
ANNEX E Opinion of Counsel to the Issuer and Holding
ANNEX F Opinion of Counsel to Purchasers
ANNEX G Escrow Agreement
ANNEX H Holdings Pledge
ANNEX I Issuer Pledge
ANNEX J Letter of Credit
ANNEX K Letter of Credit Contribution Agreement
ANNEX L Management Agreement
SCHEDULES:
1.2
2.5(d)
3.1
3.4(c)
5.29
iv
<PAGE> 6
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement dated as of February 11,
1997 (this "Agreement"), is entered into by and among Home Asset Management
Corp., a Delaware corporation (the "Issuer"), MDC Reit Holdings, LLC, a
Delaware limited liability company ("Holdings"), American Residential
Investment Trust, Inc., a Maryland corporation, and the purchasers listed on
the signature pages hereto (each a "Purchaser" and collectively, the
"Purchasers").
Capitalized terms not otherwise defined herein shall have the
meanings ascribed to such terms in Section 9.1.
In consideration of the premises, mutual covenants and
agreements hereinafter contained and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the Companies agree,
jointly and severally, and each of the Purchasers agrees, severally but not
jointly, as follows:
SECTION 1. PURCHASE AND SALE OF SECURITIES.
1.1 Issue and Sale of Securities.
(a) On or before the Closing,
(1) The Issuer will have authorized
the issue and sale to the Purchasers, in the
respective amounts set forth on the signature
pages hereof, of $25,000,000 aggregate
principal amount of its 12% Senior Secured
Notes due February 11, 2002 (the "Notes"), to
be substantially in the form attached hereto
as Annex A-1.
(2) The Issuer will have authorized
the issue and sale to the Purchasers, in the
respective amounts set forth on the signature
pages hereof, of warrants (the "Crescent
Warrants") to purchase an aggregate of
666,667 shares of its Common Stock pursuant
to a Warrant Agreement in the form attached
hereto as Annex B-1 (the "Crescent Warrant
Agreement"). In addition, the Issuer will
have authorized the issue and sale to the
Purchasers of warrants (the "Contingent
Warrants") to purchase a variable number of
shares of Common Stock pursuant to a Warrant
Agreement in the form attached hereto as
Annex B-2 (the "Contingent Warrant
Agreement"). The Notes, the Crescent Warrants
and the Contingent Warrants shall
individually be referenced herein as a
"Security" and collectively referenced herein
as the "Securities."
(b) The Notes shall include such
notations, legends or endorsements set forth thereon or required by law. The
Notes will be in the principal amount of $1,000 (except in the case of any
redemption following which the aggregate principal amount remaining is less
than $1,000) or integral multiples of $1,000 in excess thereof. Each Note
shall be dated the date of its issuance. Subject to Section 1.7, the aggregate
principal amount of the Notes outstanding at any one time may not exceed
$25,000,000. The terms and provisions contained in the Notes shall constitute,
and are hereby expressly made, a part of this Agreement and, to the extent
applicable, the Issuer and the Purchasers, by their execution and delivery of
this Agreement, expressly agree to such terms and provisions and to be bound
thereby.
<PAGE> 7
(c) Each certificate
representing a Crescent Warrant or a Contingent Warrant shall be substantially
in the form attached as Exhibit A to the Crescent Warrant Agreement or Exhibit
A to the Contingent Warrant Agreement, respectively, and shall be dated the
date of its issuance. The Crescent Warrants will be exercisable, in the manner
provided in the Crescent Warrant Agreement and the Crescent Warrants, for a
number of shares of Common Stock as provided in the Crescent Warrant Agreement
(the "Crescent Warrant Shares"). The Contingent Warrants will be exercisable,
in the manner provided in the Contingent Warrant Agreement and the Contingent
Warrants, for a number of shares of Common Stock as provided in the Contingent
Warrant Agreement (the "Contingent Warrant Shares"). Each Holder of Crescent
Warrant Shares or Contingent Warrant Shares will have certain registration
rights with respect to such shares, as set forth in the Stockholders Agreement,
Irrevocable Proxy and Voting Agreement in the form attached hereto as Annex C
(the "Stockholders Agreement"). Upon any distribution of any Reit Common Stock
by Holdings, each member of Holdings shall have certain registration rights, as
set forth in a Registration Rights Agreement in the form attached hereto as
Annex D (the "Registration Rights Agreement"). The terms and provisions
contained in the Crescent Warrant Agreement, the Crescent Warrants, the
Contingent Warrant Agreement and the Contingent Warrants shall constitute, and
are hereby expressly made, a part of this Agreement and, to the extent
applicable, the Issuer and the Purchasers, by their execution and delivery of
this Agreement, expressly agree to such terms and provisions and to be bound
thereby.
1.2 Purchase and Sale of Securities.
(a) Purchase and Sale. The
Issuer agrees to sell and, subject to the terms and conditions set forth herein
and in reliance on the representations and warranties of the Companies
contained or incorporated herein, each of the Purchasers agrees, severally but
not jointly, to purchase the Securities set forth below such Purchaser's name
on the signature pages hereto at a purchase price of $994.56 per $1,000
principal amount of Notes, $0.20 per Crescent Warrant and $0.10 per Contingent
Warrant, which amounts are based on the relative fair market value of each such
Security at the time of issuance, for an aggregate purchase price of
$24,999,000 for the Notes, the Crescent Warrants and the Contingent Warrants.
In addition to such aggregate purchase price, the Purchasers agree to pay an
aggregate of $1,000 to the Issuer, and the Issuer agrees to contribute such
amount to Holdings, on behalf of the Purchasers, as capital contributions of
the Purchasers to Holdings, in respect of the LLC Interests. The Issuer and
the Purchasers hereby agree that all Tax Returns filed by the Issuer and the
Purchasers shall be consistent in all material respects with such allocation
(including for purposes of Section 1271 et seq. of the Code).
(b) Closing. The purchase and
sale of the Securities shall take place at a closing (the "Closing") at the
offices of Gibson, Dunn & Crutcher LLP, 200 Park Avenue, New York, New York, at
10:00 a.m. on February 11, 1997, or such other Business Day as may be agreed
upon by the Purchasers and the Issuer (the "Closing Date"). At the Closing,
the Issuer will deliver to each of the Purchasers certificates and Notes
representing the Securities to be purchased by such Purchaser (in such
permitted denomination or denominations and registered in such Purchaser's name
or the name of such nominee or nominees as such Purchaser may request), dated
the Closing Date, against payment of the purchase price therefor(and the $1,000
mentioned in Section 1.2(a)) by intra-bank or Federal funds bank wire transfer
of same day funds to such bank account which is identified on Schedule 1.2 or
such other account as the Issuer shall designate at least two Business Days
prior to the Closing.
2
<PAGE> 8
(c) Fees and Expenses.
Regardless of whether the Securities are sold, each of the Issuer and Holdings
agrees, jointly and severally, to pay or reimburse all reasonable expenses
relating to this Agreement, including but not limited to:
(1) each Purchaser's reasonable
expenses incurred in connection with the
transactions contemplated by any of the
Documents including, without limitation,
travel and lodging expenses and all out-of-
pocket costs incurred in connection with such
Purchaser's review of each of the business
and operations of each of the Companies;
(2) the reasonable fees and other
charges and expenses of the Purchasers'
counsel, Skadden, Arps, Slate, Meagher & Flom
LLP, in connection with the Documents and the
transactions contemplated thereby;
(3) the cost of printing,
reproducing and delivering to each
Purchaser's home office or the office of such
Purchaser's designee, insured to such
Purchaser's satisfaction, each of the
Documents;
(4) any reasonable fees and expenses
(including the reasonable fees and expenses
of counsel) in connection with any
registration or qualification of the
Securities required in connection with the
offer and sale of the Securities pursuant to
this Agreement under the securities or "blue
sky" laws of any jurisdiction requiring such
registration or qualification or in
connection with obtaining any exemptions from
such requirements;
(5) each Purchaser's expenses
(including the reasonable fees and expenses
of counsel) relating to any amendment to, or
modification of, or any waiver or consent or
preservation of rights under, any of the
Documents; and
(6) all other expenses, including
without limitation counsel's fees,
accountants' fees and any rating agency fees
incurred by any of the Companies in
connection with the transactions contemplated
by any of the Documents.
The Issuer shall deliver to each of the Purchasers or to such
other persons as such Purchaser shall direct, concurrently with the Closing, by
intra-bank or Federal funds bank wire transfer of same day funds, the fee set
forth on such Purchaser's signature page and payment for any reasonable and
documented out-of-pocket expenses for which such Purchaser is entitled to
reimbursement pursuant to this Section 1.2(c), including, without limitation,
the reasonable and documented fees and expenses of such Purchaser's counsel,
Skadden, Arps, Slate, Meagher & Flom LLP.
(d) Other Purchasers. Each
Purchaser's obligations hereunder are subject to the execution and delivery of
this Agreement by the other Purchasers listed on the signature pages hereof.
The obligations of each Purchaser shall be several and not joint, and no
Purchaser shall be liable or responsible for the acts of any other Purchaser
under this Agreement.
1.3 Registration of Securities.
The Issuer shall cause to be kept at its principal office (a)
a register for the registration and transfer of the Notes (the "Note
Register"), (b) a register for the registration and
3
<PAGE> 9
transfer of the Crescent Warrants (the "Crescent Warrant Register"), (c) a
register for the registration and transfer of the Crescent Warrant Shares (the
"Crescent Warrant Shares Register"), (d) a register for the registration and
transfer of the Contingent Warrants (the "Contingent Warrant Register") and (e)
a register for the registration and transfer of the Contingent Warrant Shares
(the "Contingent Warrant Shares Register"). The names and addresses of the
Holders of Notes, the transfer of Notes and the names and addresses of the
transferees of the Notes shall be registered in the Note Register. The names
and addresses of the Holders of Crescent Warrants, the transfer of Crescent
Warrants and the names and addresses of the transferees of Crescent Warrants
shall be registered in the Crescent Warrant Register. The names and addresses
of the Holders of Crescent Warrant Shares, the transfer of Crescent Warrant
Shares and the names and addresses of the transferees of Crescent Warrant
Shares shall be registered in the Contingent Warrant Shares Register. The
names and addresses of the Holders of Contingent Warrants, the transfer of
Contingent Warrants and the names and addresses of the transferees of
Contingent Warrants shall be registered in the Contingent Warrant Register.
The names and addresses of the Holders of Contingent Warrant Shares, the
transfer of Contingent Warrant Shares and the names and addresses of the
transferees of Contingent Warrant Shares shall be registered in the Contingent
Warrant Shares Register.
The Person in whose name any registered Security shall be
registered shall be deemed and treated as the owner and holder thereof for all
purposes of this Agreement, and the Issuer shall not be affected by any notice
to the contrary, until due presentment of such Security for registration of
transfer so provided in this Section 1.3. Payment of or on account of the
principal, premium, if any, and interest on any registered Securities shall be
made to or upon the written order of such registered holder.
When Securities are presented to the Issuer, with a request to
register the transfer of such Securities or to exchange such Securities for an
equal amount of Securities of other authorized denominations, the Issuer shall
register the transfer or make the exchange as requested if its reasonable
requirements (including the requirements set forth in the Stockholders
Agreement with respect to the Crescent Warrants, the Crescent Warrant Shares,
the Contingent Warrants and the Contingent Warrant Shares) for such transaction
are met.
1.4 Delivery Expenses.
If a Holder surrenders any Security to the Issuer for any
reason, the Issuer shall pay the cost of delivering to such Holder's home
office or to the office of such Holder's designee from the Issuer insured to
such Holder's satisfaction, the surrendered Security and each Security issued
in substitution, replacement or exchange for, or upon conversion of, the
surrendered Security.
1.5 Issue Taxes.
The Issuer agrees to pay all Taxes (other than Taxes in the
nature of income, franchise or gift Taxes) and governmental fees in connection
with the issuance, sale, delivery or transfer by the Issuer to each Holder of a
Security and the execution and delivery of the other Documents and any
modification of any of such Security and Documents and will save such Holder
harmless without limitation as to time against any and all liabilities with
respect to all such Taxes and fees. The obligations of the Issuer under this
Section 1.5 shall survive the payment or prepayment of the Notes, at maturity,
upon redemption or otherwise, the exercise of the Crescent Warrants, the
exercise of the Contingent Warrants and the termination of this Agreement and
the other Documents.
4
<PAGE> 10
1.6 Direct Payment.
(a) The Issuer will pay or cause
to be paid all amounts payable with respect to any Note (without any
presentment of such Note and without any notation of such payment being made
thereon) by crediting (before 12:00 Noon, New York time), by Federal funds bank
wire transfer in same day funds to each Holder's account in any bank in the
United States of America as may be designated and specified in writing by such
Holder at least two Business Days prior thereto. Each Purchaser's initial bank
account name and number for this purpose is set forth on the signature pages
hereto.
(b) Notwithstanding anything to the contrary contained in
the Notes, if any principal amount payable with respect to a Note is payable,
at maturity, upon redemption or otherwise, on a Legal Holiday, then the Issuer
shall pay such amount on the next succeeding Business Day, and interest shall
accrue on such amount until the date on which such amount is paid and payment
of such accrued interest shall be made concurrently with the payment of such
amount; provided that the Issuer may elect to pay in full (but not in part) any
such amount on the last Business Day prior to the date such payment otherwise
would be due, and no such additional interest shall accrue on such amount.
Notwithstanding anything to the contrary contained in the Notes, if any
interest payable with respect to a Note is payable on a Legal Holiday, then the
Issuer shall pay such interest on the next succeeding Business Day, and such
extension of time shall be included in the computation of the interest payment;
provided that the Issuer may elect to pay in full (but not in part) any such
interest on the last Business Day prior to the date such payment otherwise
would be due, and such diminution in time shall be included in the computation
of the interest payment.
1.7 Lost, Etc. Securities.
If a mutilated Security is surrendered to the Issuer or if the
Holder of a Security claims and submits an affidavit or other evidence,
satisfactory to the Issuer to the effect that the Security has been lost,
destroyed or wrongfully taken, the Issuer shall issue a replacement Security if
the customary requirements relating to replacement securities are reasonably
satisfied. If required by the Issuer, such Holder must provide an indemnity
bond, or other form of indemnity, sufficient in the judgment of the Issuer to
protect the Issuer from any loss which it may suffer if a Security is replaced.
If any Purchaser or any other institutional Holder (or nominee thereof) is the
owner of any such lost, stolen or destroyed Security, then the affidavit of an
authorized officer of such owner, setting forth the fact of loss, theft or
destruction and of its ownership of the Security at the time of such loss,
theft or destruction shall be accepted as satisfactory evidence thereof, and no
further indemnity shall be required as a condition to the execution and
delivery of a new Security other than the unsecured written agreement of such
owner reasonably satisfactory to the Issuer to indemnify the Issuer or at the
option of the Purchaser, an indemnity bond in the amount of the Security
remaining outstanding.
Every replacement Security shall be an obligation of the
Issuer.
1.8 Indemnification.
In addition to all other sums due hereunder or provided for in
this Agreement or any of the other Documents and any and all obligations of any
of the Companies to indemnify any Purchaser hereunder or under any of the other
Documents, each of the Companies (each, an "Indemnifying Party") hereby agrees,
jointly and severally, without limitation as to time (except
5
<PAGE> 11
as set forth below with respect to Reit), to indemnify each Purchaser, each
Affiliate of a Purchaser and each director, officer, employee, counsel, agent
or representative of such Purchaser and its Affiliates (collectively, the
"Indemnified Parties") against, and hold it and them harmless from, to the
fullest extent lawful, all losses, claims, damages, liabilities, costs
(including, without limitation, costs of preparation and reasonable attorneys'
fees and disbursements) and expenses, including expenses of investigation
(collectively, "Losses"), incurred by it or them and arising out of or in
connection with this Agreement, the other Documents or the transactions
contemplated hereby or thereby (or any other document or instrument executed
herewith or pursuant hereto or thereto), regardless of whether the transactions
contemplated by this Agreement are consummated and regardless of whether any
Indemnified Party is a formal party to any proceeding; provided, however, that
the Indemnifying Parties shall not be liable to any Indemnified Party for any
Losses to the extent that it shall be finally determined by a court of
competent jurisdiction (which determination is not subject to appeal or review)
that such Losses arose from the gross negligence or willful misconduct of such
Indemnified Party, that (i) is independent of any wrongful act by the
Indemnifying Parties, their Affiliates or any of their respective
representatives and (ii) was not taken by such Indemnified Party in reliance
upon any of the representations, warranties, covenants or promises of any of
the Companies made herein (including, without limitation, those incorporated by
reference herein) or in the other Documents, including (without limitation) the
certificates delivered by any of the Companies pursuant hereto or thereto.
Each Indemnifying Party agrees, jointly and severally, to reimburse any
Indemnified Party promptly for all such Losses as they are incurred by such
Indemnified Party (regardless of whether it is or may be ultimately determined
that an Indemnified Party is not entitled to indemnification hereunder). Prior
to reimbursing any Indemnified Party for any Losses pursuant to this Section
1.8, the Indemnifying Party may require such Indemnified Party to provide a
written undertaking to reimburse such Indemnifying Party if it is finally
judicially determined by a court of competent jurisdiction (which determination
is not subject to appeal or review) that such Indemnified Party was not
entitled to indemnification pursuant to this Section 1.8 or otherwise. The
obligations of each Indemnifying Party to each Indemnified Party hereunder
shall be separate obligations, and the Indemnifying Party's liability to any
such Indemnified Party hereunder shall not be extinguished solely because any
other Indemnified Party is not entitled to indemnity hereunder. The
obligations of each Indemnifying Party under this Section 1.8 shall survive the
payment or prepayment of the Notes, at maturity, upon acceleration, redemption
or otherwise, the exercise of the Crescent Warrants or the Contingent Warrants
purchased by any Purchaser, the redemption or repurchase by the Issuer of the
Crescent Warrants or the Contingent Warrants purchased by any Purchaser, the
redemption or repurchase of any Crescent Warrant Shares or any Contingent
Warrant Shares, any transfer of the Securities by any Purchaser and the
termination of this Agreement or any of the other Documents.
In addition, the Companies, jointly and severally, shall,
without limitation as to time, indemnify, reimburse, defend and hold harmless
the Indemnified Parties for, from, and against all Losses resulting to, imposed
on, or incurred by any of the Indemnified Parties, directly or indirectly,
arising out of any of the following: (i) any pollution or threat to human
health or the environment that is related in any way to the management, use,
control, ownership or operation of the business or property in connection with
the business of any of the Companies, by such Company, or any Person for whom
any of the Companies is or may be responsible by law or contract, including,
without limitation, all on-site and off-site activities involving Materials of
Environmental Concern, and that occurred, existed, arises out of conditions or
circumstances that occurred or existed, or was caused, in whole or in part, on
or before the Closing Date; (ii) any Environmental Claim against any Person
whose liability for such Environmental Claim any of the Companies has assumed
or retained either contractually or by operation of law, including but not
6
<PAGE> 12
limited to any pollution or threat to human health or the environment, or any
Federal, state, local or foreign approvals; or (iii) the breach of any
environmental representation or warranty set forth or incorporated by reference
herein; provided, however, that the indemnification provided in this paragraph
is not intended to provide indemnification to the Indemnified Parties, as
holders of Crescent Warrants, Crescent Warrant Shares, Contingent Warrants or
Contingent Warrant Shares, for any diminution in value of such Crescent
Warrants, Crescent Warrant Shares, Contingent Warrants or Contingent Warrant
Shares, resulting from the incurrence by Reit or its Subsidiaries of costs
directly attributable to any of the matters described in clauses (i) or (ii)
above.
In case any action, claim or proceeding shall be brought
against any Indemnified Party with respect to which indemnity may be sought
against any Indemnifying Party hereunder, such Indemnified Party shall promptly
notify each Indemnifying Party in writing and such Indemnifying Party shall
assume the defense thereof, including the employment of counsel reasonably
satisfactory to such Indemnified Party and payment of all fees and expenses
incurred in connection with the defense thereof. The failure to so notify such
Indemnifying Party shall not affect any obligation it may have to any
Indemnified Party under this Agreement or otherwise, except to the extent that
(as finally determined by a court of competent jurisdiction (which
determination is not subject to review or appeal)) such failure materially and
adversely prejudiced such Indemnifying Party. Each Indemnified Party shall
have the right to employ separate counsel in such action, claim or proceeding
and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of each Indemnified Party unless: (i) such
Indemnifying Party has agreed to pay such expenses; or (ii) such Indemnifying
Party has failed promptly to assume the defense and employ counsel reasonably
satisfactory to such Indemnified Party; or (iii) the named parties to any such
action, claim or proceeding (including any impleaded parties) include any
Indemnified Party and such Indemnifying Party or an Affiliate of such
Indemnifying Party, and such Indemnified Party shall have been advised by
counsel that either (x) there may be one or more legal defenses available to it
which are different from or in addition to those available to such Indemnifying
Party or such Affiliate or (y) a conflict of interest may exist if such counsel
represents such Indemnified Party and such Indemnifying Party or its Affiliate;
provided that, if such Indemnified Party notifies the Indemnifying Party in
writing that it elects to employ separate counsel in the circumstances
described in clause (i), (ii) or (iii) above, such Indemnifying Party shall not
have the right to assume the defense thereof and such counsel shall be at the
expense of the Indemnifying Parties; provided, however, that such Indemnifying
Party shall not, in connection with any one such action or proceeding or
separate but substantially similar or related actions or proceedings in the
same jurisdiction arising out of the same general allegations or circumstances,
be responsible hereunder for the fees and expenses of more than one such firm
of separate counsel (in addition to any local counsel), which counsel shall be
designated by such Indemnified Party. No Indemnifying Party shall be liable
for any settlement of any such action effected without its written consent
(which shall not be unreasonably withheld). Each Indemnifying Party agrees,
jointly and severally, that it will not, without the Indemnified Party's prior
written consent, consent to entry of any judgment or settle or compromise any
pending or threatened claim, action or proceeding in respect of which
indemnification or contribution may be sought hereunder unless the foregoing
contains an unconditional release, in form and substance reasonably
satisfactory to the Indemnified Parties, of the Indemnified Parties from all
liability and obligation arising therefrom.
If the indemnification provided for in this Section 1.8 is
unavailable to, or insufficient to hold harmless, any Indemnified Party in
respect of any Losses referred to therein, then each Indemnifying Party shall
have an obligation to contribute to the amount paid or payable by such Persons
as a result of such Losses in such proportion as is appropriate to reflect the
7
<PAGE> 13
relative fault, as finally judicially determined by a court of competent
jurisdiction (which determination is not subject to appeal or review), of each
Indemnifying Party, its subsidiaries and Affiliates, on the one hand, and such
Indemnified Party, on the other hand, in connection with the actions which
resulted in such Losses as well as any other relevant equitable considerations.
The amount paid or payable by any such Person as a result of the Losses
referred to above shall be deemed to include, subject to the limitations set
forth in this Section 1.8, any legal or other fees or expenses reasonably
incurred by such Person in connection with any investigation, lawsuit or legal
or administrative action or proceeding.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 1.8 were determined by pro
rata allocation or solely by any other method of allocation that does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. No Person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who is not guilty of such fraudulent
misrepresentation, in each case, as finally judicially determined by a court of
competent jurisdiction (which determination is not subject to appeal or
review).
Notwithstanding the foregoing provisions of this Section 1.8,
the obligation of Reit under this Section 1.8 to indemnify any of the
Indemnified Parties shall terminate upon the closing of a Qualified Public
Equity Offering of Reit.
1.9 Further Actions.
During the period from the date hereof to the Closing Date,
each of the Companies shall (i) take all actions necessary or appropriate to
cause its representations and warranties contained in Section 3 to be true and
correct as of the Closing Date (unless stated to refer to another date), both
before and after giving effect to the transactions contemplated by this
Agreement and the other Documents, as if made on and as of such date, and (ii)
take, or cause to be taken, all action, and do, or cause to be done, all things
necessary, proper or advisable under applicable law and regulations to
consummate and make effective the transactions contemplated by this Agreement,
including, without limitation, obtaining all consents and approvals of all
Persons and removing all injunctive or other impediments or delays, legal or
otherwise, which are necessary to the consummation of the transactions
contemplated by this Agreement and the other Documents.
1.10 Other Covenants.
(a) Each of the Companies
further covenants and agrees not to, and will ensure that no affiliate (as
defined in Rule 501(b) of the Securities Act) of any of the Companies will,
sell, offer for sale or solicit offers to buy or otherwise negotiate in respect
of any security (as defined in the Securities Act) that would be integrated
with the sale of the Securities in a manner that would require the registration
under the Securities Act of the sale to the Purchasers of the Securities or the
LLC Interests.
(b) Each of the Companies
further covenants and agrees that the Issuer shall be paid and shall receive
any and all amounts recovered or paid to any of the Companies or any of their
Affiliates in connection with the lawsuit styled MDC Reit Holdings, LLC v. The
Peregrine Real Estate Investment Trust originally brought in the Superior Court
of the State of California for the County of San Francisco and relating to the
Stock Purchase Agreement dated as of September
8
<PAGE> 14
18, 1996 between Holdings and The Peregrine Real Estate Trust, a California
business trust; provided, however, that the aggregate amount to be so paid to
and received by the Issuer shall be net of the sum of $50,000 plus the
aggregate amount of all legal expenses incurred by (and not reimbursed to) such
Company in connection with such lawsuit.
SECTION 2. CLOSING CONDITIONS.
The obligations of each Purchaser to purchase and pay for the
Securities to be delivered to such Purchaser at the Closing shall be subject to
the satisfaction of each of the following conditions on or before the Closing
Date:
2.1 Delivery of Documents.
The Companies shall have delivered to each Purchaser, in form
and substance satisfactory to such Purchaser, the following:
(a) The Notes being purchased by
such Purchaser, duly executed by the Issuer, in the aggregate principal amount
set forth below such Purchaser's name on the signature pages hereto; the
Crescent Warrants and the Contingent Warrants being purchased by such
Purchaser, duly executed by the Issuer, representing the number of Crescent
Warrants and the number of Contingent Warrants set forth below such Purchaser's
name on the signature pages hereto.
(b) The following legal
opinions:
(1) Opinion letters dated the Closing Date and
addressed to such Purchaser, from Gibson, Dunn & Crutcher LLP, counsel
for the Companies, as to the matters set forth on Annex E.
(2) An opinion letter dated the Closing Date and
addressed to such Purchaser, from Skadden, Arps, Slate, Meagher & Flom
LLP, counsel for the Purchasers, as to the matters set forth on Annex
F.
(3) Such other opinions of counsel covering matters
incidental to the transactions contemplated by this Agreement and the
other Documents as any Purchaser may reasonably request.
In rendering such opinions, each counsel may rely as to
factual matters upon certificates or other documents furnished by officers and
directors of the Companies (copies of which shall be delivered to such
Purchaser) and by government officials, and upon such other documents as such
counsel deem appropriate as a basis for their opinion. Such counsel shall
opine, as applicable, as to the Federal laws of the United States of America,
the General Corporation Law of the State of Delaware, the laws of the State of
New York, the laws of the state or states of incorporation or organization of
each of the Companies and the laws of the state or states governing each of the
Documents.
(c) Resolutions of the board of
directors of the Issuer, certified by the Secretary or Assistant Secretary of
the Issuer, to be duly adopted and in full force and effect on such date,
authorizing (i) the execution, delivery and performance of this Agreement, the
Notes, the Crescent Warrant Agreement, the Stockholders Agreement and the other
Documents to which the Issuer is a party and the consummation of the
transactions contemplated hereby and thereby, (ii) the
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issuance of the Notes, the Crescent Warrants, the Crescent Warrant Shares, the
Contingent Warrants and the Contingent Warrant Shares and (iii) specific
officers of the Issuer to execute and deliver this Agreement, the Notes, the
Crescent Warrant Agreement, the Crescent Warrants, the Contingent Warrant
Agreement, the Contingent Warrants, the Stockholders Agreement and any other
Documents to which the Issuer is a party.
(d) Resolutions of the board of
directors of the managing member of Holdings, certified by the Secretary or
Assistant Secretary of such managing member to be duly adopted and in full
force and effect on such date, authorizing (i) the execution, delivery and
performance by Holdings of this Agreement and the other Documents to which
Holdings is a party and the consummation of the transactions contemplated
hereby and thereby and (ii) specific officers of the managing member of
Holdings to execute and deliver on behalf of such managing member (acting on
behalf of Holdings) this Agreement and any other Documents to which Holdings is
a party.
(e) Resolutions of the board of
directors of Reit, certified by the Secretary or Assistant Secretary of Reit,
to be duly adopted and in full force and effect on such date, adopting an
Investment, Hedging and Leverage Policy (with a copy of such policy attached to
such resolutions) and authorizing (i) the execution, delivery and performance
of this Agreement, the Registration Rights Agreement and the other Documents to
which Reit is a party and the consummation of the transactions contemplated
hereby and thereby and (ii) specific officers of Reit to execute and deliver
this Agreement, the Registration Rights Agreement and any other Documents to
which Reit is a party.
(f) Certificates of the Chief
Executive Officer and Chief Financial Officer of each of the Companies, dated
the Closing Date, certifying that (i) all of the conditions set forth in
Sections 2.3, 2.4, 2.5, 2.6, 2.7, 2.9, 2.10 and 2.11 are satisfied on and as of
such date, (ii) all of the representations and warranties of the Companies
contained or incorporated by reference herein are true and correct on and as of
such date as though made on and as of such date (unless stated to relate to
another date), (after giving effect to the transactions contemplated by this
Agreement and the other Documents) and no event has occurred and is continuing,
or would result from the issuance of the Securities that constitutes or would
constitute a Default or an Event of Default, (iii) each of the Companies has
performed its obligations that are required to be performed on or before the
closing under each of the Documents to which it is a party, in accordance
therewith and with all applicable law and (v) as to such other matters as such
Purchaser may reasonably request.
(g) The unaudited consolidated
pro forma balance sheet of the Issuer and its Subsidiaries as of the Closing
Date ("Closing Date Balance Sheet") prepared giving effect to each of the
transactions contemplated hereby to occur on the Closing Date, in reasonable
detail and certified by the chief financial officer of the Issuer that such
balance sheet fairly presents the consolidated financial condition of the
Issuer and its Subsidiaries at such date.
(h) Governmental certificates,
dated the most recent practicable date prior to the Closing Date, showing that
each of the Companies is organized and in good standing in the jurisdiction of
its incorporation or other organization and is qualified as a foreign
corporation or other entity and in good standing in all other jurisdictions in
which it has executive offices or transacts business, except where the failure
to be so qualified could not reasonably be expected to have a Material Adverse
Effect.
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(i) Copies of each consent,
license and approval required in connection with the execution, delivery and
performance by the Companies of any of the Documents and the consummation of
the transactions contemplated thereby (including without limitation consents,
if any, required pursuant to the HSR Act).
(j) Copies of the Charter
Documents of each of the Issuer, Holdings and Reit, certified as of a recent
date by the Secretaries of State of the States of Delaware and Maryland, as
appropriate, and certified by the Secretary or Assistant Secretary or managing
member of each of the Issuer, Holdings and Reit, respectively, as true and
correct as of the Closing Date.
(k) Certificates of the
Secretary or an Assistant Secretary of each of the Companies as to the
incumbency and signatures of the officers or representatives of such entity
executing any of the Documents, together with evidence of the incumbency of
such Secretary or Assistant Secretary.
(l) True and correct copies of
the Escrow Agreement, Crescent Warrant Agreement, the Crescent Warrants,
Contingent Warrant Agreement, the Contingent Warrants, the Stockholders
Agreement, the Registration Rights Agreement, the Letter of Credit Documents,
the Holdings Pledge, the Issuer Pledge, the Management Agreement and each of
the other Documents.
(m) Such additional information
and materials as any Purchaser may reasonably request, including, without
limitation, copies of any debt agreements, security agreements and other
contracts to which any of the Companies is a party.
2.2 Legal Investment; Purchase Permitted by Applicable Laws.
Each Purchaser's acquisition of the Securities and the LLC
Interests (a) shall not be prohibited by any applicable law or governmental
regulation, release, interpretation or opinion (including, without limitation,
Regulations G, T, U and X of the Board of Governors of the Federal Reserve
System), (b) shall constitute a legal investment as of the Closing Date under
the laws and regulations and orders of each jurisdiction to which such
Purchaser may be subject (without resort to any "basket" or "leeway"
provision), and (c) shall not subject such Purchaser to any penalty or, in its
reasonable judgment, other onerous condition in or pursuant to any such law,
regulation or order; and such Purchaser shall have received such certificates
or other evidence as such Purchaser may reasonably request to establish
compliance with this condition.
2.3 Payment of Fees.
The Issuer shall have delivered to each of the Purchasers or
to such other persons as such Purchaser shall direct on the signature pages
hereto, at the Closing, by intra-bank or Federal funds bank wire transfer of
same day funds, payment for such Purchaser's fee of such percent of the
aggregate principal amount of the Notes being purchased by such Purchaser as is
set forth on such Purchaser's signature page hereto.
2.4 Compliance with Agreements.
Each of the Companies shall have performed and complied in all
material respects with all agreements, covenants and conditions contained
herein, in each of the other Documents
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and in any other document contemplated hereby or thereby which are required to
be performed or complied with by such party on or before the Closing Date.
2.5 Completion of Other Transactions.
Simultaneously with or prior to the sale to each Purchaser of
the Securities to be purchased by such Purchaser:
(a) Each of the Documents
(including, without limitation, the Limited Liability Company Agreement and the
initial Letter of Credit Documents) shall have been executed and delivered by
each of the parties thereto (other than such Purchaser) in form and substance
satisfactory to the Purchasers, and such parties shall have consummated the
transactions contemplated thereby in accordance with all applicable laws
(including without limitation, the Securities Act, all applicable state
securities laws and all related rules and regulations under such statutes and
other laws).
(b) All of the other Purchasers
listed in the signature pages hereof shall have consummated their purchase of
Securities pursuant to this Agreement.
(c) The Issuer shall own,
directly, 100% of the Preferred Interests in Holdings, and Holdings shall own
100% of the Equity Interests of Reit (other than the Management Reit
Interests).
(d) The board of directors of
Reit shall be comprised of the persons listed on Schedule 2.5(d).
(e) The Series A Purchasers
shall have purchased an aggregate of 20,000 shares of Series A Preferred Stock
for aggregate net proceeds in cash to the Issuer of at least $2,000,000,
pursuant to the terms and conditions set forth in the Series A Purchase
Agreement.
2.6 Representations and Warranties.
Unless stated to relate to another date, all of the
representations and warranties of each of the Companies contained or
incorporated by reference herein or in any of the other Documents shall be true
and correct on and as of the Closing Date, both before and after giving effect
to the transactions contemplated hereby and by the other Documents.
2.7 No Event of Default.
No event shall have occurred and be continuing, or would
result from the consummation of the transactions contemplated to be consummated
on or prior to the Closing Date by this Agreement or any of the other Documents
(including without limitation the purchase of the Securities and the LLC
Interests), that constitutes or would constitute a Default or an Event of
Default.
2.8 Proceedings Satisfactory.
All proceedings taken in connection with the sale of the
Securities and the LLC Interests, the transactions contemplated hereby and all
documents and papers relating thereto, shall be reasonably satisfactory to such
Purchaser. Such Purchaser and its counsel shall have
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received copies of such documents and papers as they may reasonably request in
connection therewith, or as a basis for the Closing opinions, all in form and
substance satisfactory to such Purchaser.
2.9 Consents and Permits.
The Companies shall have received all consents, permits,
approvals and authorizations and sent or made all notices, filings,
registrations and qualifications as may be required pursuant to any law,
statute, regulation or rule (Federal, state, local or foreign) or pursuant to
any other agreement, order or decree to which any of them is a party or to
which any of them is subject, in connection with the transactions to be
consummated on or prior to the Closing Date as contemplated by this Agreement
or any of the other Documents.
2.10 No Material Adverse Effect.
Since their respective dates of organization: (A) none of the
Companies shall have suffered any adverse change in its properties, business,
operations, assets, condition (financial or otherwise) or prospects that could
reasonably be expected to result in a Material Adverse Effect; and (B) (i)
there shall not have been any material change in the capital stock or long-term
debt, or material increase in short-term debt, of any of the Companies and (ii)
none of the Companies shall have incurred any liability or obligation, direct
or contingent, that is material to it, is required to be disclosed on a balance
sheet in accordance with GAAP and is not disclosed on the latest balance sheet
previously provided to the Purchasers.
2.11 No Material Judgment or Order.
There shall not be on the Closing Date any judgment or order
of a court of competent jurisdiction or any ruling of any agency of the
Federal, state or local government that, in the reasonable judgment of any
Purchaser or its counsel, would prohibit the sale or issuance of the Securities
hereunder or the issuance or purchase of the LLC Interests or subject any of
the Companies to any material penalty if the Securities were to be issued and
sold hereunder or the LLC Interests were to be issued or purchased as
contemplated hereby.
2.12 Initial Escrow Deposit.
The Issuer shall have deposited $3,000,000 in the Escrow
Account.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANIES.
A. Representations and Warranties of the Issuer and Reit.
The Issuer and Reit, jointly and severally, represent and warrant on the date
hereof and as of the Closing, as follows:
3.1 Authorization; Capitalization.
Each of the Companies has taken all actions necessary to
authorize it (i) to execute, deliver and perform all of its obligations under
each of the Documents to which it is a party, and (ii) to consummate the
transactions contemplated thereby. Without limiting the generality of the
preceding sentence, the Issuer has taken all actions necessary to authorize it
to issue and perform all of its obligations under the Notes and the Crescent
Warrants. Each of the Documents to which any of the Companies is a party is a
legally valid and binding obligation of such Company,
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enforceable against it in accordance with its respective terms, except for (a)
the effect thereon of bankruptcy, insolvency, reorganization, moratorium and
other similar laws relating to or affecting the rights of creditors generally
and (b) limitations imposed by equitable principles upon the specific
enforceability of any of the remedies, covenants or other provisions thereof
and upon the availability of injunctive relief or other equitable remedies.
Holdings and Reit are the only Subsidiaries of the Issuer.
The total authorized Equity Interests of the Issuer consist of (a) 5,000,000
shares of Common Stock, of which 1,254,065 shares were issued and outstanding
on the date hereof prior to giving effect to the transactions contemplated
hereby and 1,254,065 shares will be issued and outstanding upon consummation of
the transactions contemplated hereby, and (b) 200,000 shares of preferred
stock, par value $.0001 per share, of which no shares were issued and
outstanding on the date hereof prior to giving effect to the transactions
contemplated hereby and 20,000 shares of Series A Preferred Stock and no shares
of Series B Preferred Stock will be issued and outstanding upon consummation of
the transactions contemplated hereby. The total authorized Equity Interests of
Holdings consists of the limited liability company interests held by the
members thereof as set forth in the Limited Liability Company Agreement on the
date hereof, which interests shall be held by such members as set forth in such
agreement upon the consummation of the transactions contemplated hereby. The
total authorized Equity Interests in Reit consist of (a) 3,000,000 shares of
Reit Common Stock, of which no shares were issued and outstanding on the date
hereof prior to giving effect to the transactions contemplated hereby and
2,017,500 shares will be issued and outstanding upon consummation of the
transactions contemplated hereby and (b) 1,000,000 shares of preferred stock,
par value $0.01 per share, of which no shares were issued and outstanding on
the date hereof prior to giving effect to the transactions contemplated hereby
and no shares will be issued and outstanding upon consummation of the
transactions contemplated hereby. The Issuer owns 100% of the Preferred
Interests of Holdings, and Holdings owns 100% of the outstanding Equity
Interests or other securities evidencing equity ownership of Reit (other than
the Management Reit Interests), in each case free and clear of any security
interest, mortgage, pledge, transfer restriction, defect, claim, lien,
limitation on voting rights, encumbrance, equity or adverse interest of any
nature (each, a "Lien"), except in the case of the Equity Interests in Reit,
the Lien in favor of the Holders. All of the outstanding Equity Interests of
the Issuer, Holdings and Reit have been duly authorized and validly issued, are
fully paid and nonassessable and were not issued in violation of, and are not
subject to, any preemptive or similar rights. Except for the Preferred
Interests, the Issuer does not own any Equity Interest in, or any other
securities of, any Person. Except for 2,000,000 shares of Reit Common Stock,
Holdings does not own any Equity Interest in, or any other securities of, any
Person. Reit does not own any Equity Interest in, or any other securities of,
any Person.
On the Closing Date, the Securities and the LLC Interests will
be duly authorized and validly issued, will be fully paid and nonassessable and
will not have been issued in violation of, nor will they be subject to, any
preemptive or similar rights. On the Closing Date, the Crescent Warrant Shares
and the Contingent Warrant Shares will be duly authorized, and upon exercise of
the Crescent Warrants and the Contingent Warrants, the Crescent Warrant Shares
and the Contingent Warrant Shares, respectively, will have been duly authorized
and validly issued, will have been fully paid and nonassessable and will not
have been issued in violation of, nor will they be subject to, any preemptive
or similar rights. Except for the Crescent Warrants, the Contingent Warrants,
the L/C Warrants, the Series A Warrants and the 1997 Stock Incentive Plan of
Reit, there are no outstanding (i) securities convertible into or exchangeable
for any Equity Interests of any of the Companies, (ii) options, warrants or
other rights to purchase or subscribe to Equity Interests of any of the
Companies or securities convertible into or exchangeable for Equity
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Interests of any of the Companies, (iii) contracts, commitments, agreements,
understandings, arrangements, calls or claims of any kind relating to the
issuance of any Equity Interests of any of the Companies, any such convertible
or exchangeable securities or any such options, warrants or rights or (iv)
voting trusts, agreements, contracts, commitments, understandings or
arrangements with respect to the voting of any of the Equity Interests of any
of the Companies.
Except for the Stockholders Agreement and the Registration
Rights Agreement, none of the Companies has entered into an agreement to
register its securities under the Securities Act. Except for this Agreement
and the agreements and stock incentive plan referenced in the immediately
preceding paragraph, none of the Companies has entered into any agreement to
issue, purchase or sell any of its securities.
There are no securities of the Issuer or Holdings registered
under the Exchange Act or listed on a national securities exchange registered
under Section 6 of the Exchange Act or quoted in an automated inter-dealer
quotation system.
Concurrently with the consummation of the transactions
contemplated hereby, (a) the Persons listed on Schedule 3.1 purchased an
aggregate of 20,000 shares of Series A Preferred Stock for the respective
amounts of consideration set forth on such Schedule and (b) each of such
Persons entered into a Letter of Credit Contribution Agreement relating to
Letters of Credit in the respective amounts set forth in such Schedule, the sum
of which shall be $4,000,000.
3.2 No Violation or Conflict; No Default.
(a) Neither the execution,
delivery or performance of this Agreement or any of the other Documents by any
of the Companies nor the compliance with their respective obligations hereunder
or thereunder, nor the consummation of the transactions contemplated hereby and
thereby, nor the issuance, sale or delivery of the Securities will:
(1) violate any provision of the
Charter Documents of any of the Companies;
(2) violate any statute, law, rule
or regulation or any judgment, decree, order,
regulation or rule of any court or
governmental authority or body to which any
of the Companies or any of their respective
properties may be subject;
(3) permit or cause the acceleration
of the maturity of any debt or obligation of
any of the Companies; or
(4) violate, or be in conflict with,
or constitute a default under, or permit the
termination of, or require the consent of any
Person under, or result in the creation or
imposition of any Lien (other than Permitted
Liens) upon any property of any of the
Companies under, any mortgage, indenture,
loan agreement, note, debenture, agreement
for borrowed money or any other agreement to
which any of the Companies is a party or by
which any of the Companies (or their
respective properties) may be bound, other
than such violations, conflicts, defaults,
terminations and Liens, or such failures to
obtain consents, which could not reasonably
be expected to result in a Material Adverse
Effect.
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(b) None of the Companies is in
default (without giving effect to any grace or cure period or notice
requirement) under its Charter Documents nor under any agreement for borrowed
money or under any agreement pursuant to which any of its securities were sold.
3.3 Use of Proceeds.
The net proceeds from the sale of the Securities hereunder
will be used solely to (a) make an equity contribution of $20,000,000 to
Holdings, which shall be used by Holdings to purchase all the issued and
outstanding shares of Reit Common Stock (other than the Management Reit
Interests) in connection with the initial capitalization of Reit, (b) pay
transactions costs in connection with the transactions contemplated hereby, (c)
make the initial deposit into the Escrow Account as required pursuant to
Section 2.12 and (d) fund working capital of the Issuer.
3.4 No Material Adverse Change; Financial Information.
(a) No Material Adverse Change.
Since the date of its formation, each of the Issuer and its Subsidiaries has
not suffered any material adverse change in its properties, business,
operations, assets, condition (financial or otherwise) or prospects which could
reasonably be expected to result in a Material Adverse Effect.
(b) Financial Statements. The
Closing Date Balance Sheet presents fairly the consolidated financial condition
of the Issuer and its Subsidiaries after giving effect to the transactions
contemplated hereby to occur on the Closing Date. Except as disclosed therein,
such balance sheet and related notes have been prepared in accordance with
GAAP. All financial statements concerning the Issuer and its Subsidiaries that
will hereafter be furnished by the Issuer and its Subsidiaries to the
Purchasers or any Holder pursuant to this Agreement will be prepared in
accordance with GAAP consistently applied (except as disclosed therein) and
will present fairly the financial condition of the entities covered thereby as
at the dates thereof and the results of their operations for the periods then
ended.
(c) Projections. True and
complete copies of (i) projections of the consolidated revenues, earnings
before depreciation, interest and taxes, operating margins, net income and
capital expenditures of each of the Issuer, Holdings and Reit for each of the
fiscal years ending December 31, 1997, 1998, 1999, 2000 and 2001, prepared by
senior management of the Issuer (assuming the consummation of the transactions
contemplated hereby and by the other Documents) and set forth in Schedule
3.4(c) (the "Projections") and (ii) the assumptions and supplemental data used
in preparing the Projections (collectively, the "Supplemental Data") have been
delivered by the Issuer to the Purchasers. The Projections were prepared on
the basis of the Supplemental Data, which represent a reasonable basis for such
preparation. The Projections and the Supplemental Data reflect the best
currently available estimates and judgment of the Issuer's senior management as
to the expected future financial performance of the Issuer and its
Subsidiaries; provided, however, that no representation or warranty is made
that actual results will meet such Projections.
3.5 Full Disclosure.
This Agreement (including without limitation the
representations and warranties incorporated herein by reference), the Closing
Date Balance Sheet, the Projections, the Supplemental Data, each of the
Documents and any other document, certificate or written
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statement furnished by or on behalf of any of the Companies to any Purchaser in
connection with the negotiation and sale of the Securities or the LLC
Interests, when taken as a whole, do not contain any untrue statement of a
material fact or omit or will omit to state a material fact necessary to make
the statements contained herein or therein not misleading in light of the
circumstances under which they were made. There is no material fact known to
any of the Companies that has had or could reasonably be expected to have a
Material Adverse Effect and that has not been disclosed herein or in such other
documents, certificates and written statements furnished to the Purchasers for
use in connection with the transactions contemplated hereby.
3.6 Third Party Consents.
Neither the nature of any of the Companies nor of any of their
businesses or properties, nor any relationship between any of the Companies and
any other Person, nor any circumstance in connection with the offer, issuance,
sale or delivery of the Securities at the Closing nor the performance by any of
the Companies of its obligations hereunder or under any other Document, or the
consummation of the transactions contemplated hereby or by any other Document,
as the case may be, is such as to require a consent, approval or authorization
of, or notice to, or filing, registration or qualification with, any
governmental authority or other Person on the part of any of the Companies as a
condition to the execution and delivery of this Agreement or any of the other
Documents or the offer, issuance, sale or delivery of the Securities at the
Closing other than such consents, approvals, authorizations, notices, filings,
registrations or qualifications which shall have been made or obtained on or
prior to the Closing Date (and copies of which will be delivered to the
Purchasers) and such filings under Federal and state securities laws which are
permitted to be made after the Closing Date and which the Issuer hereby agrees
to file within the time period prescribed by applicable law.
3.7 No Violation of Regulations of Board of Governors of Federal
Reserve System.
None of the transactions contemplated by this Agreement
(including, without limitation, the use of the proceeds from the sale of the
Securities) will violate or result in a violation of Section 7 of the Exchange
Act or any regulation issued pursuant thereto, including, without limitation,
Regulations G, T, U and X of the Board of Governors of the Federal Reserve
System.
3.8 Private Offering.
Assuming the truth and correctness of the representations and
warranties set forth in Section 4, the sale of the Securities hereunder and the
issuance and sale of the LLC Interests contemplated hereby are exempt from the
registration and prospectus delivery requirements of the Securities Act. In
the case of each offer or sale of the Securities or the LLC Interests, no form
of general solicitation or general advertising was used by any of the Companies
or their respective representatives, including, but not limited to,
advertisements, articles, notices or other communications published in any
newspaper, magazine or similar medium or broadcast over television or radio, or
any seminar or meeting whose attendees have been invited by any general
solicitation or general advertising.
The Purchasers, the parties to the Contingent Warrant
Agreement (other than the Issuer) and the members of Holdings set forth in the
Limited Liability Company Agreement are the sole purchasers of the Securities
and the LLC Interests. No securities have been issued and sold by the Issuer
or Holdings within the six-month period immediately prior to the date hereof.
None
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of the securities issued within such six-month period could be integrated with
the issuance of the Securities or the LLC Interests as a single offering for
purposes of the Securities Act, and the Issuer and Holdings agree, jointly and
severally, that none of them, nor anyone acting on their behalf, will offer or
sell the Securities, or any portion of them, if such offer or sale might bring
the issuance and sale of the Securities or the LLC Interests to any Purchaser
hereunder within the provisions of Section 5 of the Securities Act nor offer
any similar securities for issuance or sale to, or solicit any offer to acquire
any of the same from, or otherwise approach or negotiate with respect thereto
with, anyone if the sale of the Securities or the LLC Interests and any such
securities could be integrated as a single offering for the purposes of the
Securities Act, including without limitation Regulation D thereunder. It is
not necessary, in connection with the transactions contemplated hereby, to
qualify an indenture under the Trust Indenture Act of 1939, as amended.
3.9 Governmental Regulations.
None of the Companies is subject to regulation under the
Investment Company Act of 1940, as amended, the Public Utility Holdings Company
Act of 1935, as amended, the Federal Power Act, the Interstate Commerce Act,
the Commodity Exchange Act or to any Federal or state statute or regulation
limiting its ability to incur indebtedness for borrowed money or consummate the
transactions contemplated hereby and by the other Documents.
3.10 Brokers.
None of the Companies has dealt with any broker, finder,
commission agent or other such intermediary in connection with the sale of the
Securities and the transactions contemplated by this Agreement and the other
Documents, and none of the Companies is under any obligation to pay any
broker's or finder's fee or commission or similar payment in connection with
such transactions (other than $750,000 to PaineWebber Incorporated).
The Companies agree, jointly and severally, to indemnify and
hold the Holders harmless from and against any and all actions, suits, claims,
costs, expenses, losses, liabilities and/or obligations in connection with or
relating to any broker's or finder's fees or commission or similar payment in
connection with such transactions, except with respect to such fees or
commissions incurred by any Purchaser for its account, so long as the Issuer
receives notice of any such action, suit, claim, etc., reasonably promptly
after the Holders become aware thereof; provided that the failure to give such
notice as provided in this sentence shall not relieve any of the Companies of
its obligations under this sentence, except to the extent, and only to the
extent, that such Company is materially prejudiced by such failure to give
notice (as determined by a court of competent jurisdiction in a final
nonappealable judgment).
3.11 Solvency.
Immediately prior to and after giving effect to the issuance
of the Securities and the execution, delivery and performance of this
Agreement, the other Documents and any instrument governing Indebtedness of any
of the Companies incurred as of the Closing Date, each of the Companies is
Solvent.
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3.12 Representations and Warranties.
All representations and warranties (and the related schedules)
of each of the Companies contained in any of the Documents, each in the form as
in effect on the date hereof without amendment or waiver, shall be deemed to
constitute representations and warranties of the Issuer and Reit under this
Agreement with the same force and effect as the representations and warranties
expressly set forth herein. Such representations and warranties are true and
correct on the date hereof and will be true and correct as of the Closing Date
as if made at and as of such date and are hereby incorporated by reference
herein as if made hereby by the Issuer and Reit to the Purchasers. Unless
otherwise defined herein, for purposes of this Section 3.12, the definitions
contained in each of the Documents (insofar as they relate to the
representations and warranties incorporated herein) are hereby incorporated by
reference herein and made a part hereof.
3.13 Litigation.
(a) There is no action, claim,
suit, citation or proceeding (including, without limitation, an investigation
or partial proceeding, such as a deposition), whether commenced, or to the
knowledge of any of the Companies, threatened against or affecting any of the
Companies or any of their properties or assets ("Proceedings"), except for such
Proceedings that, if finally determined adversely to any of the Companies,
could not reasonably be expected to have a Material Adverse Effect, and there
is no Proceeding seeking to restrain, enjoin, prevent the consummation of or
otherwise challenge this Agreement or any of the other Documents or the
transactions contemplated hereby or thereby.
(b) None of the Companies is
subject to any judgment, order, decree, rule or regulation of any court,
governmental authority or arbitration board or tribunal that has had a Material
Adverse Effect or that could reasonably be expected to have a Material Adverse
Effect.
3.14 Labor Relations.
None of the Companies, nor any Person for whom any of the
Companies is or may be responsible by law or contract, is engaged in any unfair
labor practice that could reasonably be expected to have a Material Adverse
Effect. There is (a) no unfair labor practice charge or complaint pending or
threatened against any of the Companies, or any Person for whom any of the
Companies is or may be responsible by law or contract, before the National
Labor Relations Board or any corresponding state, local or foreign agency, and
no grievance or arbitration proceeding arising out of or under any collective
bargaining agreement is so pending or threatened, (b) no strike, labor dispute,
slowdown or stoppage pending or threatened against any of the Companies, or any
Person for whom any of the Companies is or may be responsible by law or
contract and (c) no union representation claim or question existing with
respect to the employees of any of the Companies, or any Person for whom any of
the Companies is or may be responsible by law or contract, and no union
organizing activities taking place. None of the Companies, nor any Person for
whom any of the Companies is or may be responsible by law or contract, is a
party to any collective bargaining agreement.
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Except such as could not, singly or in the aggregate,
reasonably be expected to result in a Material Adverse Effect, none of the
Companies nor any of their Subsidiaries has violated any applicable Federal,
state, provincial or foreign law relating to employment or employment practices
or the terms and conditions of employment, including, without limitation,
discrimination in the hiring, promotion or pay of employees, wages, hours of
work, plant closings and layoffs, collective bargaining, and occupational
safety and health, or any provisions of ERISA or the rules and regulations
promulgated thereunder or any other applicable law (whether foreign or
domestic) relating to or governing the operation or maintenance of any plan or
arrangement falling within the definition of an "employee benefit plan" (as
such term is defined in Section 3 of ERISA) or any other employee benefit plan
or arrangement.
3.15 Taxes.
All Tax Returns required to be filed by any of the Companies
have been timely filed and all such Tax Returns are true, complete and correct
in all material respects. All Taxes due or claimed to be due from any of the
Companies that are due and payable have been paid, other than (i) those being
contested in good faith and for which an adequate reserve or accrual has been
established in accordance with GAAP or (ii) those with respect to which payment
can be deferred without penalty or interest and for which an adequate reserve
or accrual has been established or extensions duly filed. None of the
Companies knows of (A) any actual or proposed material additional Tax
assessments or (B) any probable basis for the imposition of any material
additional Tax assessments for any fiscal period against any of the Companies.
Reit is organized, and has operated at all times since the date of its
formation, in a manner permitting it to be qualified, and will continue to
operate (i) and be qualified as a REIT under Section 856 et seq. of the Code
and (ii) in a manner that will cause it to be taxed on its income pursuant to
Section 857 of the Code.
3.16 Environmental Matters.
Except as could not reasonably be expected to have a Material
Adverse Effect:
(a) each of the Companies, and
any Person for whom any of the Companies is or may be responsible by law or
contract (which such Person is included in the definition of "Companies" for
purposes of this Section 3.16), is in full compliance with all Environmental
Laws, which compliance includes, but is not limited to, (1) compliance with all
standards, schedules and timetables therein, (2) the possession of all permits,
licenses, approvals and other authorizations required under the Environmental
Laws or with respect to the operation of the business, property and assets of
any of the Companies or any such Person, and compliance with the terms and
conditions thereof and (3) any Federal, state, local or foreign approvals
required pursuant to any Environmental Laws that pertain or relate to the
transactions contemplated by this Agreement;
(b) none of the Companies has
received any communication (written or oral), whether from a governmental
authority, citizens group, employee or otherwise, that alleges that any of the
Companies is not in full compliance with any Environmental Law; none of the
Companies has any liability under any Environmental Law, and there are no past
or present actions, activities, circumstances, conditions, events or incidents
that may be expected to prevent or interfere with full compliance with
applicable Environmental Laws in the future;
(c) there is no Environmental
Claim pending or threatened against any of the Companies;
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(d) there are no past or present
actions, activities, circumstances, conditions, events or incidents, including,
without limitation, the release, emission, discharge, presence or disposal of
any Material of Environmental Concern, that could be expected to form the basis
of any Environmental Claim against any of the Companies;
(e) no real property or facility
owned, used, operated, leased, managed or controlled by any of the Companies,
or any predecessor in interest, is listed or proposed for listing on the
National Priorities List or the Comprehensive Environmental Response,
Compensation, and Liability Information System pursuant to the Comprehensive
Environmental Response, Compensation, and Liability Act, as amended, or on any
other state or local list established pursuant to any Environmental Law;
(f) there have been no releases
(including, without limitation, any past or present releasing, spilling,
leaking, pumping, pouring, emitting, emptying, discharging, injecting,
escaping, leaching, disposing or dumping, on-site or off-site) of Materials of
Environmental Concern by any of the Companies, or any predecessor in interest,
at, on, under, from or into any facility or real property owned, operated,
leased, managed or controlled by any of the Companies, and none of the
Companies has incurred or expects to incur liability for contamination at, on,
under, from or into any on-site or off-site locations where any of the
Companies have stored, disposed or arranged for the disposal of Materials of
Environmental Concern;
(g) no underground storage tank
or other underground storage receptacle, or related piping, is located on a
facility or property currently owned, operated, leased, managed or controlled
by any of the Companies; and
(h) there is no asbestos
contained in or forming part of any building, building component, structure or
office space, and no polychlorinated biphenyls ("PCBs") or PCB-containing items
are used or stored at any property, owned, operated, leased, managed or
controlled, whether currently or in the past (for which such matters the
Companies could be liable), by any of the Companies.
3.17 ERISA.
Based upon the Purchasers' representation in Section 4.5, the
execution and delivery of this Agreement, the other Documents and the sale of
the Securities to be purchased by the Purchasers will not involve any
non-exempt "prohibited transaction." No condition exists or event or
transaction has occurred in connection with any "employee benefit plan"
maintained or contributed to by any of the Companies or any of their ERISA
Affiliates (any such plan being herein referred to as a "Company Plan") that
has resulted or is reasonably likely to result in any of the Companies or any
such ERISA Affiliate incurring any liability, fine or penalty except as could
not reasonably be expected to have a Material Adverse Effect. No Company Plan
is subject to Title IV of ERISA, and none of the Companies has any liability
under Title IV of ERISA, whether actual or contingent. No amounts payable
pursuant to any compensation or benefits plan, program, arrangement or
agreement will, in connection with the transactions contemplated under this
Agreement or the other Documents, fail to be deductible for Federal income tax
purposes by virtue of Section 280G of the Code. The terms "employee benefit
plan" and "party in interest" shall have the meanings assigned to such terms in
section 3 of ERISA, the term "disqualified person" shall have the meaning
assigned to such term in Section 4975 of the Code, the term "prohibited
transaction" shall have the meaning assigned to such term in Section 406 of
ERISA
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and Section 4975 of the Code, and the term "ERISA Affiliate" shall have the
meaning assigned to such term in Section 407 of ERISA.
3.18 Intellectual Property.
Each of the Companies owns or possesses adequate licenses or other
rights to use all trademarks, service marks, trade names, copyrights and
know-how necessary to conduct the business now conducted by it, and neither any
of the Companies nor any of their Subsidiaries has received any notice of
infringement of or conflict with (or knows or has known of such infringement of
or conflict with) asserted rights of others with respect to the use of
intellectual property, including without limitation, trademarks, service marks,
trade names, copyrights, or know-how that, individually or in the aggregate,
could reasonably be expected to result in any Material Adverse Effect. To the
best knowledge of the Issuer, all intellectual property material to the
business now conducted by the Issuer and its Subsidiaries or proposed to be
conducted is valid and enforceable, and each of the Issuer and its Subsidiaries
has performed all acts and has paid all required fees and taxes to maintain all
registrations and applications of such intellectual property in full force and
effect. The Companies and their Subsidiaries do not, in the conduct of their
business as now conducted and shall not in the conduct of their business as
proposed to be conducted, infringe or conflict with any right of any third
party where such infringement or conflict could reasonably be expected to
result in any Material Adverse Effect. To the best knowledge of the Issuer,
the Issuer and its Subsidiaries are not, nor will they be as a result of the
execution and delivery of this Agreement or the other Documents or the
performance of any obligations hereunder or thereunder, in breach of any
license or other agreement relating to any intellectual property.
3.19 Compliance with Laws.
Each of the Companies and each of their Subsidiaries has obtained and
has maintained in good standing any licenses, permits, consents and
authorizations required to be obtained by it under all laws or regulations
relating to its business (collectively, the "Laws"), the absence of which
(individually or in the aggregate) could reasonably be expected to have a
Material Adverse Effect, and any such licenses, permits, consents and
authorizations remain in full force and effect, except as to any of the
foregoing the absence of which (individually or in the aggregate) could not
reasonably be expected to have a Material Adverse Effect. Each of the
Companies and each of its Subsidiaries is in compliance with the Laws in all
material respects, and there is no pending or, to the knowledge of any of the
Companies or any of their Subsidiaries, threatened, action or proceeding
against any of the Companies or any of their Subsidiaries under any of the
Laws, other than any such actions or proceedings which, individually or in the
aggregate, if adversely determined, could not reasonably be expected to have a
Material Adverse Effect.
B. Representations and Warranties of Holdings. Holdings
represents and warrants on the date hereof and as of the Closing, as follows:
3.20 Authorization; Capitalization.
Holdings has taken all actions necessary to authorize it (i)
to execute, deliver and perform all of its obligations under each of the
Documents to which it is a party, and (ii) to consummate the transactions
contemplated thereby. Each of the Documents to which Holdings is a party is a
legally valid and binding obligation of Holdings, enforceable against it in
accordance with its respective terms, except for (a) the effect thereon of
bankruptcy, insolvency,
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reorganization, moratorium and other similar laws relating to or affecting the
rights of creditors generally and (b) limitations imposed by equitable
principles upon the specific enforceability of any of the remedies, covenants
or other provisions thereof and upon the availability of injunctive relief or
other equitable remedies.
Reit is the only Subsidiary of Holdings. The total authorized
Equity Interests of Holdings consists of the limited liability company
interests held by the members thereof as set forth in the Limited Liability
Company Agreement on the date hereof, which interests shall be held by such
members as set forth in such agreement upon the consummation of the
transactions contemplated hereby. The Issuer owns 100% of the Preferred
Interests of Holdings, and Holdings owns 100% of the outstanding Equity
Interests or other securities evidencing equity ownership of Reit (other than
the Management Reit Interests), in each case free and clear of any security
interest, mortgage, pledge, transfer restriction, defect, claim, lien,
limitation on voting rights, encumbrance, equity or adverse interest of any
nature (each, a "Lien"), except in the case of the Equity Interests in Reit,
the Lien in favor of the Holders. All of the outstanding Equity Interests of
Holdings and Reit have been duly authorized and validly issued, are fully paid
and nonassessable and were not issued in violation of, and are not subject to,
any preemptive or similar rights. Except for the Reit Shares, Holdings does
not own any Equity Interest in, or any other securities of, any Person. Reit
does not own any Equity Interest in, or any other securities, of any Person.
On the Closing Date, the LLC Interests will be duly authorized
and validly issued, will be fully paid and nonassessable and will not have been
issued in violation of, nor will they be subject to, any preemptive or similar
rights. There are no outstanding (i) securities convertible into or
exchangeable for any Equity Interests of Holdings, (ii) options, warrants or
other rights to purchase or subscribe to Equity Interests of Holdings or
securities convertible into or exchangeable for Equity Interests of Holdings,
(iii) contracts, commitments, agreements, understandings, arrangements, calls
or claims of any kind relating to the issuance of any Equity Interests of
Holdings, any such convertible or exchangeable securities or any such options,
warrants or rights or (iv) voting trusts, agreements, contracts, commitments,
understandings or arrangements with respect to the voting of any of the Equity
Interests of Holdings.
Holdings has not entered into an agreement to register its
securities under the Securities Act or to issue, purchase or sell any of its
securities.
There are no securities of Holdings registered under the
Exchange Act or listed on a national securities exchange registered under
Section 6 of the Exchange Act or quoted in an automated inter-dealer quotation
system.
3.21 No Violation or Conflict; No Default.
(a) Neither the execution,
delivery or performance of this Agreement or any of the other Documents by
Holdings nor the compliance with its obligations hereunder or thereunder, nor
the consummation of the transactions contemplated hereby and thereby, nor the
issuance, sale or delivery of the Securities will:
(1) violate any provision of the
Charter Documents of Holdings;
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(2) violate any statute, law, rule
or regulation or any judgment, decree, order,
regulation or rule of any court or
governmental authority or body to which
Holdings or any of its properties may be
subject;
(3) permit or cause the acceleration
of the maturity of any debt or obligation of
Holdings; or
(4) violate, or be in conflict with,
or constitute a default under, or permit the
termination of, or require the consent of any
Person under, or result in the creation or
imposition of any Lien upon any property of
Holdings under, any mortgage, indenture, loan
agreement, note, debenture, agreement for
borrowed money or any other agreement to
which Holdings is a party or by which
Holdings (or its properties) may be bound,
other than such violations, conflicts,
defaults, terminations and Liens, or such
failures to obtain consents, which could not
reasonably be expected to result in a
Material Adverse Effect.
(b) Holdings is not in default
(without giving effect to any grace or cure period or notice requirement) under
its Charter Documents nor under any agreement for borrowed money or under any
agreement pursuant to which any of its securities were sold.
3.22 Third Party Consents.
Neither the nature of Holdings nor of any of its businesses or
properties, nor any relationship between Holdings and any other Person, nor any
circumstance in connection with the offer, issuance, sale or delivery of the
Securities at the Closing nor the performance by Holdings of its obligations
hereunder or under any other Document, or the consummation of the transactions
contemplated hereby or by any other Document, as the case may be, is such as to
require a consent, approval or authorization of, or notice to, or filing,
registration or qualification with, any governmental authority or other Person
on the part of Holdings as a condition to the execution and delivery of this
Agreement or any of the other Documents or the offer, issuance, sale or
delivery of the Securities at the Closing other than such consents, approvals,
authorizations, notices, filings, registrations or qualifications which shall
have been made or obtained on or prior to the Closing Date (and copies of which
will be delivered to the Purchasers) and such filings under Federal and state
securities laws which are permitted to be made after the Closing Date and which
the Holdings agrees to file within the time period prescribed by applicable
law.
C. Survival of Representations and Warranties. All of the
representations and warranties of the Companies hereunder and under the other
Documents shall survive the execution and delivery of the same, any
investigation by any Purchaser and the issuance of the Securities.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF EACH PURCHASER.
Each Purchaser (as to itself only) and each Account Manager
(as to the managed accounts of Purchasers) represents and warrants to the
Companies that:
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4.1 Purchase for Own Account.
Such Purchaser or such Account Manager is purchasing the
Securities to be purchased by it solely for its own account (or in the case of
Account Managers, on behalf of managed accounts) and not as nominee or agent
for any other person (other than for such managed accounts, if applicable) and
not with a view to, or for offer or sale in connection with, any distribution
thereof (within the meaning of the Securities Act) that would be in violation
of the securities laws of the United States of America or any state thereof,
without prejudice, however, to its right at all times to sell or otherwise
dispose of all or any part of said Securities pursuant to a registration
statement under the Securities Act or pursuant to an exemption from the
registration requirements of the Securities Act, and subject, nevertheless, to
the disposition of its property being at all times within its control.
4.2 Accredited Investor.
Such Purchaser or such Account Manager is knowledgeable,
sophisticated and experienced in business and financial matters; it has
previously invested in securities similar to the Securities and it acknowledges
that the Securities have not been registered under the Securities Act and
understands that the Securities must be held indefinitely unless they are
subsequently registered under the Securities Act or such sale is permitted
pursuant to an available exemption from such registration requirement; it (or,
in the case of an Account Manager, the managed account on behalf of which the
Account Manager is acting) is able to bear the economic risk of its investment
in the Securities and is presently able to afford the complete loss of such
investment; it (or, in the case of an Account Manager, the managed account on
behalf of which the Account Manager is acting) is an "accredited investor" as
defined in Regulation D promulgated under the Securities Act; and it has been
afforded access to information about each of the Companies and their financial
condition and business sufficient to enable it to evaluate its investment in
the Securities.
4.3 Authorization.
Each Purchaser has taken all actions necessary to authorize it
(or, in the case of an Account Manager, such Account Manager is duly authorized
by the managed account for which it is acting) (i) to execute, deliver and
perform all of its obligations under this Agreement, (ii) to perform all of its
obligations under the Securities and (iii) to consummate the transactions
contemplated hereby and thereby. This Agreement is a legally valid and binding
obligation of each Purchaser enforceable against it in accordance with its
terms, except for (a) the effect thereon of bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting the
rights of creditors generally and (b) limitations imposed by Federal or state
law or equitable principles upon the specific enforceability of any of the
remedies, covenants or other provisions thereof and upon the availability of
injunctive relief or other equitable remedies.
4.4 Securities Restricted.
No transfer or sale (including, without limitation, by pledge
or hypothecation) of Securities by any Holder which is otherwise permitted
hereunder, other than a transfer or sale to the Issuer, shall be effective
unless such transfer or sale is made (A) pursuant to an effective registration
statement under the Act and a valid qualification under applicable state
securities or "blue sky" laws or (B) without such registration or qualification
as a result of the availability of an exemption therefrom and, if reasonably
requested by the Issuer, counsel for such Holder shall
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have furnished the Issuer with an opinion, reasonably satisfactory in form and
substance to the Issuer, to the effect that no such registration is required
because of the availability of an exemption from the registration requirements
of the Securities Act; provided, however, that with respect to transfers by
Holders to their Affiliates, no such opinion shall be required. A transfer
made by a Holder which is a state-sponsored employee benefit plan to a
successor trust or fiduciary pursuant to a statutory reconstitution shall be
expressly permitted and no opinions of counsel shall be required in connection
therewith.
Notwithstanding anything to the contrary in this Section 4.4,
Crescent/MACH I Partners, L.P. ("MACH I") and TCW/Crescent Mezzanine Trust
("Crescent Trust") shall each be permitted to pledge the Notes held by it to a
trustee for the benefit of secured noteholders pursuant to documents relating
to the financing of MACH I and Crescent Trust, respectively.
4.5 ERISA.
Such Purchaser represents that either:
(a) it is not acquiring the
Securities for or on behalf of (i) any employee pension benefit plan or
employee welfare benefit plan (as defined in Section 3 of ERISA) or (ii) any
"plan" (as defined in Section 4975 of the Code) (each of (i) and (ii) hereafter
a "Plan"); or
(b) the assets used to acquire
the Securities are assets of an insurance company general account and the
purchase of the Notes and Crescent Warrants would be exempt under the
provisions of Prohibited Transaction Class Exemption 95-60; or
(c) it is a "venture capital
operating company" (as defined in 29 C.F.R. Section 2510.3-10); or
(d) if it is acquiring the
Securities on behalf of a Plan, either directly or through an investment fund
(such as a bank collective investment fund or insurance company pooled separate
account), then an exemption from the prohibited transaction rules applies such
that the use of such funds does not constitute a non-exempt prohibited
transaction in violation of Section 406 of ERISA or Section 4975 of the Code,
which could be subject to a civil penalty assessed pursuant to Section 502 of
ERISA or a tax imposed under Section 4975 of the Code.
SECTION 5. COVENANTS.
So long as any of the Notes remain unpaid and outstanding, the
Issuer and, as specified in this Section 5, Reit (only as to Reit and its
Subsidiaries), each covenant to the Holders of outstanding Securities as
follows:
5.1 Payment of Notes; Satisfaction of Obligations.
The Issuer shall pay the principal of, premium, if any, and
interest on the Notes on the dates and in the manner provided in the Notes. To
the extent lawful, the Issuer shall pay interest (including interest accruing
after the commencement of any proceeding under any Bankruptcy Law) on all
unpaid amounts outstanding under the Notes (including overdue installments of
principal or interest) at a rate equal to 14% per annum, compounded quarterly.
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5.2 Financial Statements and Reports.
(a) The Issuer and Reit shall
maintain, and each shall cause each of its Subsidiaries to maintain, a system
of accounting established and administered in accordance with sound business
practices to permit preparation of financial statements in conformity with
GAAP. The Issuer shall deliver to each Holder the financial statements and
other reports described below:
(1) Monthly Financials.
(i) As soon as available and in any
event within thirty (30) days after the end
of each month ending after the Closing Date,
the Issuer will deliver: (A) the
consolidated balance sheets of the Issuer and
its Subsidiaries (other than Holdings, Reit
and the Subsidiaries of Reit) as at the end
of such month and the related consolidated
statements of income and stockholders' equity
and cash flows for such month and in each
case for the period from the beginning of the
then current fiscal year to the end of such
month, setting forth in each case in
comparative form the corresponding figures
for the corresponding periods of the previous
fiscal year and the corresponding figures
from the consolidated plan and financial
forecast for the current fiscal year
delivered pursuant to subsection
5.2(a)(4)(iv) of this Section 5.2, to the
extent prepared on a monthly basis, all in
reasonable detail and certified by the chief
financial officer of the Issuer that they
present fairly the consolidated financial
condition of the Issuer and its Subsidiaries
(other than Holdings, Reit and the
Subsidiaries of Reit) as at the dates
indicated and the results of their operations
and their cash flows for the periods
indicated, subject to changes resulting from
audit and normal year-end adjustments, and
(B) a schedule of the outstanding
Indebtedness for borrowed money of the Issuer
and its Subsidiaries (other than Holdings,
Reit and the Subsidiaries of Reit) describing
in reasonable detail each such debt issue or
loan outstanding and the principal amount
(excluding original issue discount) and
amount of accrued and unpaid interest with
respect to each such debt issue or loan;
(ii) As soon as available and in any
event within thirty (30) days after the end
of each month ending after the Closing Date,
the Issuer will deliver: (A) the
consolidated balance sheets of Holdings and
its Subsidiaries (other than Reit and its
Subsidiaries) as at the end of such month and
the related consolidated statements of income
and stockholders' equity and cash flows for
such month and in each case for the period
from the beginning of the then current fiscal
year to the end of such month, setting forth
in each case in comparative form the
corresponding figures for the corresponding
periods of the previous fiscal year (except
that such corresponding figures for the
corresponding periods of the previous fiscal
year need not be provided with respect to the
last twelve full calendar months preceding
the Closing Date) and the corresponding
figures from the consolidated plan and
financial forecast for the current fiscal
year delivered pursuant to subsection
5.2(a)(4)(iv) of this Section 5.2, to the
extent prepared on a monthly basis, all in
reasonable detail and certified by the chief
financial officer of the Issuer that they
present fairly the consolidated financial
condition of Holdings and its Subsidiaries
(other than Reit and its Subsidiaries) as at
the dates indicated and the results of their
operations and their cash flows for the
periods indicated, subject to changes
resulting from audit and normal quarterly and
year-end adjustments, and (B) a schedule of
the outstanding Indebtedness for borrowed
money of Holdings and its Subsidiaries (other
than Reit and its Subsidiaries) describing in
reasonable detail each such debt issue or
loan outstanding and the principal amount
(excluding original issue discount) and
amount of accrued and unpaid interest with
respect to each such debt issue or loan;
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(iii) As soon as available and in
any event within thirty (30) days after the
end of each month ending after the Closing
Date, the Issuer will deliver: (A) the
consolidated balance sheets of Reit and its
Subsidiaries as at the end of such month and
the related consolidated statements of
operations, shareholders' equity and cash
flows for such month and in each case for the
period from the beginning of the then current
fiscal year to the end of such month, setting
forth in each case in comparative form the
corresponding figures for the corresponding
periods of the previous fiscal year and the
corresponding figures from the consolidated
plan and financial forecast for the current
fiscal year delivered pursuant to subsection
5.2(a)(4)(iv) of this Section 5.2, to the
extent prepared on a monthly basis, all in
reasonable detail and certified by the chief
financial officer of the Issuer that they
present fairly the consolidated financial
condition of Reit and its Subsidiaries as at
the dates indicated and the results of their
operations and their cash flows for the
periods indicated, subject to changes
resulting from audit and normal year-end
adjustments, and (B) a schedule of the
outstanding Indebtedness for borrowed money
of Reit and its Subsidiaries describing in
reasonable detail each such debt issue or
loan outstanding and the principal amount
(excluding original issue discount) and
amount of accrued and unpaid interest with
respect to each such debt issue or loan;
(2) Quarterly Financials.
As soon as available and in any event within
forty-five (45) days after the end of each fiscal quarter (other than
the last quarter of any fiscal year), the Issuer shall deliver: (A)
the consolidated balance sheet of Reit and its Subsidiaries as at the
end of such fiscal quarter and the related consolidated statements of
operations, shareholders' equity and cash flows for such fiscal
quarter and for the period from the beginning of the then current
fiscal year to the end of such fiscal quarter, setting forth in each
case in comparative form the corresponding figures for the
corresponding periods of the previous fiscal year and the
corresponding figures from the consolidated plan and financial
forecast for the current fiscal year delivered pursuant to subsection
5.2(a)(4)(iv) of this Section 5.2, all in reasonable detail and
certified by the chief financial officer of the Issuer that they
present fairly the consolidated financial condition of Reit and its
Subsidiaries as at the dates indicated and the results of their
operations, shareholders' equity and their cash flows for the periods
indicated, subject to changes resulting from audit and normal year-end
adjustments, (B) a narrative report describing the operations of Reit
and its Subsidiaries in the form prepared for presentation to senior
management for such fiscal quarter and for the period from the
beginning of the then current fiscal year to the end of such fiscal
quarter, including a comparison to and discussion of any variances
from the corresponding periods of the previous fiscal year and from
the financial forecast for such fiscal period contained in the
forecast delivered pursuant to subsections 5.2(a)(v), 5.2(a)(viii) and
5.2(b) below and (C) a schedule of the outstanding Indebtedness for
borrowed money of Reit and its Subsidiaries describing in reasonable
detail each such debt issue or loan outstanding and the principal
amount (excluding original issue discount) and amount of accrued and
unpaid interest with respect to each such debt issue or loan;
provided, however, that so long as Reit is subject to the reporting
obligations of Section 13 or 15(d) of the Exchange Act, the
obligations set forth in this subsection 5.2(a)(2) may be satisfied by
delivery of Quarterly Reports on Form 10-Q filed by Reit with the SEC.
28
<PAGE> 34
(3) Year-End Financials.
(i) As soon as available and in any
event within ninety (90) days after the end
of each fiscal year, the Issuer shall
deliver: (A) the consolidated balance sheet
of the Issuer and its Subsidiaries (other
than Holdings, Reit and the Subsidiaries of
Reit) as at the end of such year and the
related consolidated statements of income,
shareholders' equity and cash flows of the
Issuer and its Subsidiaries (other than
Holdings, Reit and the Subsidiaries of Reit)
for such fiscal year, setting forth in each
case in comparative form the corresponding
figures for the previous fiscal year and the
corresponding figures from the consolidated
plan and financial forecast delivered
pursuant to subsection 5.2(a)(4)(iv) of this
Section 5.2 for the fiscal year covered by
such financial statements, all in reasonable
detail and certified by the chief financial
officer of the Issuer that they present
fairly the consolidated financial condition
of the Issuer and its Subsidiaries (other
than Holdings, Reit and the Subsidiaries of
Reit) as at the dates indicated and the
results of their operations and their cash
flows for the periods indicated, (B) a
narrative report describing the operations of
the Issuer and its Subsidiaries (other than
Holdings, Reit and the Subsidiaries of Reit)
in the form prepared for presentation to
senior management for such fiscal year, (C) a
schedule of the outstanding Indebtedness for
borrowed money of the Issuer and its
Subsidiaries (other than Holdings, Reit and
the Subsidiaries of Reit) describing in
reasonable detail each such debt issue or
loan outstanding and the principal amount
(excluding original issue discount) of
accrued and unpaid interest with respect to
each such debt issue or loan and (D) in the
case of such consolidated financial
statements, a report thereon of the
Independent Auditors, which report shall be
unqualified, shall express no doubts about
the ability of the Issuer and its
Subsidiaries (other than Holdings, Reit and
the Subsidiaries of Reit) to continue as a
going concern, and shall state that such
consolidated financial statements fairly
present the consolidated financial position
of the Issuer and its Subsidiaries (other
than Holdings, Reit and the Subsidiaries of
Reit) as of the dates indicated and the
results of their operations, shareholders'
equity and their cash flows for the periods
indicated in conformity with GAAP applied on
a basis consistent with prior years (except
as otherwise disclosed in such financial
statements) and that the examination by such
Independent Auditors in connection with such
consolidated financial statements has been
made in accordance with United States
generally accepted auditing standards;
(ii) As soon as available and in any
event within ninety (90) days after the end
of each fiscal year, the Issuer shall
deliver: (A) the consolidated balance sheet
of Holdings and its Subsidiaries (other than
Reit and its Subsidiaries) as at the end of
such year and the related consolidated
statements of income, shareholders' equity
and cash flows of Holdings and its
Subsidiaries (other than Reit and its
Subsidiaries) for such fiscal year, setting
forth in each case in comparative form the
corresponding figures for the previous fiscal
year and the corresponding figures from the
consolidated plan and financial forecast
delivered pursuant to subsection
5.2(a)(4)(iv) of this Section 5.2 for the
fiscal year covered by such financial
statements, all in reasonable detail and
certified by the chief financial officer of
the Issuer that they present fairly the
consolidated financial condition of Holdings
and its Subsidiaries (other than Reit and its
Subsidiaries) as at the dates indicated and
the results of their operations and their
cash flows for the periods indicated, (B) a
narrative report describing the operations of
Holdings and its Subsidiaries (other than
Reit and its Subsidiaries) in the form
prepared for presentation to senior
management for such fiscal year, (C) a
schedule of the outstanding Indebtedness for
borrowed money of Holdings and its
Subsidiaries (other than Reit and its
Subsidiaries) describing in reasonable
29
<PAGE> 35
detail each such debt issue or loan
outstanding and the principal amount
(excluding original issue discount) of
accrued and unpaid interest with respect to
each such debt issue or loan and (D) in the
case of such consolidated financial
statements, a report thereon of the
Independent Auditors, which report shall be
unqualified, shall express no doubts about
the ability of Holdings and its Subsidiaries
(other than Reit and its Subsidiaries) to
continue as a going concern, and shall state
that such consolidated financial statements
fairly present the consolidated financial
position of Holdings and its Subsidiaries
(other than Reit and its Subsidiaries) as of
the dates indicated and the results of their
operations, shareholders' equity and their
cash flows for the periods indicated in
conformity with GAAP applied on a basis
consistent with prior years (except as
otherwise disclosed in such financial
statements) and that the examination by such
Independent Auditors in connection with such
consolidated financial statements has been
made in accordance with United States
generally accepted auditing standards; and
(iii) As soon as available and in
any event within ninety (90) days after the
end of each fiscal year, the Issuer shall
deliver: (A) the consolidated balance sheet
of Reit and its Subsidiaries as at the end of
such year and the related consolidated
statements of operations, shareholders'
equity and cash flows of Reit and its
Subsidiaries for such fiscal year, setting
forth in each case in comparative form the
corresponding figures for the previous fiscal
year and the corresponding figures from the
consolidated plan and financial forecast
delivered pursuant to subsection
5.2(a)(4)(iv) of this Section 5.2 for the
fiscal year covered by such financial
statements, all in reasonable detail and
certified by the chief financial officer of
the Issuer that they present fairly the
consolidated financial condition of Reit and
its Subsidiaries as at the dates indicated
and the results of their operations and their
cash flows for the periods indicated, (B) a
narrative report describing the operations of
Reit and its Subsidiaries in the form
prepared for presentation to senior
management for such fiscal year, (C) a
schedule of the outstanding Indebtedness for
borrowed money of Reit and its Subsidiaries
describing in reasonable detail each such
debt issue or loan outstanding and the
principal amount (excluding original issue
discount) of accrued and unpaid interest with
respect to each such debt issue or loan and
(D) in the case of such consolidated
financial statements, a report thereon of the
Independent Auditors, which report shall be
unqualified, shall express no doubts about
the ability of Reit and its Subsidiaries to
continue as a going concern, and shall state
that such consolidated financial statements
fairly present the consolidated financial
position of Reit and its Subsidiaries as of
the dates indicated and the results of their
operations, shareholders' equity and their
cash flows for the periods indicated in
conformity with GAAP applied on a basis
consistent with prior years (except as
otherwise disclosed in such financial
statements) and that the examination by such
Independent Auditors in connection with such
consolidated financial statements has been
made in accordance with United States
generally accepted auditing standards;
provided, however, that so long as Reit is
subject to the reporting obligations of
Section 13 or 15(d) of the Exchange Act, the
obligations set forth in this subsection
5.2(a)(3)(iii) may be satisfied by delivery
of Annual Reports on Form 10-K filed by Reit
with the SEC together with any annual report
delivered to shareholders of Reit.
(4) Other Information.
(i) Promptly upon receipt thereof,
copies of all reports submitted to the
management of any of the Companies by
independent public accountants, whether in
connection with each annual, interim or
special audit of the consolidated financial
30
<PAGE> 36
statements of such Company made by such
accountants or otherwise, including the
management letter submitted by such
accountants to management in connection with
their annual audit;
(ii) Copies of all material reports,
letters and other correspondence from local,
state or Federal regulatory or other agencies
relating to business, licenses or operating
contracts of the Issuer or any of its
Subsidiaries;
(iii) Notice to each Holder of (i)
any violation of or noncompliance with any
Environmental Laws that could reasonably be
expected to have a Material Adverse Effect,
(ii) any communication (written or oral) or
Environmental Claim, whether from a
governmental authority, citizens group,
employee or otherwise, alleging that any of
the Companies is not in compliance with any
Environmental law or asserting liability of
any of the Companies for contamination from or
as a result (directly or indirectly) of any
Materials of Environmental Concern, which
noncompliance or liability could reasonably
be expected to have a Material Adverse Effect
or (iii) any releases or threatened releases
(including, without limitation, any
releasing, spilling, leaking, pumping,
pouring, emitting, emptying, discharging,
injecting, escaping, leaching, disposing or
dumping, on-site or off-site) of any
Materials of Environmental Concern for which
any of the Companies could be held liable,
either in fact or by law, which releases
could reasonably be expected to have a
Material Adverse Effect;
(iv) A consolidated plan and
financial forecast for the Issuer and its
Subsidiaries to be delivered to the Holders
on or prior to December 1 of the year
preceding the year to which such consolidated
plan and financial forecast relates, in the
same form as such consolidated plan and
financial forecast is delivered to the
members of the board of directors of the
Issuer; and
(v) Copies of such other information
and data with respect to any of the Companies
or any of their respective Subsidiaries as
from time to time may be reasonably requested
by any Holder.
(b) Each financial statement
delivered pursuant to Section 5.2(a)(1) (Monthly Financials), Section 5.2(a)(2)
(Quarterly Financials) or Section 5.1(a)(3) (Year-End Financials) shall be in a
form reasonably acceptable to each Purchaser and, in the case of financial
statements delivered pursuant to Section 5.2(a)(2) or Section 5.1(a)(3), shall
be accompanied by a brief narrative description of business and financial
trends and developments material to the Persons included in such financial
statements and significant transactions that have occurred in the appropriate
period or periods covered thereby.
(c) The Issuer and Reit shall
cause each of the Independent Auditors who perform audits of the financial
statements of each Company, to provide a letter to each of the Holders,
reasonably satisfactory to each such Holder, stating that such Holder shall be
entitled to rely upon each certification by such Independent Auditors of the
consolidated financial statements of such Company. The Issuer and Reit shall
also provide each of such Independent Auditors with instructions that they may
communicate directly with each Holder.
31
<PAGE> 37
5.3 Compliance Certificate.
(a) The Issuer shall deliver to
the Holders, within thirty (30) days after the end of each calendar month, an
Officers' Certificate stating that a review of the activities of the Issuer and
its Subsidiaries during the preceding month, fiscal quarter or fiscal year, as
the case may be, has been made under the supervision of the signing Officers
with a view to determining whether the Issuer and its Subsidiaries have kept,
observed, performed and fulfilled their respective obligations under this
Agreement, and further stating, as to each such Officer signing such
certificate, that to his or her knowledge, the Issuer and its Subsidiaries each
has kept, observed, performed and fulfilled each and every covenant contained
in this Agreement (or, if a Default or Event of Default shall have occurred,
describing all such Defaults or Events of Default of which he or she may have
knowledge) and that to his or her knowledge, no event has occurred and remains
in existence by reason of which payments on account of the principal of or
premium or interest, if any, on the Securities are prohibited or if such event
has occurred, a description of the event. The Officers' Certificate shall set
forth all financial calculations for such month, fiscal quarter or fiscal year
necessary to demonstrate compliance with the covenants contained in this
Section 5.
(b) So long as not contrary to
the then current recommendations of the American Institute of Certified Public
Accountants, the financial statements delivered pursuant to Section 5.2(a)(3)
shall be accompanied by a written statement of the Independent Auditors that in
making the examination necessary for certification of such financial statements
nothing has come to their attention which would lead them to believe that the
Issuer or any of its Subsidiaries has violated any provisions of this Agreement
or, if any such violation has occurred, specifying the nature and period of
existence thereof, it being understood that such Independent Auditors shall not
be liable directly or indirectly to any Person for any failure to obtain
knowledge of any such violation.
(c) The Issuer shall deliver to
the Holders, forthwith upon becoming aware of (i) any Default or Event of
Default or (ii) any default or event of default under any other loan agreement,
mortgage, indenture or instrument referred to in Section 7.1(f), an Officers'
Certificate specifying in reasonable detail such Default, Event of Default or
default or event of default and the nature of any remedial or corrective action
the Issuer or its Subsidiaries propose to take with respect thereto.
5.4 Limitation on Restricted Payments.
(a) The Issuer and Reit shall
not, and each shall cause each of its Subsidiaries to not:
(i) declare or pay any dividends,
either in cash or property, on, or make any
distribution to the holders (as such) in
respect of, any class of Equity Interest in
the Issuer or any of its Subsidiaries, other
than (w) dividends or distributions payable
in Equity Interests (other than Disqualified
Stock) of the Issuer or its Subsidiaries, (x)
dividends or distributions payable to the
Issuer or (y) cash dividends paid by Reit to
its shareholders;
(ii) purchase, redeem or otherwise
acquire or retire for value any Equity
Interests of the Issuer or any of its
Subsidiaries or any other Affiliate of the
Issuer;
32
<PAGE> 38
(iii) purchase, redeem, defease or
otherwise acquire or retire for value any
Indebtedness (other than the Notes) that is
pari passu with or subordinated to the Notes;
or
(iv) make any Investment (all such
payments and other actions set forth in
clauses (i) through (iv) hereof being
collectively referred to as "Restricted
Payments").
(b) Notwithstanding the
provisions of the foregoing clause (a) of this Section 5.4, so long as no
Default or Event of Default shall have occurred and be continuing or would
occur as a consequence of such Restricted Payment, the foregoing provisions of
such clause (a) will not prohibit the following Restricted Payments:
(i) the defeasance, redemption or
repurchase of pari passu or subordinated
Indebtedness with the net proceeds from an
incurrence of unsecured Permitted Refinancing
Indebtedness;
(ii) the purchase or redemption by
the Issuer or Reit of all or any portion of
the Common Stock held by an executive officer
of the Issuer or Reit following the
termination of employment of such executive
officer, which such purchase or redemption is
approved by the board of directors of the
Issuer or Reit in good faith; provided, that
the aggregate purchase price for all such
shares of Common Stock so repurchased or
redeemed from such executive officers shall
not exceed $250,000 in any fiscal year;
(iii) Investments by Reit that are
Permitted Reit Investments;
(iv) dividends paid or distributed
by any Wholly Owned Subsidiary of the Issuer
to its direct parent;
(v) distributions to the holders of
the limited liability company interests in
Holdings pursuant to, and in an amount not in
excess of that permitted by, Section 5.6(b)
of the Limited Liability Company Agreement
(as in effect on the Closing Date); and
(vi) Investments by the Issuer in
any Wholly Owned Subsidiary of the Issuer.
5.5 Limitation on Incurrence of Additional Indebtedness and
Issuance of Disqualified Stock.
(a) The Issuer shall not, and
shall cause each of its Subsidiaries (including without limitation, upon the
creation or acquisition of such Subsidiary) other than Reit to not, directly or
indirectly, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable with respect to (collectively, "incur") any
Indebtedness or issue any Disqualified Stock.
(b) The foregoing limitations of
Section 5.5(a) will not apply to:
(i) the incurrence by the Issuer and
each Guarantor of the Indebtedness
represented by the Notes and the Subsidiary
Guaranty, respectively; and
33
<PAGE> 39
(ii) the incurrence by the Issuer of
unsecured Permitted Refinancing Indebtedness
in exchange for, or the net proceeds of which
are used to extend, refinance, renew,
replace, defease or refund, any or all of the
Notes.
5.6 Limitation on Transactions With Affiliates.
(a) The Issuer and Reit shall
not, and each shall cause each of its Subsidiaries to not, sell, lease,
transfer or otherwise dispose of any of its properties or assets to or purchase
any property or assets from, or enter into any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, an
Affiliate of such Company or any of its Subsidiaries (an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to such Company or such Subsidiary than those that could have
been obtained in a comparable transaction by such Company or such Subsidiary
from an unrelated person and (ii) with respect to any Affiliate Transaction (or
series of related Affiliate Transactions) involving or having a potential value
of more than $100,000, in addition to compliance with clause (i), such
Affiliate Transaction shall also be approved by a majority of the disinterested
members of the board of directors of the Issuer after determining, in their
reasonable good faith judgment, that (A) such transaction is in the best
interest of such Company or such Subsidiary based on full disclosure of all
relevant facts and circumstances and (B) such transaction is on fair and
reasonable terms competitive with those that could be obtained from an
unrelated third party (such approval and determination to be evidenced by a
resolution of such disinterested directors of the board of directors of the
Issuer), and (iii) with respect to any Affiliate Transaction (or series of
related Affiliate Transactions) involving or having a potential value of more
than $2,500,000, in addition to compliance with clauses (i) and (ii), the board
of directors of the Issuer shall have obtained an opinion of a nationally
recognized investment banking firm or appraiser to the effect that such
transaction is fair, from a financial point of view, to such Company or such
Subsidiary, as the case may be; provided, however, that the board of directors
of the Issuer need not obtain such an opinion in connection with immaterial
modifications of the Management Agreement.
(b) The Issuer and Reit shall
not, and each shall cause each of its Subsidiaries to not, pay any fees to MDC
or any of its Affiliates in respect of advisory services, if the aggregate
amount of such fees paid by the Issuer, Reit and all of their Subsidiaries
would exceed the amount of fees required to be paid pursuant to the Advisory
Services Agreement dated as of February 11, 1997, between the Issuer and MDC
Management Company II, L.P., a California limited partnership, as in effect on
the Closing Date. Furthermore, at any time during which an Event of Default
has occurred and is continuing, the Issuer and Reit shall not, and each shall
cause each of its Subsidiaries to not, pay any fees to MDC or any of its
Affiliates in respect of advisory services.
5.7 Limitation on Liens.
The Issuer shall not, and shall cause each of its Subsidiaries
(other than Reit and its Subsidiaries) to not, create or suffer to exist any
Liens upon any assets of the Issuer or any such Subsidiaries or any shares of
capital stock of such Subsidiaries, in each case now owned or hereafter
acquired; provided, however, that this Section 5.7 shall not prohibit the
creation or continuing existence of any Permitted Lien.
34
<PAGE> 40
5.8 Limitation on Sale of Assets.
The Issuer shall not, and shall cause each of its Subsidiaries
(other than Reit and its Subsidiaries) to not, make any Asset Sale unless: (i)
no Default or Event of Default exists and is continuing or is created by such
disposition and (ii) in the case of any Asset Sale involving (A) assets for Net
Proceeds in excess of $100,000 or with a fair market value in excess of
$100,000 or (B) assets for Net Proceeds or with a fair market value (when
aggregated with the Net Proceeds or fair market value of all other assets
subject to any Asset Sales during the same fiscal year) in excess of $250,000:
(1) the Issuer or such Subsidiary receives consideration
at the time of such Asset Sale at least equal to the fair market value
of such assets (as determined in good faith by the board of directors
of the Issuer or such Subsidiary and evidenced by a resolution set
forth in an Officers' Certificate);
(2) at least 85% of the consideration therefor received
by the Issuer or such Subsidiary, as the case may be, shall be in the
form of cash; provided, however, that for the purposes of this clause
(2), the following are deemed to be cash: (x) any liabilities (as
shown on the Issuer's or such Subsidiary's most recent balance sheet
or in the notes thereto) of the Issuer or such Subsidiary that are
assumed by the transferee in connection with the Asset Sale (other
than liabilities that are incurred in connection with or in
anticipation of such Asset Sale); and (y) securities received by the
Issuer or such Subsidiary from such transferee that are immediately
converted into cash at the face amount or fair market value thereof by
the Issuer or such Subsidiary; and
(3) upon the consummation of an Asset Sale, the Issuer or
such Subsidiary may apply the Net Proceeds (it being understood that
the entire Net Proceeds and not just the portion in excess of the
amounts set forth in subclauses (A) and (B) of clause (ii) above shall
be subject to this subsection (3)) of such Asset Sale prior to the
180th day after the consummation of an Asset Sale to reinvest in
Productive Assets to the extent not otherwise prohibited hereby. Any
Net Proceeds from an Asset Sale that are not so reinvested shall
constitute excess proceeds ("Excess Net Proceeds") and shall be held
in Cash or Cash Equivalents.
When the aggregate amount of Excess Net Proceeds exceeds
$250,000, the Issuer shall as promptly as possible apply the Excess Net
Proceeds to the redemption of the maximum principal amount of Notes that may be
redeemed in accordance with the provisions of Section 6. Upon completion of
such redemption of Notes, the amount of Excess Net Proceeds shall be reset at
zero.
Simultaneously with the mailing of the Notice of Redemption
relating to such redemption of Notes, the Issuer shall provide the Holders with
an Officers' Certificate setting forth the calculations used in determining the
amount of Excess Net Proceeds to be applied to the redemption of Notes.
35
<PAGE> 41
5.9 Limitation on Capital Expenditures.
(a) The Issuer shall not, and
shall cause each of its Subsidiaries (other than Holdings, Reit and the
Subsidiaries of Reit) to not, make or incur Capital Expenditures in any fiscal
year in an aggregate amount (for the Issuer and all such Subsidiaries) in
excess of $250,000.
(b) The Issuer shall cause Holdings to not make or incur any
Capital Expenditures at any time.
(c) Reit shall not, and shall cause each of its Subsidiaries to not,
make or incur Capital Expenditures in any fiscal year in an aggregate amount
(for Reit and all such Subsidiaries) in excess of $100,000.
5.10 Limitation on Dividend and Other Payment Restrictions
Affecting Subsidiaries.
The Issuer and Reit shall not, and each shall cause each of
its Subsidiaries to not, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or restriction
on the ability of any Subsidiary of the Issuer to (a) pay dividends or make any
other distributions on its Capital Stock, Equity Interest or any other interest
or participation in, or measured by, its profits owned by, or pay any
Indebtedness owed to, the Issuer, (b) make loans or advances to the Issuer or
(c) transfer any of its properties or assets to the Issuer, except for such
encumbrances or restrictions existing under or by reason of (i) any
restrictions existing under or contemplated by this Agreement; (ii) any
restrictions, with respect to a Subsidiary of the Issuer that is not a
Subsidiary of the Issuer on the date hereof, in existence at the time such
Person becomes a Subsidiary of the Issuer (so long as such restrictions are not
created in anticipation of such Person becoming a Subsidiary of the Issuer);
(iii) with respect to clause (c) above only, any restrictions existing under
Capital Lease Obligations (provided that, in each case, such prohibition shall
only relate to the assets which are subject to such Capital Lease Obligations);
or (iv) any restrictions existing under any agreement that refinances or
replaces the agreements containing the restrictions in the foregoing clauses
(i), (ii) and (iii); provided, that the terms and conditions of any such
restrictions are no more restrictive than those under or pursuant to the
agreement evidencing the obligation refinanced.
5.11 Change of Control.
(a) Change of Control. Upon the occurrence of a Change of Control,
the Issuer shall give each Holder prompt, and in any event within ten (10)
Business Days of the occurrence of the Change of Control (the "Change of Control
Date"), notice describing in reasonable detail the nature of the Change of
Control, offering to each Holder the right to require the Issuer to repurchase
all or any part of such Holder's Notes (the "Change of Control Offer") at a
purchase price equal to 101% of the aggregate principal amount thereof, together
with unpaid interest to the date of repurchase (the "Change of Control Offer
Price").
(b) Procedure. The notice of a Change of Control Offer shall state
a date not less than thirty (30) days nor more than sixty (60) days after the
date of mailing of such notice by the Issuer for repurchase of the Notes
pursuant to the Change of Control Offer (the "Change of Control Payment Date").
The notice, which shall govern the terms of the Change of Control Offer, shall
state:
36
<PAGE> 42
(1) that the Change of Control Offer is being
made pursuant to this Section 5.11;
(2) the Change of Control Offer Price and the
Change of Control Payment Date;
(3) that, unless the Issuer defaults in the
payment of the Change of Control Offer Price, all Notes accepted for
payment shall cease to accrue interest on and after the Change of
Control Payment Date;
(4) that Holders electing to require the Issuer
to repurchase any Notes will be required to surrender the Note, with
the form entitled "Option of Holder to Elect Purchase" on the reverse
side of the Note completed and otherwise in proper form for transfer,
to the address specified in the notice prior to the close of business
on the Business Day preceding the Change of Control Payment Date;
(5) that the Holders will be entitled to withdraw
their election to require the Issuer to repurchase any Notes on the
terms and conditions set forth in such notice; and
(6) that the Holders electing to require the
Issuer to repurchase any Notes in part will be issued a new Note in a
principal amount equal to the unpurchased portion of the Notes
surrendered; provided, however, that any portion of a Note repurchased
by the Issuer and any new Note issued to the Holder in respect of the
unpurchased portion thereof shall be in the principal amount of $1,000
or an integral multiple thereof.
(c) Acceptance of Notes. On a Change of Control Payment Date, the
Issuer shall (i) accept for payment all Notes or portions thereof validly
tendered pursuant to the Change of Control Offer and (ii) promptly thereafter
mail or deliver to each Holder of Notes accepted for repurchase payment in the
amount equal to the aggregate Change of Control Offer Price for such Notes, and
the Issuer shall execute and mail or deliver to such Holders a new Note equal in
principal amount to any unpurchased portion of the Notes surrendered. As soon
as practicable, the Issuer will notify the Holders of the results of the Change
of Control Offer on the Change of Control Payment Date.
5.12 Minimum Consolidated Interest Expense Coverage Ratio.
The Issuer shall not permit its Consolidated Interest Expense
Coverage Ratio for the four-fiscal quarter period ending on the last day of the
fiscal quarter ending on or about the date set forth below to be less than the
amount set forth below opposite the date shown (provided that for the fiscal
quarters ending on or about June 30, 1997 and September 30, 1997, the Issuer's
Consolidated Interest Expense Coverage Ratio shall be calculated for the two-
and three-fiscal quarter periods (respectively) then ending, rather than for
the four-fiscal quarter period then ending):
<TABLE>
<CAPTION>
Date Consolidated Interest Expense Coverage Ratio
- ---- --------------------------------------------
<S> <C>
September 30, 1997 0.22
December 31, 1997 0.30
</TABLE>
37
<PAGE> 43
<TABLE>
<S> <C> <C>
March 31, 1998 0.35
June 30, 1998 0.45
September 30, 1998 0.50
December 31, 1998 0.55
March 31, 1999 0.65
June 30, 1999 0.80
September 30, 1999 0.85
December 31, 1999 1.10
March 31, 2000 1.30
June 30, 2000 1.60
September 30, 2000 1.85
December 31, 2000 and thereafter 2.10
</TABLE>
5.13 Fiscal Years.
At all times, the Issuer and Reit shall maintain, and each
shall cause each of its Subsidiaries to maintain, its fiscal year ending on
December 31st.
5.14 Limitation on Ranking of Future Indebtedness.
The Issuer shall not, and shall cause each of its Subsidiaries
(other than Reit and its Subsidiaries) to not, directly or indirectly, incur,
create, or suffer to exist any Indebtedness unless, by its terms or by the
terms of the instrument creating or evidencing it, such Indebtedness (A) has a
maturity and Weighted Average Life to Maturity longer than the Notes and (B) is
subordinate or junior in right of payment to the Notes (or in the case of a
Guarantor, to the Subsidiary Guaranty).
5.15 Stay, Extension and Usury Laws.
Each of the Companies covenants and agrees (to the extent that
it may lawfully do so) that it will not at any time insist upon, plead, or in
any manner whatsoever claim or take the benefit or advantage of, and will use
its best efforts to resist any attempts to claim or take the benefit of, any
stay, extension or usury law wherever enacted, now or at any time hereafter in
force, which may affect the covenants or the performance of its obligations
under this Agreement or the Notes; and each of the Companies (to the extent it
may lawfully do so) hereby expressly waives all benefit or advantage of any
such law, and covenants that it will not, by resort to any such law, hinder,
delay or impede the execution of any power herein granted to the Holders, but
will suffer and permit the execution of every such power as though no such law
has been enacted.
5.16 Corporate Existence; Merger; Successor Corporation.
(a) The Issuer and Reit shall do or cause to be done all things
necessary to preserve and keep in full force and effect the corporate or other
existence of such Company and
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each of its Subsidiaries in accordance with the organizational documents and
the corporate or other rights (charter and statutory), licenses and franchises
of such Company and each of its Subsidiaries; provided, however, that such
Company and its Subsidiaries shall not be required to preserve any such right,
license or franchise, or corporate or other existence, if the board of
directors of the Issuer shall determine in good faith that the preservation
thereof is no longer desirable in the conduct of the business of the Issuer and
its Subsidiaries and that the loss thereof is not adverse in any material
respect to any Holder.
(b) None of the Companies shall in a single transaction or through a
series of related transactions, (i) consolidate with or merge with or into any
other person, or transfer (by lease, assignment, sale or otherwise) all or
substantially all of its properties and assets as an entirety or substantially
as an entirety to another person or group of affiliated persons or (ii) adopt a
Plan of Liquidation.
5.17 Limitation on Reit's Business and Tax Status.
(a) Reit and the Subsidiaries of Reit shall not engage in any
business or activity other than the business of investing in and disposing of
Permitted Reit Investments.
(b) Prior to the consummation of a Qualified Public Equity Offering
or a Qualified Private Equity Placement, Reit and its Subsidiaries shall not
invest in or hold any B/C Mortgages, unless the aggregate fair market value of
the Investments by Reit and its Subsidiaries in B/C Mortgages does not exceed
20% of the aggregate fair market value of all the assets of Reit and its
Subsidiaries. For purposes of this Agreement, such fair market value shall be
determined at any time for each type of asset by the parties (other than Reit)
to Reit's Reverse Repurchase Agreements or, if such determination is not readily
available, by such methods as shall be approved from time to time by Reit's
Unaffiliated Directors (as defined in the Management Agreement).
(c) At all times, Reit shall operate and qualify as a REIT under
Section 856 et seq. of the Code, the income of which is taxed pursuant to
Section 857 of the Code. Upon demand of any Purchaser, Issuer shall provide the
Holders with an opinion of a law firm, selected by Reit and reasonable
acceptable to the Majority Holders, that Reit has operated and qualifies as a
REIT under Section 856 et. seq. of the Code, the income of which is taxed
pursuant to Section 857 of the Code; provided that such opinion shall be
substantially similar in form and substance to the opinion of Gibson, Dunn &
Crutcher LLP, regarding such operation and qualification, delivered to the
Purchasers on the Closing Date.
5.18 Limitation on the Businesses of the Issuer and Holdings.
(a) The Issuer shall not engage in any business or activity other
than (i) the business of providing to Reit the services described in Section 2
of the Management Agreement and (ii) the business of providing substantially
similar services to other Persons that engage solely in the business of
investing in and disposing of Permitted Reit Investments and that qualify as a
REIT under Section 856 et seq. of the Code, the income of which is taxed
pursuant to Section 857 of the Code.
(b) Holdings shall not conduct or operate any business, perform any
obligations, hold any assets nor make any investments; provided, however, that
Holdings may own Equity Interests in Reit; provided, further, however, that
Holdings may (i) enter into, and perform its
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obligations under, each of the Documents to which it is a party, (ii) pay its
Taxes and (iii) otherwise maintain its existence. At all times, Holdings shall
own directly all the Reit Shares and shall not distribute, sell, convey,
transfer or otherwise dispose of any of the Reit Shares.
5.19 Taxes.
The Issuer and Reit shall, and each shall cause each of its
Subsidiaries to, pay or discharge or cause to be paid or discharged, before the
same shall become delinquent, (i) all Taxes levied or imposed upon such Company
or such Subsidiary, as the case may be, or upon the income, profits or property
of such Company or such Subsidiary, as the case may be, and (ii) all lawful
claims, whether for labor, materials, supplies, services or anything else,
which, if unpaid, would or may by law become a Lien, upon the property of such
Company or such Subsidiary, as the case may be; provided, however, that none of
such Company nor any of its Subsidiaries shall be required to pay or discharge
or cause to be paid or discharged any such Tax, the applicability or validity
of which is being contested in good faith by appropriate proceedings which will
prevent the forfeiture or sale of any property of such Company or such
Subsidiary, as the case may be, and for which disputed amounts reserves have
been established in accordance with GAAP, in an amount which the Issuer
believes in good faith is adequate.
5.20 Investment Company Act.
The Issuer and Reit shall not, and each shall cause each of
its Subsidiaries to not, become an investment company subject to registration
under the Investment Company Act of 1940, as amended.
5.21 Ownership of Subsidiaries.
(a) At all times, the Issuer
shall own 100% of the Preferred Interests of Holdings outstanding at any time
free and clear of any Lien.
(b) The Issuer and Reit shall
not, and each shall cause each of its Subsidiaries to not, cause or permit any
Affiliate of MDC (other than Holdings and the members of the management of
Reit) to own any Equity Interests of Reit, except to the extent necessary to
allow compliance with the ownership requirements of Section 856 of the Code.
(c) The Issuer shall not create
or cause or permit to exist any Subsidiary of the Issuer other than Holdings,
Reit and Permitted Reit Subsidiaries.
5.22 Insurance.
The Issuer and Reit shall, and each shall cause each of its
Subsidiaries to, maintain liability, casualty and other insurance with a
reputable insurer or insurers in such amounts and against such risks as is
carried by responsible companies engaged in similar businesses and owning
similar assets.
5.23 Employee Plans.
The Issuer and Reit shall not, and each shall cause each of
its Subsidiaries to not, directly or indirectly, (i) terminate any employee
pension benefit plan subject to Title IV of ERISA if as a result of such
termination the Issuer and its Subsidiaries, collectively, would incur a
liability
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with respect to such plan in excess of $1,000,000 in the aggregate, or (ii)
make a complete or partial withdrawal (within the meaning of Section 4201 of
ERISA) from any multiemployer plan if as a result of such withdrawal (within
the meaning of Section 4201 of ERISA), the Issuer and its Subsidiaries,
collectively, would incur a liability with respect to such plan in excess of
$1,000,000 in the aggregate.
As used in this Section 5.23, the terms "employee pension
benefit plan" and "multiemployer plan" shall have the meanings assigned to such
terms in Section 3 of ERISA.
5.24 ERISA Notices.
Promptly, but in any event within fifteen (15) days
thereafter, the Issuer shall deliver to the Purchasers (or, if no Purchaser
continues to be a Holder, such Person as the Majority Holders shall designate),
if and when the Issuer or any of its Subsidiaries (i) gives or is required to
give notice to the Pension Benefit Guaranty Corporation (the "PBGC") of any
"reportable event" (as defined in Section 4043 of ERISA) with respect to any
employee pension benefit plan maintained by the Issuer or any of its
Subsidiaries or, to the best knowledge of the officers or directors of the
Issuer, any entity which is a member of the same controlled group as the
Issuer, which "reportable event" might reasonably constitute grounds for a
termination of such plan under Title IV of ERISA or the imposition of a tax
under section 4971 of the Code, or knows that the plan administrator of any
such plan has given or is required to give notice of any such reportable event,
a copy of the notice of such reportable event given or required to be given to
the PBGC, (ii) receives notice of complete or partial withdrawal liability
under Title IV of ERISA or notice that any multiemployer plan to which the
Issuer or any of its Subsidiaries or, to the best knowledge of the officers or
directors of the Issuer, any entity which is a member of the same controlled
group as the Issuer contributes or is obligated to contribute is in
reorganization or has been terminated, a copy of such notice, (iii) receives
notice from the PBGC under Title IV of ERISA of an intent to terminate or
appoint a trustee to administer any employee pension benefit plan maintained by
the Issuer or any of its Subsidiaries or, to the best knowledge of the officers
or directors of the Issuer, any entity which is a member of the same controlled
group as the Issuer, a copy of such notice, (iv) applies for a waiver of the
minimum funding standard under section 412 of the Code, a copy of such
application, (v) gives notice of intent to terminate any employee pension
benefit plan maintained by the Issuer or any of its Subsidiaries or, to the
best knowledge of the officers or directors of the Issuer, any entity which is
a member of the same controlled group as the Issuer under Title IV of ERISA, a
copy of such notice and other information filed with the PBGC, (vi) fails to
make any payment or contribution to any employee pension benefit plan (or
multiemployer plan or in respect of any benefit arrangement) or makes any
amendment to any employee benefit plan or benefit arrangement which could
reasonably result in the imposition of a lien or the posting of a bond or other
security, a certificate of the Chief Executive Officer of the Issuer setting
forth details as to such occurrence and action, if any, which the Issuer or any
of its Subsidiaries is required or proposes to take, (vii) adopts, establishes,
maintains or enters into any obligation to make contributions that are material
with respect to the Issuer or any of its Subsidiaries to any new employee
benefit plan or multiemployer plan, a certificate of the Chief Executive
Officer of the Issuer setting forth details as to such obligation, (viii)
modifies in any material respect any existing employee benefit plan maintained
by the Issuer or any of its Subsidiaries or, to the best knowledge of the
officers or directors of the Issuer, any entity which is a member of the same
controlled group as the Issuer (other than any modification to medical, dental
or other employee welfare benefit plans in the ordinary course of business) so
as to increase its obligations thereunder, a certificate of the Chief Executive
Officer of the Issuer setting forth details as to such modification or (ix)
materially increases a contribution obligation to any
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multiemployer plan contributed to or required to be contributed to by the
Issuer or any of its Subsidiaries or, to the best knowledge of the officers or
directors of the Issuer, any entity which is a member of the same controlled
group as the Issuer, a certificate of the Chief Executive Officer of the Issuer
setting forth details as to such increase.
As used in this Section 5.24, the terms "employee pension
benefit plan," "employee welfare benefit plan," "multiemployer plan" and
"employee benefit plan" shall have the meanings assigned to such terms in
Section 3 of ERISA and the term "controlled group" shall have the meaning
assigned to such term in section 414 of the Code.
5.25 Inconsistent Agreements.
The Issuer and Reit shall not, and each shall cause each of
its Subsidiaries to not, (i) enter into any agreement or arrangement that is
inconsistent with, or would impair the ability of the Issuer or any of its
Subsidiaries to fulfill the obligations of the Issuer or any of its
Subsidiaries under, this Agreement, or (ii) supplement, amend or otherwise
modify the terms of their respective Charter Documents, if the effect thereof
would be materially adverse to the Holders.
5.26 Compliance with Laws; Maintenance of Licenses.
The Issuer and Reit shall, and each shall cause each of its
Subsidiaries to, comply with all statutes, ordinances, governmental rules and
regulations, judgments, orders and decrees (including all Environmental Laws)
to which any of them is subject, and maintain, obtain and keep in effect all
licenses, permits, franchises and other governmental authorizations necessary
to the ownership or operation of their respective properties or the conduct of
their respective businesses, except to the extent that the failure to so comply
or maintain, obtain and keep in effect could not, singly or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
5.27 Inspection of Properties and Records.
The Issuer and Reit shall allow, and each shall cause each of
its Subsidiaries to allow, each Purchaser and each Holder of at least
$5,000,000 in aggregate principal amount of the Notes or, in the event there is
no Holder of at least $5,000,000 in aggregate principal amount of the Notes,
each Purchaser and the Holder who holds the greatest aggregate principal amount
of the Notes (and so long as a Default or an Event of Default has occurred and
is continuing, each Purchaser and Holder) (or, in each case, such Persons as
any of them may designate) (individually and collectively, "Inspectors"),
subject to appropriate agreements as to confidentiality, (i) to visit and
inspect any of the properties of such Company or any of its Subsidiaries, (ii)
to examine all their books of account, records, reports and other papers and to
make copies and extracts therefrom, (iii) to discuss their respective affairs,
finances and accounts with their respective officers and employees and (iv) to
discuss the financial condition of such Company and its Subsidiaries with their
independent accountants upon reasonable notice to such Company of its intention
to do so and so long as such Company shall be given the reasonable opportunity
to participate in such discussions (and by this provision such Company
authorizes said accountants to have such discussions with the Inspectors). All
such visits, examinations and discussions set forth in the preceding sentence
shall be at such reasonable times and as often as may be reasonably requested;
provided that unless a Default or an Event of Default shall have occurred and
be continuing such visits shall be limited to one per calendar quarter. If a
Default or an Event of Default shall have occurred and be continuing, the
Issuer shall pay or reimburse all Inspectors
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for expenses that such Inspectors may reasonably incur in connection with any
such visitations or inspections.
5.28 Board of Director Observation Rights.
Each of the Purchasers shall have the right to have one
representative present (whether in person or by telephone) at all meetings of
the boards of directors (and committees thereof) of the Issuer and Reit;
provided that such representative shall not be entitled to vote at such
meetings. The Issuer and Reit shall send to each such representative all of
the notices, information and other materials that are distributed to the
members of the board of directors of the Issuer and Reit, respectively, and
shall provide the Purchasers with a notice and agenda of each meeting of the
board of directors (and committees thereof) of the Issuer or Reit,
respectively, at the same time as delivered to the members of such board of
directors; provided, however, that upon the request of any such representative,
the Issuer or Reit, as the case may be, shall refrain from sending such
notices, information and other materials for so long as such representative
shall request. Such Purchasers shall provide notice to the Issuer and Reit of
the identity and address of, or any change with respect to the identity or
address of, such representative. The Issuer or Reit shall reimburse the
Purchasers for the reasonable out-of-pocket expenses of one such representative
incurred in connection with the attendance at such meetings.
5.29 Maintenance of Office or Agency.
The Issuer shall maintain (i) an office or agency in the
Borough of Manhattan, The City of New York where the Notes may be presented for
payment; (ii) an office or agency where the Notes may be presented for
registration and transfer and for exchange as provided in this Agreement; and
(iii) an office or agency where notices and demands to or upon the Issuer in
respect of the Notes may be served. The location of such office or agency
initially shall be as set forth on Schedule 5.29. The Issuer shall give to
each Holder written notice of any change of location thereof.
5.30 Information to Prospective Purchasers.
The Issuer shall, upon the request of any Purchaser or
subsequent Holder, deliver to such Purchaser or such Holder and any prospective
purchaser designated by such Purchaser or such Holder promptly following the
request of such Purchaser or such Holder or such prospective purchaser such
information which such Purchaser or such Holder or such prospective purchaser
may reasonably request in order to comply with the information requirements of
Rule 144A.
5.31 Private Placement Number.
The Companies consent to the filing of copies of this
Agreement with Standard & Poor's Corporation to obtain a private placement
number and with the National Association of Insurance Commissioners.
5.32 Impairment of Security Interests.
The Issuer and Reit shall not, and each shall cause each of
its Subsidiaries to not, take any action that would have the result of
impairing the security interests created pursuant to any of the Pledge
Agreements, unless such action is permitted thereby.
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5.33 Required Escrow Deposit.
On each Mandatory Redemption Date, if Excess Cash Flow for the
12-month period ended on the last day of the immediately preceding calendar
year is positive, the Issuer shall deposit into the Escrow Account cash in an
amount (the "Required Escrow Deposit") that is equal to the lesser of (a) such
amount of Excess Cash Flow and (b) the amount (not less than zero) that is
sufficient to cause the balance in the Escrow Account on such Mandatory
Redemption Date to be $1,500,000.
5.34 Maintenance of Letter of Credit Facility.
For so long as any Notes are outstanding or any amounts are
owing in respect of the Notes or this Agreement (including, without limitation,
any amounts owing in respect of any indemnification obligations hereunder), the
Issuer shall maintain the Letter of Credit Documents in full force and effect
in accordance with the following provisions:
(a) Except as contemplated
pursuant to Section 5.34(c), the Letter of Credit Documents shall not be
amended, restated, supplemented or modified in any form whatsoever.
(b) Upon the occurrence of a
Letter of Credit Triggering Event of Default, the Collateral Agent or the
Majority Holders may draw all or less than all of the maximum amount that may
be drawn on each Letter of Credit, in accordance with the terms and provisions
thereof, without any notice to, or demand upon, the Issuer or any Guarantor;
provided, however, that, if the Collateral Agent or the Majority Holders elect
to draw less than the entire amount available to be drawn, then the amount so
drawn on each Letter of Credit shall be equal to (i) the maximum amount that
may be drawn on such Letter of Credit divided by (ii) the sum of the maximum
amounts that may be drawn on all the Letters of Credit times (iii) the total
amount elected at such time by the Collateral Agent or the Majority Holders to
be drawn on all the Letters of Credit; provided, further, that the sum of (x)
such total amount referred to in this clause (iii) plus (y) the aggregate
amount previously drawn on the Letters of Credit, shall not exceed the Letter
of Credit Limit (as defined below in Section 5.34(c)).
(c) The aggregate amount of the
Letters of Credit (the "Letter of Credit Limit") shall be $4,000,000; provided,
however, that on any date after April 1, 1998, the Letter of Credit Documents
may be amended to reduce the Letter of Credit Limit to (i) $3,000,000, if the
Consolidated Interest Expense Coverage Ratio of the Issuer and its Subsidiaries
(other than Holdings, Reit and the Subsidiaries of Reit) shall have been at
least 1.60 to 1 for the 12-month period ended on the last day of the
immediately preceding calendar month or (ii) $2,000,000, if the Consolidated
Interest Expense Coverage Ratio of the Issuer and its Subsidiaries (other than
Holdings, Reit and the Subsidiaries of Reit) shall have been at least 2.00 to 1
for the 12-month period ended on the last day of the immediately preceding
calendar month; provided, further, however, that the Letter of Credit Documents
shall be terminated on any date after April 1, 1998, if the Consolidated
Interest Expense Coverage Ratio of the Issuer and its Subsidiaries (other than
Holdings, Reit and the Subsidiaries of Reit) shall have been at least 2.25 to 1
for the 12-month period ended on the last day of the immediately preceding
calendar month. Notwithstanding the foregoing, the Letter of Credit Documents
may not be amended, as contemplated in the foregoing provisions of this clause
(c), on any date, unless at all times during the period (x) beginning on the
first day of the 12-month period ended on the last day of the immediately
preceding calendar month and (y) ending on such date, no Default or Event of
Default shall have occurred.
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(d) Other than the interest,
fees and other charges expressly set forth in the Letter of Credit Documents,
no interest or other charges shall be paid with respect thereto, and all
amounts owing by the Issuer to any Guarantor or to any issuer of a Letter of
Credit shall be subordinate to the obligations of the Issuer to the Holders
hereunder and under the Notes.
5.35 Reit Leverage Ratio and Indebtedness of Reit.
(a) During each calendar month,
Reit shall cause the average of the fifteen Reit Leverage Ratios calculated on
each of the last fifteen days of such calendar month, respectively, to be less
than or equal to the Reit Leverage Ratio Limit. As used in this Section 5.35,
"Reit Leverage Ratio Limit" means (i) 0.925 during all calendar months other
than the calendar months described in clauses (ii) and (iii) of this
definition, (ii) 0.935 during the sixty (60) days immediately preceding the
anticipated closing date of a Qualified Public Equity Offering of Reit (such
anticipated closing date being determined in advance in good faith by the board
of directors of the Issuer) and (iii) 0.935 during the first sixty (60) days
following such anticipated closing date, if any such anticipated Qualified
Public Equity Offering of Reit is not consummated on or prior to such
anticipated closing date.
(b) Reit and its Subsidiaries
shall not, directly or indirectly, incur any Indebtedness other than Permitted
Reit Indebtedness.
5.36 Distributions by Holdings.
Holdings shall distribute to the Issuer, in respect of the
Preferred Interests, all cash received by Holdings, within thirty (30) days of
its receipt thereof; provided, however, that Holdings may make the
distributions permitted pursuant to Section 5.4(b)(v).
5.37 Investment, Hedging and Leverage Policy.
(a) At least once during each
fiscal year, the board of directors of Reit shall adopt a statement of policy
(an "Investment, Hedging and Leverage Policy") regarding investment of the
assets of Reit, the duration of Reit's assets and liabilities, hedging
activities to be conducted by Reit, the range of leverage ratios to be
maintained by Reit and the types of indebtedness that may be incurred by Reit,
which statement of policy shall be at least as detailed as the similar
statement of policy adopted at or before the Closing and delivered to the
Purchasers pursuant to Section 2.1(e); provided, however, that any material
difference between any Investment, Hedging and Leverage Policy to be so adopted
and the then most recently adopted Investment, Hedging and Leverage Policy must
be approved by the Majority Holders.
(b) At least once during each
fiscal year, the Issuer shall engage a professional services firm, which is not
an Affiliate of any of the Companies, to issue a report (a "Reit Compliance
Report") addressed to each of the Issuer, Holdings, Reit and the Holders
stating whether Reit has complied in all material respects during the period
since the later of the Closing Date or the then most recently issued Reit
Compliance Report, with the then most recently adopted Investment, Hedging and
Leverage Policy.
(c) Reit shall not permit to
exist, on a general portfolio average basis, a repricing differential between
Reit's assets and liabilities of greater than 180 days.
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SECTION 6. REDEMPTION.
6.1 Optional and Mandatory Redemption.
(a) The Issuer may redeem the
Notes, or a portion thereof, in accordance with the terms and conditions
provided herein and in Section 4 of the Notes.
(b) On each Mandatory Redemption
Date, the Issuer shall redeem the Applicable Amount of Notes, in accordance
with the terms and conditions provided herein and in Section 4 of the Notes.
The redemption price for Notes that the Issuer is required to redeem pursuant
to this Section 6.1(b) shall be equal to 100% of the principal amount thereof
plus accrued and unpaid interest thereon to such Mandatory Redemption Date.
(c) Within two Business Days
after each date on which the Issuer or any of its Subsidiaries (other than
Reit) consummates a Public Equity Offering, the Issuer shall redeem the maximum
principal amount of the Notes that may be redeemed out of an amount equal to
the aggregate net proceeds of such Public Equity Offering, in accordance with
the terms and conditions provided herein and in Section 4 of the Notes.
(d) The Issuer shall redeem
Notes at the time and in the aggregate principal amount required pursuant to
the provisions of Section 5.8. The redemption price for Notes that the Issuer
is required to redeem pursuant to this Section 6.1(d) shall be equal to 100% of
the principal amount thereof plus accrued and unpaid interest thereon to the
redemption date.
6.2 Selection of Notes to Be Redeemed.
If fewer than all of the Notes are to be redeemed, the Issuer
shall redeem the Notes pro rata, in such manner as complies with applicable
legal requirements, if any. Notes in denominations of $1,000 may be redeemed
only in whole. The Issuer may select for redemption portions (equal to $1,000
or any integral multiple thereof) of the principal of Notes that have
denominations larger than $1,000. Provisions of this Agreement that apply to
Notes called for redemption also apply to portions of Notes called for
redemption.
6.3 Notice of Redemption.
At least thirty (30) days but not more than sixty (60) days
before a Redemption Date, the Issuer shall mail a notice of redemption ("Notice
of Redemption") by first-class mail to each Holder whose Notes are to be
redeemed at such Holder's registered address; provided, however, that in the
case of a redemption of Notes required pursuant to Section 6.1(b), the Issuer
shall not be required to mail the relevant Notice of Redemption prior to ten
(10) days before the relevant Redemption Date; provided, further, however, that
in the case of a redemption of Notes required pursuant to Section 6.1(c), the
Issuer shall not be required to mail the relevant Notice of Redemption prior to
two (2) days before the relevant Redemption Date. Each Notice of Redemption
shall identify the Notes to be redeemed and shall state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) the name and address of the
Issuer;
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(d) that Notes called for
redemption must be surrendered to the Issuer to collect the Redemption Price;
(e) that, unless the Issuer
defaults in making the Redemption Price, interest on Notes called for
redemption ceases to accrue on and after the Redemption Date, and the only
remaining right of the Holders of such Notes is to receive payment of the
Redemption Price upon surrender to the Issuer of the Notes redeemed;
(f) if any Note is being
redeemed in part, the portion of the principal amount of such Note to be
redeemed and that, after the Redemption Date, and upon surrender of such Note,
a new Note or Notes in aggregate principal amount equal to the unredeemed
portion thereof will be issued;
(g) if fewer than all the Notes
are to be redeemed, the identification of the particular Notes (or portion(s)
thereof) to be redeemed, as well as the aggregate principal amount of Notes to
be redeemed and the aggregate principal amount of Note(s) to be outstanding
after such partial redemption; and
(h) the paragraph of the Notes
pursuant to which the Notes are to be redeemed.
6.4 Effect of Notice of Redemption.
Once Notice of Redemption is mailed in accordance with Section
6.3 above, Notes called for redemption become due and payable on the Redemption
Date and at the Redemption Price. Upon surrender to the Issuer, such Notes
called for redemption shall be paid at the Redemption Price.
6.5 Payment of Redemption Price.
On presentation and surrender of any Notes with respect to
which a notice of redemption has been given, at a place of payment specified in
such notice, such Notes or specified portions thereof shall be paid and
redeemed by the Issuer at the applicable Redemption Price.
If, on or prior to the Redemption Date, the Issuer deposits in
a segregated account or otherwise sets aside funds sufficient to pay the
Redemption Price of the Notes called for redemption, then, unless the Issuer
defaults in the payment of such Redemption Price, interest on the Notes to be
redeemed will cease to accrue on and after the applicable Redemption Date,
regardless of whether such Notes are presented for payment.
SECTION 7. DEFAULTS AND REMEDIES.
7.1 Events of Default.
An "Event of Default" occurs if:
(a) the Issuer defaults in the
payment of the principal of or premium, if any, on any Note when the same
becomes due and payable at maturity, upon redemption or otherwise;
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(b) the Issuer defaults in the
payment of interest on any Note or any other amount payable hereunder when the
same becomes due and payable and the Default continues for a period of five (5)
days;
(c) the Issuer, Holdings or any
other Guarantor fails to comply with any of the agreements, covenants, or
provisions of this Agreement, the Notes or any Subsidiary Guaranty and the
Default continues for the period and after the notice specified below;
(d) if any of the
representations or warranties of the Issuer or Holdings made in this Agreement
(including those representations and warranties incorporated by reference
herein) are untrue in any respect, the result of which could reasonably be
expected to have a Material Adverse Effect;
(e) if the Issuer transfers or
disposes of any Equity Interests of Holdings or if Holdings transfers or
disposes of any Equity Interests in Reit;
(f) if (i) the Issuer or any of
its Subsidiaries defaults in the payment of principal or interest payments
under any loan agreement, note, mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any other
Indebtedness of the Issuer or any of its Subsidiaries for borrowed money (or
the payment of which is guaranteed by the Issuer or any of its Subsidiaries),
whether such indebtedness or guarantee now exists or shall be created
hereafter, and the principal amount of such indebtedness, together with the
principal amount of any other such indebtedness for which there is a default in
the payment of interest, premium, if any, or principal, aggregates $1,000,000
or more, or (ii) an event of default occurs under any loan agreement, note,
mortgage, indenture or instrument which shall represent a default in payment
upon final maturity or otherwise result in the acceleration of such
indebtedness prior to its expressed maturity and the principal amount of such
indebtedness, together with the principal amount of any other such indebtedness
with respect to which there has been a default in payment upon final maturity
or the maturity of which has been so accelerated and has not been paid,
aggregates $1,000,000 or more;
(g) a final judgment or final
judgments for the payment of money are entered by a court or courts of
competent jurisdiction against the Issuer or any Subsidiary of the Issuer and
such remains undischarged for a period (during which execution shall not be
effectively stayed) of thirty (30) days, provided that the aggregate of all
such judgments exceeds $1,000,000;
(h) the filing by the Issuer or
any of its Subsidiaries (any such person, a "Debtor") of a petition commencing
a voluntary case under section 301 of title 11 of the United States Code, or
the commencement by a Debtor of a case or proceeding under any other Bankruptcy
Law seeking the adjustment, restructuring, or discharge of the debts of such
Debtor, or the liquidation of such Debtor, including without limitation the
making by a Debtor of an assignment for the benefit of creditors; or the taking
of any corporate action by a Debtor in furtherance of or to facilitate,
conditionally or otherwise, any of the foregoing;
(i) the filing against a Debtor
of a petition commencing an involuntary case under section 303 of title 11 of
the United States Code, with respect to which case (a) such Debtor consents or
fails to timely object to the entry of, or fails to seek the stay and dismissal
of, an order of relief, (b) an order for relief is entered and is pending and
unstayed on the 60th day after the filing of the petition commencing such case,
or if stayed, such stay is subsequently
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lifted so that such order for relief is given full force and effect, or (c) no
order for relief is entered, but the court in which such petition was filed has
not entered an order dismissing such petition by the 60th day after the filing
thereof; or the commencement under any other Bankruptcy Law of a case or
proceeding against a Debtor seeking the adjustment, restructuring, or discharge
of the debts of such Debtor, or the liquidation of such Debtor, which case or
proceeding is pending without having been dismissed on the 60th day after the
commencement thereof;
(j) the entry by a court of
competent jurisdiction of a judgment, decree or order appointing a receiver,
liquidator, trustee, custodian or assignee of a Debtor or of the property of a
Debtor, or directing the winding up or liquidation of the affairs or property
of a Debtor, and (a) such Debtor consents or fails to timely object to the
entry of, or fails to seek the stay and dismissal of, such judgment, decree, or
order, or (b) such judgment, decree or order is in full force and effect and is
not stayed on the 60th day after the entry thereof, or, if stayed, such stay is
thereafter lifted so that such judgment, decree or order is given full force
and effect;
(k) any member of the controlled
group of which the Issuer is a member shall, directly or indirectly, (i)
terminate any employee pension benefit plan subject to Title IV of ERISA and as
a result of such termination the Issuer and its Subsidiaries, collectively,
would incur any liability or (ii) make a complete or partial withdrawal (within
the meaning of Section 4201 of ERISA) from any multiemployer plan if as a
result of such withdrawal (within the meaning of Section 4201 of ERISA) the
Issuer and its Subsidiaries, collectively, would incur any liability;
(l) except, with respect to the
Letter of Credit Documents, as expressly permitted in Section 5.34, any
Subsidiary Guaranty, the Holdings Pledge, the Issuer Pledge, the Limited
Liability Company Agreement or any of the Letter of Credit Documents shall be
amended, modified or supplemented or shall for any reason cease to be, or be
asserted in writing by any responsible officer of the Issuer or any of its
Subsidiaries (or, in the case of any of the Letter of Credit Documents, any
party thereto) not to be, in full force and effect or enforceable in accordance
with its terms or shall cease to give, directly or indirectly, the Collateral
Agent or the Holders the benefits, liens, rights, powers and privileges
purported to be created thereby, including, without limitation, a perfected
security interest in the Pledged Stock (as defined in the Holdings Pledge) and
a perfected security interest in the Pledged Collateral (as defined in the
Issuer Pledge) in accordance with the terms thereof;
(m) any issuer of a Letter of
Credit shall fail to pay any of its obligations under any of the Letter of
Credit Documents;
(n) the Management Agreement
shall be amended, modified or supplemented in any material respect or shall be
terminated or shall expire or not be renewed or shall for any reason cease to
be, or be asserted in writing by any responsible officer of the Issuer or any
of its Subsidiaries not to be, in full force and effect or enforceable in
accordance with its terms, without the written consent of the Majority Holders;
(o) the terms of the Preferred
Interests shall be amended, modified or supplemented, without the written
consent of the Majority Holders;
(p) there shall occur a default
by Reit with respect to any of its payment obligations under the Management
Agreement;
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(q) Reit shall at any time fail
to operate, or otherwise fail to be qualified, as a REIT under Section 856 et
seq. of the Code or the Issuer shall be unable, at any time, to provide the
Holders with the opinion of a nationally recognized law firm required pursuant
to the provisions of Section 5.17(c); and
(r) Reit shall fail to pay cash
dividends on the Reit Common Stock during any two consecutive fiscal quarters
beginning on or after October 1, 1997.
The term "Bankruptcy Law" means title 11, U.S. Code or any
similar Federal or state law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law.
A Default under clause (c) of this Section 7.1 shall be an
Event of Default without any notice or passage of time, except that such a
Default that results from a breach of Section 5.1, 5.2, 5.3, 5.15, 5.20, 5.22,
5.24, 5.25, 5.26, 5.27, 5.28, 5.29, 5.30 or 5.31 shall not be an Event of
Default until the Majority Holders notify the Issuer of the Default and the
Issuer does not cure the Default within 30 days after receipt of the notice. A
Default under clause (f) of this Section 7.1 (other than a Default resulting
from the acceleration of any indebtedness described therein, which Default
shall be an Event of Default without the notice specified in this paragraph)
shall not be an Event of Default until the Majority Holders notify the Issuer
of the Default. Each notice referred to in this paragraph must specify the
Default, demand that it be remedied and state that the notice is a "Notice of
Default."
7.2 Acceleration of Notes; Remedies.
Subject to the following paragraph, if an Event of Default
(other than an Event of Default specified in clause (h), (i) or (j) of Section
7.1) occurs and is continuing, the Majority Holders, by notice to the Issuer,
may declare the unpaid principal of and any accrued interest on all the Notes
to be due and payable, and immediately upon such declaration, the principal,
premium, if any, and interest shall be due and payable. If an Event of Default
specified in clause (h), (i) or (j) of Section 7.1 occurs, such an amount shall
ipso facto become and be immediately due and payable without any declaration or
other act on the part of any Holder.
The Majority Holders, by notice to the Issuer, may rescind an
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default have been cured or
waived except nonpayment of principal or interest that has become due solely
because of the acceleration.
7.3 Premium on Acceleration.
In the event of an acceleration of the Notes upon an Event of
Default occurring by reason of any willful action (or deliberate inaction)
taken (or not taken) by or on behalf of the Issuer with the intention of
avoiding payment of the premium that the Issuer would have had to pay if the
Issuer had elected to redeem the Notes and such acceleration is not rescinded
or annulled, the Holders shall be entitled to receive, in addition to any other
payments to which they may be entitled, a premium equal to the percentages of
principal set forth below if the declaration date of the acceleration occurs
during the twelve month period commencing on February 11 of the year set forth
below:
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<TABLE>
<CAPTION>
Year % of Principal Amount
---- ---------------------
<S> <C>
1997 112%
1998 109%
1999 106%
2000 103%
2001 100%
</TABLE>
7.4 Other Remedies.
If an Event of Default occurs and is continuing, Holders of
the Notes may pursue any available remedy to collect the payment of principal
or interest on the Notes or to enforce the performance of any provision of the
Notes, this Agreement or any other Documents.
A delay or omission by any Holder of any Notes in exercising
any right or remedy accruing upon an Event of Default shall not impair the
right or remedy or constitute a waiver of or acquiescence in the Event of
Default. All remedies are cumulative to the extent permitted by law.
7.5 Waiver of Past Defaults.
The Majority Holders, by notice to the Issuer, may waive an
existing Default or Event of Default and its consequences except a continuing
Default or Event of Default in the payment of the principal of or interest on
any Notes.
7.6 Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Agreement, the
right of any Holder of a Note to receive payment of principal and interest on
the Note, on or after the respective due dates expressed in the Note, or to
bring suit for the enforcement of any such payment on or after such respective
dates, shall not be impaired or affected without the consent of the Holder.
7.7 Undertaking for Costs.
In any suit for the enforcement of any right or remedy under
this Agreement, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
SECTION 8. AMENDMENTS AND WAIVERS.
8.1 With Consent of Holders.
The Issuer and, to the extent the obligations of Holdings or
Reit are affected thereby, Holdings and Reit, when authorized by, as
applicable, a resolution of the board of directors of the Issuer and Reit and
the managing member of Holdings, with the written consent of the Majority
Holders, may amend this Agreement or the Notes, provided that each Holder shall
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<PAGE> 57
have received prior notice of such proposed amendment. The Majority Holders
may waive compliance by the Issuer or Holdings with any provision of this
Agreement or the Notes, provided that each Holder shall have received prior
notice of such proposed amendment. Without the consent of each Holder
affected, however, no amendment or waiver may (with respect to any Notes held
by a nonconsenting Holder of Notes):
(a) reduce the principal amount
of Notes whose Holders must consent to an amendment or waiver of any provision
of this Agreement or the Notes;
(b) reduce the principal of or
change the fixed maturity of any Note or alter the provisions with respect to
the redemption of Notes, reduce the purchase price payable in connection with
repurchases of the Notes pursuant to Section 5.11 or reduce the premium payable
pursuant to Section 7.3;
(c) reduce the rate of or change
the time for payment of interest on any Note;
(d) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes or that resulted from a failure to comply with Section 5.11 (except a
rescission of acceleration of the Notes by the Majority Holders and a waiver of
the payment default that resulted from such acceleration);
(e) make the principal of,
premium, if any, or the interest on, any Note payable in any manner other than
that stated in this Agreement and the Notes;
(f) make any change in the
provisions of this Agreement relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of, premium (if any) or
interest on the Notes;
(g) waive a redemption payment
with respect to any Note; or
(h) make any change in the
foregoing amendment and waiver provisions.
It shall not be necessary for the consent of the Holders under
this Section 8 to approve the particular form of any proposed amendment or
waiver, but it shall be sufficient if such consent approves the substance
thereof.
After an amendment or waiver under this Section 8 becomes
effective, the Issuer shall mail to the Holders affected thereby a notice
briefly describing the amendment or waiver. Any failure of the Issuer to mail
such notice, or any defect therein, shall not, however, in any way impair or
affect the validity of any such amendment or waiver.
In connection with any amendment under this Section 8, the
Issuer may offer, but shall not be obligated to offer, to any Holder who
consents to such amendment or waiver, consideration for such Holder's consent.
8.2 Revocation and Effect of Consents.
Until an amendment or waiver becomes effective, a consent to
it by a Holder is a continuing consent by the Holder and every subsequent
Holder of a Note or portion of a Note that evidences the same debt as the
consenting Holder's Note, even if notation of the consent is not
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<PAGE> 58
made on any Note. However, any such Holder or subsequent Holder may revoke the
consent as to his Note or portion of his Note by notice to the Issuer received
before the date on which the Majority Holders have consented (and not
theretofore revoked such consent) to the amendment or waiver.
The Issuer may, but shall not be obligated to, fix a record
date for the purpose of determining the Holders entitled to consent to any
amendment or waiver, which record date shall be at least thirty (30) days prior
to the first solicitation of such consent. If a record date is fixed, then
notwithstanding the last sentence of the immediately preceding paragraph, those
persons who were Holders at such record date (or their duly designated
proxies), and only those persons, shall be entitled to revoke any consent
previously given, regardless of whether such persons continue to be Holders
after such record date. No such consent shall be valid or effective for more
than ninety (90) days after such record date.
After an amendment or waiver becomes effective, it shall bind
every Holder, unless it makes a change described in any of clauses (a) through
(h) of Section 8.1, in which case, the amendment or waiver shall bind only each
Holder of a Note who has consented to it and every subsequent Holder of a Note
or portion of a Note that evidences the same debt as the consenting Holder's
Note; provided that any such waiver shall not impair or affect the right of any
Holder to receive payment of principal of, premium (if any) and interest on a
Note, on or after the respective due dates expressed in such Note, or to bring
suit for the enforcement of any such payment on or after such respective dates
without the consent of such Holder.
In determining whether the Holders of the required principal
amount of Notes have concurred in any direction, waiver, consent or amendment,
Notes owned by the Issuer or any Affiliate of the Issuer shall be considered as
though not outstanding.
8.3 Notation on or Exchange of Notes.
If an amendment or waiver changes the terms of a Note, the
Issuer may require the Holder of the Note to deliver it to the Issuer so that
it may place an appropriate notation on the Note about the changed terms and
return it to the Holder.
8.4 Payment of Expenses.
The Issuer and Holdings, jointly and severally, agree to pay
or reimburse each Purchaser's out-of-pocket expenses (including the reasonable
fees and expenses of counsel) relating to any amendment or modification of, or
any waiver or consent under, this Agreement, the Securities and any other
Documents.
SECTION SECTION 9. DEFINITIONS.
9.1 Definitions.
As used in this Agreement, the following terms shall have the
following meanings:
"Account Manager" means each Purchaser, if any, duly
authorized to act as attorney in-fact on behalf of any Person in purchasing, in
the name of and using funds provided by such Person, Securities hereunder.
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"Acquired Indebtedness" means Indebtedness of a Person
existing at the time such Person becomes a Subsidiary of the Issuer or assumed
in connection with the acquisition by the Issuer or any of its Subsidiaries of
assets from such Person, which Indebtedness was not incurred in connection with
or in anticipation of such acquisition.
"Affiliate" means, with respect to any referenced Person, a
Person (i) that directly or indirectly through one or more intermediaries
controls, or is controlled by, or is under common control with, such referenced
Person, (ii) that directly or indirectly through one or more intermediaries
beneficially owns or holds 10% or more of the combined voting power of the
total Voting Securities of such referenced Person or (iii) of which 10% or more
of the combined voting power of the total Voting Securities directly or
indirectly through one or more intermediaries is beneficially owned or held by
such referenced Person or a Subsidiary of such referenced Person. For purposes
of this definition, "control" when used with respect to any person means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, whether through the
ownership of Voting Securities, by agreement or otherwise; and the terms
"affiliated," "controlling" and "controlled" have meanings correlative to the
foregoing. Notwithstanding the foregoing, for purposes of this Agreement,
Trust Company of the West and its Affiliates and any other Purchaser and its
Affiliates shall not be considered Affiliates of the Issuer or any of its
Subsidiaries. For all purposes of this Agreement, MDC shall be deemed an
Affiliate of the Issuer, Holdings and Reit.
"Affiliate Transaction" has the meaning given to such term in
Section 5.6.
"Agreement" means this Securities Purchase Agreement dated as
of February 11, 1997, by and among the Issuer, Holdings, Reit and the
Purchasers.
"Applicable Amount of Notes" means, with respect to each
Mandatory Redemption Date, Notes having an aggregate principal amount equal to
the greatest multiple of $1,000 that is less than or equal to the amount of
Mandatory Redemption Funds on such Mandatory Redemption Date.
"Applicable Percentage" means 75%, unless a greater percentage
is selected by the Issuer.
"Asset Sale" means (i) the sale, lease, conveyance or other
disposition of assets (including by way of a sale-and-leaseback) of the Issuer
or any of its Subsidiaries (other than Reit and its Subsidiaries), other than
sales of inventory in the ordinary course of business consistent with past
practice or (ii) the issuance or sale of Equity Interests of any of the
Subsidiaries of the Issuer (other than Reit and its Subsidiaries) to any Person
other than the Issuer, in the case of either clause (i) or (ii) above, whether
in a single transaction or a series of related transactions.
"Bankruptcy Law" has the meaning given to such term in Section
7.1.
"B/C Mortgages" means adjustable rate residential mortgage
loans that are classified, by virtue of a credit underwriting analysis, as
below prime (ie. below "A" or "A-") and are not eligible for sale as conforming
loans to Federal National Mortgage Association, Federal Home Loan Mortgage
Corporation or Government National Mortgage Association, pursuant to their
respective prime mortgage purchase programs.
"Business Day" means any day which is not a Legal Holiday.
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"Capital Expenditures" means, without duplication, for any
Person for any period, the aggregate of all expenditures including deposits
(whether paid in cash or property or accrued as liabilities and including the
aggregate amount of all principal payments due for the entire term of all
Capital Leases that are required to be capitalized on the balance sheet) made
by such Person that, in conformity with GAAP, are required to be included in
the property, plant, equipment, or similar fixed asset account; provided,
however, there shall be excluded from the calculation of Capital Expenditures
permitted under Section 5.9 hereof that portion of all such expenditures the
Issuer is permitted to reinvest or use for replacement or restoration of assets
through the use of insurance proceeds, awards of compensation arising from
condemnation or eminent domain proceedings or from Net Proceeds of Asset Sales.
"Capital Lease" means any lease of any property (whether real,
personal or mixed) that, in conformity with GAAP, should be accounted for as a
capital lease.
"Capital Stock" means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock,
including without limitation all common stock and preferred stock.
"Capitalized Lease Obligation" means, with respect to any
Person for any period, any obligation of such Person to pay rent or other
amounts under a Capital Lease; the amount of such obligation shall be the
capitalized amount thereof determined in accordance with GAAP.
"Cash" means U.S. Legal Tender or U.S. Government Obligations
having a maturity of one year or less from the date of issuance thereof.
"Cash Balance" of any Person at any date means the amount (but
not less than zero) of the balance of Cash and Cash Equivalents as reflected on
the unconsolidated balance sheet of such Person at such date.
"Cash Equivalents" means (i) marketable direct obligations
issued or unconditionally guaranteed by the United States Government or issued
by any agency thereof and backed by the full faith and credit of the United
States of America, in each case maturing within one year from the date of
acquisition thereof; (ii) commercial paper maturing within one year from the
date issued and, at the time of acquisition, having a rating of at least A-1
from Standard & Poor's Corporation or at least P1 from Moody's Investors
Service, Inc.; (iii) certificates of deposit or bankers' acceptances maturing
within one year from the date of issuance thereof issued by any commercial bank
organized under the laws of the United States of America or any state thereof
or the District of Columbia having combined capital and surplus of not less
than $500,000,000 and not subject to setoff rights in favor of such bank; (iv)
time deposits maturing no more than thirty (30) days from the date of creation
thereof with commercial banks having membership in the Federal Deposit
Insurance Corporation in amounts not exceeding the lesser of $100,000 or the
maximum amount of insurance applicable to the aggregate amount of the Issuer's
deposits at such institution; (v) repurchase obligations with a term of not
more than seven (7) days for underlying securities of the types described in
clauses (i), (ii) and (iii) above entered into with any commercial bank meeting
the qualifications specified in clause (iii) above; (vi) securities with
maturities of one year or less from the date of acquisition issued or fully
guaranteed by any state of the United States of America or the District of
Columbia, or by any political subdivision or taxing authority of any such state
or the District of Columbia, the securities of which state, the District of
Columbia, political subdivision or taxing authority (as the case may be) are
rated at least AAA by Standard and Poor's Corporation or Aaa by Moody's
Investors Services, Inc.; and
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(vii) shares of money market mutual or similar funds having assets in excess of
$100,000,000 and that invest exclusively in assets satisfying the requirements
of clauses (i) through (vi) above.
"Change of Control" means (i) any sale, transfer, or other
conveyance, whether direct or indirect, of all or substantially all of the
assets of the Issuer or Holdings, to any "person" or "group" (as such terms are
used for purposes of Sections 13(d) and 14(d) of the Exchange Act, regardless
of whether applicable), whether in a single transaction or a series of related
transactions, (ii) the liquidation or dissolution of the Issuer or Holdings,
(iii) any transaction, event or circumstance pursuant to which any "person" or
"group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act, regardless of whether applicable) (other than MDC) is or becomes
the "beneficial owner" (as that term is used in Rules 13d-3 and 13d-5 under the
Exchange Act, regardless of whether applicable, except that a person shall be
deemed to be the "beneficial owner" of all shares that any such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 50% of the total
voting power of the then outstanding Voting Securities of the Issuer or of
Holdings, (iv) any transaction, event or circumstance pursuant to which any
"person" or "group" (as such terms are used for purposes of Sections 13(d) and
14(d) of the Exchange Act, regardless of whether applicable) (other than MDC)
is or becomes the "beneficial owner" (as that term is used in Rules 13d-3 and
13d-5 under the Exchange Act, regardless of whether applicable, except that a
person shall be deemed to be the "beneficial owner" of all shares that any such
person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time), directly or indirectly, of a percentage of
the total voting power of the then outstanding Voting Securities of Reit or the
Issuer that is greater than the percentage of the total voting power of the
then outstanding Voting Securities of Reit or the Issuer, as the case may be,
then owned by Holdings or MDC, as the case may be, or (v) any transaction that
results in MDC owning less than 30% of the total voting power of the then
outstanding Voting Securities of the Issuer or of Holdings.
"Change of Control Date" has the meaning given to such term in
Section 5.11.
"Change of Control Offer" has the meaning given to such term
in Section 5.11.
"Change of Control Offer Price" has the meaning given to such
term in Section 5.11.
"Change of Control Payment Date" has the meaning given to such
term in Section 5.11.
"Charter Documents" means the articles of organization,
articles of incorporation, certificate of incorporation, bylaws, declaration of
trust, trust agreement, certificate of formation, limited liability company
agreement, certificate of limited partnership, limited partnership agreement
and any other organizational document, each as amended or restated (or both) to
date, of any of the Companies, or any of their respective Subsidiaries, as
applicable.
"Closing" has the meaning given to such term in Section
1.2(b).
"Closing Date" has the meaning given to such term in Section
1.2(b).
"Closing Date Balance Sheet" has the meaning given to such
term in Section 2.1(g).
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"Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor statute or law thereto.
"Collateral Agency Agreement" means the Collateral Agency
Agreement dated as of February 11, 1997 by and among the Issuer, Holdings, the
Purchasers, as beneficiaries, and Bankers Trust Company, a New York banking
corporation, as collateral agent.
"Collateral Agent" means the collateral agent under the
Collateral Agency Agreement.
"Commercial Mortgage Assets" means Commercial Mortgage Loans
and Commercial Mortgage Securities.
"Commercial Mortgage Loans" means Mortgage Loans secured
primarily by commercial real property.
"Commercial Mortgage Securities" means mortgage securities
representing an interest in, or secured primarily by, Commercial Mortgage
Loans.
"Common Stock" means the Common Stock, $.0001 par value, of
the Issuer.
"Companies" means, collectively, the Issuer, Holdings, and
Reit.
"Consolidated" or "consolidated," when used with reference to
any accounting term, means the amount described by such accounting term,
determined on a consolidated basis in accordance with GAAP, after elimination
of intercompany items.
"Consolidated Capital Expenditures" means, for the Issuer and
its Subsidiaries (other than Holdings, Reit and the Subsidiaries of Reit), for
any period, without duplication, the aggregate of all expenditures including
deposits (whether paid in cash or property or accrued as liabilities and
including the aggregate amount of all principal payments due for the entire
term of all Capital Leases that are required to be capitalized on the
consolidated balance sheet) made by the Issuer and its Subsidiaries (other than
Holdings, Reit and the Subsidiaries of Reit) that, in conformity with GAAP, are
required to be included in the property, plant, equipment, or similar fixed
asset account.
"Consolidated EBITDA" means, with respect to the Issuer and
its Subsidiaries (other than Holdings, Reit and the Subsidiaries of Reit) for
any period, the following, each calculated for such period, without
duplication: (a) Consolidated Net Income of the Issuer and its Subsidiaries
(other than Holdings, Reit and the Subsidiaries of Reit); plus (b) any
provision for (or less any benefit from) income or franchise taxes to the
extent included in the determination of Consolidated Net Income; plus (c)
Consolidated Interest Expense of the Issuer and its Subsidiaries (other than
Holdings, Reit and the Subsidiaries of Reit) (whether paid or accrued and
including without limitation amortization of original issue discount) to the
extent deducted in the determination of Consolidated Net Income; plus (d)
amortization and depreciation to the extent deducted in the determination of
Consolidated Net Income of the Issuer and its Subsidiaries (other than
Holdings, Reit and the Subsidiaries of Reit); minus (e) gains from Asset Sales
or other non-cash items included in the determination of Consolidated Net
Income of the Issuer and its Subsidiaries (other than Holdings, Reit and the
Subsidiaries of Reit); minus (f) after tax
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extraordinary gains of the Issuer and its Subsidiaries (other than Holdings,
Reit and the Subsidiaries of Reit) (in each case as defined under GAAP).
"Consolidated Interest Expense" means, with respect to the
Issuer and its Subsidiaries (other than Holdings, Reit and the Subsidiaries of
Reit), for any period, without duplication, (i) the aggregate of all interest
paid or accrued by the Issuer and its Subsidiaries (other than Holdings, Reit
and the Subsidiaries of Reit) in respect of consolidated Indebtedness of the
Issuer and its Subsidiaries (other than Holdings, Reit and the Subsidiaries of
Reit), including all interest, fees and costs payable with respect to the
obligations related to such Indebtedness (other than fees and costs which may
be capitalized as transaction costs in accordance with GAAP and, without
duplication, other than the amortization of any original issue discount
attributable to the issuance of Notes under this Agreement) and the interest
component of Capitalized Lease Obligations, all as determined in accordance
with GAAP, and (ii) an amount equal to the product of (A) the amount of all
dividend payments on any Disqualified Stock of the Issuer and its Subsidiaries
(other than Holdings, Reit and the Subsidiaries of Reit) (including dividends
for such period which are accrued and unpaid) times (B) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current effective consolidated Federal, state and local tax rate of the Issuer
and its Subsidiaries (other than Holdings, Reit and the Subsidiaries of Reit),
expressed as a decimal.
"Consolidated Interest Expense Coverage Ratio" means, with
respect to the Issuer and its Subsidiaries (other than Holdings, Reit and the
Subsidiaries of Reit), the ratio of:
(i) the aggregate amount of
Consolidated EBITDA of the Issuer and its
Subsidiaries (other than Holdings, Reit and
the Subsidiaries of Reit) attributable to
continuing operations and businesses
(exclusive of amounts attributable to
operations and businesses permanently
discontinued or disposed of) for the four
full fiscal quarters for which financial
information in respect thereof is available
immediately prior to the date of the event
(the "Event") giving rise to the need to
calculate the Consolidated Interest Expense
Coverage Ratio (the "Event Date") minus
Consolidated Capital Expenditures and
Consolidated Other Capitalized Costs for the
Issuer and its Subsidiaries (other than
Holdings, Reit and the Subsidiaries of Reit)
for such Period, to
(ii) the sum of the aggregate
Consolidated Interest Expense of the Issuer
and its Subsidiaries (other than Holdings,
Reit and the Subsidiaries of Reit) during
such period (exclusive of amounts
attributable to operations and businesses
permanently discontinued or disposed of, but
only to the extent that the obligations
giving rise to such Consolidated Interest
Expense would no longer be obligations
contributing to Consolidated Interest Expense
of the Issuer and its Subsidiaries (other
than Holdings, Reit and the Subsidiaries of
Reit) subsequent to the Event Date);
provided, however, that for the periods ending June 30, 1997 and September 30,
1997, Consolidated EBITDA and Consolidated Interest Expense of the Issuer and
its Subsidiaries (other than Holdings, Reit and the Subsidiaries of Reit) shall
be calculated for the two- and three-quarter periods (respectively) then
ending, rather than for the four-quarter periods then ending; provided,
further, that if any such calculation includes any period prior to the Closing
Date, such calculation for such period shall be made on a pro forma basis
giving effect to the issuance of the Notes, the proceeds therefrom and the
consummation of the transactions contemplated hereby, as if the same had
occurred at the beginning of such period.
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In addition to and without limitation of the foregoing, for
purposes of this definition, "Consolidated EBITDA" and "Consolidated Interest
Expense" for the one, two, three or four full fiscal quarters, as applicable,
for which financial information in respect thereof is available immediately
prior to the Event Date shall be calculated (without duplication) after giving
effect on a pro forma basis for the period of such calculation (as if each of
the following, if applicable, occurred at the beginning of the first of such
one, two, three or four fiscal quarters, as applicable) to:
(i) the incurrence of any
Indebtedness (including, without limitation,
if applicable, Acquired Indebtedness and
other Indebtedness incurred, or Disqualified
Stock issued, with respect to the Event)
during the period commencing at the beginning
of such one, two, three or four fiscal
quarters, as applicable, and ending on the
Event Date (the "Reference Period"),
(ii) the permanent repayment of any
Indebtedness of such Person or Subsidiary
(other than Holdings, Reit and the
Subsidiaries of Reit) of such Person during
the Reference Period with the proceeds of any
Indebtedness referred to in the immediately
preceding clause (i) or with the proceeds
from the Asset Sale referred to in clause
(iv) below (so long as the Asset Sale is also
given pro forma effect),
(iii) the acquisition by such Person
or any Subsidiary (other than Holdings, Reit
and the Subsidiaries of Reit) of such Person
during the Reference Period of (a) the Equity
Interests of any other Person which, as a
result of such acquisition, becomes a
Subsidiary of such Person (provided that such
pro forma calculation shall include the
aggregate amount of Consolidated EBITDA of
such acquired Subsidiary for the one, two,
three or four (as the case may be) full
fiscal quarters of such acquired Subsidiary
for which financial information is available
immediately preceding the Event Date;
provided, that, to the extent the Net Income
of such acquired Subsidiary is subject to
restrictions, direct or indirect, on the
payment of dividends or the making of
distributions, the Net Income of such
acquired Subsidiary shall be excluded from
Consolidated EBITDA to the extent of such
restrictions) or (b) assets from any Person
which constitutes substantially all of the
operating unit or business of such Person
(provided that such pro forma calculation
shall include the Consolidated EBITDA
attributable to the assets acquired in such
transaction for the one, two, three or four
(as the case may be) full fiscal quarters for
which financial information is available
immediately preceding the Event Date), and
(iv) any Asset Sales (other than by
Reit or its Subsidiaries) occurring during
the Reference Period (including the effect,
if any, on the Issuer's or Holdings's
earnings for the Reference Period resulting
from the disposition of assets in such Asset
Sale).
Furthermore, in calculating "Consolidated Interest Expense"
(A) interest on Indebtedness determined on a fluctuating basis as of the Event
Date and which will continue to be so determined thereafter shall be deemed to
have accrued during the Reference Period at a fixed rate per annum equal to the
average rate in effect from the beginning of the Reference Period to the Event
Date and (B) if interest on any Indebtedness incurred on the Event Date may
optionally be determined at an interest rate based upon a factor of a prime or
similar rate, a Eurocurrency interbank offered rate, or other rates, then the
interest rate shall be deemed to be the lowest of such interest rates on the
Event Date which are actually available as options to the borrower of such
Indebtedness and (C) the principal amount of Indebtedness under a revolving
credit or similar arrangement that was in effect prior to the Event Date and
that will continue to
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be in effect following the Event shall be equal to the average principal amount
of Indebtedness outstanding during the Reference Period.
"Consolidated Net Income" means, with respect to the Issuer
and its Subsidiaries (other than Holdings, Reit and the Subsidiaries of Reit),
for any period, the aggregate of the Net Income of the Issuer and its
Subsidiaries (other than Holdings, Reit and the Subsidiaries of Reit) for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income of any Person that is not a Subsidiary of the Issuer or
is accounted for by the Issuer by the equity method of accounting shall be
included in Consolidated Net Income only to the extent of the amount of
dividends or distributions actually paid by such Person to the Issuer or a
Subsidiary of the Issuer (other than Holdings, Reit and the Subsidiaries of
Reit), (ii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded from Consolidated Net Income and (iii) the Net Income of any
Subsidiary of the Issuer that is subject to restrictions, direct or indirect,
on the payment of dividends or the making of distributions to the Issuer shall
be excluded from Consolidated Net Income to the extent of such restrictions.
"Consolidated Net Worth" means, with respect to any Person as
of any date, the sum of (i) the consolidated equity of the common stockholders
of such Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that
by its terms is not entitled to the payment of dividends unless such dividends
may be declared and paid only out of net earnings in respect of the year of
such declaration and payment, but only to the extent of any cash received by
such Person upon issuance of such preferred stock, plus, to the extent
excluded, the respective amounts reported on such Person's balance sheet as of
such date with respect to the Series A Preferred Stock, less (to the extent
otherwise included in (i) and (ii) above) (w) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of
tangible assets of a going concern business made within 12 months after the
acquisition of such business) subsequent to the Closing Date in the book value
of any asset owned by such Person or a consolidated Subsidiary of such Person,
(x) all amounts attributable to interests in Subsidiaries of such Person held
by Persons other than such Person or its Subsidiaries, (y) all investments as
of such date in unconsolidated Subsidiaries and in Persons that are not
Subsidiaries, and (z) all unamortized debt discount and expense and unamortized
deferred charges as of such date, all of the foregoing determined in accordance
with GAAP.
"Consolidated Other Capitalized Costs" means, for the Issuer
and its Subsidiaries (other than Holdings, Reit and the Subsidiaries of Reit),
for any fiscal period, without duplication, the gross amount capitalized for
long term assets (net of cash received in respect of long term assets) of the
Issuer and its Subsidiaries (other than Holdings, Reit and the Subsidiaries of
Reit), other than (a) Consolidated Capital Expenditures of the Issuer and its
Subsidiaries (other than Holdings, Reit and the Subsidiaries of Reit) and (b)
any fees and expenses capitalized by the Issuer and its Subsidiaries (other
than Holdings, Reit and the Subsidiaries of Reit) with respect to the Related
Transactions, all in accordance with GAAP.
"Contingent Warrant Agreement" has the meaning given to such
term in Section 1.1.
"Contingent Warrant Register" has the meaning given to such
term in Section 1.3.
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"Contingent Warrants" has the meaning given to such term in
Section 1.1.
"Contingent Warrant Shares" has the meaning given to such term
in Section 1.1.
"Contingent Warrant Shares Register" has the meaning given to
such term in Section 1.3.
"Crescent Warrant Agreement" has the meaning given to such
term in Section 1.1.
"Crescent Warrant Register" has the meaning given to such term
in Section 1.3.
"Crescent Warrants" has the meaning given to such term in
Section 1.1.
"Crescent Warrant Shares" has the meaning given to such term
in Section 1.1.
"Crescent Warrant Shares Register" has the meaning given to
such term in Section 1.3.
"Custodian" has the meaning given to such term in Section 7.1.
"Default" means any event which is, or after notice or passage
of time would be, an Event of Default.
"Derivative Mortgage Securities" means mortgage securities
that provide for the holder to receive interest only, principal only, or
interest and principal in amounts that are disproportionate to those payable on
the underlying mortgage loans.
"Disqualified Stock" means any Capital Stock which, by its
terms (or by the terms of any security into which it is convertible or for
which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof, in whole or in part, on
or prior to the Maturity Date.
"Documents" means this Agreement, the Notes, the Escrow
Agreement, the Crescent Warrant Agreement, the Contingent Warrant Agreement,
the Series A Purchase Agreement, the Series A Purchasers Warrant Agreement, the
L/C Contributors Warrant Agreement, the Crescent Warrants, the Continent
Warrants, the Series A Warrants, the L/C Warrants, the Stockholders Agreement,
the Limited Liability Company Agreement, the Registration Rights Agreement, the
Letter of Credit Documents, the Pledge Agreements, the Collateral Agency
Agreement and the Management Agreement, collectively, or each of such documents
singularly, and any documents or instruments contemplated by or executed in
connection with any of them or any of the transactions contemplated hereby or
thereby.
"EBITDA" means, without duplication and with respect to any
Person for any period, the following, each calculated for such Person and such
period: (a) Net Income plus (b) any provision for (or less any benefit from)
income or franchise taxes to the extent included in the determination of Net
Income plus (c) Interest Expense (whether paid or accrued and including without
limitation amortization of original issue discount) to the extent deducted in
the determination of Net Income plus (d) amortization and depreciation to the
extent deducted in the determination of Net Income plus (e) losses from (or
less gains from) Asset Sales or other non-
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cash items included in the determination of Net Income plus (f) after tax
extraordinary losses (in each case as defined under GAAP); provided, however,
that if such Person is the Issuer, its EBITDA shall be calculated as if an
amount equal to the Cash Balance of Holdings at the last day of such period had
been distributed to the Issuer on such day.
"Environmental Claim" means any claim, action, cause of
action, investigation of which the Companies, including any of their employees,
are aware, or notice (written or oral) by any Person alleging potential
liability (including, without limitation, potential liability for investigatory
costs, cleanup costs, governmental response costs, natural resources damages,
property damages, personal injuries, or penalties) arising out of, based on or
resulting from (a) the presence, or release into the environment, of any
Material of Environmental Concern at any location, regardless of whether owned
or operated by any of the Companies, or (b) circumstances forming the basis of
any violation, or alleged violation, of any Environmental Law.
"Environmental Laws" means all Federal, state, local and
foreign laws and regulations relating to pollution or protection of human
health or the environment (including, without limitation, ambient air, surface
water, ground water, land surface or subsurface strata), including, without
limitation, laws and regulations relating to emissions, discharges, releases or
threatened releases of Materials of Environmental Concern, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Materials of Environmental Concern.
"Equity Interest" means (i) with respect to a corporation, any
and all Capital Stock or warrants, options or other rights to acquire Capital
Stock (but excluding any debt security which is convertible into, or
exchangeable or exercisable for, Capital Stock) and (ii) with respect to a
partnership, limited liability company or similar Person, any and all units,
interests, rights to purchase, warrants, options or other equivalents of, or
other ownership interests in any such Person.
"ERISA" means The Employee Retirement Income Security Act of
1974, as amended from time to time, and any successor statute or law thereto.
"Escrow Account" means the escrow account established with the
Escrow Agent pursuant to the Escrow Agreement.
"Escrow Agreement" means the Escrow Agreement dated as of
February 11, 1997 between the Issuer and Bankers Trust Company, as escrow
agent, in the form attached hereto as Annex G.
"Event of Default" has the meaning given to such term in
Section 7.1.
"Excess Cash Flow" means, for any period, EBITDA of the Issuer
for such period minus the total amount of interest paid in cash by the Issuer,
in respect of Indebtedness of the Issuer, during such period minus the total
amount of Taxes paid in cash by the Issuer during such period minus the total
amount of Capital Expenditures of the Issuer during such period.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, from time to time, and any successor statute or law thereto.
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"Fixed Rate Mortgage Asset" means an asset bearing an interest
rate that is fixed for greater than one year.
"GAAP" means those generally accepted accounting principles
and practices which are recognized as such on the Closing Date by the American
Institute of Certified Public Accountants acting through its Accounting
Principles Board or by the Financial Accounting Standards Board or through
other appropriate boards or committees thereof and which are consistently
applied for all periods after the date hereof so as to properly reflect the
financial conditions, and the results of operations, shareholders' equity and
cash flows, of the Issuer, Holdings and their consolidated subsidiaries. In
the event that any Accounting Change (as defined below) shall occur and such
change would result in a change in the method of calculation of financial
covenants, standards or terms in this Agreement, then the Issuer and the
Holders shall enter into negotiations in order to amend such provisions of this
Agreement so as to equitably reflect such Accounting Change with the desired
result that after such amendment has been executed and delivered the criteria
for the Issuer's compliance with this Agreement shall be as nearly as
practicable the same after such Accounting Change as they were prior to such
Accounting Change having been made. Until such time as such an amendment shall
have been executed and delivered by the Issuer and the Majority Holders, all
financial covenants, standards and terms in this Agreement shall continue to be
calculated and construed as if such Accounting Change had not occurred.
"Accounting Change" means any change in accounting principles required by the
promulgation of any rule, regulation, pronouncement or opinion by the Financial
Accounting Standards Board of the American Institute of Certified Public
Accountants or, if applicable, the SEC (or successors thereto or agencies with
similar functions). That certain terms or computations are explicitly modified
by the phrase "in accordance with GAAP" shall in no way be construed to limit
the foregoing.
"Government Body" means any Federal, state, local or foreign
governmental authority or regulatory body, any subdivision, agency, commission
or authority thereof or any quasi-governmental or private body exercising any
governmental regulatory authority thereunder and any Person directly or
indirectly owned by and subject to the control of any of the foregoing, or any
court, arbitrator or other judicial or quasi-judicial tribunal.
"Guarantor" means Holdings and each other Subsidiary of the
Issuer (other than Reit and its Subsidiaries).
"guaranty" means, with respect to any Person, any contract,
agreement or understanding of such Person pursuant to which such Person
guarantees, or in effect guarantees, any Indebtedness of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, including
without limitation:
(a) agreements to purchase such
Indebtedness or any property constituting security therefor;
(b) agreements to advance or
supply funds (i) for the purchase or payment of such Indebtedness, or (ii) to
maintain working capital, equity capital or other balance sheet conditions;
(c) agreements to purchase
property, securities or services primarily for the purpose of assuring the
holder of such Indebtedness of the ability of the primary obligor to make
payment of the Indebtedness;
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(d) letters or agreements
commonly known as "comfort" or "keepwell" letters or agreements; or
(e) any other agreements to
assure the holder of the Indebtedness of the primary obligor against loss in
respect thereof;
except that "guaranty" shall not include (i) the endorsement by a Person in the
ordinary course of business of negotiable instruments or documents for deposit
or collection, or (ii) indemnities given by the Issuer, Holdings or their
respective Subsidiaries in brokerage, management and other agreements in the
ordinary course of business substantially consistent with past practices.
"Hedging Assets" means interest rate swap agreements, interest
rate cap agreements, interest rate floor agreements and interest rate collar
agreements, in each case, designed to hedge variable rate Indebtedness only.
"Hedging Obligations" means, with respect to any Person, the
obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements, in each case, designed
to protect such Person against fluctuations in interest rates and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Holder" or "Holders" means each Purchaser (so long as it
holds any Securities) and any other holder of any of the Securities.
"Holdings" has the meaning given to such term in the preamble
hereof.
"Holdings Pledge" means the Pledge Agreement (By MDC Reit
Holdings, LLC) dated as of February 11, 1997 between Holdings, as pledgor, and
the Collateral Agent, as pledgee, in the form attached hereto as Annex H.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and the rules and regulations promulgated pursuant
thereto.
"Indebtedness" means, with respect to any Person, the
aggregate amount of, without duplication, the following:
(a) all obligations for borrowed money;
(b) all obligations evidenced by bonds, debentures, notes
or other similar instruments;
(c) all obligations to pay the deferred purchase price of
property or services (except Trade Payables, accrued commissions and other
similar accrued current liabilities in respect of such obligations, in any
case, not overdue, arising in the ordinary course of business);
(d) all Capitalized Lease Obligations;
(e) all obligations or liabilities of others secured by a
lien on any asset owned by such Person or Persons regardless of whether such
obligation or liability is assumed;
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(f) all obligations of such Person or Persons, contingent
or otherwise, in respect of any letters of credit or bankers' acceptances;
(g) all Hedging Obligations; and
(h) all guaranties.
"Independent Auditors" means Deloitte & Touche or other
independent certified public accountants of recognized national standing
selected by the Issuer.
"Inspectors" has the meaning given to such term in Section
5.27.
"Interest Expense" means, when used with reference to any
Person for any period, without duplication, (i) the aggregate of all interest
paid or accrued by such Person in respect of Indebtedness of such Person,
including all interest, fees and costs payable with respect to the obligations
related to such Indebtedness (other than fees and costs which may be
capitalized as transaction costs in accordance with GAAP) and the interest
component of Capitalized Lease Obligations, all as determined in accordance
with GAAP, and (ii) an amount equal to the product of (A) the amount of all
dividend payments on any Disqualified Stock of such Person (including dividends
for such period which are accrued and unpaid) times (B) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current effective consolidated Federal, state and local tax rate of such
Person, expressed as a decimal.
"Investment" means, with respect to any Person, any direct,
indirect or beneficial investment by such Person, whether by means of share
purchase, loan, advance, extension of credit (other than accounts receivable
and trade credits arising in the ordinary course of business), capital
contribution or otherwise, in or to any other Person, the guaranty by such
Person of any Indebtedness of any other Person or the subordination of any
claim against any other Person to other Indebtedness of such other Person.
"Investment, Hedging and Leverage Policy" has the meaning given to such term
in Section 5.37.
"Issuer" has the meaning given to such term in the preamble
hereof.
"Issuer Pledge" means the Pledge Agreement (By Home Asset
Management Corp.) dated as of February 11, 1997 between the Issuer, as pledgor,
and the Collateral Agent, as pledgee, in the form attached hereto as Annex I.
"L/C Contributors Warrant Agreement" means the Warrant
Agreement dated as of February 11, 1997 by and among the Issuer and the
contributors of Letters of Credit listed on the signature pages thereto.
"L/C Warrants" has the meaning given to such term in the L/C
Contributors Warrant Agreement.
"Legal Holiday" means a Saturday, Sunday or day on which banks
and trust companies in the principal place of business of the Issuer or in New
York are not required to be open.
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"Letter of Credit Contribution Agreements" means,
collectively, the Letter of Credit Contribution Agreements dated as of February
11, 1997 by and between the Issuer an each of the Ernest J. Gallo 1991 Family
Trust, the Joseph C. Gallo 1994 Family Trust, the Stephanie A. Gallo 1990
Family Trust, PK Partners, the Josephine B. Haas Revocable Trust, the Keller
1991 Trust, Lillard Partners, PLF Partners, Saw Island Partners and Martin
Andersond, in connection with the Letters of Credit, in the form attached
hereto as Annex K or any successor or replacement agreement or agreements;
provided, however, that such successor or replacement agreement or agreements
shall be entered into by parties and on terms and conditions as shall be
acceptable to the Majority Holders on the date of such agreement or agreements.
"Letter of Credit Documents" means, collectively, the Letters
of Credit and the Letter of Credit Contribution Agreements.
"Letter of Credit Triggering Event of Default" means, (i) with
respect to the occurrence of an Event of Default under Sections 7.1(a), (b),
(h), (i), (j), (m) and (q), immediately upon the occurrence of such Event of
Default; (ii) with respect to the occurrence of an Event of Default under
Sections 7.1(c), (d), (e), (f), (g), (k), (l), (n), (o), (p) and (r), 60 days
after the occurrence of such Event of Default if not cured or waived during
such period; and (iii) with respect to any Event of Default under Section 7.1
which results in acceleration of the Notes pursuant to Section 7.2, immediately
upon the declaration that the Notes are due and payable (irrespective of the
waiting periods referred to in clause (ii) above).
"Letters of Credit" means, collectively, the Irrevocable
Standby Letters of Credit dated February 11, 1997 issued by various banks for
the account of Martin Anderson, the Ernest J. Gallo 1991 Family Trust, the
Joseph C. Gallo 1994 Family Trust, the Stephanie A. Gallo 1990 Family Trust, PK
Partners, the Josephine B. Haas Revocable Trust, the Keller 1991 Trust, Lillard
Partners, PLF Partners, and Saw Island Partners to the Collateral Agent for the
benefit of the Holders, as beneficiaries thereof, in the form attached hereto
as Annex J or any successor or replacement irrevocable standby letter or
letters of credit; provided, however, that such successor or replacement letter
or letters of credit shall be issued by a bank and on terms and conditions as
shall be acceptable to the Majority Holders on the date of issuance of such
letter or letters of credit.
"Lien" means any mortgage, pledge, lien, encumbrance, charge
or adverse claim affecting title or resulting in a charge against real or
personal property, or security interest of any kind (including, without
limitation, any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell and any filing of
any financing statement under the Uniform Commercial Code (or equivalent
statutes) of any jurisdiction).
"Limited Liability Company Agreement" means the Amended and
Restated Limited Liability Company Agreement of Holdings dated as of February
11, 1997 among the Issuer, McCown De Leeuw & Co. II, L.P., McCown De Leeuw
Associates, L.P., McCown De Leeuw & Co. Offshore (Europe), L.P., McCown De
Leeuw & Co. Offshore (Asia), L.P., the Purchasers and each of the Ernest J.
Gallo 1991 Family Trust, the Joseph C. Gallo 1994 Family Trust, the Stephanie
A. Gallo 1990 Family Trust, PK Partners, the Josephine B. Haas Revocable Trust,
the Keller 1991 Trust, Lillard Partners, PLF Partners, Saw Island Partners and
Martin Anderson.
"LLC Interests" means the limited liability company interests
in Holdings to be acquired by the Purchasers currently herewith and issued
pursuant to the Limited Liability Company Agreement.
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"Majority Holders" means, at any time, the Holder or Holders
of at least a majority in aggregate principal amount of the then outstanding
Notes.
"Management Agreement" means the Management Agreement dated as
of February 11, 1997 between Reit and the Issuer, in the form attached hereto
as Annex L.
"Management Reit Interests" means (a) an aggregate of up to
17,500 shares of Reit Common Stock sold to Jay M. Fuller and John M. Robbins,
Jr., and (b) options, stock appreciation rights and underlying Common Stock
issuable under the 1997 Stock Incentive Plan of Reit covering an aggregate of
660,000 shares of Reit Common Stock.
"Mandatory Redemption Date" means each of April 15, 1998,
April 15, 1999, April 15, 2000 and April 15, 2001.
"Mandatory Redemption Funds" means, on any Mandatory
Redemption Date, the amount equal to the Applicable Percentage of the excess,
if any, of (a) Excess Cash Flow for the 12-month period ended on the last day
of the immediately preceding calendar year over (b) the sum of (i) the Required
Escrow Deposit on such Mandatory Redemption Date and (ii) $1,000,000.
"Material Adverse Effect" means (a) a material adverse effect
upon the business, operations, properties, assets, condition (financial or
otherwise) or prospects of any of the Companies or (b) a material adverse
effect on the ability of any of the Companies to perform its obligations under
this Agreement or any of the other Documents or of any Purchaser or Holder to
enforce or collect any of the obligations hereunder or thereunder. In
determining whether any individual event could reasonably be expected to result
in a Material Adverse Effect, notwithstanding that such event does not of
itself have such effect, a Material Adverse Effect shall be deemed to have
occurred if the cumulative effect of such event and all other then existing
events could reasonably be expected to result in a Material Adverse Effect.
"Materials of Environmental Concern" means chemicals,
pollutants, contaminants, industrial, toxic or hazardous wastes, substances or
constituents, petroleum and petroleum products (or any by-product or
constituent thereof), asbestos or asbestos-containing materials, or PCBs.
"Maturity Date" means February 11, 2002.
"MDC" means, collectively, McCown De Leeuw & Co., II, L.P., a
California limited partnership, McCown De Leeuw Associates, L.P., a California
limited partnership, McCown De Leeuw & Co. Offshore (Europe), L.P., a Bermuda
limited partnership, McCown De Leeuw & Co. Offshore (Asia), L.P., a Bermuda
partnership, MDC Management Company II, L.P., a California limited partnership,
MDC Management Company IIE, L.P., a California limited partnership, and MDC
Management Company IIA, L.P, a California limited partnership.
"Mortgage Assets" means (i) Single-Family Mortgage Assets,
(ii) Multifamily Mortgage Assets, and (iii) Commercial Mortgage Assets.
"Mortgage Loans" means loans secured by a mortgage or deed of
trust or other security instrument creating a first lien in the fee simple or
ground lease estate of the related borrower in one or more parcels of real
estate and the buildings and improvements located thereon.
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"Multifamily Mortgage Assets" means Multifamily Mortgage Loans
and Multifamily Mortgage Securities.
"Multifamily Mortgage Loans" means Mortgage Loans secured
primarily by multifamily (in excess of four units) residential real property.
"Multifamily Mortgage Securities" means mortgage securities
representing an interest in, or secured primarily by, Multifamily Mortgage
Loans.
"Net Income" of any Person means the net income (loss) of such
Person, determined in accordance with GAAP, excluding, however, any gain (but
not loss) realized upon the sale or other disposition (including, without
limitation, dispositions pursuant to sale and leaseback transactions) of any
real property or equipment of such Person which is not sold or otherwise
disposed of in the ordinary course of business and any gain (but not loss)
realized upon the sale or other disposition of any capital stock of such
Person.
"Net Proceeds" means, with respect to any sale or other
disposition of any assets, (i) cash received by the Issuer or any of its
Subsidiaries from such sale or other disposition and (ii) promissory notes
received by the Issuer or any of its Subsidiaries from such sale or other
disposition upon the liquidation or conversion of such notes into cash, in each
case after (a) provision for all Taxes measured by or resulting from such sale
or other disposition, (b) payment of all brokerage commissions and other fees
and expenses related to such sale or other disposition, and (c) amounts applied
to repayment of Indebtedness secured by a Lien on the asset sold or disposed.
"Note Register" has the meaning given to such term in Section
1.3.
"Notes" has the meaning given to such term in Section 1.1.
"Notice of Redemption" has the meaning given to such term in
Section 6.3.
"Obligations" means, with reference to any Indebtedness, any
principal of, premium, interest, penalties, fees and other liabilities payable
from time to time and obligations performable under the documentation governing
such Indebtedness.
"Officer" of a Person mean its Chairman of the Board, Chief
Executive Officer, President, Treasurer, any Vice President, Secretary or any
Assistant Secretary.
"Officers' Certificate" means a certificate signed by any two
Officers, one of whom must be the Chairman of the Board, the Chief Executive
Officer, the President, the Treasurer or a Vice President of the Issuer.
"Operating Lease" means any lease other than a Capital Lease.
"Opinion of Counsel" means a written opinion from legal
counsel who is reasonably acceptable to each of the Purchasers. Unless
otherwise required by any of the Purchasers, the legal counsel may be an
employee of or counsel to the Issuer or Holdings. For purposes of Section 4.4,
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Issuer and who may be an employee of or counsel to
any Purchaser or Holder.
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"Payment Notice" has the meaning given to such term in Section
8.2(b).
"PCBs" has the meaning given to such term in Section 3.16.
"Permitted Liens" means with respect to any Person: (i) Liens
incurred or deposits made by such Person under worker's compensation laws,
unemployment insurance laws or similar legislation, or Liens incurred or good
faith deposits made in connection with bids, tenders, contracts (other than for
the payment of Indebtedness) or leases to which such Person is a party, or
Liens incurred or deposits made to secure public or statutory obligations of
such Person or deposits of cash or United States Government bonds made to
secure the performance of statutory obligations, surety, stay, customs and
appeal bonds to which such Person is a party, or deposits made as security for
contested taxes or import duties or for the payment of rent, in each case in
the ordinary course of business; (ii) Liens imposed by law, such as carriers',
warehousemen's, materialmen's and mechanics' Liens or Liens arising out of
judgments or awards against such Person with respect to which such Person shall
then be prosecuting appeal or other proceedings for review and which do not
constitute an Event of Default under Section 7.1(g); provided that, in each
case, such appeal or other proceeding is being made in good faith and with
respect to which reserves or other appropriate provisions are being made in
accordance with GAAP; (iii) Liens securing the payment of Taxes which are not
yet subject to penalties for non-payment or which are being contested in good
faith and by appropriate proceedings, with respect to which reserves or other
appropriate provisions are being maintained in accordance with GAAP; (iv) Liens
in favor of issuers of surety bonds or letters of credit issued pursuant to the
request of and for the account of such Person in the ordinary course of its
business; (v) minor survey exceptions, encumbrances, easements or reservations
of, or rights of others for, rights of way, sewers, electric lines, telegraph
and telephone lines and other similar purposes, or zoning or other restrictions
as to the use of real properties or Liens incidental to the conduct of the
business of such Person or to the ownership of its properties which were not
incurred in connection with Indebtedness or other extensions of credit and
which do not in the aggregate materially adversely affect the value of said
properties or materially impair their use in the operation of the business of
such Person; (vi) purchase money Liens upon or in any real or personal property
(including fixture and other equipment) acquired or held by the Issuer or any
of its Subsidiaries in the ordinary course of business to secure the purchase
price of such property or to secure Indebtedness permitted hereunder and
incurred solely for the purpose of financing the acquisition of such property,
or Liens existing on such property at the time of its acquisition (other than
any such Lien created in contemplation of such acquisition), provided that (A)
no such Lien shall extend to or cover any property other than the property
being acquired and (B) any such Indebtedness would be permitted to be incurred
under this Agreement; and (vii) any Liens created pursuant to any of the Pledge
Agreements.
"Permitted Refinancing Indebtedness" means, with respect to
any Person, any Indebtedness (denominated in Dollars of the United States of
America) of such Person issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of such Person; provided that: (1) the principal amount of such
Indebtedness does not exceed the principal amount of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded or, in the case
of Indebtedness being refinanced that was issued with an original issue
discount, the accreted value thereof (as determined in accordance with GAAP) at
the time of such refinancing, renewal, replacement, defeasance or refunding
(plus the amount of reasonable expenses incurred in connection therewith); (2)
such Indebtedness has a Weighted Average Life to Maturity equal to or greater
than the Weighted Average Life to Maturity of the Indebtedness being extended,
refinanced, renewed, replaced,
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defeased or refunded; (3) such Indebtedness is subordinated in right of payment
to the Notes on terms at least as favorable to the holders of Notes as those,
if any, contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (4) the annual
interest rate with respect to such Indebtedness is less than or equal to, and
is payable no more frequently than, that of the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (5) such Indebtedness
is incurred by such Person who is an obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Permitted Reit Indebtedness" means any and all forms of
obligations of Reit accounted for as liabilities under GAAP, including without
limitation notes, bonds and Reverse Repurchase Agreements; provided that such
obligations are denominated in Dollars of the United States of America, have a
maturity of greater than thirty (30) days and either (x) bear a variable
interest rate that resets at least once every six months or (y) bear a fixed
rate of interest and have a maturity of not more than one year; provided,
further that either:
(a) (i) under the agreement pursuant to which any
such obligation is incurred, such obligation is secured primarily by
Permitted Reit Investments and the amount of such obligation may not
exceed the fair market value of the collateral as determined under
such agreement or
(ii) such obligations are REMIC regular interests
or other forms of structured securities (x) that, in any case, are
obligations with recourse limited solely to the collateral securing
such obligations and (y) as to which the fair market value of Reit's
equity interest in the entity issuing such security does not exceed
five percent (5%) of the fair market value of the collateral securing
such obligations on the date of incurrence of such obligations. For
purposes of this Agreement, such fair market value shall be determined
at any time for each type of asset by the parties (other than Reit) to
Reit's Reverse Repurchase Agreements or, if such determination is not
readily available, by such methods as shall be approved from time to
time by Reit's Unaffiliated Directors (as defined in the Management
Agreement).
(b) the obligations constitute one of the following:
(i) trade debt incurred in the ordinary course of
business, paid within thirty (30) days after the same has become due
and payable or which is being contested in good faith, provided
provision is made for the eventual payment thereof in the event it is
found that such contested trade debt is payable by Reit;
(ii) Indebtedness secured by Permitted Reit Liens;
(iii) Capitalized Lease Obligations in an aggregate
amount not to exceed at any one time outstanding $500,000; or
(iv) Indebtedness of Reit in an amount not
exceeding $1,000,000 at any time outstanding incurred solely for the
purchase or financing of fixed or capital assets acquired by Reit
after the Closing Date; provided, that (w) (1) such Indebtedness is
secured by purchase money Liens on such assets and (2) such Liens do
not extend to or cover any other assets of Reit or any of its
Subsidiaries, (x) such Liens secure only the obligation to pay the
purchase price of such asset and interest thereon, (y) such
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Indebtedness is incurred within nine (9) months after the acquisition
of such assets (with recourse only against such assets) and (z) the
fair market value (as determined in good faith by the board of
directors of the Issuer) of the assets on which such Liens are placed
is at least equal to the amount of the Indebtedness secured thereby
(the Indebtedness described in this clause (iv) being referenced
herein as "Purchase Money Indebtedness."
"Permitted Reit Investments" of a Person means Investments by
such Person that are Single-Family Mortgage Assets, Multifamily Mortgage
Assets, Commercial Mortgage Assets, Hedging Assets, Derivative Mortgage
Securities (to the extent purchased expressly for hedging purposes), Fixed Rate
Mortgage Assets, REMIC residual interests and Investments in Permitted Reit
Subsidiaries, in each case, relating to real property located in the United
States of America; provided, however, that any Multifamily Mortgage Assets,
Commercial Mortgage Assets, Derivative Mortgage Securities, Fixed Rate Mortgage
Assets and REMIC residual interests to be acquired by such Person, together
with any Investments to be made by such Person in Permitted Reit Subsidiaries,
will not constitute Permitted Reit Investments to the extent that the aggregate
fair market value thereof on any date, when aggregated with the aggregate fair
market value of all other Multifamily Mortgage Assets, Commercial Mortgage
Assets, Derivative Mortgage Securities, Fixed Rate Mortgage Assets, REMIC
residual interests and Investments in Permitted Reit Subsidiaries held by such
Person on such date, would exceed 5% of the total fair market value on such
date of the Mortgage Assets then held by such Person; provided further that,
notwithstanding the foregoing, any asset, the investment in which could cause
such investing Person to fail to operate or qualify as a REIT pursuant to
Section 856 et. seq. of the Code, will not constitute a Permitted Reit
Investment. For purposes of this Agreement, such fair market value shall be
determined at any time for each type of asset by the parties (other than Reit)
to Reit's Reverse Repurchase Agreements or, if such determination is not
readily available, by such methods as shall be approved from time to time by
Reit's Unaffiliated Directors (as defined in the Management Agreement).
"Permitted Reit Liens" means (i) Liens or charges for current
taxes, assessments or other governmental charges which are not delinquent or
which remain payable without penalty, or the validity of which are being
contested in good faith by appropriate proceedings upon stay of execution of
the enforcement thereof, provided Reit shall have set aside on its books and
shall maintain adequate reserves for the payment of same in conformity with
GAAP; (ii) Liens, deposits or pledges made to secure statutory obligations,
surety or appeal bond, or bonds for the release of attachments or for stay of
execution, or to secure the performance of bids, tenders, contracts (other than
for the payment of borrowed money), leases or for purposes of like general
nature in the ordinary course of Reit's business; and (iii) Liens securing
Purchase Money Indebtedness.
"Permitted Reit Subsidiaries" means Qualified REIT
Subsidiaries of Reit and Preferred Stock Subsidiaries of Reit, in each case,
Reit's interest in which could not cause Reit to fail to operate and qualify as
a REIT under Section 856 et seq. of the Code, the income of which is taxed
pursuant to Section 857 of the Code.
"Person" means an individual, partnership, corporation,
limited liability company, trust or unincorporated organization or a government
or agency or political subdivision thereof.
"Plan of Liquidation" means, with respect to any Person, a
plan that provides for, contemplates or the effectuation of which is preceded
or accompanied by (regardless of whether substantially contemporaneously, in
phases or otherwise) (i) the sale, lease, conveyance or other disposition of
all or substantially all of the assets of such Person otherwise than as an
entirety or
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substantially as an entirety and (ii) the distribution of all or substantially
all of the proceeds of such sale, lease, conveyance or other disposition and
all or substantially all of the remaining assets of such Person to holders of
Capital Stock of such Person.
"Pledge Agreements" means the Issuer Pledge and the Holdings
Pledge.
"Preferred Interests" means the limited liability company
interests in Holdings that entitle the holder thereof to distributions pursuant
to Section 5.6(a) of the Limited Liability Company Agreement.
"Preferred Stock Subsidiary of Reit" means a corporation (a)
that has issued two and only two classes of Capital Stock, one of which being
common stock and the other of which being preferred stock; (b) all of the
preferred stock of which is non-voting, owned by Reit and at all times
represents at least 90% of the economic value of all the Capital Stock of such
corporation; (c) in which Reit owns no common stock; and (d) the ownership of
which could not cause Reit to fail to operate or qualify as a REIT under
Section 856 et seq. of the Code.
"Principal" of any Note includes premium, if any.
"Pro Forma" means the unaudited consolidated balance sheets of
the Issuer and its Subsidiaries as of the date hereof after giving effect to
the Documents and the transactions contemplated thereby. Notwithstanding any
other term contained in this Agreement, should the application of purchase or
other accounting principles permit the Issuer or Holdings, in accordance with
GAAP, to characterize certain expenditures as capital items rather than
expense, then such expenditures shall be treated as expense in the period such
expenditures were incurred or paid for all purposes under this Agreement unless
such expenditure was identified and capitalized in the Pro Forma.
"Productive Assets" means assets used in the same type of
business engaged in by the Issuer on the Closing Date.
"Projections" has the meaning given to such term in Section
3.4(c).
"Property" or "property" means any assets or property of any
kind or nature whatsoever, real, personal or mixed (including fixtures),
whether tangible or intangible, provided that the terms "Property" or
"property," when used with respect to any Person, shall not include securities
issued by such.
"Public Equity Offering" of any Person, means a sale by such
Person of Equity Interests of such Person in an underwritten (firm commitment)
public offering registered under the Securities Act.
"Purchase Money Indebtedness" has the meaning given to such
term in the definition of the term Permitted Reit Indebtedness.
"Purchasers" means the purchasers on the signature pages
hereto.
"Qualified Private Equity Placement" of any Person, means a
private placement of Equity Interest of such Person (not registered under the
Securities Act), pursuant to which such Person receives net proceeds of at
least $20,000,000.
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"Qualified Public Equity Offering" of any Person, means a
Public Equity Offering of such Person resulting in the listing of such Equity
Interest on a nationally recognized stock exchange or the NASDAQ National
Market System, pursuant to which such Person receives net proceeds of at least
$20,000,000.
"Qualified REIT Subsidiary of Reit" means any corporation 100%
of the Capital Stock of which is held by Reit at all times during the existence
of such corporation (within the meaning of Section 856 (i)(2) of the Code).
"Redemption Date" means, when used with respect to any Note to
be redeemed, the date fixed for such redemption pursuant to this Agreement and
the Notes.
"Redemption Price" means, when used with respect to any Note
to be redeemed, the price fixed for such redemption pursuant to this Agreement
and the Notes.
"Registration Rights Agreement" has the meaning given to such
term in Section 1.1.
"Reit" means American Residential Investment Trust, Inc., a
Maryland corporation, and any successor thereto.
"Reit Common Stock" means the common stock par value $0.01 per
share, of Reit.
"Reit Leverage Ratio" means, on any date, the ratio of (a) the
total consolidated Indebtedness of Reit and its Subsidiaries on such date
(other than any Permitted Reit Indebtedness described in clause (a)(ii) of the
definition of Permitted Reit Indebtedness) to (b) the fair market value (as
determined in good faith by the board of directors of Reit) of all the assets
of Reit on such date (other than any such assets upon which there is a Lien
that secures any such Permitted Reit Indebtedness).
"Reit Shares" means the 2,000,000 shares of Reit Common Stock
owned on the Closing Date by Holdings.
"Related Transactions" means the execution and delivery of the
Documents, the funding of the Notes on the Closing Date and the payment of all
fees, costs and expenses associated with all of the foregoing.
"REMIC" means Real Estate Mortgage Investment Conduit.
"Required Escrow Deposit" has the meaning given to such term
in Section 5.33.
"Restricted Payments" has the meaning given to such term in
Section 5.4.
"Reverse Repurchase Agreement" means a borrowing device
evidenced by an agreement to sell securities or other assets to a third party
and a simultaneous agreement to repurchase them at a specified future date and
price, the price difference constituting the interest on the borrowing.
"Rule 144" means Rule 144 as promulgated by the SEC under the
Securities Act, as amended from time to time, and any successor rule or
regulation thereto.
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"Rule 144A" means Rule 144A as promulgated by the SEC under
the Securities Act, as amended from time to time, and any successor rule or
regulation thereto.
"SEC" means the Securities and Exchange Commission and any
successor thereto.
"Securities Act" means the Securities Act of 1933, as amended
from time to time, and any successor statute or law thereto.
"Security" or "Securities" has the meaning given to such term
in Section 1.1.
"Series A Preferred Stock" means the preferred stock of the
Issuer designated as Series A Non-Voting Cumulative Preferred Stock, par value
$.0001 per share, pursuant to the Issuer's Amended and Restated Certificate of
Incorporation, as in effect on the Closing Date.
"Series A Purchase Agreement" means the Series A Preferred
Stock Purchase Agreement dated as of February 11, 1997 by and among the Issuer
and the purchasers named in Exhibit A thereto.
"Series A Purchasers" means the purchasers of Series A
Preferred Stock named in Exhibit A to the Series A Purchase Agreement.
"Series A Purchasers Warrant Agreement" means the Warrant
Agreement dated as of February 11, 1997 by and among the Issuer and the
purchasers of Series A Preferred Stock listed on the signature pages thereto.
"Series A Warrants" has the meaning given to such term in the
Series A Purchasers Warrant Agreement.
"Series B Preferred Stock" means the preferred stock of the
Issuer designated as Series B Non-Voting Cumulative Preferred Stock, par value
$.0001 per share, pursuant to the Issuer's Amended and Restated Certificate of
Incorporation, as in effect on the Closing Date.
"Single-Family Mortgage Assets" means Single-Family Mortgage
Loans and Single-Family Mortgage Securities.
"Single-Family Mortgage Loans" means adjustable rate Mortgage
Loans secured primarily by single-family (one-to four-units) residential real
property.
"Single-Family Mortgage Securities" means adjustable rate
mortgage securities representing an interest in, or secured primarily by,
Single-Family Mortgage Loans.
"Solvent" means, with respect to any Person on a particular
date, that on such date, (a) the fair saleable value of the assets of such
Person exceeds its probable liability on its debts as they become absolute and
mature; (b) all of such Person's assets, at a fair valuation, exceed the sum of
such Person's debts; (c) such Person is able to pay its debts or liabilities as
such debts and liabilities mature; and (d) such Person is not engaged in a
business or transaction, and is not about to engage in a business or
transaction, for which such Person's assets would constitute an unreasonably
small capital.
"Stockholders Agreement" has the meaning given to such term in
Section 1.1.
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"Subsidiary" means, with respect to any Person, (i) a
corporation a majority of whose Capital Stock with voting power, under ordinary
circumstances, to elect directors is, at the date of determination, directly or
indirectly, owned by such Person, by one or more Subsidiaries of such Person or
by such Person and one or more Subsidiaries of such Person or (ii) a
partnership in which such Person or a Subsidiary of such Person is, at the date
of determination, a general or limited partner of such partnership, but, in the
case of a limited partner, only if such Person or its Subsidiary is entitled to
receive more than 50% of the assets of such partnership upon its dissolution or
(iii) any limited liability company or any other Person (other than a
corporation or a partnership) in which such Person, a Subsidiary of such Person
or such Person and one or more Subsidiaries of such Person, directly or
indirectly, at the date of determination, has (a) at least a majority ownership
interest or (b) the power to elect or direct the election of a majority of the
directors or other governing body of such Person. Notwithstanding any
provision hereof to the contrary, Holdings and Reit and their Subsidiaries
shall be considered to be Subsidiaries of the Issuer at all times.
"Subsidiary Guaranty" means the irrevocable and unconditional
guaranty made by Holdings and any other Guarantor in Section 10.
"Supplemental Data" has the meaning given to such term in
Section 3.4(c).
"Taxes" means all Federal, state, local and foreign taxes, and
other assessments of a similar nature (whether imposed directly or through
withholding), including any interest, additions to tax, or penalties applicable
thereto.
"Tax Returns" means all Federal, state, local and foreign tax
returns, declarations, statements, reports, schedules, forms and information
returns (and any amendments to any of the foregoing) relating to Taxes.
"TCW Group Member" means any Affiliate of Trust Company of the
West or any Holder for whom Trust Company of the West or any Affiliate of Trust
Company of the West acts as an Account Manager.
"Trade Payables" means, with respect to any Person, accounts
payable and other similar accrued current liabilities in respect of obligations
or indebtedness to trade creditors created, assumed or guaranteed by such
Person or any of its Subsidiaries in the ordinary course of business in
connection with the obtaining of property or services.
"U.S. Government Obligations" means direct obligations of, or
obligations guaranteed as to timely payment by, the United States of America
for the payment (with respect to interest as well as principal) of which
obligation or guarantee the fill faith and credit of the United States of
America is pledged.
"U.S. Legal Tender" means such coin or currency of the United
States of America as at the time of payment shall be legal tender for the
payment of public and private debts.
"Voting Securities" means any class of Equity Interests of a
Person pursuant to which the holders thereof have, at the time of
determination, the general voting power under ordinary circumstances to vote
for the election of directors, managers, trustees or general partners of such
Person (irrespective of regardless of whether at the time any other class or
classes will
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have or might have voting power by reason of the happening of any contingency),
and shall include, without limitation, all the limited liability company
interests in Holdings.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the sum
of the products obtained by multiplying (x) the amount of each then remaining
installment, sinking find, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (y) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Subsidiary" means, with respect to any Person,
at any time, a Subsidiary of such Person, all of the Equity Interests of which
(except director's qualifying shares) are at the time owned directly or
indirectly by such Person.
9.2 Rules of Construction.
Unless the context otherwise requires:
(a) a term has the meaning assigned to it;
(b) "or" is not exclusive;
(c) words in the singular include the plural, and words
in the plural include the singular;
(d) provisions apply to successive events and
transactions;
(e) "herein," "hereof," "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Section or other subdivision; and
(e) any reference to a "Section," "Annex" or "Schedule"
refers to a Section of, an Annex to, or a Schedule to this Agreement,
respectively.
SECTION SECTION 10. GUARANTY.
10.1 Guaranty.
(a) In consideration of good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, each of the Guarantors hereby irrevocably and unconditionally
guarantees (each a "Subsidiary Guaranty") to each Holder of a Note,
irrespective of the validity and enforceability of this Agreement, the Notes or
the obligations of the Issuer under this Agreement or the Notes, that: (w) the
principal and premium (if any) of and interest on the Notes will be paid in
full when due, whether at the maturity or interest payment date, by
acceleration, call for redemption, upon a Change of Control or otherwise; (x)
all other obligations of the Issuer to the Holders under this Agreement or the
Notes will be promptly paid in full or performed, all in accordance with the
terms of this Agreement and the Notes; and (y) in case of any extension of time
of payment or renewal of any Notes or any of such other obligations, they will
be paid in full when due or performed in accordance with the terms of the
extension or renewal, whether at maturity, by acceleration, call for
redemption, upon a Change of Control or
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otherwise. Failing payment when due of any amount so guaranteed for whatever
reason, each Guarantor shall be obligated to pay the same before failure so to
pay becomes an Event of Default.
(b) Each of the Guarantors
hereby agrees that its obligations with regard to this Subsidiary Guaranty
shall be unconditional, irrespective of the validity, regularity or
enforceability of the Notes or this Agreement, the absence of any action to
enforce the same, any delays in obtaining or realizing upon or failures to
obtain or realize upon collateral, the recovery of any judgment against the
Issuer, any action to enforce the same or any other circumstances that might
otherwise constitute a legal or equitable discharge or defense of a guarantor.
Each of the Guarantors hereby waives diligence, presentment, demand of payment,
filing of claims with a court in the event of insolvency or bankruptcy of the
Issuer, any right to require a proceeding first against the Issuer or right to
require the prior disposition of the assets of the Issuer to meet its
obligations, protest, notice and all demands whatsoever and covenants that this
Subsidiary Guaranty will not be discharged except by complete performance of
the obligations contained in the Notes and this Agreement.
(c) If any Holder is required by
any court or otherwise to return to either the Issuer or any Guarantor, or any
custodian, trustee, or similar official acting in relation to either the Issuer
or such Guarantor, any amount paid by either the Issuer or such Guarantor to or
such Holder, the Subsidiary Guaranty, to the extent theretofore discharged,
shall be reinstated in full force and effect. Each of the Guarantors agrees
that it will not be entitled to any right of subrogation in relation to the
Holders in respect of any obligations guaranteed hereby until payment in full
of all obligations guaranteed hereby. Each Guarantor further agrees that, as
between such Guarantor, on the one hand, and the Holders, on the other hand,
(i) the maturity of the obligations guaranteed hereby may be accelerated as
provided in Section 7.2 for the purposes of this Subsidiary Guaranty,
notwithstanding any stay, injunction or other prohibition preventing such
acceleration as to the Issuer of the obligations guaranteed hereby, and (ii) in
the event of any declaration of acceleration of those obligations as provided
in Section 7.2, those obligations (whether or not due and payable) will
forthwith become due and payable by each of the Guarantors for the purpose of
this Subsidiary Guaranty.
(d) It is the intention of each
Guarantor and the Issuer that the obligations of each Guarantor hereunder shall
be in, but not in excess of, the maximum amount permitted by applicable law.
Accordingly, if the obligations in respect of the Subsidiary Guaranty would be
annulled, avoided or subordinated to the creditors of any Guarantor by a court
of competent jurisdiction in a proceeding actually pending before such court as
a result of a determination both that such Subsidiary Guaranty was made without
fair consideration and that, at the time thereof, immediately after giving
effect thereto, or at the time that any demand is made thereupon such Guarantor
was insolvent or unable to pay its debts as they mature or left with an
unreasonably small capital, then the obligations of such Guarantor under such
Subsidiary Guaranty shall be reduced by such an amount, if any, that would
result in the avoidance of such annulment, avoidance or subordination;
provided, however, that any reduction pursuant to this paragraph shall be made
in the smallest amount as is necessary to reach such result. For purposes of
this paragraph, "fair consideration," "insolvency," "unable to pay its debts as
they mature," "unreasonably small capital" and the effective times of
reductions, if any, required by this paragraph shall be determined in
accordance with applicable law.
77
<PAGE> 83
10.2 Execution and Delivery of each Subsidiary Guaranty.
To evidence its Subsidiary Guaranty set forth in Section 11.1,
each Guarantor agrees that a notation of such Subsidiary Guaranty substantially
in the form annexed hereto as Annex A-1 shall be endorsed on each Note and that
this Agreement shall be executed on behalf of such Guarantor by two Officers or
by one Officer with an attestation by another Officer, by manual or facsimile
signature.
Each Guarantor agrees that its Subsidiary Guaranty set forth
in Section 11.1 shall remain in full force and effect and apply to all the
Notes notwithstanding any failure to endorse on each Note a notation of such
Guaranty. If an Officer whose signature is on a Note no longer holds that
office at the time the Note on which a Subsidiary Guaranty is endorsed and
issued, the Subsidiary Guaranty shall be valid nevertheless.
The delivery of any Note by the Issuer shall constitute due
delivery of the Subsidiary Guaranty set forth in this Agreement on behalf of
each Guarantor.
10.3 Future Subsidiary Guarantors.
The Issuer shall cause each person that is or becomes a
Subsidiary of the Issuer after the Closing Date (other than Reit) to execute a
Subsidiary Guaranty in the form of Annex A-1 hereto and shall cause such
Subsidiary to execute an amendment to this Agreement for the purpose of adding
such Subsidiary as a Guarantor hereunder.
10.4 Certain Bankruptcy Events.
Each Guarantor hereby covenants and agrees that in the event
of the insolvency, bankruptcy, dissolution, liquidation or reorganization of
the Issuer, such Guarantor shall not file (or join in any filing of), or
otherwise seek to participate in the filing of, any motion or request seeking
to stay or to prohibit (even temporarily) execution on the Subsidiary Guaranty
and hereby waives and agrees not to take the benefit of any such stay of
execution, whether under Section 362 or 105 of the United States Bankruptcy
Code or otherwise.
SECTION SECTION 11. MISCELLANEOUS.
11.1 Notices.
All notices and other communications provided for or permitted
hereunder shall be made by hand-delivery, first-class mail, telex, telecopier,
or overnight air courier guaranteeing next day delivery:
(a) if to any Purchaser or Holder, at the address or
telecopy number set forth on the signature pages hereto (or, in the case of a
Holder other than a Purchaser, at the address or telecopy number provided in
writing by such Holder to the Issuer), with a copy to Skadden, Arps, Slate,
Meagher & Flom LLP, 300 S. Grand Avenue, Suite 3400, Los Angeles, California
90071, Telecopy No. (213) 687-5600, Attention: Jeffrey H. Cohen; and
(b) if to any of the Companies, to such party, 445
Marine View, Suite 130, Del Mar, California 92014, Telecopy No. (619) 759-1885,
Attention: Jay M. Fuller, with a copy to McCown De Leeuw & Co., 101 East 52nd
Street, 31st Floor, New York, New York, 10022,
78
<PAGE> 84
Telecopy No. (212) 355-6283, Attention: David E. De Leeuw, and to Gibson, Dunn
& Crutcher, One Montgomery Street, Telesis Tower, San Francisco, California
94104, Telecopy No. (415) 986-5309, Attention: Lawrence Calof.
All such notices and communications shall be deemed to have
been duly given: at the time delivered by hand, if personally delivered; five
Business Days after being deposited in the mail, postage prepaid, if mailed;
when answered back if telexed; when receipt acknowledged, if telecopied; and
the next Business Day after timely delivery to the courier, if sent by
overnight air courier guaranteeing next day delivery. The parties may change
the addresses to which notices are to be given by giving five days' prior
notice of such change in accordance herewith.
11.2 Successors and Assigns.
This Agreement shall inure to the benefit of and be binding
upon the successors and assigns of each of the parties.
11.3 Counterparts.
This Agreement may be executed in any number of counterparts
and by the parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together
shall constitute one and the same agreement.
11.4 Headings.
The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
11.5 Governing Law; Submission to Jurisdiction.
THIS AGREEMENT, THE NOTES AND ALL ISSUES HEREUNDER AND
THEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL
LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF
LAW EXCEPT SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW). TO THE
FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, EACH OF THE
ISSUER, HOLDINGS, REIT AND EACH GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE
JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN
THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN
IN THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING
OUT OF OR RELATING TO THIS AGREEMENT AND THE NOTES, AND IRREVOCABLY ACCEPTS FOR
ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY,
JURISDICTION OF THE AFORESAID COURTS. EACH OF THE ISSUER, HOLDINGS, REIT AND
EACH GUARANTOR IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO
SO UNDER APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE
LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH
COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY
SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NOTHING HEREIN SHALL
AFFECT THE RIGHT OF ANY HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEEDING
AGAINST THE ISSUER, HOLDINGS, REIT OR ANY GUARANTOR IN ANY OTHER JURISDICTION.
79
<PAGE> 85
11.6 Entire Agreement.
This Agreement, together with the Securities and the other
Documents (and any agreement between the Issuer and any Holder relating to
transfers), is intended by the parties as a final expression of their agreement
and intended to be a complete and exclusive statement of the agreement and
understanding of the parties hereto in respect of the subject matter contained
herein and therein. This Agreement, together with the Securities and the other
Documents supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
11.7 Severability.
In the event that any one or more of the provisions contained
herein, or the application thereof in any circumstances, is held invalid,
illegal or unenforceable in any respect for any reason, the validity, legality
and enforceability of any such provision in every other respect and of the
remaining provisions hereof shall not be in any way impaired or affected, it
being intended that each Purchaser's rights and privileges shall be enforceable
to the fullest extent permitted by law.
11.8 Further Assurances.
The Issuer shall, and shall cause each of its Subsidiaries to,
at its cost and expense, upon request of any Purchaser or Holder, duly execute
and deliver, or cause to be duly executed and delivered, to such Purchaser or
Holder such further instruments and do or cause to be done such further acts as
may be necessary or proper in the reasonable opinion of such Purchaser or
Holder to carry out more effectually the provisions and purposes of this
Agreement and the other Documents.
11.9 Disclosure of Financial Information.
Each Holder is hereby authorized to deliver a copy of any
financial statement or any other information relating to the business,
operations or financial condition of the Issuer and each of its Subsidiaries
which may be furnished to it hereunder or otherwise, to any other Holder, any
court, Governmental Body claiming to have jurisdiction over such Holder, to the
National Association of Insurance Commissioners or similar organizations, as
may be required or appropriate in response to any summons or subpoena in
connection with any litigation, to the extent necessary to comply with any law,
order, regulation or ruling applicable to such Holder, to any rating agency, in
order to protect its investment hereunder, or to any Person which shall, or
shall have any right or obligation to, succeed to all or any part of such
Holder's interest in any of the Securities and this Agreement or to any actual
or prospective purchaser or assignee thereof.
[Signature pages follow]
80
<PAGE> 86
IN WITNESS WHEREOF, this Agreement has been duly executed by
the parties set forth below as of the date first written above.
HOME ASSET MANAGEMENT CORP.
By: _____________________________________
David E. De Leeuw
President
MDC REIT HOLDINGS, LLC
By: HOME ASSET MANAGEMENT CORP.,
its Managing Member
By: _____________________________________
David E. De Leeuw
President
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
By: _____________________________________
John M. Robbins, Jr.
Chairman of the Board and
Chief Executive Officer
81
<PAGE> 87
TCW/CRESCENT MEZZANINE PARTNERS, L.P.
TCW/CRESCENT MEZZANINE TRUST
TCW/CRESCENT MEZZANINE INVESTMENT PARTNERS, L.P.
By: TCW/CRESCENT MEZZANINE, L.L.C.,
its general partner or managing owner
By: ____________________________________________
Jean-Marc Chapus
Managing Director
By: ____________________________________________
John C. Rocchio
Senior Vice President
Principal amount of Notes to be purchased:
- ------------------------------------------
$16,520,114 by TCW/Crescent Mezzanine Partners, L.P.
$5,028,462 by TCW/Crescent Mezzanine Trust
$451,424 by TCW/Crescent Mezzanine Investment Partners, L.P.
Number of Crescent Warrants and number of Contingent Warrants to be purchased:
- ------------------------------------------------------------------------------
440,537 Crescent Warrants and 11,332 Contingent Warrants by TCW/Crescent
Mezzanine Partners, L.P.
134,092 Crescent Warrants and 3,449 Contingent Warrants by TCW/Crescent
Mezzanine Trust
12,038 Crescent Warrants and 310 Contingent Warrants by TCW/Crescent Mezzanine
Investment Partners, L.P.
Aggregate purchase price of Notes, Crescent Warrants and Contingent Warrants to
be purchased: $21,999,120
Fee: 2.0% of such aggregate purchase price, payable to TCW/Crescent Mezzanine,
LLC by wire transfer to Bank of America, 525 South Flower Street, Los Angeles,
California 90071, ABA No.: 121-000-358, Account Name: TCW/Crescent Mezzanine,
LLC, Account No.: 1459-1-05940
<TABLE>
<S> <C>
Initial Bank Account and Wire Instructions: Address for Notices:
------------------------------------------ -------------------
State Street Bank and Trust (Boston) TCW/Crescent Mezzanine, LLC
Corporate Trust Department 11100 Santa Monica Boulevard
Two International Place Suite 2000
Boston, MA 02110 Los Angeles, CA 90025
ABA: 011000028 Attn: Jean-Marc Chapus
DDA: 9903-942-2 Telecopy No.: (310) 235-5967
Account No. Ref.:
with a copy to:
EW0620 TCW/Crescent Mezzanine Partners,
L.P. State Street Bank and Trust Company
EW0621 TCW/Crescent Mezzanine Trust Securities Processing Department
EW0622 TCW/Crescent Mezzanine Investment P.O. Box 2136
Partners, L.P. Boston, MA 02106
Attn: Ray Welliver Telecopy No.: (617) 664-5366
(617) 664-5482
</TABLE>
82
<PAGE> 88
CRESCENT/MACH I PARTNERS, L.P.
By: TCW ASSET MANAGEMENT COMPANY,
as investment manager and attorney-in-fact
By: ___________________________________________
Jean-Marc Chapus
Managing Director
By: ___________________________________________
John C. Rocchio
Senior Vice President
Principal amount of Notes to be purchased: $2,500,000
Number of Crescent Warrants to be purchased: 66,667
Number of Contingent Warrants to be purchased: 1,715
Aggregate purchase price of Notes, Crescent Warrants and Contingent Warrants to
be purchased: $2,499,900
Fee: 2.0% of such aggregate purchase price, payable to Crescent/Mach I
Partners, L.P. by wire transfer to the bank account described below.
Initial Bank Account and Wire Instructions:
- -------------------------------------------
State Street Bank and Trust (Boston)
Corporate Trust Department
Two International Place
Boston, MA 02110
ABA: 011000028
Account No Ref.: 99001265
Ref: Crescent/MACH I
Attn: Jackie Sweeney
Telecopy No.: (617) 664-5477
Address for Notices:
- --------------------
Trust Company of the West
11100 Santa Monica Boulevard
Suite 2000
Los Angeles, CA 90025
Attn: Jean-Marc Chapus
Telecopy No.: (310) 235-5967
with a copy to:
Trust Company of the West
200 Park Avenue, Suite 200
New York, NY 10166
Attn: Mark Gold
Telecopy No.: (212) 297-4159
83
<PAGE> 89
TCW SHARED OPPORTUNITY FUND II, L.P.
By: TCW INVESTMENT MANAGEMENT
COMPANY, its investment advisor
By: ____________________________________
Jean-Marc Chapus
Managing Director
By: ____________________________________
John C. Rocchio
Senior Vice President
Principal amount of Notes to be purchased: $500,000
Number of Crescent Warrants to be purchased: 13,333
Number of Contingent Warrants to be purchased: 343
Aggregate purchase price of Notes, Crescent Warrants and Contingent Warrants to
be purchased: $499,980
Fee: 2.0% of such aggregate purchase price, payable to TCW Shared Opportunity
Fund II, L.P. by wire transfer to the bank account described below.
Initial Bank Account and Wire Instructions:
- -------------------------------------------
Citibank/NYC/Bear Stearns
111 Wall Street
New York, NY
ABA: 021000089
A/C: Bear Stearns/0925-3186
Account No. Ref.: 102-02730
FBO: TCW Shared Opportunity Fund II, L.P.
Address for Notices:
- --------------------
Trust Company of the West
11100 Santa Monica Boulevard
Suite 2000
Los Angeles, CA 90025
Attn: Jean-Marc Chapus
Telecopy No.: (310) 235-5967
84
<PAGE> 90
ANNEX A-1
[FORM OF NOTE]
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION THEREFROM UNDER THE ACT,
THE RULES AND REGULATIONS THEREUNDER AND APPLICABLE STATE LAWS. THE TRANSFER
OF THIS NOTE IS SUBJECT TO THE CONDITIONS SPECIFIED IN THE SECURITIES PURCHASE
AGREEMENT DATED AS OF FEBRUARY 11, 1997 BY AND AMONG HOME ASSET MANAGEMENT
CORP., MDC REIT HOLDINGS, LLC, AMERICAN RESIDENTIAL INVESTMENT TRUST, INC. AND
THE PURCHASERS PARTY THERETO.
12% Senior Secured Note due February 11, 2002
No.____ $_________
HOME ASSET MANAGEMENT CORP.
promises to pay to [NAME OF PURCHASER] or registered assigns, the principal sum
of __________ Dollars ($_________) on February 11, 2002 plus accrued and unpaid
interest as provided below.
Interest Payment Dates: January 31, April 30, July 31 and October 31 of each
year; provided, that the first Interest Payment Date shall be July 31, 1997.
Record Dates: 15th day of each calendar month during which each Interest
Payment Date occurs.
Capitalized terms used herein shall have the meanings ascribed to them
in the Agreement (as defined below) unless otherwise indicated.
1. INTEREST. Home Asset Management Corp., a Delaware corporation
(the "Issuer"), promises to pay interest on the principal amount of this Note
at 12% per annum from February 11, 1997 until maturity. The Issuer will pay
interest quarterly on January 31, April 30, July 31 and October 31 of each
year, or if any such day is not a Business Day, on the next succeeding Business
Day (each an "Interest Payment Date"). Interest on the Notes will accrue from
the most recent date on which interest has been paid or, if no interest has
been paid, from the date of issuance; provided, that the first Interest Payment
Date shall be July 31, 1997. The Issuer shall pay interest (including post-
petition interest in any proceeding under Bankruptcy Law) on all due and unpaid
amounts outstanding under the Notes (including overdue installments of
principal, premium, if any, or interest), from time to time on demand at a rate
equal to 14% per annum, compounded quarterly, to the extent lawful. Interest
will be computed on the basis of a 360-day year of twelve 30-day months.
2. METHOD OF PAYMENT. The Issuer will pay interest on the Notes
to the Persons who are registered Holders of Notes at the close of business on
the January 15, April 15, July 15, or October 15, next preceding the Interest
Payment Date, even if such Notes are cancelled after such record date and on or
before such Interest Payment Date. The Notes will be payable both as to
principal and interest by Federal funds wire transfer of U.S. Legal Tender to
each Holder's account in any bank in the United States of America as may be
designated and specified in writing by such Holder at least two Business Days
prior thereto.
3. SECURITIES PURCHASE AGREEMENT. The Issuer issued the Notes
under the Securities Purchase Agreement dated as of February 11, 1997 (the
"Agreement") by and among the Issuer, MDC Reit
A-1-1
<PAGE> 91
Holdings, LLC, a Delaware limited liability company ("Holdings"), American
Residential Investment Trust, Inc., a Maryland corporation ("Reit"), and the
purchasers party thereto (the "Purchasers"). The Notes are subject to, and
qualified by, all such terms, certain of which are summarized herein, and
Holders of Notes are referred to the Agreement for a statement of such terms.
The Notes are general senior obligations of the Issuer. The Notes are limited
to $25,000,000 in aggregate principal amount.
4. REDEMPTION.
(a) The Issuer may redeem all or any of the Notes, in whole or in
part, at any time, at a redemption price equal to the percentages of the
principal amount thereof set forth below, plus accrued and unpaid interest to
the redemption date, if redeemed during the 12-month period beginning February
11 of the years indicated below.
<TABLE>
<CAPTION>
Year Redemption Prices
---- -----------------
<S> <C>
1997 112%
1998 109%
1999 106%
2000 103%
2001 100%
</TABLE>
(b) On each Mandatory Redemption Date, the Issuer shall redeem the
Applicable Amount of Notes, in accordance with the terms and conditions
provided herein and in the Agreement. The redemption price for Notes that the
Issuer is required to redeem pursuant to the preceding sentence shall be equal
to 100% of the principal amount thereof plus accrued and unpaid interest
thereon to such Mandatory Redemption Date.
(c) Within two Business Days after each date on which the Issuer
or any of its Subsidiaries (other than Reit) consummates a Public Equity
Offering, the Issuer shall redeem the maximum principal amount of the Notes
that may be redeemed out of an amount equal to the aggregate net proceeds of
such Public Equity Offering, in accordance with the terms and conditions
provided herein and in the Agreement. The redemption price for Notes that the
Issuer is required to redeem pursuant to the preceding sentence shall be equal
to the applicable percentage of the principal amount thereof set forth in
Section 4(a) above, plus accrued and unpaid interest to the redemption date.
(d) Following the occurrence of an Asset Sale, the Issuer will be
required to apply the Excess Net Proceeds therefrom to the redemption of Notes
upon the terms set forth in the Agreement. The redemption price for Notes that
the Issuer is required to redeem pursuant to this Section 4(d) shall be equal
to 100% of the principal amount thereof plus accrued and unpaid interest
thereon to the redemption date.
5. OFFERS TO REPURCHASE. Following the occurrence of any Change
of Control, the Issuer will be required to offer to purchase all outstanding
Notes upon the terms set forth in the Agreement.
6. NOTICE OF REDEMPTION. Notice of redemption pursuant to
Section 4 hereof shall be mailed at least thirty (30) days (in the case of
redemption pursuant to Section 4(a) hereof) or ten (10) days (in the case of
redemption pursuant to Section 4(b) hereof) or two (2) days (in the case of
redemption pursuant to Section 4(c) hereof) but, in any such case, not more
than sixty (60) days before a Redemption Date, by first class mail to each
Holder whose Notes are to be redeemed at such Holder's registered address.
Notes in denominations larger than $1,000 may be redeemed in part but only in
whole multiples of $1,000, unless all of the Notes held by a Holder are to be
redeemed. If, on or prior to the Redemption Date, the Issuer deposits in a
segregated account or otherwise sets aside funds sufficient to pay the
Redemption Price of the Notes called for redemption, then, on and after the
Redemption Date, interest ceases to accrue on Notes or portions thereof called
for redemption, unless the Issuer defaults in paying the redemption price.
A-1-2
<PAGE> 92
7. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are without
coupons in the principal amount of $1,000 or integral multiples of $1,000 in
excess thereof. The transfer of Notes may be registered and Notes may be
exchanged as provided in the Agreement. The Issuer may require a Holder, among
other things, to furnish appropriate endorsements and transfer documents, and
the Issuer may require a Holder to pay any taxes and fees required by law or
permitted by the Agreement. The Issuer need not exchange or register the
transfer of any Note or portion of a Note selected for redemption, except for
the unredeemed portion of any Note being redeemed in part. Also, the Issuer
need not exchange or register the transfer of any Notes for a period of fifteen
(15) days before a selection of Notes to be redeemed or during the period
between a record date and the corresponding Interest Payment Date.
8. PERSONS DEEMED OWNERS. The registered Holder of a Note may be
treated as its owner for all purposes.
9. AMENDMENTS AND WAIVERS. Subject to certain exceptions, the
Agreement and the Notes may be amended or supplemented and any existing Default
under, or compliance with any provision of, the Agreement may be waived with
the written consent of the Majority Holders.
The right of any Holder to participate in any consent required or
sought pursuant to any provision of the Agreement (and the obligation of the
Issuer to obtain any such consent otherwise required from such Holder) may be
subject to the requirement that such Holder shall have been the Holder of
record of any Notes with respect to which such consent is required or sought as
of a date identified by the Issuer in a notice furnished to Holders in
accordance with the terms of this Agreement.
10. DEFAULTS AND REMEDIES. An Event of Default is, in general:
default in the payment of the principal or premium, if any, of any Note;
default in the payment of interest on any Note for a period of five days;
failure by the Issuer for 30 days after notice to it to comply with provisions
of the Agreement or the Notes or, in the case of the failure to comply with
certain specified covenants, without such notice; if any of the representations
or warranties of the Issuer or Holdings made in or in connection with the
Agreement (including those representations and warranties incorporated by
reference therein) are untrue in any respect, the result of which could
reasonably be expected to have a Material Adverse Effect; if the Issuer
transfers or disposes of any Equity Interests of Holdings or if Holdings
transfers or disposes of any Equity Interests in Reit; certain defaults under
and/or acceleration prior to maturity of certain other indebtedness of the
Issuer; certain final judgments which remain undischarged after notice; or
certain events of bankruptcy or insolvency; certain events relating to
termination of or withdrawals from employee benefit plans; except, with respect
to the Letter of Credit Documents, as expressly permitted in Section 5.34 of
the Agreement, if the Subsidiary Guaranty, the Holdings Pledge, the Issuer
Pledge, the Limited Liability Company Agreement or any of the Letter of Credit
Documents shall be amended or shall for any reason cease to be, or be asserted
in writing by any responsible officer of the Issuer or any of its Subsidiaries
(or, in the case of any of the Letter of Credit Documents, any party thereto)
not to be, in full force and effect or enforceable in accordance with its terms
or shall cease to give, directly or indirectly, the Collateral Agent or the
Holders the benefits, liens, rights, powers and privileges purported to be
created thereby, including, without limitation, a perfected security interest
in the Pledged Stock (as defined in the Holdings Pledge) and a perfected
security interest in the Pledged Collateral (as defined in the Issuer Pledge)
in accordance with the terms thereof; if any issuer of a Letter of Credit shall
fail to pay any of its obligations under any of the Letter of Credit Documents;
if the Management Agreement shall be amended, modified or supplemented in any
material respect or shall be terminated or shall expire or not be renewed or
shall for any reason cease to be, or be asserted in writing by any responsible
officer of the Issuer or any of its Subsidiaries not to be, in full force and
effect or enforceable in accordance with its terms, without the written consent
of the Majority Holders; if the terms of the Preferred Interests shall be
amended, modified or supplemented, without the written consent of the Majority
Holders; if there shall occur a default by Reit with respect to any of its
payment obligations under the Management Agreement; if Reit shall at any time
fail to operate, or otherwise fail to be qualified, as a REIT under Section 856
et seq. of the Code or the Issuer shall be unable, at any time, to provide the
Holders with the opinion of a nationally recognized law firm required pursuant
to the provisions of Section 5.17(c) of the Agreement; and if Reit shall fail
to pay cash dividends
A-1-3
<PAGE> 93
on the Reit Common Stock during any two consecutive fiscal quarters beginning
on or after October 1, 1997. If an Event of Default occurs and is continuing,
the Majority Holders may declare all the Notes to be due and payable
immediately. The Issuer is obligated to furnish a monthly compliance
certificate to the Holders.
11. NO RECOURSE AGAINST OTHERS. A director, officer, employee or
stockholder of the Issuer or Holdings, as such, shall not have any liability
for any obligations of the Issuer under the Notes or the Agreement or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the
issuance of the Notes.
12. ABBREVIATIONS. Customary abbreviations may be used in the
name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN
ENT (= tenants by the entireties), JT TEN (= joint tenants with right of
survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (=
Uniform Gifts to Minors Act).
14. GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS NOTE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW EXCEPT SECTION
5-1401 OF THE NEW YORK GENERAL OBLIGATION LAW. TO THE FULLEST EXTENT IT MAY
EFFECTIVELY DO SO UNDER APPLICABLE LAW, EACH OF THE ISSUER, HOLDINGS, REIT AND
EACH GUARANTOR HEREBY IRREVOCABLY SUBMIT TO THE JURISDICTION OF ANY NEW YORK
STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK OR ANY
FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK IN
RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT AND THE NOTES, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF
ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID
COURTS. EACH OF THE ISSUER, HOLDINGS, REIT AND EACH GUARANTOR IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW,
ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF
ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM
THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM. NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY
HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEEDING AGAINST THE ISSUER,
HOLDINGS, REIT OR ANY GUARANTOR IN ANY OTHER JURISDICTION.
The Issuer will furnish to any Holder upon written request and without
charge a copy of the Agreement. Requests may be made to Home Asset Management
Corp., 445 Marine View, Suite 130, Del Mar, California 92014, Telecopy No.:
(619) 759-1885, Attention: President
HOME ASSET MANAGEMENT CORP.
By: ___________________________________
Name: _________________________________
Title: _________________________________
Date: February 11, 1997
A-1-4
<PAGE> 94
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and
transfer this Note to __________________________________________________________
- --------------------------------------------------------------------------------
(Insert assignee's Soc. Sec. or tax I.D. no.)
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint ________________________________________________________
to transfer this Note on the books of the Issuer. The agent may substitute
another to act for him.
Date: _______________________
Your Signature: ________________________
(Sign exactly as your
name appears on the face
of this Note)
Signature Guarantee
A-1-5
<PAGE> 95
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Issuer
pursuant to Section 5.11 of the Agreement (Change of Control Offer), state the
amount you elect to have purchased: $_____________.
Date:______________________
Your Signature:_________________________
(Sign exactly as your
name appears on the Note)
Tax Identification No.:______________
Signature Guarantee
By:_______________________________________________________________________
(Bank or trust company having an office or correspondent in the United
States of America or a broker or dealer which is a member of a
registered securities exchange or the National Association of
Securities Dealers, Inc.)
A-1-6
<PAGE> 96
ANNEX A-2
FORM OF GUARANTY
This Guaranty is issued pursuant to the Securities Purchase
Agreement dated as of February 11, 1997 (the "Agreement") by and among the
Issuer, MDC Reit Holdings, LLC, a Delaware limited liability company
("Holdings"), American Residential Investment Trust, Inc., a Maryland
corporation ("Reit"), and the purchasers party thereto. For value received,
[Name of Subsidiary] hereby unconditionally guarantees to the Holder of the
Note upon which this Guaranty is endorsed (a) the due and punctual payment, as
set forth in the Agreement pursuant to which such Note and this Guaranty were
issued, of the principal of, premium (if any) and interest on such Note when
and as the same shall become due and payable for any reason according to the
terms of such Note and Section 10 of the Agreement, and (b) that all other
obligations of the Issuer under the Agreement or the Notes will be promptly
paid in full or performed in accordance with the terms of the Agreement and the
Notes.
[NAME OF SUBSIDIARY]
By: ___________________________________
Name: _________________________________
Title: _________________________________
Attest: _________________________
A-2-1
<PAGE> 97
ANNEX B-1
CRESCENT WARRANT AGREEMENT
B-1-1
<PAGE> 98
ANNEX B-2
CONTINGENT WARRANT AGREEMENT
B-2-1
<PAGE> 99
ANNEX C
REGISTRATION RIGHTS AGREEMENT
C-1
<PAGE> 100
ANNEX D
STOCKHOLDERS AGREEMENT
D-1
<PAGE> 101
ANNEX E
OPINION OF COUNSEL TO THE ISSUER AND HOLDING
E-1
<PAGE> 102
ANNEX F
OPINION OF COUNSEL TO PURCHASERS
F-1
<PAGE> 103
ANNEX G
ESCROW AGREEMENT
G-1
<PAGE> 104
ANNEX H
HOLDINGS PLEDGE
H-1
<PAGE> 105
ANNEX I
ISSUER PLEDGE
I-1
<PAGE> 106
ANNEX J
LETTER OF CREDIT
J-1
<PAGE> 107
ANNEX K
LETTER OF CREDIT CONTRIBUTION AGREEMENT
K-1
<PAGE> 108
ANNEX L
MANAGEMENT AGREEMENT
L-1
<PAGE> 1
EXHIBIT 10.11
SUBSCRIPTION AGREEMENT
(REIT)
American Residential Investment Trust, Inc.
c/o McCown DeLeeuw & Co.
101 East 52nd Street
New York, NY 10022
Gentlemen:
The undersigned understands that American Residential Investment Trust,
Inc., a Maryland corporation (the "Company"), is offering for sale to its
initial founding shareholders up to 2,017,500 shares of its Common Stock, par
value $0.01 per share (the "Shares"), having the rights, privileges and
obligations as set forth in the Articles of Incorporation (the "Articles")
attached hereto as Exhibit 1. The undersigned further understands that the
offering is being made without registration of the Shares under the Securities
Act of 1933, as amended (the "Securities Act"), and is being made only to the
initial founding shareholders of the Company, all of whom are "accredited
investors" (as defined in Rule 501 of Regulation D under the Securities Act).
The undersigned acknowledge that the investment in the Shares involves a high
degree of risk and that the Company has not commenced business operations.
l. Subscription. Subject to the terms and conditions hereof, the
undersigned hereby irrevocably subscribes for that number of Shares set forth on
Schedule A hereto a price per share of $10.00, which is payable as described in
Section 4 hereof.
2. Acceptance of Subscription and Issuance of Shares. It is
understood and agreed that this Subscription shall be deemed to be accepted by
the Company only when it is signed by a duly authorized officer of the Company
and delivered to the undersigned at the Closing referred to in Section 3 hereof.
3. The Closing. The closing of the purchase and sale of the Shares
(the "Closing") shall take place at the offices of Gibson, Dunn & Crutcher, 200
Park Avenue, New York, NY 10166 at 10:00 a.m. on February 11, 1997 or at such
other time and place as the Company shall designate by notice to the
undersigned.
4. Payment for Shares. Payment for the Shares shall be received by
the Company from the undersigned by cashier's check or wire transfer of
immediately available funds at or prior to the Closing, in an amount as set
forth in Schedule A hereto. The Company shall deliver the Shares to the
undersigned at the Closing.
5. Registration Rights Agreement. At the Closing, the Company shall
enter into the Registration Rights Agreement attached to this Agreement as
Exhibit 2.
<PAGE> 2
6. Representations and Warranties of the Company. As of the
Closing, the Company represents and warrants that:
(a) The Company is duly incorporated, validly existing and in
good standing under the laws of the State of Maryland, with full power
and authority to conduct its business as it is currently being conducted
and to own its assets; and has secured any other authorizations,
approvals, permits and orders required by law for the conduct by the
Company of its business as it is currently being conducted.
(b) The Company has duly authorized the issuance and sale of the
Shares by all requisite corporate action.
(c) The Shares, when issued and paid for, will represent validly
authorized, duly issued and fully paid and nonassessable Shares of the
Company, and the issuance thereof will not conflict with the Articles or
bylaws of the Company nor with any outstanding warrant, option, call,
preemptive right or commitment of any type relating to the Company's
capital stock. The Shares shall have the rights, preferences and
privileges set forth in the Articles.
(d) No representation or warranty by the Company in this
Agreements and no statement by an officer of the Company contained in
any document, certificate or other writing furnished to the undersigned
in connection with the transactions contemplated hereby, when taken as a
whole, contains any untrue statement of a material fact or omits to
state any material fact necessary to make statements herein or therein
not misleading in light of the circumstances in which they are made.
7. Representations, Warranties and Covenants of the Undersigned.
The undersigned hereby represents and warrants to and covenants with the Company
that:
(a) General:
(i) The undersigned has all requisite authority to enter
into this Agreement and to perform all the obligations required
to be performed by the undersigned hereunder.
(ii) The undersigned is a resident of the state set forth
on the signature page hereto and is not acquiring the Shares as
an agent or otherwise for any other person.
(b) Information Concerning the Company:
(i) The undersigned is familiar with the business and
financial condition, properties, operations and prospects of the
Company. The undersigned has been given the opportunity to obtain
any information necessary to evaluate the purchase of the Shares
and has been furnished all such information so requested. The
undersigned has had a reasonable opportunity to ask questions of
and receive answers from a person or persons acting on behalf of
the Company concerning the
2
<PAGE> 3
offering of Shares, and all such questions have been answered to
the full satisfaction of the undersigned.
(ii) The undersigned understands that the purchase of the
Shares involves various risks, including those outlined in this
Agreement.
(iii) The undersigned understands that no federal or state
agency has passed upon the Shares or made any finding or
determination concerning the fairness or advisability of this
investment.
(c) Status of Undersigned:
(i) The undersigned has such knowledge, skill and
experience in business, financial and investment matters so that
he is capable of evaluating the merits and risks of an investment
in the Shares. To the extent necessary, the undersigned has
retained, at his own expense, and relied upon, appropriate
professional advice regarding the investment, tax and legal
merits and consequences of this Agreement and owning Shares.
(ii) The undersigned is an "accredited investor" as
defined in Rule 501(a) under the Securities Act. The undersigned
agrees to furnish any additional information requested to assure
compliance with applicable federal and state securities laws in
connection with the purchase and sale of the Shares.
(d) Restrictions on Transfer or Sale of Shares:
(i) The undersigned is acquiring the Shares solely for his
own beneficial account, for investment purposes, and not with a
view to, or for resale in connection with, any distribution of
the Shares. The undersigned understands that the Shares have not
been registered under the Securities Act or any state securities
laws by reason of specific exemptions under the provisions
thereof which depend in part upon the investment intent of the
undersigned and of the other representations made by the
undersigned in this Agreement. The undersigned understands that
the Company is relying upon the representations and agreements
contained in this Agreement (and any supplemental information)
for the purpose of determining whether this transaction meets the
requirements for such exemptions
(ii) The undersigned understands that the Shares are
"restricted securities" under applicable federal securities laws
and that the Securities Act and the rules of the Securities and
Exchange Commission (the "Commission") provide in substance that
the undersigned may dispose of the Shares only pursuant to an
effective registration statement under the Securities Act or an
exemption there from, and the undersigned understands that the
Company has no obligation or intention to register any of the
Shares (except for the registration rights granted pursuant to
the Registration Rights Agreement), or to take action so as to
permit sales pursuant to the Securities Act (including Rule 144
thereunder). Accordingly,
3
<PAGE> 4
the undersigned understands that under the Commission's rules,
the undersigned may dispose of the Shares principally only in
"private placements" which are exempt from registration under the
Securities Act, in which event the transferee will acquire
"restricted securities" subject to the same limitations as in the
hands of the undersigned. As a consequence, the undersigned
understands that he must bear the economic risks of the
investment in the Shares for an indefinite period of time.
(iii) The undersigned understands that there is no public
market for the Shares or the Common Stock of the Company and such
a public market may never develop.
(iv) The undersigned agrees: (A) that the Shares shall not
be transferred, sold, assigned, encumbered, gifted, pledged,
hypothecated or otherwise disposed of (a "Transfer") except upon
compliance with the provisions of the Securities Act and the
Articles and any attempted Transfer of any Shares other than in
accordance with the terms of the Articles is void ab initio and
transfers no right, title or interest in or to such Shares to the
purported transferee, buyer, donee, assignee or encumbrance
holder; (B) that the certificate(s) for the Shares will bear a
legend making reference to the foregoing restrictions; and (C)
that the Company and any transfer agent for the Shares shall not
be required to give effect to any purported transfer of such
shares except upon compliance with the foregoing restrictions.
Notwithstanding the above, the Company and the undersigned
acknowledge that the shares being purchased by MDC Reit Holdings,
LLC, a Delaware limited liability company ("Holdings"), are being
pledged as security for obligations owed to the purchasers of
senior secured notes pursuant to a Securities Purchase Agreement,
dated the date hereof. The parties hereto consent to the pledge
of such Shares.
(v) The undersigned has not offered or sold any portion of
his Shares and has no present intention of dividing his Shares
with others or of reselling or otherwise disposing of any portion
of his Shares either currently or after the passage of a fixed or
determinable period of time or upon the occurrence or
nonoccurrence of any predetermined event or circumstance.
(vi) The undersigned acknowledges that neither the Company
nor any other person offered to sell the Shares to it by means of
any form of general advertising, such as rnedia advertising or
seminars.
(e) Change of Control Transaction.
(i) The undersigned hereby agrees that upon dissolution or
liquidation of the Company or the consummation of a Change of
Control Transaction (as defined in Section 7(e)(ii), in which the
Shares purchased hereby are being sold or otherwise settled for
consideration, the undersigned shall cooperate in, and shall take
all actions which stockholders holding a majority of the voting
power of the
4
<PAGE> 5
Company deem reasonably necessary or desirable to consummate the
Change of Control Transaction, including, without limitation, (A)
entering into agreements with third parties on terms
substantially identical or better than those applicable to the
holders of a majority of the outstanding shares of Common Stock
(which agreements may require the undersigned to sell all of his,
her or its Shares and may require representations, indemnities,
holdbacks, and escrows), and (B) obtaining all governmental
consents and approvals reasonably necessary or desirable to
consummate such Change of Control Transaction (to the extent such
consents and approvals may be obtained without any significant
effort or expense by the undersigned).
(ii) "Change of Control Transaction" means a "Change of
Control Transaction" (as defined in the Amended and Restated
Limited Liability Company Agreement of MDC REIT Holdings, LLC,
dated as of February 11, 1997, by and among the members listed on
Schedule 1 thereto, as amended from time to time) or a
transaction, approved or agreed to by the holders of a majority
of the outstanding shares of Common Stock of the Company (the
"Common Stock"), in which all of the business or assets of the
Company, or a majority of the shares of Common Stock, are sold or
otherwise transferred in an arm's-length transaction in which the
form and amount of consideration per share, if any, payable to
the holders of Common Stock is distributed pro rata based upon
ownership of such Common Stock and in which the other significant
terms of the transaction (including, but not limited to,
indemnification or escrow arrangements) apply, in all material
respects, equally to the holders of a majority of the outstanding
shares of Common Stock and to the undersigned. The assumption by
such majority stockholders of greater potential liability in a
Change of Control Transaction than the undersigned shall be
deemed to constitute equal treatment. A Change of Control
Transaction may take the form of a majority of the outstanding
voting stock of the Company, a merger or consolidation in which
the holders of the outstanding voting stock of the Company before
the transaction do not own a majority of the outstanding voting
stock of the combined entity or a sale of all the business assets
of the Company (other than an insignificant amount of immaterial
assets).
8. Legend. Each certificate for Shares (sold pursuant to this
Agreement) will be imprinted with legends required under federal and state
securities laws and as required by the Articles with respect to restrictions on
transfer relating to qualification of the Company as an REIT.
9. Waivers; Amendment. Neither this Agreement nor any provisions
hereof shall be modified, changed, discharged or terminated except by an
instrument in writing, signed by the party against whom any waiver, change,
discharge or termination is sought.
10. Assignability. Neither this Agreement nor any right, remedy,
obligation or liability arising hereunder or by reason hereof shall be
assignable by either the Company or the undersigned without the prior written
consent of the other party.
5
<PAGE> 6
11. Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
12. Section and Other Headings. The section and other headings
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which together shall be deemed to be one and the same
agreement.
14. Notices. All notices and other communications provided for
herein shall be in writing and shall be deemed to have been duly given if
delivered personally or sent by registered or certified mail, return receipt
requested, postage prepaid:
(a) If to the Company, to it at the following address:
American Residential Investment Trust, Inc.
c/o McCown DeLeeuw & Co.
101 East 52nd Street
New York, NY 10022
Attention: David E. De Leeuw
(b) If to the undersigned, at the address set forth on Schedule A
hereto; or at such other address as either party shall have specified by
notice in writing to the other.
15. Binding Effect. The provisions of this Agreement shall be
binding upon and accrue to the benefit of the parties hereto and their
respective heirs, legal representatives, successors and assigns.
16. Survival. All representations, warranties and covenants contained in
this Agreement shall survive (i) the acceptance of the subscription by the
Company, (ii) changes in the transactions, documents and instruments described
herein which are not material or which are to the benefit of the undersigned,
and (iii) the death or disability of the undersigned.
6
<PAGE> 7
IN WITNESS WHEREOF, each of the undersigned has executed Subscription
Agreement this ___ th day of February, 1997.
SUBSCRIBERS
----------------------------------
John M. Robbins, Jr.
(###-##-####)
----------------------------------
Jay M. Fuller
(###-##-####)
MDC REIT HOLDINGS, LLC
By: Home Asset Management Corp.,
its managing member
By:
------------------------------
David E. De Leeuw, President
Accepted as of
February ___, 1997
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
By: ____________________________
Name: ____________________________
Title: ____________________________
7
<PAGE> 8
SCHEDULE A
<TABLE>
<CAPTION>
Number of Subscription
Name Address Shares Amount
- ---- ------- ------ ------
<S> <C> <C> <C>
MDC REIT c/o McCown DeLeeuw 2,000,000 $20,000,000
Holdings, LLC 101 East 52nd Street
New York, NY 10022
John M. Robbins, Jr. P.O. Box 9668 10,000 $100,000
17444 Circa Oriente
Rancho Sante Fe, CA 92067
Jay M. Fuller P.O. Box 675491 7,500 $75,000
6621 Camino Saucito
Rancho Sante Fe, CA 92067
</TABLE>
8
<PAGE> 9
EXHIBIT 1
ARTICLES OF INCORPORATION
<PAGE> 10
EXHIBIT 2
REGISTRATION RIGHTS AGREEMENT
<PAGE> 1
EXHIBIT 10.12
SECURED PROMISSORY NOTE
$25,000,000 New York, New York
Dated: June 25, 1997
FOR VALUE RECEIVED, the undersigned AMERICAN RESIDENTIAL INVESTMENT
TRUST, a Maryland corporation having its principal place of business at 445
Mariner View, Suite 230, Del Mar, California 92014 ("Borrower"), promises to
pay to the order of PAINE WEBBER REAL ESTATE SECURITIES INC., a Delaware
corporation, with its principal office at 1285 Avenue of the Americas, New
York, New York 10019 ("Lender"), at the Lender's principal office or at such
other place as the holder hereof may designate, in lawful money of the United
States of America and in immediately available funds, the lesser of (i)
principal sum of TWENTY-FIVE MILLION AND 00/100 DOLLARS ($25,000,000) or (ii)
the sum of the unpaid principal amounts of the advances ("Advances") made by
the Lender to the Borrower and recorded on the "Advance Schedule" attached
hereto, plus interest, as provided herein.
As security for the payment of principal of and interest on this
Secured Promissory Note and for the payment and performance of all of
Borrower's obligations in respect of or arising out of the Advances evidenced
by this Secured Promissory Note (the "Borrower's Obligations"), Borrower hereby
pledges and assigns to Lender, and grants Lender a continuing lien and first
priority security interest in, all of Borrower's right, title and interest in
and to certain Retained Income, for the Securities then held by Paine Webber
Incorporated ("PWI") or its bailee under that certain Master Repurchase
Agreement between PWI and Borrower (the "Repurchase Agreement") dated as of
June 25, 1997 and amended by Annex I thereto dated as of June 25, 1997 (the
"Repurchase Agreement"), which Retained Income and Securities terms are further
defined in and subject to such Repurchase Agreement ("Retained Income").
The Borrower shall pay to the Lender interest on each Advance from
time to time outstanding at a rate per annum equal to that rate which is
six-tenths of one percent (.60%) in excess of the applicable LIBOR (as defined
below). Such interest shall be due and payable on the related Advance Date (as
defined herein) for the period commencing on such Advance Date until and
including the related Advance Maturity Date (as defined below). As used
herein, the term "LIBOR" means, the interpolated London interbank offered rate
for U.S. dollar deposits as it appears on page five of the Telerate screen at
9:00 a.m. (New York City time), on the related Advance Date having a term that
most closely approximates the term of the related Advance. With respect to
each Advance recorded on the "Advance Schedule" attached hereto, the (i)
"Advance Date" shall mean the applicable date set forth in the "Advance Date"
column of such Advance Schedule and (ii) "Advance Maturity Date" shall mean the
applicable date set forth in the "Advance Maturity date" column of such Advance
Schedule.
With respect to each Advance, the Borrower shall pay to the Lender on
the Advance Maturity Date, in full, (i) any accrued and unpaid interest on such
Advance and (ii) the outstanding principal amount of such Advance, which amount
shall be reduced by an amount equal to any Retained Income remitted by PWI to
PWRES.
<PAGE> 2
All Advances made by the Lender hereunder and all payments made on
account of the principal hereof, including amounts received by Lender from PWI
in connection with the Repurchase Agreement, shall be recorded by the Lender on
the schedule attached to this Note (provided that any failure by the Lender to
make any such notation on such schedule shall not affect the obligations of the
Borrower hereunder).
Subject to the rights and interests of PWI in such Securities under
the Repurchase Agreement, Borrower hereby agrees for the purpose of perfecting
Lender's security interest herein, to transfer beneficial ownership in and to
cause the transfer of legal title to the Retained Income together with any
proceeds, income and payments related thereto (the "Collateral") to Lender,
which Collateral shall be retained by PWI as bailee for the benefit of Lender
in accordance with the terms of the Repurchase Agreement, regardless of whether
Borrower has defaulted in the performance of Borrower's Obligation hereunder.
Following the repayment in full of an Advance made with respect to the related
pledge of Retained Income by Borrower, all of Lender's right, title and
interest in such Retained Income shall be released from the provisions of this
Secured Promissory Note and, if appropriate, Lender shall take reasonable
actions to evidence such release, including the execution of an appropriate
form of release.
This Promissory Note constitutes a "security agreement" within the
meaning of the Uniform Commercial Code of the State of New York. Upon Lender's
request, Borrower shall prepare, sign and file all financing statements naming
the Lender as secured party and identifying the Retained Income. If Borrower
fails to timely comply with Lender's request pursuant to the preceding
sentence, then Lender shall have the authority to sign and file financing
statements on borrower's behalf in order to prefect a security interest in the
Collateral. Upon any of (i) the failure of Borrower to perform or comply with,
or the default by the Borrower on, any of Borrower's Obligations or, (ii) the
occurrence of an Event of Credit Impairment (as defined below), Lender may
immediately declare all sums due to the Lender hereunder to be immediately due
and payable and shall have all of the rights and shall be entitled to all of
the remedies conferred upon secured parties by the Uniform Commercial Code,
laws relating to creditors' rights with respect to real property mortgages, and
all other applicable laws, including the right to take possession of the
collateral with or without judicial process (to the extent permitted by law)
and to retain all collateral in satisfaction of Borrower's Obligations, or to
dispose of the same by public or private sale, with or without advertising, as
Lender may determine, or as may be required by applicable law. All proceeds of
any such disposition, less attorneys' fees and any other costs of collection or
disposition incurred by Lender in connection therewith, shall be credited
against all amounts due and owing on account of the Borrower's Obligations in
such order as Lender shall elect and any balance shall thereafter be paid by
Lender to Borrower. To the extend that applicable law requires the giving of
notice by Lender to Borrower of any such is position, Borrower agrees that the
minimum time required by such law (or, if no minimum is specified, five
business days) shall constitute reasonable notice.
The occurrence of any of the following shall constitute an "Event of
Credit Impairment": (i) Borrower shall make an assignment for the benefit of
creditors or admit in writing its inability to pay debts as they become due, or
file any petition, application or answer
-2-
<PAGE> 3
seeking for itself any entry of an order for relief, protective decree,
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under the U.S. Bankruptcy code or any other
federal, state or foreign, present or future, statute, law or regulation, or be
subject to any such order for relief or protective decree entered by a court,
or the Borrower or its trustees, directors, majority shareholders, partners or
other principals, as the case may be, shall take any action looking to the
dissolution or liquidation of the Borrower or the taking of any action
described in this clause (i) Borrower admits its inability to perform fully
when due any obligations of the Borrower, in the aggregate, in excess of
$2,000,000 due and owing to any broker, dealer, bank or other financial
institution in respect of a transaction involving securities, commodities or
other instruments (regardless of whether Lender has any right, title or
interest therein); (ii) if an action shall be commenced or a petition or
application filed against the Borrower seeking any order for relief, protective
decree or similar relief under the U.S. Bankruptcy code or any federal, state
or foreign, present or future statute, rule or regulation, and such action,
petition or application shall not have been dismissed or all orders or
proceedings thereunder stayed or vacated in 90 days; (iii) if any judgments for
the payment of money, in the aggregate, in excess of $2,000,000 shall be
entered or rendered against Borrower, and such judgment shall not have been
discharged in full or effectively stayed; or (iv) if any statement oft he
Borrower's financial condition prepared by the Borrower or at its request shall
indicate that, or if the Borrower acknowledges that, the Borrower has a
negative net worth or is insolvent.
Upon either Borrower's failure to perform any of Borrower's
Obligations or the occurrence of an Event of Credit Impairment, Lender shall,
without regard to the adequacy of the security for Borrower's Obligations, be
entitled to the appointment of a receive by any court having jurisdiction,
without notice, to take possession of and protect, collect manage, liquidate,
and sell the Collateral or any portion thereof, collect any payments due with
respect to the Collateral or any portion thereof, and do anything that Lender
is authorized hereunder to do. Borrower shall pay all costs and expenses
incurred by Lender in connection with the appointment and activities of such
receiver. Lender may enforce its rights and remedies hereunder without prior
judicial process or hearing, and Borrower hereby expressly waives, to the
extent permitted by law, any right Borrower might otherwise have to require
Lender to enforce its rights by judicial process. Borrower also waives, to the
extent permitted by law, any defense Borrower might otherwise have to the
Borrower's Obligations arising from use of non-judicial process, enforcement
and sale of all or any portion of the Collateral or from any other election of
remedies. Borrower recognizes that non- judicial remedies are consistent with
the usages of the trade, are responsive to commercial necessity and are the
result of a bargain at arm's length.
If any amount due hereunder is not paid when due (whether at stated
maturity, by acceleration or otherwise) a rate per annum during the period
commencing on the due date until such amount is paid in full equal to 200 basis
points above the otherwise applicable rate, to the extent permitted by
applicable law, shall be imposed on said amount.
Interest shall be computed for the actual number of days elapsed on
the basis of a 360-day year. In no event shall interest be chargeable or
collectible hereunder in excess of the maximum lawful rate under applicable
law.
-3-
<PAGE> 4
The Borrower promises to pay the holder hereof all costs and expenses
of collection of this Note and to pay all attorney's fees incurred in such
collection or in any suit or action to collect this Note and any appeal
thereof.
The provisions of this Note shall inure to the benefit of the Lender
and its successors and assigns and be binding on the Borrower and its
successors and assigns. No failure or delays by the Lender in the exercise of
any power or right under this Note shall operate as a waiver thereof, and no
exercise or waiver of any single power or right, or the partial exercise
thereof, shall affect the Lender's rights with respect to any and all other
rights and powers.
THIS NOTE SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF
CONSTRUCTION, PERFORMANCE AND VALIDITY. THE BORROWER WAIVES PRESENTMENT AND
DEMAND FOR PAYMENT, NOTICE OF DISHONOR, PROTEST AND NOTICE OF PROTEST OF THIS
NOTE.
The Borrower hereby irrevocably consents and submits to the
nonexclusive jurisdiction and venue of any State or Federal Court sitting in
New York County over any action or proceeding arising out of or relating to
this Note or any document or instrument delivered in connection herewith, and
the Borrower hereby irrevocably agrees that all claims in respect of such
action or proceeding may be heard and determined in such State or Federal
Court. The Borrower waives any objection to any action or proceeding in any
State or Federal Court sitting in New York County on the basis of forum non
conveniens. The Borrower hereby waives the right to trial by jury, rights of
set-off and right to interpose counterclaims of any nature, except for
compulsory counterclaims. The Borrower agrees that a final judgment in any
such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
The Borrower further agrees that any action or proceeding brought against the
Lender shall be brought only in any State or Federal Court sitting in New York
County. The Borrower further agrees that in the Lender's discretion, it may
serve legal process in any other manner permitted by law and may bring any
action or proceeding against the Borrower or its property in the courts of any
other jurisdiction.
The unenforceability or invalidity of any provision or provisions of
this Note shall not render any other provision or provisions herein contained
unenforceable or invalid.
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<PAGE> 5
This Note cannot be amended, modified or change din any way except by
a written instrument executed by both the Borrower and the Lender.
AMERICAN RESIDENTIAL INVESTMENT TRUST,
as Borrower
By:____________________________________
Name:__________________________________
Title:_________________________________
Accepted and Agreed to:
PAINE WEBBER REAL ESTATE
SECURITIES INC., as Lender
By:___________________________
Name:_________________________
Title:________________________
-5-
<PAGE> 6
State of California )
):SS
County of San Diego )
On this ______ day of _______, 1997 before me personally
appeared __________________ to me known who, being duly sworn did depose and
say that he/she is the _____________ of American Residential Investment Trust,
the corporation described in and which executed the foregoing instrument; that
he knows the seal of said corporation; that the seal affixed to said instrument
is such corporate seal and that it was so affixed by order of the Board of
Directors of said corporation, and that he signed his name thereto by like
order.
Notary Public
-6-
<PAGE> 7
ADVANCE SCHEDULE
<TABLE>
<CAPTION>
ADVANCE PRINCIPAL AMOUNT DESCRIPTION CUSIP AGENCY AGENCY
ADVANCE MATURITY AMOUNT INTEREST OF OF SECURITY/ NUMBER OF FACTOR REMITTANCE P&I
DATE DATE OF ADVANCE RATE INTEREST POOL NUMBER SECURITY DATE DATE FACTOR
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIBOR +
.60%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 8
ANNEX I
SUPPLEMENTAL TERMS AND CONDITIONS
The MASTER REPURCHASE AGREEMENT dated as of June 25, 1997, between
PAINEWEBBER INCORPORATED ("Buyer") and AMERICAN RESIDENTIAL INVESTMENT TRUST
("Seller") is amended, supplemented and restated as set forth below. All
capitalized terms used herein which are defined in the Master Repurchase
Agreement are used herein as defined therein except to the extent such terms
are amended or supplemented herein.
1. Subparagraph 2(h) of the Master Repurchase Agreement is
amended by adding the following after the word "any" and before the word
"Income" in the third line thereof:
"Retained Income held for the benefit of PWRES or any"
2. Paragraph 2 of the Master Repurchase Agreement is amended by
adding new subparagraphs (r) and (s) as follows:
"(r) "PWRES", Paine Webber Real Estate Securities Inc., a
Delaware corporation, or any successor thereto;
(s) "Retained Income", the meaning specified in Paragraph
5 hereof;"
3. Subparagraph (a) of Paragraph 4 of the Master Repurchase
Agreement is amended by adding the following sentence at the end thereof:
"The retention by Buyer of any Retained Income shall not
affect any of Seller's obligations in connection with a Margin Deficit."
4. Paragraph 5 of the Master Repurchase Agreement is amended by
deleting both sentences in Paragraph 5 and substituting the following:
"Where a particular Transaction's term extends over an Income
payment date on the Securities subject to that Transaction, Buyer
shall retain the amount of any payment or payments of such Income
("Retained Income") as bailee with notice for the benefit of PWRES
pursuant to the terms of that certain Secured Promissory Note dated as
of May ______, 1997 between Seller and PWRES (the "Secured Promissory
Note"). With respect to any Retained Income, Buyer shall have no
obligation to either (i) transfer to or credit to the account of
Seller an amount equal to such Retained Income with respect to
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<PAGE> 9
any Purchased Securities subject to such Transaction or (ii) apply the
Retained Income payment or payments to reduce the amount to be
transferred to Buyer by Seller upon termination of the Transaction.
The retention by Buyer of any Retained Income shall not relieve or
otherwise discharge Seller of any of its obligations hereunder,
including without limitation Seller's obligations pursuant to
subparagraph (a) of Paragraph 4 hereof."
5. Paragraph 6 of the Master Repurchase Agreement is amended by
adding the following at the end of the last sentence thereof:
", including without limitation all Income and Retained Income
thereon; provided, however, that upon Buyer's receipt of notice from PWRES that
any Retained Income is being pledged by Seller to PWRES, Buyer agrees that all
of its rights and interests, including its security interest, in such Retained
Income shall be subordinate to the secured interest of PWRES pursuant to the
Secured Promissory Note and Buyer agrees to act as the bailee and agent of
PWRES with respect to such Retained Income until all amounts due and owing by
Seller to PWRES under the Secured Promissory Note have been paid in full."
6. Paragraph 11 of the Master Repurchase Agreement is amended by
deleting subclause (A) of clause (ii) of subparagraph (b) of Paragraph 11.
7. Clause (iii) of subparagraph (b) of Paragraph 11 is amended in
its entirety as follows:
"(iii) all Income and Retained Income paid after such exercise
or deemed exercise shall be retained by the nondefaulting party and shall not
be applied to the aggregate unpaid Repurchase Prices owed by the defaulting
party, and"
8. The Master Repurchase Agreement as supplemented, amended and
restated by this Annex I is in all respects ratified and confirmed, and the
Master repurchase Agreement as supplemented, amended and restated by this Annex
shall be read and construed as one and the same instrument.
9. All of the covenants, stipulations, promises and agreements in
this Annex I shall bind and be for the benefit of the successors and assigns of
the parties hereto, whether expressed or not.
10. This Annex I may be executed in any number of counterparts,
each of which shall be an original but such counterparts shall together
constitute but one and the same instrument.
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<PAGE> 10
11. This Annex I shall supersede any existing annex to or
modification of the Master Repurchase Agreement.
Dated as of June 25, 1997.
PAINE WEBBER INCORPORATED AMERICAN RESIDENTIAL
INVESTMENT TRUST
By: __________________________ By: ______________________________
Title: _______________________ Title: ___________________________
Date: ________________________ Date: ____________________________
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<PAGE> 11
Annex II
Names and Addresses for Communications Between Parties
If to the Seller:
American Residential Investment Trust
445 Marine View Avenue, Suite 230
Del Mar, CA 92014
Attention: Clay Strittmatter
Telephone: 619-350-5006
FAX: 619-350-6484
If to the Buyer:
PaineWebber Incorporated
1285 Avenue of the Americas 11th Floor
New York, New York 10019
Attention: George A. Mangiaracina
Telephone: 212-713-3734
FAX: 212-265-3881
<PAGE> 1
EXHIBIT 10.13
LEASE
This Lease is executed on March 7, 1997 between JLRB ASSOCIATES, a California
limited partnership having an address at 445 Marine View Avenue, Suite 260, Del
Mar, California 92014 ("Landlord"), Home Asset Management Corp., a Delaware
corporation having an address at 445 Marine View Avenue, Suite 240, Del Mar,
California 92014 ("Tenant"), who agree as follows:
1. SPECIAL DEFINITIONS. For purposes of this Lease, the following definitions
shall apply:
1.1. "Building" shall mean the building commonly known as The Timbers, 445
Marine View Avenue, Del Mar, California, located on the Land (as defined below).
1.2. "Commencement Date" shall mean April 1, 1997.
1.3. "Initial Expiration Date" shall mean March 31, 2000
1.4 "Extension Expiration Date" shall mean March 31, 2003
1.5. "Expiration Date" shall mean the Initial Expiration Date, unless this Lease
is extended pursuant to the Paragraph below entitled "Extension Term," in which
event "Expiration Date" shall mean the Extension Expiration Date.
1.6. "Permitted Use" shall mean general offices or professional offices.
1.7. "Base Monthly Rent" shall mean $ 5,465.60 per month. Upon execution of this
Lease Tenant and Landlord waive any right to adjust the "Base Monthly Rent" or
"Adjusted Minimum Rent" by way of the measurement or calculation of square
footage of the premises.
1.8 "Security Deposit Sum" shall mean $ 6,832.00
1.9. "Default Rate " shall mean the lesser of Eleven (11) percent per annum and
the maximum rate permitted by applicable law.
1.10. Omitted.
1.11. Omitted.
1.12. "Tenant's Proportionate Share" shall mean eleven and 8/10ths percent
(11.8%).
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<PAGE> 2
1.13. "Base Expense Stop" shall mean the amount equal to the "First Calendar
Year".
2. STANDARD DEFINITIONS. For purposes of this Lease, the following definitions
shall apply:
2.1. "Land" shall mean the land described on the attached Exhibit A, entitled
"Description of Land."
2.2. "Premises" shall mean a portion of the real property located in the
Building, substantially as shown as the Premises on the attached Exhibit B,
entitled "Description of Premises."
2.3. "Real Property" shall mean the Premises, the Building, the Land, and any
other improvements that are part of the Building or the Land.
2.4. "Adjusted Minimum Monthly Rent" shall mean the Base Monthly Rent, as
adjusted pursuant to the provisions of the Lease.
2.5. Omitted.
2.6. "Lease Expenses" shall mean the sum of (a) Real Property Taxes (as defined
below), (b) Insurance Expenses (as defined below in the Paragraph entitled
"Landlord's Insurance"), and (c) all costs and expenses paid or incurred by
Landlord or on Landlord's behalf with respect to the management, repair,
maintenance, and/or operation of the Real Property, including without limitation
costs and expenses which belong within any one or more of the categories set
forth on the attached Exhibit C, entitled "Expenses.but subject, however, to the
exclusions from Expenses set forth on Exhibit C."
2.7. "Rental" shall mean Adjusted Minimum Monthly Rent, additional rent, prepaid
rent, any security deposit, Personal Property Taxes, late charges, insurance
premium charges, utilities, Tenant's Monthly Payment (as defined below) and/or
any other sums payable by Tenant to Landlord under this Lease.
2.8. "Alterations" shall mean any alterations, improvements, additions,
installations, or changes of any nature in or to the Premises.
2.9. "Good Condition" shall mean first-class, neat, clean, broom-clean and
similar phrases referring to physical adequacy in appearance and use.
2.10. "Landlord's Representatives" shall mean any agent, employee, officer or
independent contractor of or retained by Landlord.
2.11. "Mortgage" shall mean any deed of trust, mortgage or other written
security instrument or agreement affecting the Real Property, that constitutes
security for the payment of a debt or performance of an obligation.
2.12. "Lender" shall mean the beneficiary, mortgagee, secured party, or other
holder of any
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<PAGE> 3
Mortgage.
2.13. "Real Property Taxes" shall mean all real property taxes and general and
special assessments levied or assessed against the Real Property, including
without limitation any tax, fee or excise on (a) rents other than Federal, State
and municipal net income taxes, (b) the square footage of the Premises, (c) the
act of entering into this Lease, or (d) the occupancy of Tenant, or any other
tax, fee or excise, however described, including without limitation a value
added tax, levied or assessed against the Real Property, by the United States,
the State of California or any political subdivision of the State of California,
including without limitation any county, city, city and county, public
corporation, district, or any other political entity or public corporation of
State of California, as a direct substitution in whole or in part for, or in
addition to, any real property taxes or general or special assessments.
Notwithstanding anything to the contrary in the preceding sentence, "Real
Property Taxes" shall not mean any municipal, county, state, or federal income,
franchise, estate, succession, inheritance or transfer taxes of Landlord. If the
Real Property is assessed in combination with other property owned by Landlord,
then Landlord shall have the right to allocate the Real Property Taxes between
the Real Property and such other property included in the tax bill on a pro rata
basis. If any Real Property Taxes are assessed or collected on the basis of a
fiscal period, a portion of which occurs during the Term and the remainder of
which occurs before or after the Term, then the Real Property Taxes payable for
such fiscal period shall be apportioned between such periods based upon the
number of days during such fiscal period that occur during the Term and the
number of days that occur before or after the Term.
2.14. "Tenant's Personal Property" shall mean all of Tenant's personal property
installed or located in or on the Premises, including without limitation trade
fixtures, furnishings, equipment and inventory.
2.15. "Tenant's Representatives" shall mean any agent, employee, officer,
independent contractor, licensee, invitee, visitor or customer of or retained by
Tenant.
2.16. "Term" shall mean the term of this Lease.
3. PREMISES AND RELOCATION. Subject to the provisions of this Lease, Landlord
leases to Tenant and Tenant leases from Landlord the Premises during the Term.
Tenant shall have reasonable access to the Premises at all times during the
Term. This Lease confers no rights either with regard to the subsurface of the
Land below the ground level of the Building or with regard to air space above
the ceiling of the Premises.
4. TERM. Subject to Tenant's acceptance of the Premises as provided in Section
6, The Term shall commence on the Commencement Date and shall expire on the
Expiration Date.
5. EXTENSION TERM. Tenant may at its election extend the Term to the Extension
Expiration Date, on all the provisions of this Lease (except this Paragraph),
provided that (a) Tenant shall notify Landlord in writing, at least 180 days
prior to the Initial Expiration Date, of Tenant's election to
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<PAGE> 4
extend, and (b) at the time Landlord receives such notice, and upon the Initial
Expiration Date, Tenant shall not be in Default under this Lease nor shall any
event have then occurred and be outstanding which by the giving of notice or
lapse of time, or both, would constitute a Default under this Lease. If the Term
is so extended, then on the Initial Expiration Date, and for the period until
the next increase in the Adjusted Minimum Monthly Rent pursuant to this Lease,
the Adjusted Minimum Monthly Rent shall be increased to an amount equal to the
Adjusted Minimum Monthly rent increased in accordance with the Paragraph below
entitled "Rent" as if the Initial expiration Date is an Adjustment Date.
6. POSSESSION. Prior to the commencement of this Lease, Landlord will complete
the work described on the Site Plan attached as Exhibit B to this Lease (the
"Tenant Improvements"). After Landlord has substantially completed the Tenant
Improvements, Landlord will give Tenant notice of such substantial completion
and schedule an inspection of the Premises. Landlord and Tenant shall, within
two (2) business days thereafter, conduct an inspection of the Premises and
shall mutually agree to a "punch-list" of any unfinished items which do not
materially interfere with Tenant's ability to occupy and use the Premises.
Landlord will use its best efforts to complete all punch-list items within ten
(10) business days after Tenant takes possession of the Premises. Tenant's
acceptance of the Premises after substantial completion of the Tenant
Improvements and inspection of the Premises shall constitute Tenant's acceptance
of the Premises in their then "as is" condition, and Tenant's acknowledgment
that the Premises are in Good Condition. Landlord represents and warrants to
Tenant that the Premises and the Building will comply with all applicable laws,
rules, ordinances and other applicable requirements as of the Commencement Date.
7. RENT. Tenant shall pay to Landlord as minimum monthly rent, without
deduction, setoff, prior notice, or demand, the Adjusted Minimum Monthly Rent
(which is subject to adjustment as provided below) in advance on or before the
first day of each month commencing on the Commencement Date and continuing
during the Term. Adjusted Minimum Monthly Rent for the first month of the Term
shall be paid upon execution of this Lease. If the Commencement Date is other
than the first day of a month, then Adjusted Minimum Monthly Rent for the second
month of the Term and the final month of the Term shall be prorated on the basis
of the actual number of days elapsed during the relevant month. All Rental shall
be paid to Landlord at Landlord's address set forth in the Paragraph below
entitled "Notices." On each anniversary of the Commencement Date, and for the
period until the next increase in the Adjusted Minimum Monthly Rent pursuant to
this Lease, the Adjusted Minimum Monthly Rent shall be increased to an amount
equal to following:
<TABLE>
<S> <C>
First Escalation - April 1, 1998..................................$6,832.00
Second Escalation - April 1, 1999.................................$7,105.28
</TABLE>
If the Option to extend the Lease is exercised by Tenant, then the Third, Fourth
and Fifth Escalations shall be as follows:
<TABLE>
<S> <C>
Third Escalation - April 1, 2000..................................$7,389.49
</TABLE>
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<PAGE> 5
<TABLE>
<S> <C>
Fourth Escalation - April 1, 2001.................................$7,685.07
Fifth Escalation - April 1, 2002..................................$7,992.47
</TABLE>
As a courtesy to Tenant but not as a condition to Tenant's paying the applicable
Adjusted Minimum Monthly Rent, Landlord will deliver to Tenant, as soon as
practicable, a notice setting forth the Adjusted Minimum Monthly Rent and the
applicable Adjusted Minimum Monthly Rent. Landlord's delay in delivering such
notice shall not release Tenant of its obligation to pay the applicable Adjusted
Minimum Monthly Rent.
8. INTEREST AND LATE CHARGES. Rental not paid when due shall bear interest from
the date due at the Default Rate, as set forth above, or if no Default Rate is
set forth above, then at the maximum rate permitted by applicable law. Late
payment by Tenant to Landlord of Rental will cause Landlord to incur costs not
contemplated by this Lease, the exact amount of which would be impracticable or
extremely difficult to fix. Such costs include, without limitation, processing,
collection and accounting charges, and late charges that may be imposed on
Landlord by the terms of any Mortgage covering the Premises. Therefore, if any
Rental is not received by Landlord within five working days of its due date,
then, without any requirement for notice to Tenant, Tenant shall pay to Landlord
an additional sum of 5 percent of such overdue amount as a late charge. Such
late charge represents a fair and reasonable estimate of the costs that Landlord
will incur by reason of any late payment by Tenant, and therefore this Paragraph
is reasonable under the circumstances existing at the time this Lease is made.
Acceptance of such late charge by Landlord shall not constitute a waiver of
Tenant's default with respect to such overdue amount, nor prevent Landlord from
exercising any of the other rights and remedies available to Landlord under this
Lease.
9. SECURITY DEPOSIT. Upon the execution of this Lease, Tenant shall deposit with
Landlord cash in the amount of the Security Deposit Sum to secure the
performance by Tenant of its obligations under this Lease, including without
limitation Tenant's obligations (a) to pay Adjusted Minimum Monthly Rent, (b) to
repair damages to the Premises caused by Tenant, (c) to clean the Premises upon
the termination of this Lease, and (d) to remedy future defaults by Tenant in
any obligation under this Lease to restore, replace or return personal property
or appurtenances. If Tenant commits any defaults under this Lease, including
without limitation those set forth in the preceding sentence, Landlord may, at
its election, use such security deposit to cure such defaults, and to compensate
Landlord for all of Landlord's damage resulting from such defaults. Within 15
days after the Expiration Date or earlier termination of this Lease, Landlord
shall deliver to Tenant, at Tenant's last known address, any portion of such
security deposit not used by Landlord, as provided in this Paragraph. Landlord
may commingle such security deposit with Landlord's other funds and Landlord
shall not pay to Tenant interest on such security deposit.
10. LEASE EXPENSES INCREASES. Landlord shall deliver to Tenant, prior to the
Commencement Date and prior to the commencement of each calendar year during the
Term, a written statement ("Estimated Lease Expenses Statement") setting forth
Landlord's estimate of the Lease Expenses allocable to the calendar year during
which the Commencement Date occurs (the "First Calendar Year") or such ensuing
calendar year, whichever is applicable. Landlord may, at its election, no more
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<PAGE> 6
than one time during any calendar year, deliver to Tenant a revised Estimated
Lease Expenses Statement, revising Landlord's estimate of the Lease Expenses
allocable to such calendar year, in accordance with Landlord's most current
estimate. Tenant shall pay to Landlord, on the first day of each month during
the Term, an amount ("Tenant's Monthly Payment") equal to one-twelfth of
Tenant's Proportionate Share of the increase, if any, in the Lease Expenses
allocable to the then-current calendar year compared to the Base Expense Stop
(the "Lease Expenses Increase"), as estimated by Landlord in the most recently
delivered Estimated Lease Expenses Statement. No later than 90 days after the
end of each calendar year during the Term, Landlord shall deliver to Tenant an
itemized written statement ("Actual Lease Expenses Statement") setting forth in
detail the actual Lease Expenses Increase allocable to such calendar year. If
the sum of Tenant's Monthly Payments actually paid by Tenant during any calendar
year exceeded Tenant's Proportionate Share of the actual Lease Expenses Increase
allocable to such calendar year, then such excess shall be credited against
future Tenant's Monthly Payments, unless such calendar year was the calendar
year during which the Expiration Date or earlier termination of this Lease
occurs (the "Last Calendar Year"), in which event either (i) such excess shall
be credited against any monetary default of Tenant under this Lease, or (ii) if
Tenant is not in default under this Lease, then Landlord shall pay to Tenant
such excess. Notwithstanding anything to the contrary in this Paragraph, in no
event shall Rental paid by Tenant under this Lease be less than Adjusted Minimum
Monthly Rent. If the sum of Tenant's Monthly Payments actually paid by Tenant
during any calendar year was less than Tenant's Proportionate Share of the
actual Lease Expenses Increase allocable to such calendar year, then Tenant
shall, within 10 days of delivery of the Actual Lease Expenses Statement, pay to
Landlord the amount of such deficiency. Landlord's delay in delivering the
Actual Lease Expenses Statement shall not release Tenant of its obligation to
pay any excess upon receipt of the Actual Lease Expenses Statement. The
references in this Paragraph to the actual Lease Expenses Increase allocable to
a calendar year, shall mean (A) if such calendar year is the First Calendar
Year, the actual Lease Expenses Increase allocable to the portion of the First
Calendar Year following the Commencement Date, or (B) if such calendar year is
the Last Calendar Year, the actual Lease Expenses Increase allocable to the
portion of the Last Calendar Year prior to the Expiration Date or earlier
termination of this Lease. There will be no increase to the Tenant of the Lease
Expense during the "First Calendar Year". In no event following the "First
Calendar Year" shall the Tenant's proportionate share of the actual Lease
Expense Increase increase more than 10% per annum.
Tenant may, upon written request to Landlord within thirty (30) days after
receipt of the Actual Lease Expenses Statement, inspect Landlord's books and
records with respect to Lease Expenses, and Tenant may cause such books and
records to be audited by a certified public accountant. If such audit discloses
any discrepancies, then any amounts owed to Landlord shall be paid by Tenant
within thirty (30) days thereafter and any amounts owed to Tenant shall be
returned to Tenant within thirty (30) days.
11. UTILITIES AND SERVICES. During the hours of 7:00 a.m. to 7:00 p.m. from
Monday through Friday and 7:00 a.m. to Noon on Saturday, (a) Landlord shall
provide for the Premises water for ordinary office uses, and (b) Landlord shall
operate the master heating and air-conditioning system of the Building that
supplies heated or chilled water, as appropriate, to the individual heating and
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<PAGE> 7
air-conditioning unit within the Premises. Landlord shall arrange for the
removal of trash placed by Tenant in containers designated by Landlord. Landlord
shall furnish janitorial services within the Premises on the following schedule:
spot vacuuming, emptying waste baskets and cleaning ashtrays, daily; vacuuming
carpets and floors and dusting furniture, weekly; and washing windows,
semi-annually. Such janitorial services shall include only ordinary dusting and
cleaning and shall not include (i) shampooing of carpets or rugs, (ii) cleaning
of draperies or furniture, or (iii) unusual cleaning services. Landlord shall
not be liable for failure to furnish any utilities or services to the Premises
when such failure results from causes beyond Landlord's reasonable control. If
Landlord discontinues or fails to provide any of the utilities or services
furnished by Landlord to the Premises, such discontinuance shall neither be
deemed an actual or constructive eviction, nor release Tenant of its obligations
under this Lease, including without limitation Tenant's obligations to pay
Rental; provided, however, that if such discontinuance results in Tenant's
inability to occupy and use the Premises for its intended use, and (A) such
interruption continues for a period of thirty (30) days, then Tenant shall be
entitled to an abatement of rent during such period of interruption of services,
and (B) such interruption continues for a period of sic (6) months, then Tenant
shall be entitled to terminate this Lease upon thirty (30) days written notice
to Landlord. Except for Landlord's obligations as set forth above, Tenant shall
make all arrangements for and pay the cost of all utilities and services
(including without limitation their connection charges) separately metered to
the Premise or used by Tenant, including without limitation electricity
(including without limitation electricity to operate the heating and
air-conditioning unit within the Premises), and telephone services.
12. MAINTENANCE. Tenant shall at its sole cost maintain, repair, replace and
repaint, all in Good Condition, (normal wear and tear excepted) all portions of
the Premises (except those portions of the Premises to be maintained by Landlord
as expressly set forth below or elsewhere in this Lease). Tenant shall be liable
for any damage to the Real Property resulting from the acts or omissions of
Tenant or Tenant's Representatives. If Tenant fails to maintain the Premises as
provided above, then Landlord may after ten business days written notice to
Tenant, at its election, maintain the Premises and Tenant shall promptly
reimburse Landlord for Landlord's actual cost of such maintenance, plus a
management fee in the amount of 10 percent of such actual cost. Landlord shall
maintain and repair only the structural parts of the Building, which are only
the foundations, exterior walls (excluding doors), and the structural portions
of the roof. Landlord shall also maintain in Good Condition and repair glass and
doors, including skylights and the surface of the cover of the roof, except as
to those repairs necessitated by the acts or omissions of tenant or tenant's
representatives. Landlord's failure to perform its obligations set forth in the
preceding sentence shall not release Tenant of its obligations under this lease,
including without limitation Tenant's obligation to pay Rental.
13. HVAC. Landlord shall, at Landlord's sole cost operate, maintain, repair and
replace the heating and air-conditioning (HVAC) unit that serves the Premises in
operating condition, except any repairs and replacements resulting from the acts
or errors of Tenant or Tenant's representatives. Notwithstanding the foregoing,
Tenant acknowledges that there may be interruptions in HVAC services from time
to time in the course of normal operations and maintenance of the HVAC
equipment. Tenant shall make all arrangements for and pay the cost of all
utilities and services with respect to the heating and air-conditioning unit
that serves the Premises, and which is separately
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<PAGE> 8
metered to the Premises, including without limitation electricity to operate
such heating and air-conditioning unit.
14. COMMON AREAS. Tenant shall have the non-exclusive right to use any public
areas of the Real Property that are not leased to any tenants or for lease to
any tenants (the "Common Areas"). Landlord shall manage, repair, operate, and
maintain the Common Areas. Landlord's failure to perform its obligations set
forth in the preceding sentence shall not release Tenant of its obligations
under this Lease, including without limitation Tenant's obligation to pay
Rental. Landlord may, at its election, (a) close any of the Common Areas to the
extent required in the opinion of Landlord's counsel to prevent a dedication of
any of the Common Areas or the accrual of any rights of any person or of the
public to the Common Areas, (b) close temporarily any of the Common Areas for
maintenance purposes, and/or (c) make any changes to the Common Areas, or any
part of the Real Property, including without limitation changes to buildings or
other improvements, and changes in the location of driveways, entrances, exits,
vehicular parking spaces, or the direction of the flow of traffic; provided,
however, that Landlord, in doing any of the foregoing activities, will not
materially prohibit theTenant's access to the Premises.
15. SIGNS. Tenant shall not place, construct, or maintain any sign,
advertisement, awning, banner or other exterior decoration in the Premises or on
the Building without Landlord's prior written consent. Any sign that Tenant is
permitted by Landlord to place, construct, or maintain shall comply with
Landlord's sign criteria applicable to Landlord's other tenants in the Building,
including without limitation criteria relating to size, color, shape, graphics
and location, and shall comply with all laws, and Tenant shall obtain any
approval required by such laws. Tenant shall be responsible of all cost
associated with the design, approval and construction of the building sign.
16. PARKING. Subject to the remaining provisions of this Paragraph, Landlord
grants to Tenant the right to the non-exclusive use of the parking area adjacent
to and serving the Building (the "Parking Area"). Tenant's use of the Parking
Area shall be subject to such rules as Landlord may, in its sole discretion,
adopt from time to time with respect to the Parking Area, including without
limitation (a) in order to maintain the availability of accessible parking
spaces for clients, guests and invitees of tenants of the building, rules
limiting tenants of the building (including without limitation Tenant) to the
use of certain parking spaces or certain portions of the Parking Area (the
"Restricted Parking Area"), and (b) rules limiting each tenant of the Building
(including without limitation Tenant) to the use of a restricted number of
parking spaces such that the parking spaces in the Restricted Parking Area shall
be allocated fairly to all the tenants of the Building (including without
limitation Tenant). Notwithstanding anything to the contrary in this Paragraph,
Landlord may, at its election, construct upon or otherwise alter in any manner
the Parking Area provided that Landlord makes available to Tenant elsewhere on
the Land, as many parking spaces as are currently included in the Parking Area.
Tenant shall be entitled to use a total of 16 parking spaces of which 2 of those
spaces shall be located in the "Restricted Parking Area" or Sub-Basement Level.
17. RULES. Tenant and Tenant's Representatives shall observe faithfully and
comply strictly with the rules that are set forth on the attached Exhibit
entitled "Rules" and such other reasonable rules as
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Landlord may from time to time adopt for the Premises and distribute to Tenant
in writing. Landlord shall use its good faith efforts to enforce the rules
against any other tenants, to prevent any unreasonable disruption or
interruption in Tenant's use and enjoyment of the Premises or access thereto,
which may be caused by the violation of such rules by any other Tenant in the
building; however Landlord shall not be liable to Tenant for violation of any
rule by any other tenant, or any other tenant's agents, employees, officers,
independent contractors, customers, invitees, visitors or licensees.
18. PERSONAL PROPERTY TAXES. Tenant shall pay before delinquency all taxes,
assessments, license fees, and other charges that are levied or assessed
against, or based upon the value of, Tenant's personal property installed or
located in or on the Premises including without limitation trade fixtures,
furnishings, equipment and inventory (collectively, "Tenant's Personal
Property"). On demand by Landlord, Tenant shall furnish Landlord with
satisfactory evidence of such payments. If any such taxes, assessments, license
fees, and/or other charges are levied against Landlord or Landlord's property,
or if the assessed value of the Premises is increased by the inclusion of a
value placed on Tenant's Personal Property, and if Landlord pays such taxes,
assessments, license fees, and/or other charges or any taxes based on the
increased assessments caused by Tenant's Personal Property, then Tenant, on
demand, shall immediately reimburse Landlord for the sum of such taxes,
assessments, license fees, and/or other charges so levied against Landlord, or
the proportion of taxes resulting from such increase in Landlord's assessment.
Landlord may, at its election, pay such taxes, assessments, license fees, and/or
other charges or such proportion, and receive such reimbursement, regardless of
the validity of the levy. These charges shall not be on a pro rata basis to
other tenants.
19. PERMITTED USE, ETC. Tenant may use the Premises for the Permitted Use and
for no other use. Tenant shall not do, bring or keep anything in or about the
Premises that will cause a cancellation of any insurance covering the Premises.
If the rate of any insurance carried by Landlord is increased as a result of
Tenant's use, Tenant shall pay to Landlord, within 10 days after Landlord
delivers to Tenant a notice of such increase, the amount of such increase.
Tenant shall comply with all laws concerning the Premises and Tenant's use of
the Premises, including without limitation the obligation at Tenant's sole cost
to alter, maintain, or restore the Premises in compliance with all laws relating
to the condition, use, or occupancy of the Premises. Tenant shall not use the
Premises in any manner that will constitute waste, nuisance or unreasonable
annoyance to any other tenants of the Building, or to the owners or occupants of
nearby properties. Tenant shall not use the Premises for sleeping, washing
clothes, or the preparation, manufacture, or mixture of anything that might emit
any odor or objectionable noises or lights onto the Real Property or nearby
properties. Tenant shall neither bring into the Building, nor permit the
bringing into the Building any animal, motorcycle or other vehicle. Neither
Tenant nor Tenant's Representatives shall do anything that will cause damage to
the Real Property. Neither the floor nor any other portion of the Premises shall
be overloaded. No machinery, apparatus, or other appliance shall be used or
operated in or on the Premises that will in any manner injure, vibrate or shake
all or any part of the Real Property.
20. ACCESS BY LANDLORD. Landlord and any of Landlord's Representatives shall
have the right to enter the Premises at all reasonable times, during normal
business hours if feasible under the circumstances,
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and upon reasonable notice telephonic or written, if feasible under the
circumstances, (a) to determine whether the Premises are in Good Condition or
whether Tenant is complying with its obligations under this Lease, (b) to do any
necessary maintenance or make any restoration to the Premises that Landlord has
the right or obligation to perform, (c) to serve, post, or keep posted any
notices required or allowed under this Lease, (d) to show the Premises to
brokers, agents, buyers, tenants or other persons interested in a listing of,
financing, purchasing or occupying the Premises or any portion of the Premises.
Landlord's rights under this Paragraph extend with Landlord's consent to the
owner of adjacent property on which excavation or construction is to take place
and the adjacent property owner's agents, employees, officers and contractors.
Landlord shall not be liable for any inconvenience, disturbance, loss of
business, nuisance, or other damage arising out of any entry on the Premises as
provided in this Paragraph except damage resulting directly from the negligent
acts of Landlord or Landlord's Representatives. Tenant shall not be entitled to
abatement or reduction of Adjusted Minimum Monthly Rent or Rental because of the
exercise by Landlord of any rights under this Paragraph.
21. ALTERATIONS. Tenant shall not make any alterations, improvements, additions,
installations, or changes of any nature in or to the Premises (any of the
preceding, "Alterations") without Landlord's prior written consent which shall
not be unreasonably withheld or delayed. At least 10 days prior to making any
Alterations, Tenant shall submit to Landlord, in written form, proposed detailed
plans of such Alterations. Tenant shall, prior to the commencement of any
Alterations, at Tenant's sole cost, (a) acquire (and deliver to Landlord a copy
of) a permit from appropriate governmental agencies to make such Alterations
(any conditions of which permit Tenant shall comply with, at Tenant's sole cost,
in a prompt and expeditious manner), (b) obtain and deliver to Landlord a lien
and completion bond in an amount equal to 150 percent of the estimated cost of
the proposed Alterations, to insure Landlord against any liability for
mechanics' liens and to insure completion of the work, (c) provide Landlord with
10 days' prior written notice of the date the installation of the Alterations is
to commence, so that Landlord can post and record an appropriate notice of
non-responsibility, and (d) obtain (and deliver to Landlord proof of) reasonably
adequate workers compensation insurance with respect to any of Tenant's
employees installing or involved with such Alterations (which insurance Tenant
shall maintain in force until completion of the Alterations). All Alterations
shall upon installation become the property of Landlord and shall remain on and
be surrendered with the Premises on the Expiration Date or earlier termination
of this Lease, except that Landlord may, at its election, require Tenant to
remove any or all of the Alterations, by so notifying Tenant in writing on or
before the Expiration Date or earlier termination of this Lease, in which event,
Tenant shall, at its sole cost, on or before the Expiration Date or earlier
termination of this Lease, repair and restore the Premises to the condition of
the Premises prior to the installation of such Alterations to be removed. Tenant
shall pay all costs for Alterations and other construction done or caused to be
done by Tenant. Tenant shall keep the Premises free and clear of all mechanics'
liens resulting from Alterations or other construction. Tenant may, at its
election, contest the correctness or validity of any such lien provided that (i)
immediately on demand by Landlord, Tenant procures and records a lien release
bond in California, in an amount equal to 150 percent of the amount of the claim
of lien, which bond meets the requirement of California Civil Code Section 3143,
(ii) Tenant shall indemnify Landlord against liability for such claim of lien
and shall hold the Real Property free from the effect of such
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claim of lien, and (iii) Landlord may, at its election, require Tenant to pay
Landlord's attorneys' fees and costs in participating in such an action, if such
attorney's fees and costs are incurred by Landlord as a result of Tenant's
Default hereunder.
22. SURRENDER OF PREMISES AND HOLDING OVER. On the Expiration Date or earlier
termination of this Lease, (a) Tenant shall surrender to Landlord the Premises
and all Alterations in Good Condition except for reasonable wear and tear to the
carpets and except for Alterations that Tenant is obligated to remove as
expressly set forth below, (b) Tenant shall remove all of Tenant's Personal
Property and perform all repairs and restoration required by the removal of any
Alterations or Tenant's Personal Property, and (c) Tenant shall surrender to
Landlord all keys to the Premises (including without limitation any keys to any
exterior or interior doors). Landlord may elect to retain or dispose of in any
manner any Alterations or Tenant's Personal Property that Tenant does not remove
from the Premises on the Expiration Date or earlier termination of this Lease as
required by this Lease by giving written notice to Tenant. Any such Alterations
or Tenant's Personal Property that Landlord elects to retain or dispose of shall
vest in Landlord. Tenant waives all claims against Landlord for any damage to
Tenant resulting from Landlord's retention or disposition of any such
Alterations or Tenant's Personal Property. Tenant shall be liable to Landlord
for Landlord's costs for storing, removing or disposing of any such Alterations
or Tenant's Personal Property. If Tenant, with Landlord's consent, remains in
possession of the Premises after the Expiration Date or earlier termination of
this Lease, such possession by Tenant shall be deemed to be a month-to-month
tenancy terminable on 30-days written notice given at any time by Landlord or
Tenant. During any such month-to-month tenancy, Tenant shall pay, as minimum
monthly rent, 110 percent of the Adjusted Minimum Monthly Rent in effect
immediately prior to the Expiration Date or earlier termination of this Lease,
as the case may be. All provisions of this Lease except for those pertaining to
Term shall apply to such month-to-month tenancy.
23. INDEMNITY AND EXEMPTION OF LANDLORD FROM LIABILITY. Tenant shall indemnify
Landlord against all liabilities, costs, expenses, attorneys' fees and claims,
(except to the extent caused by Landlord's or Landlord's representatives grossly
negligent acts or misconduct), and all costs, expenses and attorneys' fees
incurred in the defense of any such claim and any action or proceeding brought
on any such claim (except to the extent they result from Landlord's negligent
acts or misconduct), arising from (a) Tenant's or Tenant's Representatives' use
of the Premises, (b) the conduct of Tenant's business, (c) any activity, work or
things done, permitted or suffered by Tenant or any of Tenant's Representatives
in or about the Premises or elsewhere, (d) any breach or default in the
performance of any obligation to be performed by Tenant under this Lease, or (e)
any negligence of Tenant or any of Tenant's Representatives. If any action or
proceeding is brought against Landlord by reason of any such claim, Tenant upon
notice from Landlord shall defend such action or proceeding at Tenant's sole
cost by counsel satisfactory to Landlord. Except to the extent caused by
Landlord's or Landlord's representatives grossly negligent act or willful
misconduct, Tenant assumes all risk of, Tenant waives all claims against
Landlord in respect of, and Landlord shall not be liable for, any of the
following : injury to Tenant's business, loss of income from such business, or
damage or injury to the goods, wares, merchandise, or other property or the
person of Tenant, Tenant's Representatives or any other persons in, upon or
about the Premises, whether such damage,
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loss or injury is caused by or results from criminal acts, fire, steam,
electricity, gas, water, rain, the breakage, leakage, obstruction or other
defects of pipes, sprinklers, wires, appliances, plumbing, air-conditioning or
lighting fixtures, any other cause, conditions arising upon the Premises or
other sources or places and regardless of whether the cause of such damage, loss
or injury or the means of repairing such damage, loss or injury is inaccessible
to Tenant. This Lease shall not be affected or impaired by any change to any
part of the Real Property or any sidewalks, streets or improvements nearby the
Real Property. Landlord may, at its election, at any time, change the name of
the Building.
24. SECURITY MEASURES. Tenant acknowledges (a) the Adjusted Minimum Monthly Rent
does not include the cost of any security measures for any portion of the Real
Property, (b) that Landlord shall have no obligation to provide any such
security measures, and (c) that Landlord has made no representation to Tenant
regarding the safety or security of the Real Property. If Landlord provides any
security measures at any time, then Landlord shall not be obligated to continue
providing such security measures and Landlord shall not be obligated to provide
such security measures with any particular standard of care. Tenant assumes all
responsibility for the security and safety of Tenant and/or Tenant's
Representatives. Tenant releases Landlord from all claims for damage, loss or
injury to Tenant, Tenant's Representatives, and/or to the personal property of
Tenant and/or of Tenant's Representatives, even if such damage, loss or injury
is caused by or results from the criminal or negligent acts of third parties.
25. FIRE AND EXTENDED COVERAGE INSURANCE. Tenant at its sole cost shall maintain
on Tenant's Alterations and Personal Property a policy of standard fire and
extended coverage insurance, with vandalism and malicious mischief endorsements,
to the extent of at least 100 percent of full replacement value issued in the
names of Landlord, Tenant and Landlord's Lender, as their interest may appear.
Such "full replacement value" shall be determined by the company issuing such
policy at the time the policy is initially obtained.
26. INSURANCE GENERALLY. If Tenant fails during the Term to maintain any
insurance required to be maintained by Tenant under this Lease, then Landlord
may after ten days prior written notice to Tenant, at its election, arrange for
any such insurance, and Tenant shall reimburse Landlord for any premiums for any
such insurance within ten days after Tenant receives a copy of the premium
notice. If any such premiums are allocable to a period, a portion of which
occurs during the Term and the remainder of which occurs before or after the
Term, then such premiums shall be apportioned between Landlord and Tenant based
upon the number of days elapsed during such period that occur during the Term
and the number of days that occur before or after the Term, such that Tenant
pays for the premiums that are allocable to the period during the Term.
Insurance required to be maintained by Tenant under this Lease (a) shall be
issued as a primary policy by insurance companies authorized to do business in
the State of California with a Best's Rating of at least "A+" and a Best's
Financial Size Category rating of at least "XV," as set forth in the most
current edition of "Best's Insurance Reports", or such higher rating as may be
required by any Lender, (b) shall name Landlord and any Lender as additional
named insureds, and (c) shall not be cancellable or subject to reduction of
coverage or other modification except after 30-days' prior written notice to
Landlord and any Lender. Tenant shall, at least 30 days prior to the expiration
of each such policy, furnish Landlord
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with a renewal or "binder" of such policy. Tenant shall promptly deliver to
Landlord copies of such policy or policies or certificates evidencing the
existence and amounts of such insurance together with evidence of payment of
premiums.
27. WAIVER OF SUBROGATION. Landlord and Tenant release each other, Tenant's
Representatives, Landlord's Representatives, and Landlord's guests, invitees,
customers and licensees from all claims for damage, loss or injury to the Real
property, to Tenant's Personal Property and to the fixtures and Alterations of
either Landlord or Tenant in or on the Real Property to the extent such damage,
loss or injury is covered by any insurance policies carried by Landlord and
Tenant and in force at the time of such damage. Subject to the remaining
provisions of this Paragraph, Landlord and Tenant shall cause each insurance
policy obtained by it pursuant to this Lease to provide that the insurance
company waives all right of recovery by way of subrogation against Landlord or
Tenant in connection with any damage, loss or injury covered by such policy. If
any such policy cannot be obtained with a waiver of subrogation, or is
obtainable only by the payment of an additional premium charge above that
charged by insurance companies issuing policies without waiver of subrogation,
the party undertaking to obtain such policy (the "Undertaking Party") shall so
notify the other party (the "Notified Party"). The Notified Party shall, within
10 days after the giving of such notice, either obtain such policy from a
company that is reasonably satisfactory to the Undertaking Party and that will
issue such policy with a waiver of subrogation, or agree to pay the additional
premium if such policy is obtainable at additional cost. If such policy cannot
be obtained with a waiver of subrogation or the Notified Party refuses to pay
such additional premium, then the Undertaking Party shall not be required to
obtain a waiver of subrogation with respect to such policy.
28. LANDLORD'S INSURANCE. Landlord may, at its election, maintain any of the
following insurance, in such amounts and with such limits as Landlord shall
determine in its reasonable discretion: (a) Public liability and property damage
insurance, and products liability insurance; (b) Fire and extended coverage
insurance; (c) Earthquake insurance; (d) Plate-glass insurance; and (e) Rental
interruption insurance. Insurance maintained by Landlord under this Lease shall
conform to any requirements of any lender holding a security interest on the
property of which the Premises. Landlord shall notify Tenant of Landlord's
arranging any such insurance. The premiums, costs, expenses and deductibles (or
similar costs or charges) of and/or with respect to any such insurance (all of
the preceding, collectively "Insurance Expenses") shall be included in Lease
Expenses.
29. DESTRUCTION. If the Real Property is totally or partially destroyed during
the Term, rendering the Premises totally or partially inaccessible or unusable,
then, subject to the remainder of this Paragraph, (a) Landlord shall restore the
Real Property to substantially the same condition as it was in immediately
before such destruction including the Tenant Improvements, (b) Landlord shall
not be required to restore Tenant's Alterations, or Tenant's Personal Property,
unless they are an integral part of the Premises and specifically covered by
insurance proceeds received by Landlord, such excluded items being the sole
responsibility of Tenant to restore, (c) such destruction shall not terminate
this Lease, and (d) all obligations of Tenant under this Lease shall remain in
effect, except that Adjusted Minimum Monthly Rent shall be abated or reduced,
between the date of such destruction and the date of completion of restoration,
by the ratio of (i) the area of the Premises
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rendered unsuitable or inaccessible by the destruction to (ii) the area of the
Premises prior to such destruction. Notwithstanding anything to the contrary in
this Lease, Landlord or Tenant may, at its election, terminate this Lease by so
notifying the other party in writing on or before the later of 60 days after
such destruction or 60 days after Landlord's receipt of the proceeds from
insurance maintained by Landlord, if (A) then-existing laws do not permit such
restoration, (B) such destruction occurred during the last year of the Term, (C)
such destruction exceeded 25 percent of the then-replacement value of the
Premises or the Real Property, or (D) Landlord determines that the cost of such
restoration exceeds the amount of insurance proceeds relating to such
destruction actually received by Landlord from insurance maintained by Landlord.
If Landlord so terminates this Lease, then (1) Landlord shall have no obligation
to restore the Real Property, (2) Landlord shall retain all insurance proceeds
relating to such destruction, and (3) this Lease shall terminate as of the date
of destruction. If Landlord restores the Premises as provided above, then Tenant
waives the provisions of California Civil Code Sections 1932(2) and 1933(4) with
respect to any destruction of the Premises.
30. CONDEMNATION. If during the Term, or during the period of time between the
execution of this Lease and the Commencement Date, there is any taking of all or
any part of the Premises or any interest in this Lease by the exercise of any
governmental power, whether by legal proceedings or otherwise, by any public or
quasi-public authority, or private corporation or individual, having the power
of condemnation (any of the preceding a "Condemnor"), or a voluntary sale or
transfer by Landlord to any Condemnor, either under threat of condemnation or
while legal proceedings for condemnation are pending (any of the preceding, a
"Condemnation"), the rights and obligations of Landlord and Tenant shall be
determined pursuant to this Paragraph. If such condemnation is of the entire
Premises, then this Lease shall terminate on the date the Condemnor has a right
to possession of the Premises (the "Date of Condemnation"). A temporary
Condemnation of the Premises, or any part of the Premises, for less than 60
days, shall not constitute a Condemnation under this Paragraph provided,
however, that Tenant will receive rent abatement during such temporary
condemnation. If such condemnation is of any portion, but not all, of the
Premises, then this Lease shall remain in effect, except that, if the remaining
portion of the Premises is rendered unsuitable for Tenant's continued use of the
Premises in Tenant's reasonable judgment, then Tenant may elect to terminate
this Lease, by so notifying Landlord in writing (the "Termination Notice")
within 30 days after the date that the nature and extent of the Condemnation
have been determined. Such termination shall be effective on the earlier of (a)
the date that is 30 days after giving the Termination Notice, and (b) the Date
of Condemnation. If Tenant does not give to Landlord the Termination Notice
within such 30-day period, then all obligations of Tenant under this Lease shall
remain in effect, except that (unless the Premises are restored as set forth
below) Adjusted Minimum Monthly Rent shall be reduced by the ratio of (i) the
area of the Premises taken to (ii) the area of the Premises immediately prior to
the Date of Condemnation. Notwithstanding anything to the contrary in this
Paragraph, if, within 20 days after Landlord's receipt of the Termination
Notice, Landlord notifies Tenant that Landlord at its cost will add to the
remaining Premises so that the area of the Premises will be substantially the
same after the Condemnation as they were before the Condemnation, and Landlord
commences the restoration promptly and completes it within 150 days after
Landlord so notifies Tenant, then all obligations of Tenant under this Lease
shall remain in effect, except that Adjusted
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Minimum Monthly Rent shall be abated or reduced during the period from the Date
of Condemnation until the completion of such restoration by the ratio of (A) the
area of the Premises taken to (B) the area of the Premises immediately prior to
the Date of Condemnation. Unless Landlord restores the Premises pursuant to the
preceding sentence, or unless Tenant gives to Landlord the Termination Notice
within the relevant 30-day period, Tenant at its sole cost shall accomplish any
restoration required by Tenant to use the Premises. All compensation, sums or
anything of value awarded, paid, or received on a total or partial Condemnation
(the "Award") shall belong to and be paid to Landlord. Tenant shall have no
right to any part of the Award, and Tenant hereby assigns to Landlord all of
Tenant's right, title and interest in and to any part of the Award, except for
an Award made separately for the loss of good will Lessees relocation costs
and/or loss of trade fixtures.
31. ASSIGNMENT, SUBLETTING AND RECAPTURE. Without Landlord's prior written
consent, which shall not be unreasonably withheld, Tenant shall not do any of
the following (any of the following, a "Transfer"), voluntarily, involuntarily,
by operation of law or otherwise: (a) any assignment, transfer, sublease, sale,
transfer, grant of concessions or licenses, mortgage, encumbrance,
hypothecation, pledge, collateral assignment, or other disposition, of this
Lease, any interest in this Lease, or all or any portion of the Premises. At
least 30 days prior to entering into any Transfer, Tenant shall submit to
Landlord the sum of $100.00 (as payment toward Landlord's (and Landlord's
attorneys') cost of reviewing, consenting to, rejecting and/or consummating any
proposed Transfer), the form of the proposed Transfer, and a written notice
("Tenant's Notice") setting forth in reasonable detail (i) the name and address
of the Proposed Transferee, (ii) the terms and conditions of the proposed
Transfer, including without limitation the commencement or effective date of the
proposed Transfer, which shall be at least 30 days after Tenant's Notice is
given, and (iii) the nature, character, and current banking, financial, and
other credit information relating to the Proposed Transferee and the business of
the Proposed Transferee, in reasonably sufficient detail to enable Landlord to
determine the Proposed Transferee's financial responsibility. Within 30 days
after Landlord's receipt from Tenant of such sum, the form of proposed Transfer,
and Tenant's Notice, Landlord shall notify Tenant whether Landlord has consented
to the proposed Transfer and, if Landlord has disapproved the proposed Transfer,
setting forth the reasons therefor. Notwithstanding the foregoing, if the
proposed Transfer does not require approval by any Lender, then Landlord shall
notify Tenant of its consent or disapproval within ten (10) days Any consent
granted by Landlord in any instance shall not constitute a consent with respect
to any other instance or request. If Landlord consents to any proposed Transfer,
and Tenant fails to consummate such Transfer on or before the commencement or
effective date of the proposed Transfer (as set forth in the Tenant's Notice),
then such consent shall be deemed withdrawn and Tenant shall be required again
to comply with this Paragraph before making a Transfer. Landlord shall not have
unreasonably withheld its consent with respect to any Transfer if Landlord shall
not have received the sum set forth above, the form of proposed Transfer or
Tenant's Notice, if the nature or character of the Proposed Transferee, or the
proposed use and occupancy of the Premises by the Proposed Transferee, is not in
keeping with the dignity and character of the Building and the surrounding area,
if the proposed Transfer will result in the diminution of the value or
marketability of the Premises, or if Landlord is not satisfied that the Proposed
Transferee is creditworthy. No Transfer shall release or discharge Tenant from
any liability, whether past, present, or future, under this Lease and Tenant
shall continue to remain primarily liable
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under this Lease. Tenant irrevocably assigns to Landlord, as security for
Tenant's obligations under this Lease, all rent and other amounts from any
Transfer, and Landlord, as assignee and as special attorney-in-fact for Tenant,
or a receiver for Tenant appointed on Landlord's application, may collect such
rent and other amounts and apply them toward Tenant's obligations under this
Lease; except that, unless Tenant defaults under this Lease, Tenant shall have
the right to collect such rent and other amounts. Any Transfer must contain the
following provisions, which provisions whether contained in such Transfer or
not, shall apply to such Transfer: (A) Such Transfer shall be subject and
subordinate to all provisions of this Lease; (B) No Proposed Transferee shall be
permitted to enter into any Transfer without Landlord's prior written consent;
and (C) In the event of cancellation or termination of this Lease for any reason
or the surrender of the Lease, whether voluntarily, involuntarily, by operation
of law or otherwise, prior to the expiration of such Transfer, the Proposed
Transferee shall make full and complete attornment to Landlord for the Balance
of the term of such Transfer. Such attornment shall be evidenced by an agreement
in form and substance satisfactory to Landlord which the Proposed Transferee
shall execute and deliver to Landlord within five days after request by
Landlord. Tenant shall promptly reimburse Landlord for Landlord's reasonable
cost (less any payment made by Tenant with Landlord as set forth above) of
reviewing, consenting to, rejecting and/or consummating any proposed Transfer,
including without limitation reasonable attorneys' fees. Tenant shall promptly
pay to Landlord 75 percent of all rents and other consideration, of whatever
nature, payable by the Proposed Transferee (or receivable by Tenant) pursuant to
any Transfer less Tenant's reasonable costs and expenses incurred in connection
with the Transfer (excluding the cost of tenant improvement for proposed
Transferee, moving costs, or loss due to the surrender of existing improvements
or alterations), which exceed (1) if a sublease of a portion of the Premises,
the portion of the Adjusted Minimum Monthly Rent that is allocable to the
portion of the Premises subleased (such allocation based on the area of the
portion subleased), or (2) if any other Transfer, the Adjusted Minimum Monthly
Rent. Landlord may at its election, by giving written notice ( the "Recapture
Notice") to Tenant to Tenant within 30 days after receipt of Tenant's Notice
recapture the Premises and and terminate this Lease. The Recapture Notice shall
terminate this Lease sixty (60) days thereafter, and Tenant shall surrender
possession of the Premises as of such date. Landlord's election to recapture
within such 30-day period shall not constitute Landlord's consent to Tenant's
proposed Transfer.
32. DEFAULT. The occurrence of any of the following shall constitute a material
default and breach of this Lease by Tenant: (a Default)
32.1. The vacating or abandoning of the Premises by Tenant, except in connection
with a casulty or condemnation..
32.2. Tenant's failure to make any payment of Rental as and when due, where such
failure shall continue for a period of three days after written notice of such
failure from Landlord to Tenant; provided, however, that any such notice shall
be in lieu of, and not in addition to, any notice required under applicable
unlawful detainer statutes.
32.3. Tenant's failure to observe or perform any of the provisions of this Lease
to be observed or
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performed by Tenant, other than described in the preceding two Paragraphs where
such failure shall continue for a period of 10 days after written notice of such
failure from Landlord to Tenant; provided, however, that any such notice shall
be in lieu of, and not in addition to, any notice required under applicable
unlawful detainer statutes; and provided further, however, that if the nature of
Tenant's default is such that more than 10 days are required for its cure, then
Tenant shall not be deemed to be in default if Tenant commenced such cure within
such 10-day period and thereafter diligently prosecutes such cure to completion
within a reasonable period of time after Landlord's written notice.
32.5. The making by Tenant of any general arrangement or assignment for the
benefit of creditors; Tenant's becoming bankrupt, insolvent or a "debtor" as
defined in 11 U.S.C. Section 101, or any successor statute (unless, in the case
of a petition filed against Tenant, such petition is dismissed within 30 days
after its original filing); the institution of proceedings under the bankruptcy
or similar laws in which Tenant is the debtor or bankrupt; the appointing of a
trustee or receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease (unless possession
is restored to Tenant within 30 days after such taking); the attachment,
execution or judicial seizure of substantially all of Tenant's assets located at
the Premises or Tenant's interest in this Lease (unless such attachment,
execution or judicial seizure is discharged within 30 days after such
attachment, execution or judicial seizure); or, if Tenant is a partnership or
consists of more than one person or entity, any partners of the partnership or
any such other person or entity becoming bankrupt or insolvent or making a
general arrangement or assignment for the benefit of creditors.
33. LANDLORD'S REMEDIES. Landlord shall have the following remedies if Tenant
commits a default or breach under this Lease; these remedies are not exclusive,
but are cumulative in addition to any remedies provided elsewhere in this Lease,
or now or later allowed by law.
33.1. CONTINUATION OF LEASE. No act by Landlord (including without limitation
the acts set forth in the succeeding sentence) shall terminate Tenant's right to
possession unless Landlord notifies Tenant in writing that Landlord elects to
terminate Tenant's right to possession. As long as Landlord does not terminate
Tenant's right to possession, Landlord may (a) continue this Lease in effect,
(b) continue to collect Rental when due and enforce all the other provisions of
this Lease, (c) enter the Premises and relet them, or any part of them, to third
parties for Tenant's account, for a period shorter or longer than the remaining
term of this Lease. Tenant shall immediately pay to Landlord all reasonable
costs Landlord incurs in such reletting, including, without limitation, brokers'
commissions, attorneys' fees, and advertising costs.
33.2. RENT FROM RELETTING. If Landlord elects to relet all or any portion of the
Premises as permitted above, rent that Landlord receives from such reletting
shall be applied to the payment of, in the following order and priority, (a) any
indebtedness from Tenant to Landlord other than Adjusted Minimum Monthly Rent
due from Tenant, (b) all reasonable costs incurred by Landlord in such
reletting, and (c) Adjusted Minimum Monthly Rent due and unpaid under this
Lease. After applying such payments as referred to above, any sum remaining from
the rent Landlord receives from such
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reletting shall be held by Landlord and applied in payment of future Adjusted
Minimum Monthly Rent as it becomes due under this Lease. In no event shall
Tenant be entitled to any excess rent received by Landlord.
33.3. TERMINATION OF TENANT'S RIGHT TO POSSESSION. Landlord may terminate
Tenant's right to possession of the Premises at any time, by notifying Tenant in
writing that Landlord elects to terminate Tenant's right to possession. On
termination of this Lease, Landlord has the right to recover from Tenant (a) the
worth at the time of the award of the unpaid Adjusted Minimum Monthly Rent which
had been earned at the time of such termination, (b) the worth at the time of
the award of the amount by which the unpaid Adjusted Minimum Monthly rent which
would have been earned after such termination until the time of award exceeds
the amount of such loss of Adjusted Minimum Monthly Rent that Tenant proves
could have been reasonably avoided, (c) the worth at the time of the award of
the amount by which the unpaid Adjusted Minimum Monthly Rent for the balance of
the Term after the time of award (had there been no such termination) exceeds
the amount of such loss of Adjusted Minimum Monthly Rent that Tenant proves
could be reasonably avoided, and (d) any other amount necessary to compensate
Landlord for all detriment proximately caused by Tenant's failure to perform
Tenant's obligations under this Lease or in the ordinary course of things would
be likely to result therefrom. The "worth at the time of the award" of the
amounts referred to in Clauses (a) and (b) above is to be computed by allowing
interest at the Default Rate, as set forth above, or if no Default Rate is set
forth above, then at the maximum rate permitted by applicable law. The "worth at
the time of the award" of the amount referred to in Clause (c) above is to be
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent.
33.4. LANDLORD'S RIGHT TO CURE DEFAULT. Landlord, at any time after Tenant is in
Default under this Lease, may cure such Default at Tenant's sole cost. If
Landlord at any time, by reason of Tenant's Default , pays any sum or does any
act that requires the payment of any sum, such sum shall be due immediately from
Tenant to Landlord at the time such sum is paid, and shall be deemed additional
rent under this Lease.
35. WAIVER. No delay or omission in the exercise of any right or remedy of
Landlord in the event of any Default by Tenant shall impair such right or remedy
or be construed as a waiver. The receipt and acceptance by Landlord of
delinquent Rental shall not constitute a waiver of any Default other than the
particular Rental payment accepted. Landlord's receipt and acceptance from
Tenant, on any date (the "Receipt Date"), of an amount less than Rental due on
such Receipt Date, or to become due at a later date but applicable to a period
prior to such Receipt Date, shall not release Tenant of its obligation (a) to
pay the full amount of such Rental due on such Receipt Date or (b) to pay when
due the full amount of such Rental to become due at a later date but applicable
to a period prior to such Receipt Date. No act or conduct of Landlord, including
without limitation, the acceptance of the keys to the Premises, shall constitute
an acceptance by Landlord of the surrender of the Premises by Tenant before the
Expiration Date. Only a written notice from Landlord to Tenant stating
Landlord's election to terminate Tenant's right to possession of the Premises
shall constitute acceptance of the surrender of the Premises and accomplish a
termination of this Lease. Landlord's consent to or
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approval of any act by Tenant requiring Landlord's consent or approval shall not
be deemed to waive or render unnecessary Landlord's consent to or approval of
any other or subsequent act by Tenant. Any waiver by Landlord of any Default
must be in writing and shall not be a waiver of any other Default concerning the
same or any other provision of this Lease. Tenant represents and warrants that
if Tenant is in Default and, as a result, this Lease is terminated, Tenant will
not suffer any undue hardship as a result of such termination and, during the
Term, will make such alternative or the contingency plans to provide for its
vacation of the Premises and relocation in the event of such termination. Tenant
acknowledges that Tenant's waivers set forth in this Paragraph are a material
part of the consideration for Landlord's entering into this Lease and that
Landlord would not have entered into this Lease in the absence of such waivers.
36. SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT. This Lease and Tenant's
rights under this Lease are subject and subordinate to any Mortgage, ground
lease, or underlying lease ( a "Security Device"), and to all renewals,
modifications, consolidations, replacements, or extensions thereof, now or
hereafter affecting the Premises provided, however, that with respect to any
Security Device executed after the Commencement Date, Tenant shall subordinate
its interest in this Lease only if Tenant receives from the holder and
beneficiary of any such Security Device a written non-disturbance agreement,
satisfactory in form and substance to Tenant, pursuant to which such holder and
beneficiary agrees that, in the event such beneficiary or holder takes title to
the Premises, whether pursuant to an exercise of its remedies under the Security
Device or otherwise, Tenant's rights hereunder shall be honored in accordance
with the terms of this Lease.Tenant shall promptly execute and deliver any
instruments that Landlord, the holder of any Mortgage, or the lessor of any
ground or underlying lease may request to evidence such subordination.. If the
holder of any Security Device, shall hereafter succeed to the rights of Landlord
under this Lease, Tenant shall attorn to and recognize such successor as
Tenant's landlord under this Lease, and shall promptly execute and deliver any
instruments that may be necessary to evidence such attornment. Upon such
attornment, this Lease shall continue in effect as a direct lease between such
successor landlord and Tenant upon and subject to all the provisions of this
Lease.
37. ESTOPPEL CERTIFICATES. Within 10 days after notice from Landlord, Tenant
shall execute and deliver to Landlord, in recordable form, a certificate stating
(a) that this Lease is unmodified and in full force and effect, or in full force
and effect as modified, and stating all modifications, (b) the then-current
Adjusted Minimum Monthly Rent, (c) the dates to which Adjusted Minimum Monthly
Rent has been paid in advance, (d) the amount of any security deposit, prepaid
rent or other payment constituting Rental which has been paid, (e) whether or
not Tenant or Landlord is in default under this Lease, and (f) such other
matters as Landlord shall reasonably request. Tenant's failure to deliver such
certificate within such 10-day period shall be conclusive upon Tenant for the
benefit of Landlord, and any successor in interest to Landlord, that, except as
may be represented by Landlord, this Lease is unmodified and in full force and
effect, no Rental has been paid more that 30 days in advance, and neither Tenant
nor Landlord is in default under this Lease.
38. BROKERS. Except for Colliers Ilif Thorn, Landlord and Tenant represent that,
except as disclosed prior to the execution of this Lease, no real estate broker,
agent, finder, or other person is responsible
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for bringing about or negotiating this Lease and neither party has dealt with
any real estate broker, agent, finder, or other person, relative to this Lease
in any manner. Landlord and Tenant shall indemnify and defend the other party
against all liability, costs, expenses and charges (including without limitation
attorneys' fees and disbursements) arising from any claims that may be made
against Landlord or Tenant by any real estate broker, agent, finder, or other
person (other than those disclosed as set forth above), alleging to have acted
on behalf of or to have dealt with Landlord or Tenant.
39. EASEMENTS. Landlord may, at its election, from time to time, grant such
easements, rights and dedications, and cause the recordation of parcel maps and
restrictions, provided such easements, rights dedications, parcel maps and
restrictions do not unreasonably interfere with Tenant's access to the Premises
or the use of the Premises by Tenant. Tenant shall promptly sign any documents
or instruments to accomplish the foregoing upon request by Landlord.
40. LIMITATIONS ON LANDLORD'S LIABILITY. If Landlord is in default of this
Lease, and as a consequence Tenant recovers a money judgement against Landlord,
such judgment shall be satisfied only out of the proceeds of sale received upon
execution of such judgment and levy against the right, title and interest of
Landlord in the Real Property, and out of rent or other income from the Real
Property receivable by Landlord or out of the consideration received by Landlord
from the sale or other disposition of all or any part of Landlord's right, title
and interest in the Real Property. Neither Landlord nor the partners comprising
Landlord (if any) shall be personally liable for any deficiency.
41. SALE OF TRANSFER OF PREMISES. If Landlord sells or transfers any portion of
the Premises, Landlord, on consummation of the sale or transfer, shall be
released from any liability thereafter accruing under this Lease. If any
security deposit or prepaid rent has been paid by Tenant, Landlord shall
transfer the security deposit and/or prepaid rent to Landlord's
successor-in-interest and on such transfer Landlord shall be discharged from any
further liability arising from the security deposit or prepaid rent.
42. QUITCLAIM DEED. Tenant shall execute and deliver to Landlord on the
Expiration Date or earlier termination of this Lease, promptly on Landlord's
request, a quitclaim deed to the Premises, in recordable form, designating
Landlord as transferee.
43. NO MERGER. The voluntary or other surrender of this Lease by Tenant, or a
mutual cancellation of this Lease, or a termination by Landlord, shall not work
a merger, and shall, at the option of Landlord, terminate any existing subleases
or may, at the option of Landlord, operate as an assignment to Landlord of any
such subleases.
44. NOTICES. All notices or other communications required or permitted to be
given to Tenant or Landlord shall be in writing and shall be personally
delivered, sent by registered or certified mail, postage prepaid, return receipt
requested, or sent by an overnight express courier service that provides written
confirmation of delivery, to Tenant at the Premises and to Landlord at its
address as set forth in the introductory Paragraph of this Lease. Each such
notice or other communication
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shall be deemed given, delivered and received upon its actual receipt, except
that if it is mailed in accordance with this Paragraph, then it shall be deemed
given, delivered and received three days after the date such notice or other
communication is deposited with the United States Postal Service in accordance
with this Paragraph. Landlord or Tenant may give a notice of a change of its
address to the other.
45. EXPENSES. The prevailing party shall be entitled to recover from the
unsuccessful party all costs, expenses and actual attorney's fees relating to
the enforcement of, or any litigation relating to, this Lease.
46. TIME OF ESSENCE. Time and strict and punctual performance are of the essence
with respect to each provision of this Lease.
47. SUCCESSORS-IN-INTEREST AND ASSIGNS. Subject to any restriction on
transferability contained in this Lease, this Lease shall be binding upon and
shall inure to the benefit of the successors-in-interest and assigns of each
party to this Lease. Nothing in this Paragraph shall create any rights
enforceable by any person not a party to this Lease, except for the rights of
the successors-in-interest and assigns of each party to this Lease, unless such
rights are expressly granted in this Lease to other specifically identified
persons.
48. MISCELLANEOUS. This Lease contains the entire agreement between Landlord and
Tenant with respect to the subject matter of this Lease and supersedes all prior
understandings, agreements, representations and warranties, if any, with respect
to such subject matter. This Lease shall be governed by and construed in
accordance with the laws of the State of California. The headings of the
Paragraphs of this Lease have been included only for convenience, and shall not
be deemed in any manner to modify or limit any of the provisions of this Lease,
or be used in any manner in the interpretation of this Lease. Whenever the
context so requires, all words used in the singular shall be construed to have
been used in the plural (and vice versa), each gender shall be construed to
include any other genders, and the word "person" shall be construed to include a
natural person, a corporation, a firm, a partnership, a joint venture, a trust,
a estate or any other entity. Each provision of this Lease shall be valid and
enforceable to the fullest extent permitted by law. If any provision of this
Lease or the application of such provision to any person or circumstance shall,
to any extent, be invalid or unenforceable, the remainder of this Lease, or the
application of such provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, shall not be affected by such
invalidity or unenforeceability, unless such provision or such application of
such provision is essential to this Lease. All provisions, whether covenants or
conditions, to be performed or observed by Tenant shall be deemed to be both
covenants and conditions. If more than one person is Tenant, then the
obligations imposed on Tenant shall be joint and several; provided, however,
that any act or signature of one or more of any of the persons executing this
Lease as Tenant and any notice or refund given to or served on any one of such
persons shall be fully binding on all of such persons. This Lease shall become
effective when it has been executed by each of Landlord and Tenant. This Lease
may be executed in counterparts, each of which shall be deemed an original and
all of which together shall constitute one document. All payments to be made by
Tenant to Landlord
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under this Lease shall be in United States currency. For purposes of venue and
jurisdiction, this Lease shall be deemed made and to be performed in the City of
San Diego, California.
49. ADDITIONAL PROVISIONS. Attached Paragraph(s), are incorporated in
this Lease by this reference.
50. HAZARDOUS SUBSTANCES. If Landlord knows, or has reasonable cause to
believe, that a Hazardous Substance (as hereinafter defined), or a condition
involving or resulting in the same, has come to be located in, on, under or
about the Premises or the Real Property, Landlord shall immediately give written
notice of such fact to Tenant. Landlord hereby represents and warrants to and
for the benefit of Tenant that except for any matter disclosed by the Phase I
Environmental Assessment dated January 9, 1995 and prepared by Law Crandall,
Inc. (A copy of which has been furnish to Tenant), to the best of Landlord's
knowledge there are and have been no Hazardous Substances located in, on, under
or about the Premises or the Real Property, and there have been no violations of
applicable regulations on or with respect to the Premises or the Real Property.
51. AMERICANS WITH DISABILITIES ACT. Landlord hereby represents and
warrants, to the best of Landlord's knowlege, that the Premises, as of the
Commencement Date, as they are currently used and as Tenant intends to use them,
comply in all respects with the Americans With Disabilities Act (the "ADA"), and
covenants to (a) make all repairs and alterations to the Premises and the
improvements thereon that may be required to cause the Premises and such
improvements to comply with the ADA.
52. RIGHT OF FIRST REFUSAL. Landlord hereby grants to Tenant a right of
first refusal to lease up to an additional 1,000 square feet in the Building
adjacent and contiguous to the Premises (an "Adjacent Space") as hereinafter set
forth in this Paragraph 52. At any time during the term of this Lease, provided
that Tenant is not then in Default under this Lease, if an Adjacent Space
becomes available or Landlord receives a bona fide offer to lease an Adjacent
Space, Landlord shall give notice to Tenant (the "Notice") that such Adjacent
Space is available, and concurrently therewith, Landlord shall provide Tenant
with a copy the price and other terms and conditions upon which Landlord will
lease the Adjacent Space to Tenant or, If Landlord has received an offer from a
third party, the terms and conditions of the proposed lease to such third party.
If Tenant elects to exercise its right of first refusal with respect to the
Adjacent Space, it shall do so by delivering to Landlord written notice of its
election to lease the Adjacent Space on the terms and conditions identical to
those set forth in the Notice within ten (10) business days after receipt of the
Notice. If Tenant does not so notify Landlord within such ten (10) day period,
then Tenant shall be deemed to have rejected the right to lease the Adjacent
Space, and Landlord may, to lease the Adjacent Space to a third party on
substantially the same terms and conditions set forth in the Notice. If Landlord
does not lease the Adjacent Space, this right of first refusal shall not
terminate, but shall continue for the balance of the term of this Lease.
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LANDLORD: JLRB ASSOCIATES, a California limited partnership.
By: _______________________________________________________
TENANT:
HOME ASSET MANAGEMENT CORP., a Delaware Corporation
By: _______________________________________________________
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EXHIBIT A
DESCRIPTION OF LAND
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EXHIBIT B
DESCRIPTION OF PREMISES
Premises is located on the First (2) level, more commonly known as the Suite
230.
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EXHIBIT C
EXPENSES
1. Salaries, wages, medical and surgical benefits, insurance (including without
limitation group life and disability insurance), union and general welfare
benefits, pension payments, payroll taxes, workers' compensation, uniforms and
related expenses for Landlord's Representatives; provided, however, that any
salaries or other compensation paid to any principal or partner of Landlord
shall not exceed amounts customarily paid in arms-length transactions.
2. Painting, landscaping, window cleaning, janitorial and other cleaning
services, pest and termite control and removal, and security services.
3. Supplies (including without limitation cleaning supplies), and tools and
other materials, and sales and other taxes on such items.
4. Gas, oil, electricity, heat, ventilation, air-conditioning, water, steam for
heating, and other utilities, together with any taxes on such utilities, and
water and sewer charges.
5. Premiums, costs, expenses and deductibles (or similar costs or charges) of
and/or with respect to insurance Landlord maintains, including without
limitation public liability and property damage insurance, fire and extended
coverage insurance, business interruption insurance, rent insurance, fidelity
insurance, plate-glass insurance, earthquake insurance, and/or any other
insurance that Landlord is obligated to maintain under this Lease.
6. Whether or not capitalized under generally accepted accounting principles,
the cost of operation, maintenance and repairs, and costs of replacements (which
costs shall be amortized over five years) made in connection with operation,
maintenance and repairs, of cables, fans, pumps, boilers, cooling equipment,
wiring, electrical fixtures, metering control and distribution equipment,
heating, ventilating and air-conditioning systems, electrical systems, plumbing
systems, elevators, parking lots, driveways, asphalt areas, lighting, life
and/or property protection (including without limitation sprinkler) systems,
window washing equipment, and/or any other portions of the Real Property.
7. The cost of, and/or the cost of the rental of, together with the cost of the
installation (which costs shall be amortized over five years) of, any security
or other system used in connection with life or property protection (including
without limitation all machinery, electronic systems, and other equipment
comprising any part of such systems), as well as the cost of the operation,
maintenance, and/or repair of any such system.
8. Reasonable legal, accounting, and other professional fees directly
attributable to the Premises; Provided, however, that the foregoing expenses
shall not include expenses incurred in enforcing a lease against any tenant
(except for Landlord's enforcement of the building's Rules and Regulations).
9. Management fees, which is not in excess of the then-prevailing rates for
on-site management fees
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of comparable buildings in San Diego County.
10. All other charges properly allocable in accordance with real estate
accounting practices customarily used in Southern California.
11. Notwithstanding anything to the contrary contained in the foregoing,
"Expenses" shall not include the following:
(1) costs incurred for the construction, or replacement of the
structural components of the Building, including, without limitation,
foundations, exterior walls, roof, beams, columns, footings and structural
slabs;
(2) costs incurred to cure any defects in the Building and expenditures
required to maintain the Building or any portion thereof in compliance with
existing laws, rules, regulations, codes or permits (as of the date of issuance
of such permit) applicable to the Building or any portion thereof;
(3) costs, expenses and penalties (including, without limitation,
attorneys' fees) incurred as a result of the use, storage, removal or
remediation of any Hazardous Substances or in connection with a hazardous
substances condition not caused by Lessee;
(4) costs incurred for alterations, replacements or improvements which
are classified as capital expenditures or improvements under generally accepted
accounting principles;
(5) rentals and other payments by Lessor under any ground lease and
interest, principal, points and fees on debt or amortization of any debt secured
in whole or in part by the Building;
(6) costs incurred for or in connection with the financing, sale or
acquisition of the Building;
(7) depreciation on the structural componets of the Building;
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EXHIBIT D
RULES
1. Tenant, and Tenant's Representatives, shall neither loiter in the entrances
or corridors of the Building, nor in any way obstruct the sidewalks, entries,
passages, halls, stairways (if any) and elevators (if any) of the Building, and
shall use the same only as passageways and means of passage to and from their
respective offices.
2. Elevators of the Building, if any, shall not be used during normal business
hours for the moving or transporting of freight, furniture, business equipment,
merchandise and/or bulky matter. Such moving and transporting shall be performed
only upon Landlord's prior written consent.
3. No person shall use any utility area, truck loading area, or other area
reserved for use in conducting business, except for the specific purpose for
which permission to use such area has been given.
4. Without the prior written consent of Landlord, no person shall use any of the
Common Areas for any of the following:
4.1. Vending, peddling, soliciting orders for sale or distributing of any
merchandise, device, service, periodical, book, pamphlet, or other matter.
4.2. Exhibiting or distributing any sign, placard, banner, notice, circular,
booklet, handbill, or other material.
4.3. Soliciting membership in any organization, group, or association or
soliciting contributions for any purpose.
4.4. Parading, patrolling, picketing, demonstrating, or engaging in conduct that
might interfere with the use of the Common Areas or be detrimental to any of the
business establishments in the Building.
4.5. Using the Common Areas for any purpose when none of the business
establishments in the Building is open for business.
4.6. Discarding any paper, glass, or extraneous matter of any kind, except in
designated receptacles.
5. Landlord shall prescribe the location with in the premises in which the
Tenant shall locate the position of all furniture, file cabinets, equipment or
objects weighing more than 250 pounds, either individually or cumulatively,
brought into the Building, and also the times of moving in and out of the
Building and all such moving must be done under the supervision of Landlord.
Landlord will not be responsible for any loss of or damage to any such equipment
or objects from any cause; but all damage done to the Building by moving or
maintaining any such equipment or objects shall be repaired at the expense of
Tenant.
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6. Two keys will be furnished by Landlord for every store and any additional key
required must be obtained from Landlord. All keys shall be surrendered to
Landlord on the Expiration Date or earlier termination of this Lease. Tenant
will not change any locks without Landlord's prior written consent.
7. Landlord's employees shall not perform any work nor do anything outside their
regular duties unless under special instructions from Landlord or Landlord's
designated agent, and no such employee shall admit any person (Tenant or
otherwise) to any store without instructions from Landlord or Landlord's agent.
8. Landlord may prohibit any supplier from making deliveries to the Building
because of undesirable conduct of deliverymen, such as the parking of delivery
vehicles contrary to Landlord's instructions.
9. At any time while a watchman is in charge of the Building, persons entering
or leaving the Building may be questioned by the watchman as to their business
in the Building; and anyone not satisfying the watchman of his or her right to
enter the Building may be excluded by the watchman.
10. Tenants, and Tenant's Representatives, shall observe faithfully and comply
strictly with these rules and such other rules as Landlord may from time to time
adopt for the Premises or the Common Areas in Landlord's absolute discretion.
Tenant shall cause its Tenants' Representatives to observe faithfully and comply
strictly with all of such rules.
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ADDENDUM TO LEASE
Addendum to Lease dated January 16, 1997 between JLRB ASSOCIATES, a California
limited partnership ("Landlord"), and ("Tenant"). Tenant shall have the right to
occupy the premises the earlier of; completion of Landlord's work, or
Commencement Date set forth in Paragraph 1.2 of this Lease.
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EXHIBIT E
TENANT IMPROVEMENTS
Tenant agrees to accept the existing tenant improvements in an "As Is" condition
and waives any claims to additional tenant improvements by the Landlord, subject
only to the additional Tenant Improvement reflected in the attached space plan.
As of April 11, 1997, Tenant hereby accepts Landlord's work as completed in
accordance to the revised and updated space plan, subject only to punch list
items. It is also agreed that Tenant shall pay Landlord as "Additional Rent" the
sum of $422.52 per month from April 1, 1997 to March 31, 2000 for additional
tenant improvement work of $13,287.00 requested by Tenant and constructed by
Landlord. The monthly payment for the above referenced additional tenant
improvements paid by Landlord have been amortized over 36 months at nine percent
interest.
Tenant shall also reimburse landlord $4,000.00 in nine equal installments of
$444.44 per month for each month from April 1, 1997 to December 31. 1997 a
matter of lease negotiations associated with the buy out of Jenny Craig Inc.'s
leasehold responsibility.
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EXHIBIT 10.14
INDEMNITY AGREEMENT
AGREEMENT dated as of ________, by and between American Residential
Investment Trust, Inc., a Maryland corporation (the "Corporation"), and
_____________ (the "Indemnitee").
RECITALS
WHEREAS, the Charter and Bylaws of the Corporation provide for
indemnification by the Corporation of its directors and officers as provided
therein, and the Indemnitee has been serving and continues to serve as a
director and/or officer of the Corporation in part in reliance on such
provision;
WHEREAS, to provide Indemnitee with additional contractual assurance of
protection against personal liability in connection with certain proceedings
described below, the Corporation desires to enter into this Agreement;
WHEREAS, the Maryland General Corporation Law (the "Maryland Statute")
expressly recognizes that the indemnification provisions of the Maryland Statute
are not exclusive of any other rights to which a person seeking indemnification
may be entitled under the Charter or Bylaws of the Corporation, a resolution of
stockholders or directors, an agreement or otherwise, and this Agreement is
being entered into pursuant to and in furtherance of the Charter and Bylaws of
the Corporation, as permitted by the Maryland Statute and as authorized by the
Charter and the Board of Directors of the Corporation; and
WHEREAS, in order to induce the Indemnitee to serve or continue to serve
as a director and/or officer of the Corporation and in consideration of the
Indemnitee's so serving, the Corporation desires to indemnify the Indemnitee and
to make arrangements pursuant to which the Indemnitee may be advanced or
reimbursed expenses incurred by Indemnitee in certain proceedings described
below, according to the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the foregoing recitals and of
Indemnitee's serving or continuing to serve the Corporation as a director and/or
officer, the parties agree as follows:
1. Indemnification.
(a) In accordance with the provisions of subsection (b) of this
Section 1, the Corporation shall hold harmless and indemnify the Indemnitee
against any and all expenses, liabilities and losses (including, without
limitation, investigation expenses and expert witnesses' and attorneys' fees and
expenses, judgments, penalties, fines, ERISA excise taxes and amounts
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paid or to be paid in settlement) actually incurred by the Indemnitee (net of
any related insurance proceeds or other amounts received by Indemnitee or paid
by or on behalf of the Corporation on the Indemnitee's behalf), in connection
with any action, suit, arbitration or proceeding (or any inquiry or
investigation, whether brought by or in the right of the Corporation or
otherwise, that Indemnitee in good faith believes might lead to the institution
of any such action, suit, arbitration or proceeding), whether civil, criminal,
administrative or investigative, or any appeal therefrom, in which the
Indemnitee is a party, is threatened to be made a party, is a witness or is
participating (a "Proceeding") based upon, arising from, relating to, or by
reason of the fact that Indemnitee is, was, shall be, or shall have been a
director and/or officer of the Corporation or is or was serving, shall serve, or
shall have served at the request of the Corporation as a director, officer,
partner, trustee, employee, or agent ("Affiliate Indemnitee") of another foreign
or domestic corporation or non-profit corporation, cooperative, partnership,
joint venture, trust, or other incorporated or unincorporated enterprise (each,
a "Company Affiliate").
(b) In providing the foregoing indemnification, the Corporation
shall, with respect to a Proceeding, hold harmless and indemnify the Indemnitee
to the fullest extent required by the Maryland Statute and to the fullest extent
permitted by the Express Permitted Indemnification Provisions (as hereinafter
defined) of the Maryland Statute. For purposes of this Agreement, the Express
Permitted Indemnification Provisions of the Maryland Statute shall mean
indemnification as permitted by Section 2-418(b) of the Maryland Statute or by
any amendment thereof or other statutory provisions expressly permitting such
indemnification which is adopted after the date hereof (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than said law required or permitted
the Corporation to provide prior to such amendment).
(c) Without limiting the generality of the foregoing, the Indemnitee
shall be entitled to the rights of indemnification provided in this Section 1
for any expenses actually incurred in any Proceeding initiated by or in the
right of the Company unless the Indemnitee shall have been adjudged to be liable
to the Company.
(d) If Indemnitee is entitled under this Agreement to indemnification
by the Corporation for some or a portion of the Indemnified Amounts but not,
however, for all of the total amount thereof, the Corporation shall nevertheless
indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.
2. Other Indemnification Arrangements. The Maryland Statute and the
Charter and Bylaws of the Corporation permit the Corporation to purchase and
maintain insurance or furnish similar protection or make other arrangements,
including, but not limited to, providing a trust fund, letter of credit, or
surety bond ("Indemnification Arrangements") on behalf of the Indemnitee against
any liability asserted against him or her or incurred by or on behalf of him or
her in such capacity as a director or officer of the Corporation or an
Affiliated Indemnitee, or arising out of his or her status as such, whether or
not the Corporation would have the power to indemnify him or her against such
liability under the provisions of this Agreement or under the Maryland Statute,
as it may then be in effect. The purchase, establishment, and maintenance of
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any such Indemnification Arrangement shall not in any way limit or affect the
rights and obligations of the Corporation or of the Indemnitee under this
Agreement except as expressly provided herein, and the execution and delivery of
this Agreement by the Corporation and the Indemnitee shall not in any way limit
or affect the rights and obligations of the Corporation or the other party or
parties thereto under any such Indemnification Arrangement. All amounts payable
by the Corporation pursuant to this Section 2 and Section 1 hereof are herein
referred to as "Indemnified Amounts."
3. Advance Payment of Indemnified Amounts.
(a) The Indemnitee hereby is granted the right to receive in advance
of a final, nonappealable judgment or other final adjudication of a Proceeding
(a "Final Determination") the amount of any and all expenses, including, without
limitation, investigation expenses, expert witness' and attorney's fees and
other expenses expended or incurred by the Indemnitee in connection with any
Proceeding or otherwise expended or incurred by the Indemnitee (such amounts so
expended or incurred being referred to as "Advanced Amounts").
(b) In making any written request for Advanced Amounts, the
Indemnitee shall submit to the Corporation a schedule setting forth in
reasonable detail the dollar amount expended or incurred and expected to be
expended. Each such listing shall be supported by the bill, agreement, or other
documentation relating thereto, each of which shall be appended to the schedule
as an exhibit. In addition, before the Indemnitee may receive Advanced Amounts
from the Corporation, the Indemnitee shall provide to the Corporation (i) a
written affirmation of the Indemnitee's good faith belief that the applicable
standard of conduct required for indemnification by the Corporation has been
satisfied by the Indemnitee, and (ii) a written undertaking by or on behalf of
the Indemnitee to repay the Advanced Amount if it shall ultimately be determined
that the Indemnitee has not satisfied any applicable standard of conduct. The
written undertaking required from the Indemnitee shall be an unlimited general
obligation of the Indemnitee but need not be secured. The Corporation shall pay
to the Indemnitee all Advanced Amounts within twenty (20) days after receipt by
the Corporation of all information and documentation required to be provided by
the Indemnitee pursuant to this paragraph.
4. Procedure for Payment of Indemnified Amounts.
(a) To obtain indemnification under this Agreement, the Indemnitee
shall submit to the Corporation a written request for payment of the appropriate
Indemnified Amounts, including with such requests such documentation and
information as is reasonably available to the Indemnitee and reasonably
necessary to determine whether and to what extent the Indemnitee is entitled to
indemnification. The Secretary of the Corporation shall, promptly upon receipt
of such a request for indemnification, advise the Board of Directors in writing
that the Indemnitee has requested indemnification.
(b) The Corporation shall pay the Indemnitee the appropriate
Indemnified Amounts unless it is established that the Indemnitee has not met any
applicable standard of conduct of the
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Express Permitted Indemnification Provisions. For purposes of determining
whether the Indemnitee is entitled to Indemnified Amounts, in order to deny
indemnification to the Indemnitee the Corporation has the burden of proof in
establishing that the Indemnitee did not meet the applicable standard of
conduct. In this regard, a termination of any Proceeding by judgment, order or
settlement does not create a presumption that the Indemnitee did not meet the
requisite standard of conduct; provided, however, that the termination of any
criminal proceeding by conviction, or a pleading of nolo contendere or its
equivalent, or an entry of an order of probation prior to judgment, creates a
rebuttable presumption that the Indemnitee did not meet the applicable standard
of conduct.
(c) Any determination that the director has not met the applicable
standard of conduct required to qualify for indemnification shall be made (i)
either by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties of such action, suit or proceeding; or (ii) by
independent legal counsel (who may be the outside counsel regularly employed by
the Corporation); provided that the manner in which (and, if applicable, the
counsel by which) the right to indemnification is to be determined shall be
approved in advance in writing by both the highest ranking executive officer of
the Corporation who is not party to such action (sometimes hereinafter referred
to as "Senior Officer") and by the Indemnitee. In the event that such parties
are unable to agree on the manner in which any such determination is to be made,
such determination shall be made by independent legal counsel retained by the
Corporation especially for such purpose, provided that such counsel be approved
in advance in writing by both the said Senior Officer and Indemnitee and
provided further, that such counsel shall not be outside counsel regularly
employed by the Corporation. The fees and expenses of counsel in connection with
making said determination contemplated hereunder shall be paid by the
Corporation, and, if requested by such counsel, the Corporation shall give such
counsel an appropriate written agreement with respect to the payment of their
fees and expenses and such other matters as may be reasonably requested by
counsel.
(d) The Corporation will use its best efforts to conclude as soon as
practicable any required determination pursuant to subparagraph (c) above and
promptly will advise the Indemnitee in writing with respect to any determination
that the Indemnitee is or is not entitled to indemnification, including a
description of any reason or basis for which indemnification has been denied.
Payment of any applicable Indemnified Amounts will be made to the Indemnitee
within ten (10) days after any determination of the Indemnitee's entitlement to
indemnification.
(e) Notwithstanding the foregoing, Indemnitee may, at any time after
sixty (60) days after a claim for Indemnified Amounts has been filed with the
Corporation (or upon receipt of written notice that a claim for Indemnified
Amounts has been rejected, if earlier) and before three (3) years after a claim
for Indemnified Amounts has been filed, petition a court of competent
jurisdiction to determine whether the Indemnitee is entitled to indemnification
under the provisions of this Agreement, and such court shall thereupon have the
exclusive authority to make such determination unless and until such court
dismisses or otherwise terminates such action without having made such
determination. The court shall, as petitioned, make an independent determination
of whether the Indemnitee is entitled to indemnification as provided under this
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Agreement, irrespective of any prior determination made by the Board of
Directors or independent counsel. If the court shall determine that the
Indemnitee is entitled to indemnification as to any claim, issue or matter
involved in the Proceeding with respect to which there has been no prior
determination pursuant to this Agreement or with respect to which there has been
a prior determination that the Indemnitee was not entitled to indemnification
hereunder, the Corporation shall pay all expenses (including attorneys' fees)
actually incurred by the Indemnitee in connection with such judicial
determination.
5. Agreement Not Exclusive; Subrogation Rights, etc.
(a) This Agreement shall not be deemed exclusive of and shall not
diminish any other rights the Indemnitee may have to be indemnified or insured
or otherwise protected against any liability, loss, or expense by the
Corporation, any subsidiary of the Corporation, or any other person or entity
under any charter, bylaws, law, agreement, policy of insurance or similar
protection, vote of stockholders or directors, disinterested or not, or
otherwise, whether or not now in effect, both as to actions in the Indemnitee's
official capacity, and as to actions in another capacity while holding such
office. The Corporation's obligations to make payments of Indemnified Amounts
hereunder shall be satisfied to the extent that payments with respect to the
same Proceeding (or part thereof) have been made to or for the benefit of the
Indemnitee by reason of the indemnification of the Indemnitee pursuant to any
other arrangement made by the Corporation for the benefit of the Indemnitee.
(b) In the event the Indemnitee shall receive payment from any
insurance carrier or from the plaintiff in any Proceeding against such
Indemnitee in respect of Indemnified Amounts after payments on account of all or
part of such Indemnified Amounts have been made by the Corporation pursuant
hereto, such Indemnitee shall promptly reimburse to the Corporation the amount,
if any, by which the sum of such payment by such insurance carrier or such
plaintiff and payments by the Corporation or pursuant to arrangements made by
the Corporation to Indemnitee exceeds such Indemnified Amounts; provided,
however, that such portions, if any, of such insurance proceeds that are
required to be reimbursed to the insurance carrier under the terms of its
insurance policy, such as deductible or co-insurance payments, shall not be
deemed to be payments to the Indemnitee hereunder. In addition, upon payment of
Indemnified Amounts hereunder, the Corporation shall be subrogated to the rights
of Indemnitee receiving such payments (to the extent thereof) against any
insurance carrier (to the extent permitted under such insurance policies) or
plaintiff in respect of such Indemnified Amounts and the Indemnitee shall
execute and deliver any and all instruments and documents and perform any and
all other acts or deeds which the Corporation deems necessary or advisable to
secure such rights. Such right of subrogation shall be terminated upon receipt
by the Corporation of the amount to be reimbursed by the Indemnitee pursuant to
the first sentence of this paragraph.
6. Insurance Coverage. In the event that the Corporation directors
and officers liability maintains insurance to protect itself and any director or
officer of the Corporation against any expense, liability or loss, such
insurance shall cover the Indemnitee to at least the same extent as any other
director or officer of the Corporation.
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7. Establishment of Trust. In the event of a potential business
combination or change in control (as contemplated by Article Eleventh (11) of
the Charter of the Corporation) (collectively, a "Change in Control"), the
Corporation shall, upon written request by Indemnitee, create a trust (the
"Trust") for the benefit of the Indemnitee and from time to time upon written
request of Indemnitee shall fund the Trust in an amount sufficient to satisfy
any and all Indemnified Amounts (including, Advanced Amounts) which are actually
paid or which Indemnitee reasonably determines from time to time may be payable
by the Corporation under this Agreement. The amount or amounts to be deposited
in the Trust pursuant to the foregoing funding obligation shall be determined by
the independedt legal counsel appointed under Section 4 hereof. The terms of the
Trust shall provide that upon a Change in Control: (i) the Trust shall not be
revoked or the principal thereof invaded without the written consent of the
Indemnitee; (ii) the trustee of the Trust shall advance, within twenty (20) days
of a request by the Indemnitee, any and all Advanced Amounts to the Indemnitee
(and the Indemnitee hereby agrees to reimburse the Trust under the circumstances
under which the Indemnitee would be required to reimburse the Corporation under
Section 3(b)(ii) hereof); (iii) the Corporation shall continue to fund the Trust
from time to time in accordance with the funding obligations set forth above;
(iv) the trustee of the Trust shall promptly pay to the Indemnitee all
Indemnified Amounts for which the Indemnitee shall be entitled to
indemnification pursuant to this Agreement; and (v) all unexpended funds in the
Trust shall revert to the Corporation upon a final determination by a court of
competent jurisdiction in a final decision from which there is no further right
of appeal that the Indemnitee has been fully Indemnified under the terms of this
Agreement. The Trustee of the Trust shall be chosen by the Indemnitee.
8. Continuation of Indemnity. All agreements and obligations of the
Corporation contained herein shall continue during the period Indemnitee is a
director or officer, as the case may be, of the Corporation (or is serving at
the request of the Corporation as an Affiliate Indemnitee) and shall continue
thereafter so long as Indemnitee shall be subject to any possible Proceeding by
reason of the fact that Indemnitee was a director or officer of the Corporation
or was serving in any other capacity referred to herein.
9. Successors; Binding Agreement. This Agreement shall be binding on
and shall inure to the benefit of and be enforceable by the Corporation's
successors and assigns and by the Indemnitee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees, and legatees. The Corporation shall require any successor or assignee
(whether direct or indirect, by purchase, merger, consolidation, or otherwise)
to all or substantially all of the business and/or assets of the Corporation, by
written agreement in form and substance reasonably satisfactory to the
Corporation and to the Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Corporation would
be required to perform if no such succession or assignment had taken place.
10. Enforcement. The Corporation has entered into this Agreement and
assumed the obligations imposed on the Corporation hereby in order to induce the
Indemnitee to act as a director or officer, as the case may be, of the
Corporation, and acknowledges that the Indemnitee
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is relying upon this Agreement in continuing in such capacity. In the event the
Indemnitee is required to bring any action to enforce rights or to collect
moneys due under this Agreement and is successful in such action, the
Corporation shall reimburse Indemnitee for all of the Indemnitee's fees and
expenses in bringing and pursuing such action. The Indemnitee shall be entitled
to the advancement of Indemnified Amounts to the full extent contemplated by
Section 3 hereof in connection with such proceeding.
11. Separability. Each of the provisions of this Agreement is a
separate and distinct agreement independent of the others, so that if any
provision hereof shall be held to be invalid or unenforceable for any reason,
such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof, which other provisions shall
remain in full force and effect.
12. Miscellaneous. No provision of this Agreement may be modified,
waived, or discharged unless such modification, waiver, or discharge is agreed
to in writing signed by Indemnitee and either the Chairman of the Board or the
President of the Corporation or another officer of the Corporation specifically
designated by the Board of Directors. No waiver by either party at any time of
any breach by the other party of, or of compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same time or
at any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not set forth expressly in this Agreement.
The validity, interpretation, construction, and performance of this Agreement
shall be governed by the laws of the State of Maryland, without giving effect to
the principles of conflicts of laws thereof. The Indemnitee may bring an action
seeking resolution of disputes or controversies arising under or in any way
related to this Agreement in the state or federal court jurisdiction in which
Indemnitee resides or in which his or her place of business is located, and in
any related appellate courts, and the Corporation consents to the jurisdiction
of such courts and to such venue.
13. Notices. For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to Indemnitee:
Attention:
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If to Corporation:
Attention: Secretary
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
15. Effectiveness. This Agreement shall be effective as of the date
it is executed.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of the day and year first above written.
ATTEST: [Name of Corporation]
_______________________________ By:_________________________________*
WITNESS: INDEMNITEE
- -------------------------------
[Name of Indemnitee]
8
