<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended: June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________________ to _________________
Commission File Number: 1-13485
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
(Exact name of Registrant as specified in its Charter)
<TABLE>
<S> <C>
Maryland 33-0741174
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
445 Marine View Avenue, Suite 230
Del Mar, California 92014
(Address of principal executive offices) Zip Code
</TABLE>
Registrant's telephone number, including area code (619) 350-5000
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to files such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] YES [ ] NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock ($.01 par value) 8,114,000 as of August 1, 1998
<PAGE> 2
<TABLE>
<CAPTION>
INDEX
Page
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 1998 and December 31, 1997 1
Consolidated Statements of Operations for the three months ended June 30, 1998
and 1997, for the six months ended June 30, 1998, and for the period
from February 11, 1997 (commencement of operations) through June 30, 1997 2
Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and
for the period from February 11, 1997 (commencement of operations)
through June 30, 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
</TABLE>
<PAGE> 3
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
June 30, 1998 December 31, 1997
<S> <C> <C>
Cash and cash equivalents $ 5,925 $ 5,893
Retained interest in securitization 6,659 --
Mortgage securities available-for-sale, net 303,006 387,099
Mortgage loans held-for-investment, net, pledged 643,065 162,762
Interest rate cap agreements 1,362 411
Accrued interest receivable 12,392 5,169
Due from affiliate 464 269
Investment in American Residential Holdings 475 --
Other assets 269 231
-----------------------------
$ 973,617 $ 561,834
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term debt $ 404,366 $ 451,288
Long-term debt, net 456,536 --
Accrued interest payable 3,430 1,839
Due to affiliate 954 --
Accrued expenses and other liabilities 366 632
Management fees payable -- 208
Accrued dividends -- 1,298
Deferred income 475 --
-----------------------------
Total liabilities 866,127 455,265
Stockholders' Equity:
Preferred stock, par value $.01 per share; 1,000 shares
authorized; no shares issued and outstanding -- --
Common stock, par value $.01 per share; 25,000,000 shares
authorized; 8,114,000 shares issued and outstanding 81 81
Additional paid-in-capital 109,763 109,786
Accumulated other comprehensive loss (4,630) (3,300)
Cumulative dividends declared (4,673) (2,401)
Retained earnings 6,949 2,403
-----------------------------
Total stockholders' equity 107,490 106,569
-----------------------------
$ 973,617 $ 561,834
=============================
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the period from
For the February 11, 1997
For the Three Months Ended Six Months (commencement of
June 30, Ended operations) through
1998 1997 June 30, 1998 June 30, 1997
---- ---- ------------- -------------
<S> <C> <C> <C> <C>
Interest income:
Mortgage assets $18,942 $ 3,801 $33,324 $ 4,017
Cash and investments 69 41 140 151
-------------------------------------------------------------
Total interest income 19,011 3,842 33,464 4,168
Interest expense 16,554 3,275 27,604 3,444
-------------------------------------------------------------
Net interest income 2,457 567 5,860 724
Provision for loan losses 282 -- 418 --
-------------------------------------------------------------
Net interest income after provision for loan losses 2,175 567 5,442 724
Other operating income:
Fee income 102 -- 102 --
Equity in income of Holdings 885 -- 885 --
Prepayment penalty 161 -- 183 --
-------------------------------------------------------------
Total other operating income 1,148 -- 1,170 --
-------------------------------------------------------------
Net operating income 3,323 567 6,612 724
Other expenses:
Management fee 700 66 1,169 69
Loan expense 275 -- 282 --
General and administrative expenses 79 63 615 71
-------------------------------------------------------------
Total other expenses 1,054 129 2,066 140
-------------------------------------------------------------
Net income $ 2,269 $ 438 $ 4,546 $ 584
=============================================================
Net income per share of Common Stock -- Basic $ 0.28 $ 0.27 $ 0.56 $ 0.36
Net income per share of Common Stock -- Diluted $ 0.28 $ 0.26 $ 0.56 $ 0.35
Dividends per share of Common Stock for related period $ 0.28 $ 0.27 $ 0.56 $ 0.36
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the period
For the February 11, 1997
Six Months (commencement of
Ended operations) through
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,546 $ 584
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of mortgage assets premiums 5,315 528
Amortization of interest rate cap agreements 91 40
Amortization of closing costs 1 --
Provision for loan loss 418 --
Increase in accrued interest receivable (7,223) (2,259)
Increase in other assets (39) (10)
Increase in due from affiliate (195) --
Increase in accrued interest payable 1,591 1,088
Decrease in accrued expenses and management fees payable (474) 288
Increase in due to affiliate 954 --
-----------------------------------
Net cash provided by operating activities 4,985 259
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage securities available-for-sale -- (239,555)
Purchases of mortgage loans held for investment (606,749) --
Principal payments on mortgage securities available-for-sale 79,608 10,407
Principal payments on mortgage loans held for investment 20,342 --
Sale of mortgage loans held for investment 103,526 --
Investment in Holdings (475) --
Purchase of retained interest in securitization (6,659) --
Deferred income from Class "X" certificate 475 --
Purchase of interest rate cap agreements (1,042) (542)
-----------------------------------
Net cash used in investing activities (410,974) (229,690)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase/(decrease) in net borrowings from reverse
repurchase agreements (46,922) 209,539
Other (23) --
Net proceeds from stock issuance -- 20,165
Dividends paid (3,570) (146)
Issuance of CMO/FASIT bonds 456,536 --
-----------------------------------
Net cash provided by financing activities 406,021 229,558
Net increase in cash and cash equivalents 32 127
Cash and cash equivalents at beginning of period 5,893 --
-----------------------------------
Cash and cash equivalents at end of period $ 5,925 $ 127
===================================
Supplemental information - interest paid $ 20,697 $ 1,828
===================================
Non-cash transactions:
Increase in accumulated other comprehensive loss $ 1,330 $ --
===================================
Equity in income of Holdings $ 885 $ --
===================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF FINANCIAL PRESENTATION AND ORGANIZATION
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of American
Residential Investment Trust, Inc. ("AmRES") and American Residential Eagle,
Inc. ("Eagle"), its wholly owned subsidiary (collectively "AmREIT").
Substantially all of the assets of Eagle are pledged or subordinated to support
long-term debt in the form of collateralized mortgage bonds ("Long-Term Debt")
and are not available for the satisfaction of general claims of AmREIT and
American Residential Holdings, Inc. ("Holdings"), (collectively the "Company").
The Company's exposure to loss on the assets pledged as collateral is limited to
its net investment, as the Long-Term Debt is non-recourse to the Company. All
significant intercompany balances and transactions with Eagle have been
eliminated in the consolidation of AmREIT.
During the first half of 1998, the Company formed Holdings, through which a
portion of the Company's Mortgage Loan acquisition and finance activities will
be conducted. AmREIT owns all of the preferred stock and has a non-voting 95%
economic interest in Holdings. Because AmREIT does not control Holdings, its
investment in Holdings is accounted for under the equity method. Under this
method, original equity investments in Holdings are recorded at cost and
adjusted by AmREIT's share of earnings or losses and decreased by dividends
received.
For financial reporting purposes, references to AmREIT mean AmRES and Eagle;
while references to the "Company" mean AmRES, Eagle, and Holdings. Certain
amounts for prior periods have been reclassified to conform with the 1998
presentation.
The accompanying consolidated financial statements have been prepared in
accordance with Generally Accepted Accounting Principles ("GAAP") and with the
instructions to Form 10-Q promulgated under the Securities and Exchange Act of
1934. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of the
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of AmREIT and its consolidated
financial condition and results of operations have been included. Operating
results for the three and six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998.
Organization
American Residential Investment Trust, Inc., a Maryland corporation, commenced
operations on February 11, 1997. AmRES was financed through a private equity
funding from its manager, Home Asset Management Corporation (the "Manager").
AmRES operates as a mortgage real estate investment trust ("REIT") which has
elected to be
4
<PAGE> 7
taxed as a real estate investment trust for Federal income tax purposes, which
generally will allow AmRES to pass through its income to its stockholders
without payment of corporate level Federal income tax, provided that the Company
distributes out 100% of its taxable income to stockholders. During 1998, the
Company formed Eagle, a special-purpose finance subsidiary. Holdings, a
non-REIT, taxable affiliate of the Company, was established during the first
half of 1998. The Company acquires residential mortgage-backed securities and
mortgage loans (collectively, "Mortgage Assets"). These Mortgage Assets are
typically secured by single-family real estate properties throughout the United
States. The Company utilizes both debt and equity to finance its acquisitions.
The Company may also use securitization techniques to enhance the value and
liquidity of the Company's Mortgage Assets and may sell Mortgage Assets from
time to time.
The Company diversified its residential mortgage loan sales activities in the
second quarter of 1998 to include the securitization of such loans through a
Real Estate Mortgage Investment Conduit ("REMIC"). The REMIC, which consisted of
pooled fixed-rate first-lien mortgages, was issued by Holdings to the public
through the registration statement of the related underwriter.
Earnings Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128"). This
statement replaces the previously reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effect of options. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts have been restated to conform
to the SFAS No. 128 requirements.
The following table illustrates the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
For the period
For the February 11, 1997
For the Three Months Ended Six Months (commencement of
June 30, Ended operations) through
1998 1997 June 30, 1998 June 30, 1997
---- ---- ------------- -------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic income per share - net income $ 2,269 $ 438 $ 4,546 $ 584
Denominator:
Denominator for basic income per share - weighted average
number of common shares outstanding during the period 8,114,000 1,614,000 8,114,000 1,614,000
Incremental common shares attributable to exercise of
outstanding options -- 52,533 7,700 52,533
--------------------------------------------------------------
Denominator for diluted income per share 8,114,000 1,666,533 8,121,700 1,666,533
Basic income per share $ 0.28 $ 0.27 $ 0.56 $ 0.36
Diluted income per share 0.28 0.26 0.56 0.35
</TABLE>
5
<PAGE> 8
Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income
(Statement 130). Statement 130 establishes standards for reporting and display
of comprehensive income and its components in the consolidated financial
statements.
The FASB defines comprehensive income as "the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners."
The following table illustrates comprehensive income:
<TABLE>
<CAPTION>
For the period from
For the February 11, 1997
For the Three Months Ended Six Months (commencement of
June 30, Ended operations) through
1998 1997 June 30, 1998 June 30, 1997
------- ------- ------------- --------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 2,269 $ 438 $ 4,546 $ 584
Other comprehensive income/(loss) (630) 217 (1,330) --
------------------------------------------------------------------
Comprehensive income/(loss) $ 1,639 $ 655 $ 3,216 $ 584
==================================================================
</TABLE>
Recent Accounting Developments
Disclosure about Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Standards (SFAS) No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for the way
that public enterprises report information about operating segments in annual
financial statements and requires that selected information about these
operating segments be reported in interim financial statements. This statement
supersedes SFAS 14 "Financial Reporting for Segments of a Business Enterprise."
SFAS No. 131 requires that all public enterprises report financial and
descriptive information about its reportable operating segments. Operating
segments are defined as components evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. This statement is effective for fiscal years beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years should be restated.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other
6
<PAGE> 9
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
Under SFAS No. 133, an entity that elects to apply hedge accounting is required
to establish at the inception of the hedge the method it will use for assessing
the effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk.
SFAS No. 133 amends FASB Statement No. 32, "Foreign Currency Translation," to
permit special accounting for a hedge of a foreign currency forecasted
transaction with a derivative. It supersedes FASB Statements No. 80, "Accounting
for Futures Contracts," No. 105, "Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk," and No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments." It amends FASB
Statement No. 107, "Disclosures about Fair Value of Financial Instruments," to
include in Statement 107 the disclosure provisions about concentrations of
credit risk from Statement 105. This Statement also nullifies or modifies the
consensuses reached in a number of issues addressed by the Emerging Issues Task
Force. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.
NOTE 2. MORTGAGE SECURITIES AVAILABLE FOR SALE, NET
At June 30, 1998, the Company's Mortgage Securities consisted of the following
mortgage participation certificates issued or guaranteed by Federal government
sponsored agencies:
<TABLE>
<CAPTION>
Federal Home Federal National
Loan Mortgage Mortgage
Corporation Association Total
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Mortgage Securities available-for-sale,
principal $ 200,753 $ 95,095 $ 295,848
Unamortized premium 7,690 4,098 11,788
--------- --------- ---------
Amortized cost 208,443 99,193 307,636
Unrealized loss (3,079) (1,551) (4,630)
--------- --------- ---------
Fair value $ 205,364 $ 97,642 $ 303,006
========= ========= =========
</TABLE>
7
<PAGE> 10
At June 30, 1998 all investments in Mortgage Securities consisted of interests
in adjustable rate mortgage loans on residential properties. The securitized
interest 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 is subject to
change based on the prepayments of the underlying mortgage loans.
At June 30, 1998, the weighted average net coupon on the Mortgage Securities was
7.78% per annum based on the amortized cost of the Mortgage Securities. All
Mortgage Securities have a repricing frequency of one year or less.
NOTE 3. MORTGAGE LOANS HELD FOR INVESTMENT, NET, PLEDGED
The Company purchases certain non-conforming Mortgage Loans to be held as
long-term investments. At June 30, 1998, Mortgage Loans held for investment
consists of the following (dollars, in thousands):
<TABLE>
<S> <C>
Mortgage Loans held for investment, principal $ 601,586
Unamortized premium 44,336
Allowance for loan losses (2,857)
---------
$ 643,065
=========
</TABLE>
At June 30, 1998, the weighted average net coupon on the Mortgage Loans was
9.21% per annum. All Mortgage Loans have a repricing frequency of five years or
less. At June 30, 1998, 37.44% of the collateral was located in California with
no other state representing more than approximately 8%.
NOTE 4. SHORT-TERM DEBT
The Company has entered into uncommitted reverse repurchase agreements
(collectively "short-term" debt), which may be withdrawn at any time, to finance
the acquisition of a portion of its Mortgage Assets. The maximum aggregate
amount available under the uncommitted reverse repurchase agreements at June 30,
1998 is over $3.3 billion. These reverse repurchase agreements are
collateralized by a portion of the Company's Mortgage Assets.
Mortgage Securities
The maximum outstanding reverse repurchase agreements with any one lender during
the six months ended June 30, 1998 was approximately $98.5 million, or 36.4% of
the total repurchase liability in any one period. At June 30, 1998, Mortgage
Securities pledged had an estimated fair value of approximately $270.0 million.
At June 30, 1998, the Company had approximately $270.6 million of Mortgage
Securities reverse repurchase agreements outstanding with a weighted average
borrowing rate of 5.61% per annum and a weighted average remaining maturity of
20 days. The maximum month end balance and the average balance outstanding for
the six months ended June
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30, 1998 were approximately $304.4 million and $283.6 million, respectively. At
June 30, 1998, the Mortgage Securities reverse repurchase agreements had the
following characteristics:
<TABLE>
<CAPTION>
Repurchase Underlying Interest Rate Weighted Average
Mortgage Securities Liability Collateral (per annum) Maturity Date
------------------- -------------------- ------------------ ---------------
(dollars in thousands)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ABN-AMRO $ 34,307 $ 35,246 5.59% July 21, 1998
First Boston 47,832 49,612 5.64 July 21, 1998
First Union 45,172 44,184 5.58 July 15, 1998
Lehman Brothers 17,548 16,925 5.61 July 30, 1998
Morgan Stanley 19,644 20,132 5.61 July 26, 1998
Paine Webber 98,506 96,125 5.60 July 18, 1998
Prudential 7,560 7,747 5.65 July 23, 1998
------------------------------------------------------------------------------
$270,569 $269,971 5.61% July 20, 1998
==============================================================================
</TABLE>
Mortgage Loans
Reverse repurchase agreements for Mortgage Loans are currently placed with two
investment banking firms. The maximum amount outstanding with Lehman Brothers
during the six months ended June 30, 1998 was approximately $668.7 million. At
June 30, 1998, Mortgage Loans pledged had an estimated fair value of
approximately $136.6 million.
At June 30, 1998, the Company had approximately $133.8 million of Mortgage Loans
reverse repurchase agreements outstanding with a weighted average borrowing rate
of 6.39% per annum and a weighted average remaining maturity of one day. The
maximum month end balance and the average balance outstanding for the six months
ended June 30, 1998 were approximately $668.7 million and $421.4 million,
respectively. At June 30, 1998, the Mortgage Loans reverse repurchase agreements
had the following characteristic:
<TABLE>
<CAPTION>
Repurchase Underlying Interest Rate Weighted Average
Mortgage Loans Liability Collateral (per annum) Maturity Date
-------------- ---------------- ------------- ----------------
(dollars in thousands)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lehman Brothers $104,546 $107,379 6.40% July 1, 1998
Bear Stearns 29,251 29,251 6.38 July 1, 1998
--------------------------------------------------------------------------------
$133,797 $136,630 6.39% July 1, 1998
=================================================================================
</TABLE>
NOTE 5. LONG-TERM DEBT, NET
During the second quarter of 1998, AmREIT, through its wholly owned subsidiary,
Eagle, issued approximately $456.5 million of collateralized mortgage bonds
(Long-Term Debt) through a Financial Asset Securitization Investment Trust
(FASIT). The bonds were assigned to a FASIT trust and trust certificates
evidencing the assets of the trust were sold to investors. The trust
certificates were issued in classes representing
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senior, mezzanine, and subordinate payment priorities. Payments received on
single-family mortgage loans ("Bond Collateral") are used to make payments on
the Long-Term Debt. The obligations under the Long Term Debt are payable solely
from the Bond Collateral and are otherwise non-recourse to AmREIT. The maturity
of each class of trust certificates is directly affected by the rate of
principal repayments on the related Bond Collateral. The Long-Term Debt is also
subject to redemption according to the specific terms of the indenture pursuant
to which the bonds were issued and the FASIT trust. As a result, the actual
maturity of the Long-Term Debt is likely to occur earlier than its stated
maturity.
The components of the Long-Term Debt at June 30, 1998 along with selected other
information are summarized below (dollars in thousands):
<TABLE>
<S> <C>
Long-Term Debt $ 456,822
Capitalized Costs on Long-Term Debt (286)
---------------
Total Long-Term Debt $ 456,536
===============
Range of coupons on bonds 6.49% to 13.90%
Stated maturities 2008 - 2028
</TABLE>
NOTE 6. COLLATERAL FOR LONG-TERM DEBT
AmREIT has pledged collateral in order to secure the Long-Term Debt issued in
the form of Bond Collateral. This Bond Collateral consists primarily of
adjustable-rate, conventional, 30-year mortgage loans secured by first liens on
one- to four-family residential properties. All Bond Collateral is pledged to
secure repayment of the related Long-Term Debt obligation. All principal and
interest (less servicing and related fees) on the Bond Collateral is remitted to
a trustee and is available for payment on the Long-Term Debt obligation.
AmREIT's exposure to loss on the Bond Collateral is limited to its net
investment, as the Long-Term Debt is non-recourse to AmREIT.
The components of the Bond Collateral at June 30, 1998 are summarized as follows
(dollars in thousands):
<TABLE>
<S> <C>
Mortgage loans $ 463,076
Unamortized premium 37,002
Allowance for loan losses (2,807)
Accrued interest receivable 1,511
-----------
$ 498,782
===========
</TABLE>
NOTE 7. RETAINED INTEREST IN SECURITIZATION
Retained interests in securitization consist of assets generated by the
Company's loan securitization. These assets at June 30, 1998 were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
REMIC subordinate certificates $ 6,659
======================
</TABLE>
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<PAGE> 13
The Company classifies REMIC securities as trading securities in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
and carries them as current assets at market value.
The fair value of the retained interest is determined by computing the present
value of the excess of the weighted-average coupon of the residential mortgages
sold (9.32%) over the sum of: (1) the coupon on the senior interest (5.95%), and
(2) a basic servicing fee paid to servicer of the residential mortgages (0.50%)
and other fees, and taking into account expected estimated losses to be incurred
on the portfolio of residential mortgages sold over the estimated lives of the
residential mortgages and using an estimated future average prepayment
assumption (25%) per year. The prepayment assumptions used in estimating the
cash flows is based on recent evaluations of the actual prepayments of the
related portfolio and on market prepayment rates on new portfolios of similar
residential mortgages, taking into consideration the current interest rate
environment and its expected impact on the estimated future prepayment rate. The
estimated cash flows expected to be received by the Company are discounted at an
interest rate that the Company believes is commensurate with the risk of holding
such a financial instrument. The rate used to discount the cash flows coming out
of the trust was approximately 12%. To the extent that actual future excess cash
flows are different from estimated excess cash flows, the fair value of the
Company's retained interest could decline.
Under the terms of the securitization, the retained interest is required to
build overcollateralization to specified levels using the excess cash flows
described above until set percentages of the securitized portfolio are attained.
Future cash flows to the retained interest holder are all held by the REMIC
trust until a specific percentage of either the original or current certificate
balance is attained which percentage can be raised if certain charge-offs and
delinquency ratios are exceeded. The certificate holders' recourse for credit
losses is limited to the amount of overcollateralization held in the REMIC
trust. Upon maturity of the certificates or upon exercise of an option ("clean
up call") to repurchase all the remaining residential mortgages once the balance
of the residential mortgages in the trust are reduced to 10% of the original
balance of the residential mortgages in the trust, any remaining amounts in the
trust are distributed. The current amount of any overcollateralization balance
held by the trust is recorded as part of the retained interest.
NOTE 8. STOCKHOLDERS' EQUITY
On July 14, 1998, the Company declared a dividend of $2.3 million or $0.28 per
share. This dividend was paid on July 31, 1998 to holders of record of Common
Stock as of July 24, 1998. On April 24, 1998, the Company declared a dividend of
$2.3 million or $0.28 per share. This dividend was paid on April 30, 1998 to
holders of record of Common Stock as of April 24, 1998. On December 19, 1997,
the Company declared a dividend of $1.3 million or $0.16 per share. The dividend
was paid on January 21, 1998 to holders of record of Common Stock as of December
31, 1997.
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<PAGE> 14
NOTE 9. INVESTMENT IN AMERICAN RESIDENTIAL HOLDINGS, INC.
The following condensed financial information summarizes the financial position
and results of operations of American Residential Holdings, Inc. (dollars in
thousands, except per share data):
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 1998
-------------
ASSETS
<S> <C>
Cash and cash equivalents $ 1
Due from affiliate 944
Class "X" Certificate - CMO/FASIT 475
Other assets 25
-------
$ 1,445
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Other liabilities $ 898
-------
Total liabilities 898
Stockholders' Equity:
Preferred stock, par value $1,000 per share; 10,000 shares
authorized; 475 shares issued and outstanding 475
Common stock, par value $.01 per share; 100 shares
authorized; 50 shares issued and outstanding --
Additional paid-in-capital 25
Cumulative dividends declared (885)
Retained earnings 932
-------
Total stockholders' equity 547
-------
$ 1,445
=======
</TABLE>
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the period
January 28, 1998
(commencement of
operations) through
June 30, 1998
---------------
<S> <C>
Revenue - gain on sale of loans $ 1,585
Expense - income taxes 653
---------------
Net income $ 932
===============
</TABLE>
12
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The statements contained in this Report that are not purely historical are
forward looking statements, including statements regarding the Company's
expectations, hopes, beliefs, intentions or strategies regarding the future.
Statements which use the words "intends", "expects", "will", "may",
"anticipates" and "seeks" are forward looking statements. These forward looking
statements, including statements regarding changes in the Company's future
income and intent to acquire fixed rate Mortgage Loans, are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward looking statement. It is important to note
that the Company's actual results could differ materially from those in such
forward looking statements. Among the factors that could cause actual results to
differ materially are the factors set forth below under the heading "Business
Risks". In particular, the Company's future income could be affected by changes
in levels of repayments, changes in interest rates, lack of available Mortgage
Assets which meet the Company's acquisition criteria, the type of Mortgage
Assets acquired by the Company and the credit characteristics of the borrowers
under Mortgage Loans acquired by the Company.
OVERVIEW
The Company's income to date consists primarily of interest income generated
from its Mortgage Assets and its cash balances (collectively, "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, the Company expects that income from this source
will tend to increase and decrease as interest rates rise and fall,
respectively.
For that portion of the Company's earning assets funded with borrowings ("spread
lending"), the 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.
The Company intends to begin acquiring fixed-rate Mortgage Loans in the third
quarter. Currently, the market for fixed-rate Mortgage Loans substantially
exceeds that for adjustable-rate Mortgage Loans and the Company believes the
fixed-rate market may represent a significant source of Mortgage Loan
acquisitions in the future. The Company intends to begin with a pilot program
and may expand the volume of acquisitions over time. The Company will seek to
reduce the interest rate risk associated with the fixed-rate product through
hedging activities and the financing of such product through long-
13
<PAGE> 16
term securitizations. There can be no assurance, however, that the Company will
be able to hedge or finance fixed-rate Mortgage Loans on terms favorable to the
Company or at all. See "Business Risks - Sudden Interest Rate Fluctuations May
Reduce Income From Operations."
RESULTS OF OPERATIONS
For the three months ended June 30, 1998, the Company generated net income of
approximately $2.3 million and diluted net income per share of Common Stock of
$0.28. At June 30, 1998 the Company held Mortgage Securities that had a carrying
value of approximately $303.0 million, including a $4.6 million net unrealized
loss, and Mortgage Loans with a carrying value of approximately $643.1 million.
Net income for the Company increased 418% from approximately $438 thousand for
the three months ended June 30, 1997, to approximately $2.3 million for the
three months ended June 30, 1998. The growth in net income was directly
attributable to an increase in net interest income and other operating income.
Net interest income grew approximately 333% from the three months ended June 30,
1997 to the three months ended June 30, 1998, from approximately $567 thousand
to approximately $2.5 million respectively. Other operating income was zero for
the three months ended June 30, 1997 and was approximately $1.1 million for the
three months ended June 30, 1998. This increase in income was partially offset
by an increase in other expenses consisting of management fees and
administrative expenses. From the three months ended June 30, 1997 to the three
months ended June 30, 1998, other expenses increased from approximately $129
thousand to approximately $1.1 million, or approximately 717%.
The growth in net interest income from the three months ended June 30, 1997 to
the three months ended June 30, 1998 was due to an increase in the Company's
Mortgage Loans held-for-investment during the second quarter of 1998. An
increase in other operating income includes the increase in fee income,
prepayment penalty income and dividends from Holdings. Fee income increased due
to the increase in the Company's Mortgage Loans during the second quarter of
1998 and prepayment penalty income increased due to the high levels of
prepayments in the Mortgage Securities portfolio during the three months ended
June 30, 1998.
For the six months ended June 30, 1998, the Company generated net income of
approximately $4.5 million and diluted net income per share of Common Stock of
$0.56. At June 30, 1998 the Company held Mortgage Securities that had a carrying
value of approximately $303.0 million, including a $4.6 million net unrealized
loss, and Mortgage Loans with a carrying value of approximately $643.1 million
Net income for the Company increased 678% from approximately $584 thousand for
the period from February 11, 1997 (commencement of operations) through June 30,
1997, to approximately $4.5 million for the six months ended June 30, 1998. The
growth in net income was directly attributable to an increase in net interest
income and other operating income. Net interest income grew approximately 709%
from the period from February 11, 1997 (commencement of operations) through June
30, 1997 to the six months ended June 30, 1998, from approximately $724 thousand
to approximately $5.9 million respectively. Other operating income was zero for
the period from February 11, 1997 (commencement of operations) through June 30,
1997 and was approximately $1.2 million for the six months ended June 30, 1998.
This increase in income was partially offset by an increase in other expenses
consisting of management fees and administrative expenses. From the period from
February 11, 1997 (commencement of operations) through June 30, 1997 to the six
months ended June 30, 1998, other expenses increased from approximately $140
thousand to approximately $2.1 million, or approximately 138%.
The growth in net interest income from the period from February 11, 1997
(commencement of operations) through June 30, 1997 to the six months ended June
30, 1998 was due to an increase in the Company's Mortgage Loans
held-for-investment during the first six months of 1998. An increase in other
operating income includes the increase in fee income, prepayment penalty income
and dividends from Holdings. Fee income increased due to the increase in the
Company's Mortgage Loans during the first six months of 1998 and prepayment
penalty income increased due to the high levels of prepayments in the Mortgage
Securities portfolio during the six months ended June 30, 1998. While prepayment
income increases cash flow, higher than expected prepayments have a long-term
negative effect on operating income due to write-offs of capitalized mortgage
premiums which would otherwise have been amortized over a longer period of time.
Equity in Income of Holdings increased due to the sale of loans structured in a
Real Estate Mortgage Investment Conduit ("REMIC"). The Company does not
anticipate that it will receive other operating income from REMIC transactions
in the future on a regular basis, or at all. Similarly, the increase in other
expenses from the period from February 11, 1997 (commencement of operations)
through June 30, 1997 to the six months ended June 30, 1998 is primarily the
result of the Company's increased management fees which resulted from the
increase in the
14
<PAGE> 17
Company's Mortgage Loans and the increased professional fees and printing and
reproduction expenses from the 10-K and annual report.
The Company experienced very high levels of prepayments in the Mortgage Security
portfolio in the six months ended June 30, 1998. The annualized Mortgage
Security principal prepayment rate for the Company was approximately 46% in the
six months ending June 30, 1998 compared to the annualized mortgage principal
prepayment rate of approximately 30% for the period from February 11, 1997
(commencement of operations) through June 30, 1997. The Company anticipates that
prepayment rates may continue at very high levels for an indefinite period. The
Company's financial condition and results of operations will continue to be
materially adversely affected if prepayments continue at high levels. See
"Business Risks - High Levels of Mortgage Loan Prepayments May Reduce Operating
Income".
In the second quarter 1998, the Company purchased the preferred stock of
Holdings, representing a 95% economic interest in this taxable affiliate.
Holdings was formed to assist the Company in the creation of certain types of
mortgage equity interests and generally to provide increased flexibility to the
Company in carrying out its business strategy as a REIT-qualifying mortgage
investor. Holdings' future earnings will be recognized using the equity method
of line-item on the Company's income statement. See "Investment in Holdings" in
the Financial Condition section below and the notes to the consolidated
financial statements for additional information on Holdings.
Liquidity and Capital Resources
During the six months ended June 30, 1998, net cash provided by operating
activities was approximately $5.0 million. Net cash provided by operating
activities was negatively impacted by an increase in accrued interest
receivable. Mortgage Loans increased from $162.8 million on December 31, 1997 to
$643.1 million at June 30, 1998 and, therefore, accrued interest receivable at
June 30, 1998 has increased proportionally to loans, thereby negatively
affecting cash. Net cash for the period was positively affected by an increase
in accrued interest payables.
Net cash used in investing activities for the six months ended June 30, 1998 was
approximately $410.9 million. Net cash used for the period was negatively
affected by the purchase of Mortgage Loans in the amount of approximately $503.2
million and positively affected by principal prepayments of approximately $98.9
million.
For the six months ended June 30, 1998, net cash provided by financing
activities was approximately $406.0 million. Net cash used was positively
affected by the issuance of long-term debt in the form of CMO/FASIT bonds issued
for approximately $456.5 million. Net cash used was negatively affected by a
decrease in borrowings under reverse repurchase agreements of $46.9 million.
At June 30, 1998 the Company had uncommitted reverse repurchase agreement
facilities in place to provide over $3.3 billion to finance investments in
Mortgage Assets. In
15
<PAGE> 18
addition, the Company has a line of credit with one counter party to a reverse
repurchase agreement. Pursuant to the line of credit, the Company may borrow the
lesser of $25 million and the outstanding principal and interest receivable
balance with the counter party, 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.
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.
BUSINESS RISKS
High Levels of Mortgage Loan Prepayments May Reduce Operating Income
Prepayments of Mortgage Assets adversely affect the Company's results of
operations in several ways. A portion of the adjustable-rate Mortgage Assets
acquired by the Company bear initial "teaser" interest rates which are lower
than their "fully-indexed" rates (the applicable index plus a 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 has been purchased with a premium by the Company would result in the
immediate write-off of any remaining capitalized premium amount and the
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 Loans, the assumability of an
adjustable-rate Mortgage Loan, the ability of the borrower to obtain or convert
to a fixed-rate Mortgage 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 very high levels of prepayments during the six
months ended June 30, 1998 and the Company anticipates that prepayment rates
will continue at very high levels for an indefinite period.
Certain 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 of prepayments. Prepayment charges may be
in an amount which is less than
16
<PAGE> 19
the figure which would fully compensate the Company for a lower yield upon
reinvestment of the prepayment proceeds.
Borrower Credit May Decrease Value of Mortgage Loans
A substantial portion of the Company's Mortgage Assets consist of Mortgage
Loans. Accordingly, the Company is subject to increased credit risks, including
risks 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 established an allowance for
Mortgage Loan losses in an amount that it believes is adequate to cover these
risks, in view of its limited operating history and lack of experience with the
Company's current Mortgage Loans and Mortgage Loans that may be acquired, 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.
The Company's Mortgage Loans remain relatively young from a delinquency
perspective, and there have not yet been any losses incurred on these loans.
Because of the age of the Company's loans, current delinquency and loss
information is not yet expected to be representative of future delinquencies and
losses. At June 30, 1998, approximately 6.26% of the Company's Mortgage Loans
were delinquent 60 days or more. In addition, at June 30, 1998, 19 Mortgage
Loans were in bankruptcy with a total loan value of approximately $1.9 million.
Credit risks associated with non-conforming Mortgage Loans, especially sub-prime
Mortgage Loans, may be greater than those associated with Mortgage Loans that
conform to FNMA and FHLMC guidelines. The principal difference between
non-conforming sub-prime Mortgage Loans and conforming Mortgage Loans include
the applicable loan-to-value ratios, the credit and income histories of the
mortgagors, the documentation required for approval of the mortgagors, the types
of properties securing the Mortgage Loans, loan sizes and the mortgagors'
occupancy status with respect to the mortgaged property. As a result of these
and other factors, the interest rates charged on non-conforming Mortgage Loans
are often higher than those charged for conforming Mortgage Loans. The
combination of different underwriting criteria and higher rates of interest may
lead to higher delinquency rates and/or credit losses for non-conforming as
compared to conforming Mortgage Loans and could have an adverse effect on the
Company to the extent that the Company has invested in such Mortgage Loans or
securities secured by such Mortgage Loans.
At June 30, 1998, the Mortgage Loans held for Investment had the following
credit grade characterizations:
17
<PAGE> 20
<TABLE>
<CAPTION>
Credit Grade Non-Conforming Loans
------------ --------------------
<S> <C>
A $392,350
B 133,938
C 59,817
D 15,474
----------
$601,586
</TABLE>
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 would
materially prolong the time period required to resell such properties.
The Company Has Significant Conflicts with, and Is Dependent on, an Affiliate of
the Executive Officers of the Company
The Company is subject to conflicts of interest with the Manager and its
executive officers. The executive officers of the Company generally will also be
executive officers, employees and stockholders of the Manager, and will
therefore be affiliated with the Manager. The Manager will manage the day-to-day
operations of the Company. Accordingly, the Company's success will depend in
significant part on 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.
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
18
<PAGE> 21
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 Mortgage Assets, other than the Company.
Sudden Interest Rate Fluctuations May Reduce Income From Operations
Substantially all of the Company's Mortgage Assets have a repricing frequency of
two years or less, and substantially all of the Company's borrowings 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 on such Mortgage Assets, 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 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.
The Company's results of operations may also be adversely affected to the extent
the Company acquires fixed-rate Mortgage Loans and is not able to fully hedge
the interest rate risk associated with such loans through hedging activities or
the financing of such loans through long-term securitizations.
Failure To Successfully Manage Interest Rates 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 management strategy
is complex and no management strategy 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
19
<PAGE> 22
ability to fully hedge its interest rate risks. Such Federal tax laws may
prevent the Company from effectively implementing hedging strategies that,
absent such restrictions, would best insulate the Company from the risks
associated with changing interest rates.
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 Securities 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 began in the second quarter of 1998.
Accordingly, the Company may not be adequately protected against risks
associated with interest rate changes and such changes could aversely affect the
Company's financial condition and results of operations.
Future Offerings of Securities 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 resources of capital on favorable
terms could have a materially adverse affect on the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required
PART II. OTHER INFORMATION
Item. 1. Legal Proceedings
At June 30, 1998, there were no pending legal proceedings to which
the Company was a party or of which any of its property was subject.
20
<PAGE> 23
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of the Company was
held on May 22, 1998.
(b) The following matters were voted on at the Annual
Meeting:
(1) Election of (2) Directors
Nominee Votes
------- -----
H. James Brown 7,748,209
Ray McKewon 7,748,634
The following Directors will complete their term of
office and were not due for election this calendar
` year:
David DeLeeuw
Jay Fuller
Richard Pratt
Mark Riedy
John Robbins
(2) Amendment to the Registrant's 1997 Stock
Option Plan
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
6,355,878 1,356,249 82,577
(3) Appointment of KPMG Peat Marwick LLP as the
Registrant's independent accountants for the
current fiscal year
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
7,733,822 27,527 33,355
Item 5. Other Information
Proposals of stockholders intended to be presented at the next Annual
Meeting of the Stockholders of the Company (other than proposals made
under Rule 14a-8 of the Securities Exchange Act of 1934, as amended)
must be received by the Company at its offices at 445 Marine View
Avenue, Suite 230, Del Mar California 92014, between February 21 and
March 23, 1999.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
*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
**4.2 Indenture dated as of June 1, 1998 between
American Residential Eagle Board Trust
1998-1, a California wholly-owned
consolidated subsidiary of AmREIT, and First
Union National Bank, as Trustee.
10.6A Amendment to 1997 Stock Incentive Plan
10.7A 1997 Stock Option Plan, as amended
27. Financial Data Schedule
* Incorporated by reference to Registration Statement on
Form S-11 (File No. 333-33679)
** Incorporated by reference to Registration Statement on
Form 8-K dated June 17, 1998, filed with the Commission
on July 2, 1998.
(b) Reports on Form 8-K
None
21
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
Dated: August 14, 1998 By: /s/ MARK A. CONGER
-------------------------------------
Mark A. Conger,
Executive Vice President
Chief Financial Officer
22
<PAGE> 1
EXHIBIT 10.6(a)
EXHIBIT A
AMENDMENT TO 1997 STOCK INCENTIVE PLAN
9. 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, 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 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.
<PAGE> 2
EXHIBIT B
FORM OF PROMISSORY NOTE
PROMISSORY NOTE
AND PLEDGE AGREEMENT
$_____________ ______________, 1997
FOR VALUE RECEIVED, the undersigned promises to pay to American Residential
Trust Investment, Inc., Inc., a Maryland corporation (the "Company"), or order,
at its principal office (now located in Del Mar, California), the principal sum
of ________________________ Dollars ($_____________) on ______________, 2002
(the "Due Date"). Such principal sum shall bear interest from the date hereof at
a rate of Eight Percent (8%) per annum on the unpaid balance of this Note,
compounded annually. Accrued but unpaid interest shall be payable at the end of
each three-month period following the date hereof and on the Due Date. The
entire outstanding balance of principal and accrued but unpaid interest shall be
due and payable on the Due Date.
Each payment shall be credited first to interest then due and the remainder
to principal. Should interest not be paid when due hereunder, it shall be added
to the principal and thereafter bear like interest as the principal, provided
such unpaid interest so compounded shall not exceed an amount equal to simple
interest on the unpaid principal at the maximum rate permitted by law.
The Company may at its option accelerate, in whole or in part, the maturity
of the outstanding principal balance due on this Note and any accrued interest
thereon upon the occurrence of any of the following events:
(1) The termination of the undersigned's employment with the Company (or
any present or future parent and/or subsidiary corporations of the Company) for
any reason, or no reason, with or without cause.
(2) A default in the payment of any installment of principal and/or
interest when due.
(3) A sale of the Pledged Stock (as defined below).
(4) Such acceleration is reasonably necessary for the Company to comply
with any regulations promulgated by the Board of Governors of the Federal
Reserve System affecting the extension of credit in connection with the
Company's securities.
<PAGE> 3
The undersigned waives demand, presentment, notice of protest, notice of
demand, dishonor, diligence in collection and notices of intention to accelerate
maturity. Any such acceleration may be automatically effectuated by the Company
by making an entry to such effect in its records, in which event the unpaid
balance on this Note shall become immediately due and payable without demand or
notice.
Principal and interest are payable in lawful money of the United States of
America. The undersigned may prepay any amount due hereunder, without premium or
penalty.
In the event the Company incurs any costs or fees in order to enforce
payment of this Note or any portion thereof, the undersigned agrees to pay to
the Company, in addition to such amounts as are owed pursuant to this Note, such
costs and fees, including, without limitation, a reasonable sum for attorneys'
fees.
The undersigned hereby waives to the full extent permitted by law all
rights to plead any statute of limitations as a defense to any action hereunder.
As security for the full and timely payment of this Note, the undersigned
hereunder pledges and grants to the Company a security interest in certain
shares of the Company's common stock (the "Pledged Stock") purchased by the
undersigned pursuant to the terms of the Company's Stock Option Exercise Form
attached hereto as Exhibit A. The undersigned shall, upon execution of this
Note, deliver all certificates representing the Pledged Stock to the agent for
the Company (the "Agent") pursuant to joint escrow instructions between the
Company and the undersigned in a form approved by the Company. The Agent shall
hold the Pledged Stock for the benefit of the Company to perfect the security
interest granted hereunder.
Notwithstanding the foregoing, the undersigned acknowledges that this Note
is a full recourse note and that the undersigned is liable for full payment of
this Note without regard to the value at any time or from time to time of the
Pledged Stock. In the event of any default in the payment of this Note, the
Company shall have and may exercise any and all remedies of a secured party
under the California Commercial Code, and any other remedies available at law or
in equity, with respect to the Pledged Stock. The undersigned (i) acknowledges
that state or federal securities laws may restrict the public sale of
securities, and may require private sales at prices or on terms less favorable
to the seller than public sales and (ii) agrees that where the Company, in its
sole discretion, determines that a private sale is appropriate, such sale shall
be deemed to have been made in a commercially reasonable manner.
In the event the undersigned desires to obtain a release from the Company's
security interest in some or all of the Pledged Stock, the undersigned shall pay
that portion of the principal balance of this Note equal to the purchase price
of the Pledged Stock being released plus accrued interest thereon. The Company
shall thereafter instruct the Agent to effect such release, provided that the
fair market value of the Pledged Stock to remain subject to the Company's
security interest (as determined by the Board of Directors of the Company or by
the closing price of the Company's common stock on the New York Stock Exchange,
or any successor listing, on the date of such notice) shall satisfy the
conditions of Regulation G, as
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<PAGE> 4
promulgated by the Board of Governors of the Federal Reserve System, or other
comparable law or regulation.
The failure of the Company to exercise any of the rights created hereby, or
to promptly enforce any of the provisions of this Note, shall not constitute a
waiver of the right to exercise such rights or to enforce any such provisions.
As used herein, the undersigned includes the successors, assigns and
distributees of the undersigned.
As used herein, the Company includes the successors, assigns and
distributees of the Company, as well as a holder in due course of this Note.
This Note is made under and shall be construed in accordance with the laws
of the State of California, without regard to the conflict of law provisions
thereof.
---------------------------------------
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<PAGE> 1
EXHIBIT 10.7(a)
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.
(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.
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(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) "SECTION 162(M)" means Section 162(m) of the Code.
(v) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(w) "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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<PAGE> 4
(x) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
(y) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
(z) "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 COMMITTEE COMPLYING WITH SECTION 162(M). If a Participating
Company is a "publicly held corporation" within the meaning of Section 162(m),
the Board may establish a Committee of "outside directors" within the meaning of
Section 162(m) to approve the grant of any Option which might reasonably be
anticipated to result in the payment of employee remuneration that would
otherwise exceed the limit on employee remuneration deductible for income tax
purposes pursuant to Section 162(m).
3.4 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;
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<PAGE> 5
(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;
(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 Seven Hundred Seventy-Four Thousand Eight
Hundred (774,800). If any outstanding Option for any reason expires or is
terminated or canceled or shares of Stock
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<PAGE> 6
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 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 Section 162(m) Grant Limit set forth in Section 5.4 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 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
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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.
5.4 SECTION 162(M) GRANT LIMIT. Subject to adjustment as provided in
Section 4.2, at any such time as a Participating Company is a "publicly held
corporation" within the meaning of Section 162(m), no Employee shall be granted
one or more Options within any fiscal year of the Company which in the aggregate
are for the purchase of more than two hundred fifty thousand (250,000) shares
(the "SECTION 162(M) GRANT LIMIT").
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 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
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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 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
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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").
(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
9
<PAGE> 10
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.
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
10
<PAGE> 11
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 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
11
<PAGE> 12
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 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
12
<PAGE> 13
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.
13
<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 is the American Residential Investment Trust, Inc. 1997 Stock
Option Plan as duly adopted by the Board on August 6, 1997 and amended by the
Board on April 7, 1998.
____________________________________
Secretary
14
<PAGE> 15
PLAN HISTORY
August 6, 1997 Board adopts Plan, with an initial reserve of 474,800
shares.
August 6, 1997 Stockholders approve Plan, with an initial reserve of
474,800 shares.
April 7, 1998 Board amends Plan to increase share reserve to 774,800
shares and to establish the Grant Limit.
_______, 1998 Stockholders approve share reserve increase to 774,800
shares and establishment of the Grant Limit.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,925
<SECURITIES> 955,587
<RECEIVABLES> 14,962
<ALLOWANCES> 2,857
<INVENTORY> 0
<CURRENT-ASSETS> 973,617
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 973,617
<CURRENT-LIABILITIES> 409,591
<BONDS> 456,536
0
0
<COMMON> 81
<OTHER-SE> 107,409
<TOTAL-LIABILITY-AND-EQUITY> 973,617
<SALES> 0
<TOTAL-REVENUES> 34,634
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,066
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,604
<INCOME-PRETAX> 4,546
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,546
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,546
<EPS-PRIMARY> 0.56<F1>
<EPS-DILUTED> 0.56
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
