SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-9360
ASSET INVESTORS CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 84-1038736
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 South Yosemite Street, Suite 900 80237
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
(303) 793-2703
(Registrant's telephone number, including area code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __.
As of July 31, 1996, 24,737,600 shares of Asset Investors Corporation
Common Stock were outstanding.
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of June 30, 1996 (unaudited)
and December 31, 1995...................................... 1
Statements of Operations for the three and six
months ended June 30, 1996 and 1995 (unaudited)............ 2
Statements of Cash Flows for the six months
ended June 30, 1996 and 1995 (unaudited)................... 3
Notes to Financial Statements (unaudited).................. 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 11
Definitions............................................... 21
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of
Security Holders.......................................... 24
Item 6. Exhibits and Reports on Form 8-K.......................... 24
(i)
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
June 30, December 31,
1996 1995
---- ----
(Unaudited)
Assets
<S> <C> <C>
Cash and cash equivalents $ 451 $ 5,328
Non-agency MBS Bonds 59,904 52,753
Investment in Commercial Assets 19,384 19,225
Other assets, net 2,787 2,347
------------ ------------
Total Assets $ 82,526 $ 79,653
============ ============
Liabilities
Accounts payable and accrued liabilities $ 621 $ 416
Management fees payable 471 478
Short-term borrowings 1,400 --
------------ ------------
Total Liabilities 2,492 894
------------ ------------
Stockholders' Equity
Common Stock, par value $.01 per share, 50,000,000 shares authorized;
24,737,600 and 24,355,862 shares issued and outstanding, respectively 247 244
Additional paid-in capital 228,613 227,546
Cumulative dividends (233,657) (229,239)
Cumulative net income 85,453 80,965
------------ ------------
Dividends in excess of net income (148,204) (148,274)
Unrealized holding losses on debt securities (622) (757)
------------ ------------
Total Stockholders' Equity 80,034 78,759
------------ ------------
Total Liabilities and Stockholders' Equity $ 82,526 $ 79,653
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
Ongoing Operations: 1996 1995 1996 1995
---- ---- ---- ----
Revenues
<S> <C> <C> <C> <C>
Non-agency MBS bonds $ 2,835 $ 1,889 $ 5,665 $ 3,222
Equity in earnings of Commercial Assets
539 435 976 855
Interest and other income 43 105 129 254
--------- --------- --------- ---------
Total revenues 3,417 2,429 6,770 4,331
--------- --------- --------- ---------
Expenses
Management fees 350 216 802 364
General and administrative 157 376 655 1,152
Elimination of DERs 825 -- 825 --
Interest -- 23 -- 56
--------- --------- --------- ---------
Total expenses 1,332 615 2,282 1,572
--------- --------- --------- ---------
Earnings from ongoing operations 2,085 1,814 4,488 2,759
Earnings from liquidating operations
-- 56 -- 3,118
--------- --------- --------- ---------
Net income $ 2,085 $ 1,870 $ 4,488 $ 5,877
========= ========= ========= =========
Net income per share $ .08 $ .07 $ .18 $ .24
========= ========= ========= =========
Weighted-average shares outstanding 24,500 24,259 24,433 24,243
Dividends per share $ .09 $ .08 $ .18 $ .16
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
--------
1996 1995
---- ----
Cash Flows From Operating Activities
<S> <C> <C>
Net income $ 4,488 $ 5,877
Adjustments to reconcile net income to net cash flows from operating
activities:
Accretion of discounts on non-agency MBS bonds 1,294 758
Equity in earnings of Commercial Assets (976) (855)
Issuance of Common Stock for the elimination of DERs 825 --
Increase in other assets (185) (516)
Increase (decrease) in accounts payable and accrued liabilities 310 (1,494)
Net gain on sale of assets -- (2,022)
Amortization of CMO Ownership Interests -- 749
------- ----------
Net Cash Provided By Operating Activities 5,756 2,497
------- ----------
Cash Flows From Investing Activities
Acquisition of non-agency MBS bonds (9,844) (17,088)
Principal collections on non-agency MBS bonds 1,320 848
Indemnifications from non-agency MBS bonds 281 414
Dividends from Commercial Assets 469 1,021
Principal collections on CMO Ownership Interests -- 4,111
Proceeds from the sale of assets -- 16,862
Release of restricted cash upon repayment of secured notes payable -- 15,862
--------- ----------
Net Cash (Used By) Provided By Investing Activities (7,774) 22,030
--------- ----------
Cash Flows From Financing Activities
Dividends paid (4,418) (2,664)
Increase (decrease) in short-term borrowings, net 1,400 (2,181)
Repayment of secured notes payable -- (30,592)
Issuance of Common Stock from the exercise of stock options 159 --
---------- ----------
Net Cash Used By Financing Activities (2,859) (35,437)
---------- ----------
Cash and Cash Equivalents
Decrease (4,877) (10,910)
Beginning of period 5,328 14,961
---------- ----------
End of period $ 451 $ 4,051
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Capitalized terms not otherwise defined in the narrative below shall
have the meaning indicated in the "Definitions" following "Management`s
Discussion and Analysis of Financial Condition and Results of
Operations."
A. The Company
Asset Investors Corporation was incorporated under Maryland law on
October 14, 1986, by MDC. The Common Stock is listed on the NYSE under the
symbol "AIC." The Company's assets primarily are non-agency MBS bonds and shares
of Commercial Assets common stock.
B. Presentation of Financial Statements
The Condensed Consolidated Financial Statements of the Company
presented herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. These
financial statements reflect all adjustments, consisting of only normal
recurring accruals, which, in the opinion of management, are necessary to
present fairly the financial position, results of operations and cash flows of
the Company as of June 30, 1996, and for the periods then ended and for all
prior periods presented. These financial statements are condensed and do not
include all the information required by GAAP in a full set of financial
statements. These financial statements should be read in conjunction with the
Company's Consolidated Financial Statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995.
Certain reclassifications have been made in the 1995 Condensed
Consolidated Financial Statements to conform to the classifications used in the
current year.
C. Summary of Significant Accounting Policies
Principles of Consolidation - The Condensed Consolidated Financial
Statements include the accounts of the Company and its wholly owned corporate
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation. The Company's investment in Commercial Assets is
recorded under the equity method. The Company has recorded its proportionate
share of the unrealized holding losses on the CMBS bonds of Commercial Assets.
Income Taxes - The Company operates in a manner that permits it to
qualify for the income tax treatment accorded to a REIT. If it so qualifies, the
Company's REIT income, with certain limited exceptions, will not be subject to
federal income tax at the corporate level. Accordingly, no provision for taxes
has been made in the Condensed Consolidated Financial Statements.
In order to maintain its status as a REIT, the Company generally is
required, among other things, to distribute annually to its shareowners at least
95% of its REIT income reduced by the NOL carryover. The Company also is
required to meet certain asset, income and stock ownership tests.
Statements of Operations - In 1993, the Company began a program of
liquidating its prepayment and interest rate sensitive CMO Ownership Interests
and acquiring credit-sensitive assets (non-agency MBS bonds and shares of
Commercial Assets) that should benefit from an improving economy. Accordingly,
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<PAGE>
the Company has classified as liquidating operations revenues from CMO Ownership
Interests along with expenses directly allocable to the CMO Ownership Interests,
including interest on borrowings collateralized by CMO Ownership Interests. All
other revenues and expenses of the Company, including corporate general and
administrative expenses, are classified as ongoing operations.
Statements of Cash Flows - For purposes of reporting cash flows, cash
maintained in bank accounts, money market funds and overnight cash investments
are considered to be cash and cash equivalents. The Company made interest
payments of $0 and $894,000 for the six months ended June 30, 1996 and 1995,
respectively.
Non-cash investing and financing activities for the six months ended
June 30, 1996 and 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1996 1995
---- ----
<S> <C> <C>
Dividends declared but not yet received from Commercial Assets $ 469 --
Unrealized holding gains on debt securities $ 135 --
Distributions of Common Stock pursuant to DERs $ 87 $ 104
Distributions of Common Stock as consideration for the elimination of DERs $ 825 --
Dividends declared but not yet paid -- $ 1,941
</TABLE>
D. Non-agency MBS Bonds
From April 1994 through June 30, 1996, the Company acquired 195
non-agency MBS bonds, with an aggregate outstanding principal balance on the
date of acquisition of $225,391,000 and an aggregate total cost of $67,038,000.
The net carrying value of the Company's non-agency MBS bonds was as follows
(dollar amounts in thousands):
- 5 -
<PAGE>
<TABLE>
<CAPTION>
Outstanding Balance
-------------------
June 30, December 31,
Price(1) Coupon(2) 1996 1995
------ ------ ---- ----
(Unaudited)
Non-agency MBS bonds backed by:
<S> <C> <C> <C> <C>
30-year fixed-rate mortgage loans 31.5% 7.1% $ 147,775 $ 116,757
15-year fixed-rate mortgage loans 37.0 6.6 19,923 16,611
Adjustable-rate mortgage loans 24.9 7.3 4,958 4,149
Lesser quality mortgage loans(3) 58.9 8.2 12,961 14,083
Other subordinate, non-agency MBS bonds(4) 27.3 6.9 28,137 28,565
---- --- ---------- -----------
34.5% 7.1% 213,754 180,165
==== ===
Less:
Allowance for credit losses (104,824) (71,365)
Unamortized discount (49,439) (56,446)
---------- -----------
Amortized cost 59,491 52,354
Net unrealized holding gains 413 399
---------- -----------
Total net book value $ 59,904 $ 52,753
========== ===========
- ---------------------------------
<FN>
1 Weighted-average price as a percentage of the principal balance of the non-
agency MBS bonds.
2 Weighted-average coupon of non-agency MBS bonds at June 30, 1996.
3 The Lesser quality mortgage loans, commonly referred to as "B and C"
mortgage loans, are adjustable-rate mortgages and include $8,112,000 of
non-agency MBS bonds with a "B" credit rating at June 30, 1996 and December
31, 1995.
4 The non-agency MBS bonds that are backed by "Other subordinate non-agency
MBS bonds" are referred to as re-REMICs.
</FN>
</TABLE>
The Company's non-agency MBS bonds are subject to the risk of default
and foreclosure loss from the $41.0 billion principal balance of non-conforming
mortgage loans that, at June 30, 1996, backed its bonds. The subordinate
non-agency MBS bonds owned by the Company represent, on average, 0.52% of the
bond issuances that are collateralized by these mortgages. The future credit
losses for each bond are limited to the outstanding balance of each bond
(averaging $1,096,000 at June 30, 1996). Additionally, the Company's economic
exposure from its investment in a non-agency MBS bond is limited to the purchase
price of the bond (averaging 34.5% of the acquired principal balance at June 30,
1996), less principal payments received.
The servicers of the mortgage loans that back the Company's non-agency
MBS bonds reported to the Company that mortgage loans with an outstanding
principal balance of $111,302,000 (0.3% of the total outstanding balance of the
mortgage loans) were in foreclosure or REO at June 30, 1996. If a mortgage loan
in foreclosure or REO is not worked out, or if the proceeds from the foreclosure
sale are not sufficient to repay the outstanding mortgage and related
foreclosure and servicing costs, any losses will be passed on to the Company as
the holder of the subordinate non-agency MBS bond. Consequently, the amount of
the losses passed on to the holders of the subordinate bonds from the mortgage
loans in foreclosure or REO is dependent upon what portion of these mortgages
are not cured and the loss severity from a foreclosure sale. The Company
performs certain surveillance activities with respect to these loans to attempt
to minimize the impact of these two factors. The Company has established an
allowance for future credit losses of $104,824,000 at June 30, 1996.
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<PAGE>
The allowance for credit losses is: (i) increased or decreased for
changes in the Company's expectations of future credit losses; (ii) increased
for expectations of future credit losses when a non-agency MBS bond is acquired;
and (iii) reduced by actual credit losses allocated to the Company's non-agency
MBS bonds. The activity in the allowance for credit losses during the six months
ended June 30, 1996 and 1995 was as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
---- ----
<S> <C> <C>
Balance at the beginning of the period $ 71,365 $ 22,075
Additions to the allowance for credit losses on non-agency MBS bonds 37,926 28,210
Credit losses (net of indemnifications of $281 and $414, respectively) (4,467) (729)
---------- ---------
Balance at the end of the period $ 104,824 $ 49,556
========== =========
</TABLE>
E. Investment in Commercial Assets
On June 30, 1996, and December 31, 1995, the Company owned 2,761,126
shares (approximately 27%) of the common stock of Commercial Assets, a REIT
which owns and manages debt interests backed by loans on multi-family real
estate. According to Commercial Assets, the mortgages which comprise the
collateral for its CMBS bonds are secured by apartment communities in 36 states.
Approximately 26%, 12% and 8% of the mortgage loans are collateralized by
properties in Texas, Arizona and Florida, respectively. Presented below is the
summarized financial information of Commercial Assets as reported by Commercial
Assets (in thousands):
<TABLE>
<CAPTION>
Balance Sheets June 30, December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
CMBS bonds, net of unrealized holding losses $ 60,814 $ 69,503
Cash and other assets 13,446 2,087
--------- ---------
Total Assets 74,260 71,590
--------- ---------
Short-term borrowings -- 700
Other liabilities 2,256 425
--------- ---------
Total Liabilities 2,256 1,125
--------- ---------
Stockholders' Equity $ 72,004 $ 70,465
========= =========
</TABLE>
- 7 -
<PAGE>
<TABLE>
<CAPTION>
Statements of Income Three Months Ended Six Months Ended
(Unaudited) June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
CMBS bonds $ 3,462 $ 2,209 $ 5,773 $ 4,419
Other revenues 64 31 71 170
---------- ---------- ---------- ----------
Total revenues 3,526 2,240 5,844 4,589
---------- ---------- ---------- ----------
Management fees 452 284 830 517
General and administrative 114 272 444 665
Elimination of dividend equivalent rights 966 -- 966 --
Interest 2 35 5 225
---------- ---------- ---------- ----------
Total expenses 1,534 591 2,245 1,407
---------- ---------- ---------- ----------
Net Income $ 1,992 $ 1,649 $ 3,599 $ 3,182
========== ========== ========== ==========
</TABLE>
According to Commercial Assets, at June 30, 1996, and December 31,
1995, it had $3,864,000 and $4,245,000, respectively, of unrealized holding
losses on its CMBS bonds. The Company's share of these unrealized holding losses
on CMBS bonds of $1,034,000 and $1,156,000, respectively, is recorded as a
reduction in the carrying value of its investment in Commercial Assets and as a
component of stockholders' equity.
F. Liquidating Operations
The Company, as of December 31, 1995, had substantially liquidated its
investment in CMO Ownership Interests. Revenues and expenses from CMO Ownership
Interests during the three and six months ended June 30, 1995, are reported as
liquidating operations. The components of revenues and expenses from CMO
Ownership Interests during the three and six months ended June 30, 1995, are as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1995 June 30, 1995
------------- -------------
Revenues
<S> <C> <C>
CMO Ownership Interests $ 145 $ 1,619
Interest income -- 225
Net (loss) gain on sale of CMO Ownership Interests (9) 2,022
-------- --------
Total revenues 136 3,866
-------- --------
Expenses
Management fees 73 162
General and administrative 7 22
Interest -- 564
-------- --------
Total expenses 80 748
-------- --------
Earnings from liquidating operations $ 56 $ 3,118
======== ========
</TABLE>
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<PAGE>
During the six months ended June 30, 1995, the Company exercised the
Call Rights on certain CMO Ownership Interests, recognizing net gains of
$2,008,000. The exercise of Call Rights resulted in the sale of $45,698,000
principal amount of Mortgage Collateral and the early redemption of the related
CMO Bonds.
On March 30, 1995, Asset Securitization sold 28 CMO Ownership Interests
classified as available-for-sale for $14,927,000. No gain or loss was recognized
at the time of the sale; however, the Company recognized $1,205,000 of net
holding losses related to the CMO Ownership Interests sold as of December 31,
1994. The proceeds from the sale and $15,569,000 of restricted cash for secured
notes payable were used to repay the $28,437,000 outstanding principal balance
of the secured notes and $355,000 of accrued interest, and to provide $1,704,000
of cash to the Company.
G. Short-Term Borrowings
The Company has entered into a credit facility that extends through
December 23, 1996, secured by certain non-agency MBS bonds. The credit facility
is subject to certain financial covenants, with which the Company is in
compliance, and bears interest, payable monthly, based on one-month LIBOR. At
June 30, 1996, $700,000 was borrowed under the credit facility at a weighted
average effective interest rate of 6.46%. Subsequent to June 30, 1996, the
advance was repaid and the collateral was retrieved by the Company. At December
31, 1995, there were no borrowings outstanding under the credit facility.
On July 19, 1995, the Company obtained a one-year, $1,000,000 unsecured
line of credit. The line of credit was renewed for an additional year on July
19, 1996. Advances under this line bear interest at the prime rate. At June 30,
1996, $700,000 was borrowed under this line of credit at an effective interest
rate of 8.5%. At December 31, 1995, there were no borrowings under this line of
credit.
On July 24, 1996, the Company secured a $10,000,000 revolving credit
and term loan agreement with a bank, which, at the election of the Company, may
be increased to $15,000,000 at any time prior to January 24, 1997. The revolving
portion of the agreement expires on July 23, 1997, and then can be converted to
a term loan, amortizing over the following 30 months. The Company is able to
select either a fixed or floating interest rate. Borrowings under the agreement
are indirectly subject to the value of the pledged collateral, which is set at
the original purchase price percentage of the bonds and is not subject to market
price fluctuations. The credit facility is collateralized by a portion of the
Company's non-agency MBS bonds with a net carrying value of $10,303,000 at June
30, 1996. On August 9, 1996, the Company was able to borrow $4,398,000 on the
facility, of which, $600,000 was outstanding. One of the Company's Independent
Directors is a member of the board of directors of the parent holding company of
the bank.
The Company has canceled the eight Repurchase Agreement facilities it
had at December 31, 1995.
H. Other Matters
The Company has entered into a series of Management Agreements with the
Manager through December 31, 1996. Pursuant to the Management Agreements, the
Manager advises the Company on its business and oversees its day-to-day
operations subject to the supervision of the Company's Board of Directors, the
majority of whom are Independent Directors. During the three and six months
ended June 30, 1996, the Company incurred combined Incentive Fees and Base Fees
of $170,000 and $458,000, respectively, compared with $165,000 and $291,000,
respectively for the same periods in 1995. The Company also incurred
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<PAGE>
Administrative Fees pursuant to the Management Agreements and certain
administration agreements entered into with the Manager in connection with
certain of the Company's CMO Ownership Interests and non-agency MBS bonds.
Administrative Fees incurred for the three and six months ended June 30, 1996,
were $180,000 and $344,000, respectively, compared with $220,000 and $547,000,
respectively, for the same periods in 1995.
Effective April 1, 1996, Financial Asset Management LLC assumed the
obligations of the Management Agreement. Financial Asset Management LLC is 80%
owned by two indirect, wholly owned subsidiaries of MDC and 20% owned by Spencer
I. Browne, the President of the Company.
The Company had an NOL carryover of approximately $99,000,000 at June
30, 1996, which could be used to reduce the Company's requirement under the Code
to distribute at least 95% of REIT income. As of June 30, 1996, the Company also
had a capital loss carryover of approximately $35,000,000 which expires
beginning in 1998.
- 10 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Capitalized terms not otherwise defined in the narrative below shall
have the meaning indicated in the "Definitions" which may be found at
the end of this report.
Asset Investors Corporation is a real estate investment trust (REIT)
that was incorporated by MDC under Maryland law in 1986. Its shares of Common
Stock are listed on the NYSE under the symbol "AIC." Asset Investors owns and
manages debt interests in residential mortgage loan securitizations (non-agency
MBS bonds) and owns approximately 27% of the common stock of Commercial Assets,
Inc. (AMEX: CAX).
The Company's acquisition and other policies are determined by its
Board of Directors. The Company's By-laws require that a majority of the Board
of Directors and each committee thereof be comprised of Independent Directors.
The Company's day-to-day operations are performed by the Manager
pursuant to a Management Agreement which is subject to the approval of a
majority of the Independent Directors. The Manager is subject to the supervision
of the Board of Directors. As part of its duties, the Manager presents the
Company with asset acquisition opportunities consistent with the policies and
objectives of the Company and furnishes the Board of Directors with information
concerning the acquisition, performance and disposition of assets. The Company
has no employees.
Effective April 1, 1996, Financial Asset Management LLC assumed the
obligations of the Management Agreement. Financial Asset Management LLC is 80%
owned by two indirect, wholly owned subsidiaries of MDC and 20% owned by Spencer
I. Browne, the President of the Company.
The Company operates in a manner that permits it to qualify for the
income tax treatment accorded to a REIT under the Code. Accordingly, the
Company's REIT income, with certain limited exceptions, is not subject to state
or federal income tax at the corporate level. In order to maintain its REIT
status, the Company will be required, among other things, to distribute annually
(as determined under the Code) to its shareowners at least 95% of its REIT
income. The Company must also meet certain asset, income and stock ownership
tests.
The Company currently acquires its subordinate, unrated non-agency MBS
bonds at a 70% to 80% discount from the principal amount of the bond. As with
any "deep-discount" bond, the Company's non-agency MBS bonds generate non-cash
or "phantom" income from the amortization of the purchase discount. Because
REITs must distribute at least 95% of their REIT income (and generally
distribute 100% because undistributed REIT income is subject to income tax) to
maintain their favorable tax status, most REITs would have to issue additional
capital, sell assets or find some other way to provide funds to distribute at
least 95% of this non-cash, phantom income.
At June 30, 1996, the Company had an available NOL carryover of
approximately $99,000,000. The Company uses its NOL carryover to reduce its
requirement to distribute REIT income, including the non-cash, phantom income
which results from the amortization of the purchase discount. Because of its NOL
carryover, the Company is able to use the cash flow that otherwise would be
required to be distributed as dividends to increase its earnings and cash flow
by acquiring additional non-agency MBS bonds, while maintaining high dividend
yields for the Company's shareowners. The Company believes that its NOL
- 11 -
<PAGE>
carryover gives it a unique competitive advantage in acquiring deep discount,
non-agency MBS bonds.
The Company generated $9,226,000 in cash from operations (net of
expenses) during the six months ended June 30, 1996, of which $4,418,000, or
48%, was distributed to shareowners, and the remaining $4,808,000, or 52%, was
available for additional acquisitions of non-agency MBS bonds. The Company's
Board of Directors and management determine the amount of the net cash flow to
use to pay dividends and to acquire additional assets. The Company's REIT income
for the six months ended June 30, 1996, was $6,620,000. Without the use of its
NOL carryover, and based upon REIT income for the first six months of 1996, the
Company would have been required by the Code to: (i) distribute $6,289,000 (95%
of REIT income) in dividends to maintain its REIT status; and (ii) pay taxes on
the remaining 5% of REIT income.
The Company acquired 36 non-agency MBS bonds with an aggregate
outstanding balance on the date of acquisition of $39,469,000 during the first
six months of 1996. These non-agency MBS bonds were acquired at a total cost of
$9,844,000, a weighted-average acquisition price of 26.2%, and with a
weighted-average pass-through coupon interest rate of 7.2%.
The Company's subordinate non-agency MBS bonds have credit risk.
Non-agency MBS bonds are collateralized by mortgage loans that do not meet GNMA,
FNMA or FHLMC guarantee standards, typically because the mortgage loans exceed
agency size limits (currently $207,000) or because the borrower does not meet
other agency credit underwriting criteria (a "non-conforming mortgage loan").
The Company generally acquires the subordinate class of the non-agency MBS bond
which bears the first losses from the related Mortgage Collateral. If a borrower
defaults on a mortgage loan which backs a non-agency MBS bond and the proceeds
from the foreclosure sale of the property securing the mortgage loan are less
than the unpaid balance of the mortgage, Foreclosure Costs and servicer
advances, the Company, as the holder of the first-loss class, will suffer a
loss. The loss would be equal to the unpaid principal balance of the mortgage
loan plus Foreclosure Costs and servicer advances, net of proceeds from the
foreclosure sale, mortgage insurance and loss indemnifications, if any.
Conversely, the holder of an agency-guaranteed mortgage loan virtually is
assured of full payment of principal and interest because of the agency
guarantee.
The Company intends to use its available funds to pay dividends and to
acquire additional non-agency MBS bonds. Although the Company's acquisitions
will generally emphasize subordinate unrated non-agency MBS bonds, future
acquisitions may include, among other things, rated classes of non-agency MBS
bonds, participations in residential real estate or other assets. The Company
also may acquire or originate agency-guaranteed and non-conforming mortgage
loans which, among other things, may be used for future securitizations. See
"FORWARD LOOKING INFORMATION" below.
- 12 -
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE
AND SIX MONTHS ENDED JUNE 30, 1996 and 1995
The table below summarizes the Company's results of operations during
the three and six months ended June 30, 1996 and 1995 (in thousands, except per
share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
Ongoing Operations:
Revenues
<S> <C> <C> <C> <C>
Non-agency MBS bonds $ 2,835 $ 1,889 $ 5,665 $ 3,222
Equity in earnings of Commercial Assets 539 435 976 855
Interest and other income 43 105 129 254
--------- --------- -------- --------
3,417 2,429 6,770 4,331
--------- --------- -------- --------
Expenses
Management fees 350 216 802 364
General and administrative 157 376 655 1,152
Elimination of DERs 825 -- 825 --
Interest -- 23 -- 56
--------- --------- -------- --------
1,332 615 2,282 1,572
--------- --------- -------- --------
Earnings from ongoing operations 2,085 1,814 4,488 2,759
Earnings from liquidating operations -- 56 -- 3,118
--------- --------- -------- --------
Book income $ 2,085 $ 1,870 $ 4,488 $ 5,877
========= ========= ======== ========
Earnings from ongoing operations per share $ .08 $ .07 $ .18 $ .11
Earnings from liquidating operations per share -- -- -- .13
--------- --------- -------- --------
Book income per share $ .08 $ .07 $ .18 $ .24
========= ========= ======== ========
REIT Income (Loss):
Ongoing operations $ 3,031 $ 3,314 $ 7,216 $ 4,897
Liquidating operations (271) (3,512) (596) (5,540)
---------- --------- -------- --------
REIT income (loss) $ 2,760 $ (198) $ 6,620 $ (643)
========== ========= ======== ========
REIT income (loss) per share $ .11 $ (.01) $ .27 $ (.03)
========== ========= ======== ========
Dividends $ 2,226 $ 1,941 $ 4,418 $ 3,879
========== ========= ======== ========
Dividends per share $ .09 $ .08 $ .18 $ .16
========== ========= ======== ========
Weighted-average shares outstanding 24,500 24,259 24,433 24,243
</TABLE>
Book Income
Non-agency MBS Bonds - Book income from the Company's non-agency MBS
bonds increased significantly during the three and six months ended June 30,
1996, compared with the same periods in 1995 primarily due to the acquisition of
- 13 -
<PAGE>
63 non-agency MBS bonds during the second half of 1995 and the first half of
1996 with an outstanding principal balance of $68,772,000 and a weighted-average
coupon at June 30, 1996, of 7.2%. As the Company continues to acquire non-agency
MBS bonds, earnings from the bonds should continue to increase as long as future
credit losses and prepayment speeds on the Mortgage Collateral remain within the
Company's estimates. See "FORWARD LOOKING INFORMATION" below.
The Company's effective book yield on its non-agency MBS bonds (based
upon their original purchase price percentage) for the six months ended June 30,
1996 and 1995, taking into consideration the Company's estimate of future credit
losses, was 19.1% and 16.0%, respectively. The effective book yield on the
Company's non-agency MBS bonds has increased primarily from the decrease in the
weighted-average purchase price of the non-agency MBS bonds from 37.3% at June
30, 1995, to 34.5% at June 30, 1996. Also, the weighted-average coupon on the
non-agency MBS bonds increased from 6.9% at June 30, 1995, to 7.1% at June 30,
1996. As a result of the decrease in the weighted-average purchase price
together with the increase in the weighted-average coupon of the Company's
non-agency MBS bonds, the effective interest rate received by the Company
(stated coupon divided by purchase price) increased from 18.5% at June 30, 1995,
to 20.6% at June 30, 1996.
The Company's non-agency MBS bonds are subject to the risk of default
and foreclosure loss from the $41.0 billion principal balance of non-conforming
mortgage loans that, at June 30, 1996, backed its bonds. The subordinate
non-agency MBS bonds owned by the Company represent, on average, 0.52% of the
bond issuances that are collateralized by these mortgages. The future credit
losses for each bond are limited to the outstanding balance of each bond
(averaging $1,096,000 at June 30, 1996). Additionally, the Company's economic
exposure from its investment in a non-agency MBS bond is limited to the purchase
price of the bond (averaging 34.5% of the acquired principal balance at June 30,
1996), less principal payments received.
The servicers of the mortgage loans that back the Company's non-agency
MBS bonds reported to the Company that mortgage loans with an outstanding
principal balance of $111,302,000 (0.3% of the total outstanding balance of the
mortgage loans) were in foreclosure or REO at June 30, 1996. If a mortgage loan
in foreclosure or REO is not worked out, or if the proceeds from the foreclosure
sale are not sufficient to repay the outstanding mortgage and related
foreclosure and servicing costs, any losses will be passed on to the Company as
the holder of the subordinate non-agency MBS bond. Consequently, the amount of
the losses passed on to the holders of the subordinate bonds from the mortgage
loans in foreclosure or REO is dependent upon what portion of these mortgages
are not cured and the loss severity from a foreclosure sale. The Company
performs certain surveillance activities with respect to these loans to attempt
to minimize the impact of these two factors. The Company has established an
allowance for future credit losses of $104,824,000 at June 30, 1996, which it
believes is sufficient to cover future credit losses from the subordinate
non-agency MBS bonds. See "FORWARD LOOKING INFORMATION" below.
For the six months ended June 30, 1996 and 1995, the allowance for
credit losses on the Company's non-agency MBS bonds was reduced by $4,467,000
and $729,000, respectively, as a result of the allocation of credit losses, net
of indemnifications, on the home mortgage loan collateral backing the bonds. The
credit losses and indemnifications allocated to the Company's non-agency MBS
bonds resulted in a net economic loss to the Company of $1,038,000 for the six
months ended June 30, 1996, and a net economic gain of $20,000 for the six
months ended June 30, 1995.
The Company believes that the increase in credit losses from the
Company's non-agency MBS bonds is consistent with the Public Securities
Association SDA model which is one of the primary factors used by the Company in
- 14 -
<PAGE>
determining its allowance for credit losses. The SDA model assumes that defaults
on mortgage loans are generally highest during years three through five of the
life of the mortgage loan. Most of the mortgage loans that collateralize the
Company's subordinate non-agency MBS bonds were originated in 1993 through 1995
and have not yet reached the years during which defaults are anticipated to be
at their highest. While the Company anticipates that the amount of credit losses
allocated to the Company's non-agency MBS bonds will continue to increase in
future periods, it believes that the current balance of the allowance for credit
losses is adequate to absorb such future credit losses. This assumes, among
other things, no significant changes in general economic conditions or
widespread natural disasters which may impact adversely the values of the
single-family homes securing the mortgage loans backing the Company's non-agency
MBS bonds. See "FORWARD LOOKING INFORMATION" below.
On December 31, 1995, the Company changed the classification of its
non-agency MBS bonds for financial reporting purposes from held-to-maturity to
available-for-sale. The change in classification was not attributable to any
current plans to liquidate its non-agency MBS bonds; however, from time to time,
the Company may evaluate opportunities to sell a non-agency MBS bond as part of
its efforts to maximize portfolio value and increase shareowner returns.
Accordingly, the Company has classified its non-agency MBS bonds as
available-for-sale, carried at fair value in the financial statements.
Unrealized holding gains of $413,000 and $399,000 at June 30, 1996, and December
31, 1995, respectively, from the Company's non-agency MBS bonds are reported as
a net amount in stockholders' equity until realized.
Commercial Assets - Income from the Company's shares of Commercial
Assets (which, for book income purposes, is based on the Company's pro rata
share of Commercial Assets' book income) for the three and six months ended June
30, 1996, was $539,000 and $976,000, respectively, compared with $435,000 and
$855,000, respectively, for the same periods in 1995. The increase in income
from Commercial Assets is primarily due to the early redemption of two bonds in
May 1996 offset by a one-time, non-cash charge resulting from the issuance of
157,413 shares of Commercial Assets common stock for the elimination of dividend
equivalent rights under its stock option plan. At June 30, 1996, and December
31, 1995, the CMBS bonds had outstanding principal balances of $89,515,000 and
$100,368,000, respectively, and weighted-average coupons of 8.15% and 8.24%,
respectively. The decrease in the outstanding principal balance and
weighted-average coupon of the CMBS bonds from December 31, 1995, to June 30,
1996, was primarily the result of the early bond redemptions in May 1996.
According to Commercial Assets, at June 30, 1996, and December 31,
1995, it had $3,864,000 and $4,245,000, respectively, of unrealized holding
losses on its CMBS bonds. The Company's share of these unrealized holding
losses, $1,034,000 and $1,156,000 as of June 30, 1996 and December 31, 1995,
respectively, was recorded as a reduction in the carrying value of its
investment in Commercial Assets and as a component of stockholders' equity.
Interest and Other Income - Interest and other income decreased during
the three and six months ended June 30, 1996, compared with the same period in
1995 because the Company has used its available cash to acquire non-agency MBS
bonds.
Management Fees - Management fees increased during the three and six
months ended June 30, 1996, compared with the same period in 1995 due to: (i)
higher Administrative Fees from acquisitions of non-agency MBS bonds during 1995
and the first and second quarters of 1996; (ii) a change in the method of
calculating Incentive Fees pursuant to the terms of an amendment to the
Management Agreement dated January 1, 1996; and (iii) a decrease in the average
Ten-Year U.S. Treasury Rate during the six months ended June 30, 1996, from the
same period in 1995 by 73 basis points. See Incentive Fee under "DEFINITIONS"
below.
- 15 -
<PAGE>
Effective April 1, 1996, Financial Asset Management LLC assumed the
obligations of the Management Agreement. Financial Asset Management LLC is 80%
owned by two indirect, wholly owned subsidiaries of MDC and 20% owned by Spencer
I. Browne, the President of the Company.
General and Administrative Expenses - General and administrative
expenses decreased during the three and six months ended June 30, 1996, compared
with the same periods in 1995 due primarily to the elimination of DER expense in
the second quarter of 1996, reductions in legal and consulting fees, and lower
costs associated with the Company's annual report.
Elimination of DERs - The three and six months ended June 30, 1996,
included a one-time, non-cash expense from the issuance of Common Stock pursuant
to an amendment to the Stock Option Plan which eliminated the future accrual of
DERs on outstanding stock options. At their annual meeting in May 1996, the
Company's shareowners approved an amendment to the Stock Option Plan which
permitted the Company to issue shares of Common Stock to the holders of options
who voluntarily relinquished their right to receive DERs in the future. The
issuance of Common Stock in exchange for the right to receive DERs in the future
resulted in a one-time, non-cash charge to second quarter 1996 earnings of
$825,000 and the issuance of 244,391 shares of Common Stock. The effect of the
amendment will be to reduce general and administrative expenses from the accrual
of DERs from options granted under the Stock Option Plan. General and
administrative expenses related to DERs totaled $337,000 in 1995. See "FORWARD
LOOKING INFORMATION" below.
Interest Expense - Interest expense on the Company's borrowing
facilities decreased during the three and six months ended June 30, 1996,
compared with the same periods in 1995, reflecting the decrease in the average
daily balance to $44,000 and $22,000, respectively, for the three and six months
ended June 30, 1996, from $1,169,000 and $1,487,000, respectively, for the same
periods in 1995.
Liquidating Operations - In 1993, the Company began to liquidate its
CMO Ownership Interests and acquire credit-sensitive non-agency MBS bonds and
shares of Commercial Assets. Accordingly, the Company had classified as
liquidating operations its revenues from CMO Ownership Interests along with
expenses directly allocable to the CMO Ownership Interests. As of December 31,
1995, the Company had substantially liquidated all of its CMO Ownership
Interests. Earnings from liquidating operations during the three and six months
ended June 30, 1995, was comprised of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1995 June 30, 1995
------------- -------------
Revenues
<S> <C> <C>
CMO Ownership Interests $ 145 $ 1,619
Interest income -- 225
Net gain on sale of CMO Ownership Interests (9) 2,022
------- -------
Total revenues 136 3,866
------- -------
Expenses
Management fees 73 162
General and administrative 7 22
Interest -- 564
------- -------
Total expenses 80 748
------- -------
Earnings from liquidating operations $ 56 $ 3,118
======= =======
</TABLE>
- 16 -
<PAGE>
Earnings from CMO Ownership Interests during the three and six months
ended June 30, 1995, were from the $22,490,000 net carrying amount of CMO
Ownership Interests at December 31, 1994. These CMO Ownership Interests were
liquidated throughout 1995.
During the six months ended June 30, 1995, the Company exercised Call
Rights on certain CMO Ownership Interests resulting in gains of $2,008,000. The
exercise of these Call Rights reduced the outstanding principal amount of the
Company's Mortgage Collateral by $45,698,000.
On March 30, 1995, Asset Securitization sold 28 CMO Ownership Interests
and repaid the outstanding secured notes payable. As of December 31, 1994, the
Company recognized $1,205,000 of net holding losses for book income purposes
related to the 28 CMO Ownership Interests sold. As a result, no gain or loss was
recorded on the sale of the CMO Ownership Interests and repayment of the secured
notes in 1995. Asset Securitization was liquidated in May 1995.
Interest income from liquidating operations during the six months ended
June 30, 1995, was earned primarily from restricted cash for the secured notes
payable. The restricted cash was used to repay the secured notes on March 30,
1995. Interest expense from liquidating operations during the six months ended
June 30, 1995, was principally from the $30,592,000 of secured notes payable
which was repaid during the first quarter of 1995.
REIT Income
The Company's REIT income from ongoing operations was $3,031,000 during
the three months ended June 30, 1996, compared with $3,314,000 for the same
period in 1995. The decline was due, in part, to the one-time charge for the
issuance of Common Stock to eliminate DERs. The timing of the second quarter
dividend from Commercial Assets, which was paid and recognized for REIT income
purposes on July 10, 1996, also contributed to the decline. These reductions in
REIT income partially were offset by $935,000 of higher REIT earnings from
non-agency MBS bonds in the second quarter of 1996 resulting from acquisitions
of non-agency MBS bonds in 1995 and 1996.
The Company's REIT income from ongoing operations during the six months
ended June 30, 1996, improved over the same period in 1995 due to $3,081,000 of
higher REIT earnings from non-agency MBS bonds, partially offset by the cost to
eliminate DERs and lower dividend income due to the timing of Commercial Assets'
second quarter dividend.
The Company's REIT losses from liquidating operations for the three and
six months ended June 30, 1996, were $271,000 and $596,000, respectively,
significantly less than the same periods in 1995 primarily due to sales during
1995 of the CMO Ownership Interests that were generating REIT losses.
NOL and Capital Loss Carryovers
At June 30, 1996, the Company's NOL carryover was approximately
$99,000,000, and its capital loss carryover was approximately $35,000,000. The
NOL carryover may be used to offset all or a portion of the Company's REIT
income, and as a result, to reduce the amount of income that the Company must
distribute to shareowners to maintain its status as a REIT. The NOL carryover is
scheduled to expire between 2007 and 2009 and the capital loss carryover is
scheduled to expire between 1998 and 2000.
- 17 -
<PAGE>
Reconciliation of REIT Income and Book Income
Substantially all of the difference between REIT income and book income
is due to: (i) the method of recording credit losses, which for REIT income
purposes are not deducted until they occur and which for book income purposes
are estimated and reflected as a reduction of revenues in the form of lower
discount amortization included in income from non-agency MBS bonds; (ii)
differences in the calculation of discount and premium amortization for REIT
income compared to book income attributable to non-agency MBS bonds and CMO
Ownership Interests; (iii) gains on the sales of assets recorded for book income
purposes that resulted in either capital losses or capital gains for REIT income
purposes that are reduced to zero by the Company's capital loss carryover; and
(iv) recognition of income from Commercial Assets which for REIT income purposes
is based upon dividends received and which for book income purposes is based on
the Company's pro rata share of Commercial Assets' book income.
Dividend Distributions
On June 12, 1996, the Company declared a second quarter dividend of
$2,226,000, or $.09 per share, compared with $1,941,000, or $.08 per share, for
the same period in 1995. The 1996 second quarter dividend was paid on June 28,
1996, to shareowners of record on June 21, 1996. For the six months ended June
30, 1996 and 1995, the Company declared dividends of $4,418,000 ($.18 per share)
and $3,879,000 ($.16 per share), respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its cash flow from operating activities and other
capital resources to provide working capital to support its operations, for the
payment of dividends to its shareowners and for the acquisition of assets.
The table below summarizes the Company's operating cash flows and uses
of those cash flows for the six months ended June 30, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1996 1995
---- ----
Cash Generated by (Used in) Ongoing Operations:
Non-agency MBS bonds:
<S> <C> <C>
Interest $ 6,959 $ 3,980
Principal 1,320 848
Indemnifications 281 414
Dividends from Commercial Assets 469 1,021
Borrowings (repayment) of short-term debt 1,400 (2,181)
Cash Generated by (Used in) Liquidating Operations:
CMO Ownership Interests -- 6,479
Restricted cash for secured notes payable -- 15,862
Sale of assets -- 16,862
Repayment of secured notes payable -- (30,592)
Total Expenses, Net of Interest Income and Other (1,203) (3,851)
--------- ----------
Cash Generated by Operations $ 9,226 $ 8,842
========= ==========
</TABLE>
- 18 -
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1996 1995
---- ----
<S> <C> <C>
Issuance of Common Stock from Exercise of Stock Options $ 159 $ --
========= ==========
Dividends Paid $ 4,418 $ 2,664
========= ==========
Acquisitions of Non-agency MBS Bonds $ 9,844 $ 17,088
========= ==========
</TABLE>
The Company's cash from ongoing operations continues to increase due to
acquisitions of non-agency MBS bonds. The Company received no cash from
liquidating operations in 1996 because the process of liquidating the Company's
CMO Ownership Interests was completed as of December 31, 1995.
The Company has entered into a credit facility that extends through
December 23, 1996, secured by certain non-agency MBS bonds. The credit facility
is subject to certain financial covenants, with which the Company is in
compliance, and bears interest, payable monthly, based on one-month LIBOR. At
June 30, 1996, $700,000 was borrowed under the credit facility at a weighted
average effective interest rate of 6.46%. Subsequent to June 30, 1996, the
advance was repaid and the collateral was retrieved by the Company. At December
31, 1995, there were no borrowings outstanding under the credit facility.
On July 19, 1995, the Company obtained a one-year, $1,000,000 unsecured
line of credit. The line of credit was renewed for an additional year on July
19, 1996. Advances under this line bear interest at the prime rate. At June 30,
1996, $700,000 was borrowed under this line of credit at an effective interest
rate of 8.5%. At December 31, 1995, there were no borrowings under this line of
credit.
On July 24, 1996, the Company secured a $10,000,000 revolving credit
and term loan agreement with First Bank National Association, which, at the
election of the Company, may be increased to $15,000,000 at any time prior to
January 24, 1997. The revolving portion of the agreement expires on July 23,
1997, and then can be converted to a term loan, amortizing over the following 30
months. The Company is able to select either a fixed or floating interest rate.
Borrowings under the facility are indirectly subject to the value of the pledged
collateral, which is set at the original purchase price percentage of the bonds
and is not subject to market price fluctuations. The credit facility is
collateralized by non-agency MBS bonds with a net carrying value of $10,303,000
at June 30, 1996. On August 9, 1996, the Company was able to borrow $4,398,000
on the facility, of which, $600,000 was outstanding. One of the Company's
Independent Directors is a member of the board of directors of the parent
holding company of the bank.
The Company has canceled the eight Repurchase Agreement facilities it
had at December 31, 1995.
The cash generated by the Company's non-agency MBS bonds is reduced by
the credit losses allocated to the bonds. The amount of defaults and resulting
credit losses on the Company's non-agency MBS bonds may be impacted adversely by
natural disasters not generally insured against by a standard homeowners
insurance policy (e.g., floods, earthquakes, etc.) in geographic areas in which
residential properties that collateralize the Company's non-agency MBS bonds are
located. The Company is unable to predict the impact natural disasters may have
on the Company's income. The Company has provided $104,824,000 of allowances for
credit losses at June 30, 1996, to absorb future credit losses, including losses
from natural disasters not covered by standard homeowner policies. See "FORWARD
LOOKING INFORMATION" below.
- 19 -
<PAGE>
The Company's NOL carryover allows it to use internally generated cash
flow to acquire additional non-agency MBS bonds while maintaining high dividend
yields for the Company's shareowners. The Company had available cash of
$5,328,000 at December 31, 1995, and generated cash from ongoing operations of
$9,226,000 during the six months ended June 30, 1996, enabling the Company to
acquire 36 non-agency MBS bonds for $9,844,000. The Company also paid $2,192,000
($.09 per share) and $2,226,000 ($.09 per share), respectively, in dividends
during the first and second quarters of 1996.
FORWARD LOOKING INFORMATION
Some of the statements in this Form 10-Q as well as statements made by
the Company in periodic press releases, oral statements made by the Company's
officials to analysts and shareowners in the course of presentations about the
Company and conference calls following quarterly earnings releases, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). The statements include
projections of the Company's estimated 1996 cash flow and dividends. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. Such
factors include the following: general economic and business conditions;
interest rate changes; competition; the availability of additional non-agency
MBS bonds at approximately the same prices currently paid by the Company; the
Company's ability to maintain or reduce expense levels and the assumption that
losses on non-agency MBS bonds do not exceed the Company's estimates.
- 20 -
<PAGE>
DEFINITIONS
The following terms used in the text are understood to have the meanings
indicated below.
Administrative Fee - A fee up to $3,500 per annum per non-agency MBS bond, for
bond administration and other services related to the Company's non-agency MBS
bonds paid pursuant to the Management Agreement.
agency - GNMA, FNMA or FHLMC.
AMEX - American Stock Exchange, Inc.
Asset Securitization - Asset Investors Securitization Corporation, a wholly
owned subsidiary of the Company incorporated under Delaware law, liquidated
effective May 2, 1995.
Base Fee - An annual management fee equal to 3/8 of one percent of the Company's
consolidated Average Invested Assets (as defined in the Management Agreement)
which is payable quarterly to the Manager pursuant to the Management Agreement.
book income - Income computed in accordance with GAAP.
By-laws - The By-laws of the Company, as amended from time to time.
Call Rights - The rights provided in the Indenture of a CMO Bond that allow the
issuer of the CMO Bond to sell the Mortgage Collateral and redeem the bonds at
par at a predetermined date or if the bond balance falls below a predetermined
amount (for example, 10% of the original bond balance). Any excess proceeds from
the sale of the Mortgage Collateral over the funds required to redeem the bonds
is passed on to the residual interest holder.
CMBS bond - A commercial mortgage-backed security or a debt instrument which is
secured by mortgage loans on commercial real property.
CMO Class or CMO Bond - A debt obligation resulting from the issuance of a
collateralized mortgage obligation. A CMO Class may represent the right to
receive interest only, principal only, a proportionate amount of interest and
principal (each, respectively, and "IO Class," "PO Class" and "Regular Class")
or a disproportionate amount of interest and principal.
CMO Ownership Interests - An ownership interest in a collateralized mortgage
obligation. CMOs are multi-class issuances of bonds which are secured and funded
as to the payment of interest and repayment of principal by a specific group of
mortgage loans, mortgage-backed certificates or other collateral.
Code - The Internal Revenue Code of 1986, as amended.
Commercial Assets - Commercial Assets, Inc., (AMEX: CAX) a publicly traded REIT
formed by the Company in August 1993, incorporated under Maryland law.
Commission - The Securities and Exchange Commission.
- 21 -
<PAGE>
Common Stock - Asset Investors Corporation common stock, par value $.01 per
share, listed on the New York Stock Exchange, Inc. under the symbol "AIC."
Company - Asset Investors Corporation, a Maryland corporation.
DERs - Dividend equivalent rights as defined in the 1986 Stock Option Plan, as
amended. Prior to adoption of an amendment to the Stock Option Plan that
eliminated DERs, option holders earned shares of Common Stock equal to the value
of dividends received as if the options were outstanding Common Stock.
FHLMC - Federal Home Loan Mortgage Corporation.
FNMA - Federal National Mortgage Association.
Foreclosure Costs - Necessary repair and maintenance costs during the
foreclosure period, brokerage fees, legal fees, taxes and insurance, net of
proceeds from mortgage insurance, if any.
GAAP - Generally accepted accounting principles.
GNMA - Government National Mortgage Association.
Incentive Fee - An annual management fee equal to 20% of the dollar amount by
which GAAP Net Income (as defined in the Management Agreement) of the Company
exceeds an amount equal to the Average Net Worth (as defined in the Management
Agreement) of the Company multiplied by the Ten-Year U.S. Treasury Rate (as
defined in the Management Agreement) plus one percent, payable quarterly to the
Manager pursuant to the Management Agreement.
Independent Director - Pursuant to the Company's By-laws, an Independent
Director is a person "who is not affiliated, directly or indirectly, with the
person or entity responsible for directing or performing the day-to-day business
affairs of the corporation (the "advisor"), including a person or entity to
which the advisor subcontracts substantially all of such functions, whether by
ownership of, ownership interest in, employment by, any material business or
professional relationship with, or by serving as an officer of the advisor or an
affiliated business entity of the advisor."
Lesser quality mortgage loans - Mortgage loans made to borrowers who have credit
histories of a lower overall quality than most borrowers generally resulting
from previous repayment difficulties, brief job histories, previous bankruptcies
or other causes. Also referred to as B and C credit quality mortgage loans.
LIBOR - The London Interbank Offered Rate on Eurodollar deposits.
Management Agreement - The one-year management agreement entered into between
the Company and the Manager.
Manager - Financial Asset Management LLC, a Colorado limited liability
corporation 80% owned by two indirect, wholly owned subsidiaries of MDC and 20%
owned by Spencer I. Browne, President of the Company. As of April 1, 1996,
Financial Asset Management LLC was successor to Financial Asset Management
Corporation, the previous Manager of the Company and an indirect, wholly owned
subsidiary of MDC.
- 22 -
<PAGE>
MDC - M.D.C. Holdings, Inc., a Delaware corporation.
Mortgage Collateral - Private certificates representing undivided beneficial
interests in pools of mortgage loans and individual mortgage loans which secure
CMO bonds and non-agency MBS bonds.
mortgage loans - Mortgage loans which are secured by single-family, residential
(one-to four-unit) properties.
NOL - Net operating loss.
NYSE - New York Stock Exchange, Inc.
non-agency MBS bonds - Debt interests in residential mortgage loan
securitizations collateralized by pools of non-conforming (non-agency
guaranteed) single-family (one- to four-unit) mortgage loans.
Real estate owned (REO) - The ownership of real property acquired as a result of
foreclosure.
REIT - A real estate investment trust as defined in the Code.
REIT income/loss - Taxable income/loss computed as prescribed for REITs prior to
consideration of any NOL carryovers and prior to the "dividends paid deduction"
(including the dividends paid deduction for dividends related to capital gains).
REMIC - A pass-through tax entity known as a "real estate mortgage investment
conduit" created by the Tax Reform Act of 1986 to facilitate the structuring of
mortgage-asset transactions.
Repurchase Agreements - Financial transactions involving the sale and subsequent
repurchase of an identical security on a specified date at two different,
pre-negotiated prices. Because Repurchase Agreements require the same security
to be returned when the transaction is completed, these agreements are perceived
as and accounted for as collateralized borrowing/lending arrangements.
Standard Default Assumption (SDA) - A standardized benchmark default curve
developed by the Public Securities Association used for the measurement of the
rates of default on mortgage loans.
Stock Option Plan - The Company's 1986 Stock Option Plan, as restated November
15, 1990, as amended.
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<PAGE>
PART II
OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's 1996 Annual Meeting of Shareowners was held on
May 28, 1996. At the meeting, Messrs. Richard L. Robinson and
Tim Schultz were elected as Class I directors to terms
expiring in 1999. There were 22,220,288 and 22,225,150 votes
cast "for" the election of Richard L. Robinson and Tim
Schultz, respectively, as Class I directors and 338,890 and
334,028 votes, respectively, were "withheld." At the meeting,
the shareowners also approved an amendment to the Stock Option
Plan to eliminate DERs and to permit the grant of shares of
the Company's Common Stock in connection therewith. Of the
votes cast, 20,723,353 were cast "for" the amendment and
1,295,249 were cast "against" the amendment. There were
540,576 votes cast "abstain."
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
4 Form of certificate representing Common Stock of the
Registrant (incorporated herein by reference to Exhibit 10.15
to the Annual Report on Form 10-K of the Registrant for the
fiscal year ended December 31, 1988, Commission File No.
1-9360, filed on April 5, 1989).
4.1 Revolving Credit and Term Loan Agreement, dated as of July 24,
1996, by and between the Registrant and First Bank National
Association.
4.1(a) Pledge Agreement, dated as of July 24, 1996, by and between
the Registrant and First Bank National Association.
10.1 Management Agreement dated as of January 1, 1995, between the
Registrant and Financial Asset Management Corporation
(incorporated herein by reference to Exhibit 10.1(b) to the
Quarterly Report on Form 10-Q of the Registrant for the
quarter ended June 30, 1995, Commission File No.
1-9360, filed on May 15, 1995).
10.1(a) Amendment to Management Agreement dated as of January 1, 1996,
between the Registrant and Financial Asset Management
Corporation (incorporated herein by reference to Exhibit
10.1(a) to the Quarterly Report on Form 10-Q of the Registrant
for the quarter ended March 31, 1996, Commission File No.
1-9360, filed on May 15, 1996).
10.1(b) Assignment of Management Agreements dated as of April 1, 1996,
between Financial Asset Management Corporation and Financial
Asset Management LLC (incorporated herein by reference to
Exhibit 10.1(b) to the Quarterly Report on Form 10-Q of the
Registrant for the quarter ended March 31, 1996, Commission
File No. 1-9360, filed on May 15, 1996).
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<PAGE>
10.2 CMO Participation Agreement, dated as of December 15, 1986,
among the Registrant, Holdings and Yosemite Financial, Inc.
(incorporated herein by reference to Exhibit 10.10 to the
Quarterly Report on Form 10-Q of the Registrant for the
quarter ended June 30, 1988, Commission File No.
1-9360, filed on August 15, 1988).
10.4 Form of Indemnification Agreement between the Registrant and
each Director of the Registrant (incorporated herein by
reference to Appendix A to the Proxy Statement of the
Registrant, Commission File No. 1-9360, dated May 18, 1987).
10.5(a) 1986 Stock Option Plan of the Registrant as restated November
15, 1990 (incorporated herein by reference to Exhibit A to the
Proxy Statement of the Registrant, Commission File No. 1-9360,
dated April 22, 1991).
10.5(b) First Amendment to the Registrant's 1986 Stock Option Plan as
restated November 15, 1990 (incorporated herein by reference
to Exhibit 10.9(b) to the Annual Report on Form 10-K of the
Registrant for the fiscal year ended December 31, 1992,
Commission File No. 1-9360, filed on April 5, 1993).
10.5(c) Second Amendment to the Registrant's 1986 Stock Option Plan as
restated November 15, 1990, as amended (incorporated herein by
reference to Exhibit 10.9(c) to the Annual Report on Form 10-K
of the Registrant for the fiscal year ended December 31, 1992,
Commission File No. 1-9360, filed on April 5, 1993).
10.5(d) Form of Non-Qualified Stock Option Agreement pursuant to the
1986 Stock Option Plan of the Registrant as amended and
restated through November 15, 1990 (incorporated here-in by
reference to Exhibit 10.9(b) to the Annual Report on Form 10-K
of the Registrant for the fiscal year ended December 31, 1991,
Commission File No. 1-9360, filed on March 30, 1992).
10.5(e) Third Amendment to the Registrant's 1986 Stock Option Plan as
restated November 15, 1990, as amended (incorporated herein by
reference to Exhibit 10.9(e) to the Quarterly Report on Form
10-Q of the Registrant for the quarter ended June 30, 1993,
Commission File No. 1-9360, filed on November 15, 1993).
10.5(f) Fourth Amendment to the Registrant's 1986 Stock Option Plan as
restated November 15, 1990, as amended, dated March 11, 1996.
10.15 Contribution Agreement, dated as of August 20, 1993, by and
between the Registrant and Commercial Assets, Inc.
(incorporated herein by reference to Exhibit 10.19 to the
Quarterly Report on Form 10-Q of the Registrant for the
quarter ended June 30, 1993, Commission File No.
1-9360, filed on November 15, 1993).
27 Financial Data Schedule.
99 Automatic Dividend Reinvestment Plan relating to the Common
Stock of the Registrant, as amended (incorporated herein by
reference to Exhibit 28 to the Annual Report on Form 10-K of
the Registrant for the fiscal year ended December 31, 1991,
Commission File No. 1-9360, filed on March 30, 1992).
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<PAGE>
(b) Reports on Form 8-K:
No current reports on Form 8-K were filed by the Registrant
during the period covered by this Quarterly Report on Form
10-Q.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ASSET INVESTORS CORPORATION
(Registrant)
Date: August 13, 1996 By /s/ Paris G. Reece III
-----------------------
Paris G. Reece III
Chief Financial Officer
- 27 -
REVOLVING CREDIT AND TERM LOAN AGREEMENT
THIS REVOLVING CREDIT AND TERM LOAN AGREEMENT, dated as of July 24,
1996, is by and between ASSET INVESTORS CORPORATION, a Maryland corporation (the
"Borrower"), and FIRST BANK NATIONAL ASSOCIATION, a national banking association
(the "Bank").
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS
Section 1.1 Defined Terms. In addition to the terms defined elsewhere
in this Agreement, the following terms shall have the following respective
meanings (and such meanings shall be equally applicable to both the singular and
plural form of the terms defined, as the context may require):
"Advance": The portion of the outstanding Loans bearing interest at an
identical rate for an identical Interest Period, provided that all Reference
Rate Advances shall be deemed a single Advance. An Advance may be a "Eurodollar
Advance" or "Reference Rate Advance" (each, a "type" of Advance).
"Adjusted Cost Basis": Defined in Exhibit C attached hereto.
"Adjusted Portfolio Value": The aggregate face or par value of the
Borrower's portfolio of Eligible Bonds minus principal amortization of such
Eligible Bonds and minus realized losses on such Eligible Bonds.
"Adverse Event": The occurrence of any event that could have a material
adverse effect on the business, operations, property, assets or condition
(financial or otherwise) of the Borrower and the Restricted Subsidiaries as a
consolidated enterprise or on the ability of the Borrower or any other party
obligated thereunder to perform its obligations under the Loan Documents.
"Agreement": This Revolving Credit and Term Loan Agreement, as it may
be amended, modified, supplemented or restated from time to time.
"Amortization Event": The Adjusted Portfolio Value shall not equal or
exceed $100,000,000.
"Borrowing Base": The Borrowing Base as defined in, and determined in
accordance with, Exhibit C attached hereto.
"Borrowing Base and Portfolio Certificates": Certificate in the form of
Exhibits D-1 and D-2 duly completed and signed by an authorized officer of the
Borrower.
"Business Day": Any day (other than a Saturday, Sunday or legal holiday
in the State of Minnesota) on which national banks are permitted to be open in
Minneapolis, Minnesota and, with respect to Eurodollar Advances, a day on which
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dealings in Dollars may be carried on by the Bank in the interbank eurodollar
market.
"Capital Expenditure": Any amount debited to the fixed asset account on
the consolidated balance sheet of the Borrower in respect of (a) the acquisition
(including, without limitation, acquisition by entry into a Capitalized Lease),
construction, improvement, replacement or betterment of land, buildings,
machinery, equipment or of any other fixed assets or leaseholds, and (b) to the
extent related to and not included in (a) above, materials, contract labor and
direct labor (excluding expenditures properly chargeable to repairs or
maintenance in accordance with GAAP).
"Capitalized Lease": Any lease which is or should be capitalized on the
books of the lessee in accordance with GAAP.
"Code": The Internal Revenue Code of 1986, as amended, or any successor
statute, together with regulations thereunder.
"Collateral Certificate": Defined in the Pledge Agreement.
"Commitment": The agreement of the Bank to make Loans to the Borrower
subject to the terms and conditions of this Agreement.
"Consolidated Tangible Net Worth": As of any date of determination, the
sum of the amounts set forth on the consolidated balance sheet of the Borrower
as the sum of the common stock, preferred stock, additional paid-in capital and
retained earnings of the Borrower (excluding treasury stock), less the book
value of all assets of the Borrower and its Restricted Subsidiaries that would
be treated as intangibles under GAAP, including, without limitation, all such
items as goodwill, trademarks, trade names, service marks, copyrights, patents,
licenses, unamortized debt discount and unamortized deferred charges, and less
(a) amounts shown on such consolidated balance sheet as investments in
Unrestricted Subsidiaries for Unrestricted Subsidiaries held as investments, and
(b) the book value of all assets of Unrestricted Subsidiaries and plus the book
amount of total liabilities of Unrestricted Subsidiaries (to the extent deducted
in determining equity of the Borrower) for Unrestricted Subsidiaries that are
consolidated with the Borrower for financial reporting purposes.
"Conversion Date": July 23, 1997, or such earlier date (which shall be
a Business Day) as may be fixed by the Borrower on at least ten Business Days'
prior written notice by the Borrower to the Bank.
"Default": Any event which, with the giving of notice to the Borrower
or lapse of time, or both, would constitute an Event of Default.
"Eligible Bonds": Defined in Exhibit C attached hereto.
"Eligible Collateral": Defined in Exhibit C attached hereto.
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<PAGE>
"ERISA": The Employee Retirement Income Security Act of 1974, as
amended, and any successor statute, together with regulations thereunder.
"ERISA Affiliate": Any trade or business (whether or not incorporated)
that is a member of a group of which the Borrower is a member and which is
treated as a single employer under Section 414 of the Code.
"Eurodollar Advance": An Advance designated as such in a notice of
borrowing under Section 2.3 or a notice of continuation or conversion under
Section 2.4.
"Eurodollar Interbank Rate": The offered rate for deposits in United
States Dollars (rounded upwards, if necessary, to the nearest 1/16 of 1%), for
delivery of such deposits on the first day of an Interest Period of a Eurodollar
Advance, for the number of days comprised therein (or for each Floating
Eurodollar Advance, for one month), which appears on the Reuters Screen LIBO
Page as of 11:00 a.m., London time, on the day that is:
(a) for Fixed Eurodollar Advances, two Banking Days preceding the first
day of the Interest Period of such Eurodollar Advance; or
(b) for Floating Eurodollar Advances, the first day of the Interest
Period of such Eurodollar Advance;
or the rate determined by the Bank at such time based on such other published
service of general application as shall be selected by the Bank for such
purpose. If the Reuters Screen LIBO Page or such other service does not report
such rates or such rates do not, in the judgment of the Bank, accurately reflect
the rates of interest applicable to the Bank in the relevant markets, the rate
for such Interest Period shall be determined by the Bank based on rates offered
to the Bank for United States Dollar deposits in the interbank eurodollar
market. "Reuters Screen LIBO Page" means the display designated as page "LIBO"
on the Reuter Monitor Money Rates Service (or such other page as may replace the
LIBO Page on that service for the purpose of displaying London interbank offered
rates of major banks for United States Dollar deposits).
"Eurodollar Rate (Reserve Adjusted)": A rate per annum (rounded upward,
if necessary, to the nearest 1/16th of 1%) calculated for the Interest Period of
a Eurodollar Advance in accordance with the following formula:
ERRA = Eurodollar Interbank Rate
1.00 - ERR
In such formula, "ERR" means "Eurodollar Reserve Rate" and "ERRA" means
"Eurodollar Rate (Reserve Adjusted)", in each instance determined by the Bank
for the applicable Interest Period. The Bank's determination of all such rates
for any Interest Period shall be conclusive in the absence of manifest error.
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<PAGE>
"Eurodollar Reserve Rate": A percentage equal to the daily average
during such Interest Period of the aggregate maximum reserve requirements
(including all basic, supplemental, marginal and other reserves), as specified
under Regulation D of the Federal Reserve Board, or any other applicable
regulation that prescribes reserve requirements applicable to Eurocurrency
liabilities (as presently defined in Regulation D) or applicable to extensions
of credit by the Bank the rate of interest on which is determined with regard to
rates applicable to Eurocurrency liabilities. Without limiting the generality of
the foregoing, the Eurocurrency Reserve Requirement shall reflect any reserves
required to be maintained by the Bank against (i) any category of liabilities
that includes deposits by reference to which the Eurodollar Rate is to be
determined, or (ii) any category of extensions of credit or other assets that
includes Eurodollar Advances.
"Event of Default": Any event described in Section 10.1.
"Federal Reserve Board": The Board of Governors of the Federal Reserve
System or any successor thereto.
"Fixed Eurodollar Advance": A Eurodollar Advance with an Interest
Period of one or more months.
"Floating Eurodollar Advance": A Eurodollar Advance with an Interest
Period of less than one month.
"GAAP": Generally accepted accounting principles as applied in the
preparation of the audited financial statement of the Borrower referred to in
Section 7.5.
"Indebtedness": Without duplication, all obligations, contingent or
otherwise, which in accordance with GAAP should be classified upon the obligor's
balance sheet as liabilities, but in any event including the following (whether
or not they should be classified as liabilities upon such balance sheet): (a)
obligations secured by any mortgage, pledge, security interest, lien, charge or
other encumbrance existing on property owned or acquired subject thereto,
whether or not the obligation secured thereby shall have been assumed and
whether or not the obligation secured is the obligation of the owner or another
party; (b) any obligation on account of deposits or advances; (c) any obligation
for the deferred purchase price of any property or services, except trade
accounts payable incurred in the ordinary course of business and except for
accrued liabilities, such as salary accruals, arising in the ordinary course of
business; (d) any obligation as lessee under any Capitalized Lease; (e) all
guaranties, endorsements and other contingent obligations in respect to
Indebtedness of others; (f) undertakings or agreements to reimburse or indemnify
issuers of letters of credit; and (g) obligations incurred to finance the
purchase of collateralized mortgage obligations. Notwithstanding the foregoing,
Indebtedness shall not include undertakings or agreements to reimburse or
indemnify issuers of letters of credit intended to secure or guaranty
performance of obligations (and not to secure or back financial obligations),
which do not exceed $1,000,000 in the aggregate (with any letters of credit in
excess of such amount being deemed "Indebtedness"). For all purposes of this
Agreement, the Indebtedness of any Person shall include the Indebtedness of any
partnership, trust or joint venture in which such Person is a general partner,
beneficiary, owner or joint venturer, provided, that if the recourse to such
4
<PAGE>
Person is limited (by contract or otherwise), Indebtedness shall be limited to
the recourse portion.
"Interest Period" For any Eurodollar Advance, the period commencing on
the borrowing date of such Eurodollar Advance or the date a Reference Rate
Advance is converted into such Eurodollar Advance, or the last day of the
preceding Interest Period for such Eurodollar Advance, as the case may be, and
ending: (a) for Floating Eurodollar Advances, on the next following Business
Day, and (b) for Fixed Eurodollar Advances, on the numerically corresponding day
one, two or three months thereafter, as selected by the Borrower pursuant to
Section 2.3 or Section 2.4; provided, that for Fixed Eurodollar Advances:
(a) any Interest Period which would otherwise end on a day which is not
a Business Day shall end on the next succeeding Business Day unless
such next succeeding Business Day falls in another calendar month, in
which case such Interest Period shall end on the next preceding
Business Day;
(b) any Interest Period which begins on the last Business Day of a
calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Business Day of the calendar month at the
end of such Interest Period;
(c) no Interest Period shall start before and continue after the
Conversion Date, provided, that Interest Periods for Advances of the
Term Loan may commence on and after the Conversion Date; and
(d) Interest Periods shall not be chosen for Advances under the Term
Loan that would require payment of any amount of any Advance prior to
the last day of the Interest Period in order to pay an installment of
the Term Loan when due.
"Lien": Any security interest, mortgage, pledge, lien, hypothecation,
judgment lien or similar legal process, charge, encumbrance, title retention
agreement or analogous instrument or device (including, without limitation, the
interest of the lessors under Capitalized Leases and the interest of a vendor
under any conditional sale or other title retention agreement).
"Loan Documents": This Agreement, the Notes, the Pledge Agreement and
each other instrument, document, guaranty, security agreement, mortgage, or
other agreement executed and delivered by the Borrower or any guarantor or party
granting security interests in connection with this Agreement, the Loans or any
collateral for the Loans.
"Loans": The Revolving Loans and the Term Loans.
"Notes": The Revolving Note and the Term Note.
"Payment Date": The Conversion Date, or date of any other termination
of the Revolving Credit Commitment, the due dates of installments of the Term
Loan described in Section 2.5(b) for interest on the principal due on such
dates, plus (a) the last day of each Interest Period for each Fixed Eurodollar
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<PAGE>
Advance; and (b) the last day of each month of each year for each Reference Rate
Advance and Floating Eurodollar Advance and for any fees including, without
limitation, Facility Fees.
"PBGC": The Pension Benefit Guaranty Corporation, established pursuant
to Subtitle A of Title IV of ERISA, and any successor thereto or to the
functions thereof.
"Person": Any natural person, corporation, partnership, joint venture,
firm, association, trust, unincorporated organization, government or
governmental agency or political subdivision or any other entity, whether acting
in an individual, fiduciary or other capacity.
"Plan": An employee benefit plan or other plan, maintained for
employees of the Borrower or of any ERISA Affiliate, and subject to Title IV of
ERISA or Section 412 of the Code.
"Pledge Agreement": A Pledge Agreement in the form of Exhibit E hereto,
duly executed by the Borrower, as the same shall hereafter be amended, modified,
extended, renewed or replaced.
"Reference Rate": The rate of interest from time to time publicly
announced by the Bank as its "reference rate." The Bank may lend to its
customers at rates that are at, above or below the Reference Rate. For purposes
of determining any interest rate which is based on the Reference Rate, such
interest rate shall change on the effective date of any change in the Reference
Rate.
"Reference Rate Advance": An Advance designated as such in a notice of
borrowing under Section 2.3 or a notice of continuation or conversion under
Section 2.4.
"Reportable Event": A reportable event as defined in Section 4043 of
ERISA and the regulations issued under such Section, with respect to a Plan,
excluding, however, such events as to which the PBGC by regulation has waived
the requirement of Section 4043(a) of ERISA that it be notified within 30 days
of the occurrence of such event, provided that a failure to meet the minimum
funding standard of Section 412 of the Code and Section 302 of ERISA shall be a
reportable event regardless of the issuance of any such waivers in accordance
with Section 412(d) of the Code.
"Restricted Subsidiary": All Subsidiaries except for Unrestricted
Subsidiaries.
"Revolving Credit Commitment": The maximum unpaid principal amount of
Revolving Loans which may from time to time be outstanding hereunder, being
initially $10,000,000, which shall be increased to $15,000,000 upon written
notice by the Borrower to the Bank given not later than January __, 1997, as the
same may be reduced from time to time pursuant to Section 4.3 and, as the
context may require, the agreement of the Bank to make Loans to the Borrower
subject to the terms and conditions of this Agreement.
"Revolving Loans": The Loans described in Section 2.1(a).
6
<PAGE>
"Revolving Note": The promissory note of the Borrower described in
Section 2.5(a), substantially in the form of Exhibit A, as such promissory note
may be amended, modified or supplemented from time to time, and such term shall
include any substitutions for, or renewals of, such promissory note.
"Subsidiary": Any Person of which or in which the Borrower and it's
other Subsidiaries own directly or indirectly 50% or more of: (a) the combined
voting power of all classes of stock having general voting power under ordinary
circumstances to elect a majority of the board of directors of such Person, if
it is a corporation, or (b) the capital interest or profit interest of such
Person, if it is a partnership, joint venture or similar entity.
"Term Loan": The Loan described in Section 2.1(b).
"Term Note" The promissory note of the Borrower described in Section
2.5(b), substantially in the form of Exhibit B, as such promissory note may be
amended, modified or supplemented from time to time, and such term shall include
any substitutions for, or renewals of, such promissory note.
"Unrestricted Subsidiary": A Subsidiary listed as such on Exhibit I,
and any other Subsidiary designated as such by the Borrower from time to time in
writing to the Bank, each of which shall meet the following qualifications (and
the following shall have been certified by an officer of the Borrower to the
Bank upon such designation): (a) it shall have been formed to hold assets or a
pool of assets in connection with a collateralized mortgage obligation or other
asset securitization structure; (b) it shall not conduct any material portion of
the business activities of the Borrower and its Subsidiaries, except as provided
in (a); (c) neither the Borrower nor any Restricted Subsidiary shall be directly
or contingently liable on the Indebtedness or other obligations of such
Unrestricted Subsidiaries, whether by guaranty or otherwise, or shall have
agreed to maintain the net worth of such Unrestricted Subsidiaries or shall have
pledged collateral for the obligations of such Unrestricted Subsidiaries; (d) no
adverse change or result of such Unrestricted Subsidiary, including without
limitation insolvency or the institution of bankruptcy proceedings, would
constitute an Adverse Event; and (e) for Unrestricted Subsidiaries designated
after the date of this Agreement, apart from transfer for value of assets
constituting such pool of assets the Borrower's investment in any such
Unrestricted Subsidiary shall not exceed $10,000 and the net worth of any such
Unrestricted Subsidiary at the time of designation as an Unrestricted Subsidiary
shall not exceed $100,000.
Section 1.2 Accounting Terms and Calculations. Except as may be
expressly provided to the contrary herein, all accounting terms used herein
shall be interpreted and all accounting determinations hereunder (including,
without limitation, determination of compliance with financial ratios and
restrictions in Articles VIII and IX hereof) shall be made in accordance with
GAAP consistently applied. Changes in GAAP will be adopted for purposes of
determining compliance with the covenants herein only on mutual agreement of the
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<PAGE>
Borrower and the Bank. Any reference to "consolidated" financial terms shall be
deemed to refer to those financial terms as applied to the Borrower and its
Subsidiaries in accordance with GAAP.
Section 1.3 Computation of Time Periods. In this Agreement, in the
computation of a period of time from a specified date to a later specified date,
unless otherwise stated the word "from" means "from and including" and the word
"to" or "until" each means "to but excluding."
Section 1.4 Other Definitional Terms. The words "hereof", "herein" and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement. References to Sections, Exhibits, schedules and like references are
to this Agreement unless otherwise expressly provided.
ARTICLE II TERMS OF LENDING
Section 2.1 The Loans. Subject to the terms and conditions hereof and
in reliance upon the warranties of the Borrower herein, the Bank agrees:
(a) Revolving Loans. To make loans (each, a "Revolving Loan" and,
collectively, the "Revolving Loans") to the Borrower from time to time
from the date hereof until the Conversion Date or until the occurrence
of an Amortization Event, during which period the Borrower may repay
and reborrow in accordance with the provisions hereof, provided, that
the aggregate unpaid principal amount of all outstanding Revolving
Loans shall not exceed the lesser of (i) the Revolving Credit
Commitment at any time, or (ii) the Borrowing Base; and
(b) Term Loan. To make a loan (the "Term Loan") to the Borrower on the
Conversion Date in such amount as the Borrower shall request, but not
exceeding the amount of the Revolving Credit Commitment on the
Conversion Date (giving effect to all reductions pursuant to Section
4.3); the proceeds of the Term Loan shall be applied to the extent
necessary to the concurrent payment in full of the aggregate principal
amount of the Revolving Loans outstanding on the Conversion Date plus
accrued interest thereon, but in an amount not to exceed the Borrowing
Base.
Section 2.2 Advance Options. The Loans shall be constituted of
Eurodollar Advances and Reference Rate Advances, as shall be selected by the
Borrower, except as otherwise provided herein. Any combination of types of
Advances may be outstanding at the same time, except that the total of
outstanding Eurodollar Advances shall not exceed 3 at any one time. Each Fixed
Eurodollar Advance shall be in a minimum amount of $500,000 or in an integral
multiple of $100,000 above such amount. Each Reference Rate Advance and Floating
Eurodollar Advance shall be in an amount that is an integral multiple of
$25,000.
Section 2.3 Borrowing Procedures for Revolving Loans. Any request by
the Borrower for a Revolving Loan shall be in writing, or by telephone promptly
confirmed in writing, and must be given so as to be received by the Bank not
later than:
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(a) 10:00 a.m., Minneapolis time, on the date of the requested Loan, if
the Revolving Loan shall be comprised of Reference Rate Advances or
Floating Eurodollar Advances; or
(b) 10:00 a.m., Minneapolis time, two Business days prior to the date
of the requested Revolving Loan, if the Revolving Loan shall be, or
shall include, a Fixed Eurodollar Advance.
Each request for a Revolving Loan shall specify (i) the borrowing date (which
shall be a Business Day), (ii) the amount of such Revolving Loan and the type or
types of Advances comprising such Revolving Loan (subject to the limitation on
amount set forth in Section 2.2), and (iii) if such Loan shall include Fixed
Eurodollar Advances, the initial Interest Periods for such Advances. Unless the
Bank determines that any applicable condition specified in Article VI has not
been satisfied, the Bank will make the amount of the requested Loan available to
the Borrower at the Bank's principal office in Minneapolis, Minnesota, in
immediately available funds on the date requested.
2.4 Continuation or Conversion of Loans. The Borrower may elect to (i)
continue any outstanding Eurodollar Advance from one Interest Period into a
subsequent Interest Period to begin on the last day of the earlier Interest
Period, or (ii) convert any outstanding Advance into another type of Advance (on
the last day of an Interest Period only, in the instance of a Eurodollar
Advance), by giving the Bank notice in writing, or by telephone promptly
confirmed in writing, given so as to be received by the Bank not later than:
(a) 10:00 a.m., Minneapolis time, on the date of the requested
continuation or conversion, if the continuing or converted Advance
shall be a Reference Rate Advance or a Floating Eurodollar Advance; or
(b) 10:00 a.m., Minneapolis time, two Business days prior to the date
of the requested continuation or conversion, if the continuing or
converted Advance shall be a Fixed Eurodollar Advance.
Each notice of continuation or conversion of an Advance shall specify (i) the
effective date of the continuation or conversion date (which shall be a Business
Day), (ii) the amount and the type or types of Advances following such
continuation or conversion (subject to the limitation on amount set forth in
Section 2.2), and (iii) for continuation as, or conversion into, Fixed
Eurodollar Advances, the Interest Periods for such Advances. Absent timely
notice of continuation or conversion, each Eurodollar Advance shall
automatically convert into a Reference Rate Advance on the last day of an
applicable Interest Period, unless paid in full on such last day. No Advance
shall be continued as, or converted into, a Eurodollar Advance if the shortest
Interest Period for such Advance may not transpire prior to the Conversion Date
(for a Revolving Loan) or the date due (for the Term Loan) or if a Default or
Event of Default shall exist.
Section 2.5 The Notes and Maturities. The Loans shall be evidenced by
the following Notes:
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(a) Revolving Note. The Revolving Loans shall be evidenced by the
Revolving Note, in the amount of $15,000,000, dated as of the date of
this Agreement. The Revolving Loans and the Revolving Note shall mature
and be payable on the Conversion Date (subject to mandatory prepayment
requirements), unless an Amortization Event shall occur, in which
instance the Revolving Loans and Revolving Note shall mature and be
payable as provided in Section 4.5. The Bank shall enter in its records
the amount of each Advance comprising the Revolving Loans, the rate of
interest borne by each Advance and the payments of the Revolving Loans,
and such records shall be conclusive evidence of the subject matter
thereof, absent manifest error.
(b) Term Loan. The Term Loan shall be evidenced by the Term Note, in
the amount of the Term Loan when made, dated as of the Conversion Date.
The Term Loan and the Term Note shall mature and be payable in 24
consecutive, equal monthly installments, payable on the last day of
each month, commencing on last day of the sixth month after the
Conversion Date, each equal to one twenty-fourth (1/24) of the initial
amount of the Term Loan. If an Amortization Event shall occur prior to
commencement of such installments, the Term Loan and Term Note shall
mature and be payable as provided in Section 4.5. The Bank shall enter
in its records the amount of each Advance comprising the Term Loan, the
rate of interest borne by each Advance and the payments of the Term
Loan, and such records shall be conclusive evidence of the subject
matter thereof, absent manifest error.
Section 2.6 Funding Losses. The Borrower will indemnify the Bank upon
demand against any loss or expense which the Bank may sustain or incur
(including, without limitation, any loss or expense sustained or incurred in
obtaining, liquidating or employing deposits or other funds acquired to effect,
fund, or maintain any Advance) as a consequence of (i) any failure of the
Borrower to make any payment when due of any amount due hereunder or under the
Notes, (ii) any failure of the Borrower to borrow, continue or convert an
Advance on a date specified therefor in a notice thereof, or (iii) any payment
(including, without limitation, any payment pursuant to Section 4.2, 4.3 or
10.2), prepayment or conversion of any Fixed Eurodollar Advance on a date other
than the last day of the Interest Period for such Advance. Determinations by the
Bank for purposes of this Section 2.6 of the amount required to indemnify the
Bank shall be conclusive in the absence of manifest error.
Section 2.7 Use of Proceeds. Proceeds of the Loans shall be used by the
Borrower to make investments in Eligible Bonds.
ARTICLE III INTEREST AND FEES
Section 3.1 Interest.
(a) Eurodollar Advances. The unpaid principal amount of each Eurodollar
Advance shall bear interest prior to maturity at a rate per annum equal
to the Eurodollar Rate (Reserve Adjusted) in effect for each Interest
Period for such Eurodollar Advance plus 2.75% per annum.
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(b) Reference Rate Advances. The unpaid principal amount of each
Reference Rate Advance shall bear interest prior to maturity at a rate
per annum equal to the Reference Rate.
(c) Interest After Maturity. Any amount of the Loans not paid when due,
whether at the date scheduled therefor or earlier upon acceleration,
shall bear interest until paid in full at a rate per annum equal to the
greater of (i) 2.00% in excess of the rate applicable to the unpaid
principal amount immediately before it became due, or (ii) the
Reference Rate plus 2.00% per annum.
Section 3.2 Facility Fee. The Borrower shall pay to the Bank fees (the
"Facility Fees") in an amount determined by applying a rate of 0.375% per annum
to the Revolving Credit Commitment (whether used or unused) for the period from
the date hereof to the Conversion Date, and thereafter in an amount determined
by applying a rate of 0.375% per annum to the outstanding principal amount of
the Term Loan.
Section 3.3 Computation. Interest shall be computed on the basis of
actual days elapsed and a year of 360 days. Facility Fees shall be computed on
the basis of actual days elapsed and a year of 365 or 366 days.
Section 3.4 Payment Dates. Accrued interest under Section 3.1(a) and
(b) shall be payable on the Payment Dates for the applicable types of Advances.
Accrued interest under Section 3.1(c) shall be payable on demand. Facility Fees
under Section 3.2 shall be payable on the Payment Dates for fees, in advance for
the next following month.
ARTICLE IV PAYMENTS, PREPAYMENTS, REDUCTION OR TERMINATION
OF THE CREDIT AND SETOFF
Section 4.1 Repayment. Principal of the Loans, together with all
accrued and unpaid interest thereon, shall be due and payable as provided in
Section 2.5 regarding maturity of the Notes.
Section 4.2 Optional Prepayments. The Borrower may prepay the Loans, in
whole or in part, at any time subject to the provisions of Section 2.6, without
any other premium or penalty. Any such prepayment must be accompanied by accrued
and unpaid interest on the amount prepaid. Each prepayment of the Term Loan
shall be applied to the unpaid installments of the Term Loan in the inverse
order of their maturities.
Section 4.3 Optional Reduction or Termination of Revolving Credit
Commitment. The Borrower may, at any time, upon no less than 3 Business Days
prior written or telephonic notice received by the Bank, reduce the Revolving
Credit Commitment, with any such reduction in a minimum amount of $1,000,000 or
an integral multiple thereof. Any reduction of the Revolving Credit Commitment
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while at the lower level ($10,000,000) shall also reduce the Revolving Credit
Commitment after the increase provided in the definition thereof. Upon any
reduction in the Revolving Credit Commitment pursuant to this Section, the
Borrower shall pay to the Bank the amount, if any, by which the aggregate unpaid
principal amount of outstanding Loans exceeds the Revolving Credit Commitment as
so reduced. Amounts so paid cannot be reborrowed. The Borrower may, at any time,
upon not less than 3 Business Days prior written notice to the Bank, terminate
the Revolving Credit Commitment in its entirety. Upon termination of the
Revolving Credit Commitment pursuant to this Section, the Borrower shall pay to
the Bank the full amount of all outstanding Loans, all accrued and unpaid
interest thereon, all unpaid Facility Fees accrued to the date of such
termination and all other unpaid obligations of the Borrower to the Bank
hereunder. All payment described in this Section is subject to the provisions of
Section 2.6. The initial amount of the Term Loan shall not exceed the amount of
the Revolving Credit Commitment as reduced (or terminated) hereunder.
Section 4.4 Mandatory Prepayment and Liquidation of Collateral upon
Borrowing Base Deficiency. If at any time the Loans exceed the Borrowing Base,
the Borrower shall, promptly upon demand of the Bank and in any case not later
than the third Business Day after such demand, as directed by the Bank either
(a) deliver and cause additional Eligible Collateral to exist, with an
additional Collateral Certificate under the Pledge Agreement and bond powers and
all other documents required by the Bank, so that the Borrowing Base is
sufficient for the amount of the Loans outstanding; or (b) prepay the Loans so
that they do not exceed the Borrowing Base. THE BORROWER EXPRESSLY AGREES THAT
IF THE BORROWER SHALL NOT PROMPTLY COMPLY WITH THE DIRECTION OF THE BANK UPON
SUCH A DEFICIENCY, THE BANK MAY SELL COLLATERAL IN A SUFFICIENT AMOUNT SO THAT
AFTER APPLICATION OF PROCEEDS OF SUCH SALE, NO SUCH DEFICIENCY SHALL EXIST.
Section 4.5 Mandatory Prepayment upon Amortization Event. Upon the
occurrence of an Amortization Event:
(a) if such Amortization Event shall occur prior to the Conversion
Date, the Loans shall continue to be evidenced by the Revolving Note,
but shall be payable in twenty four consecutive, equal monthly
installments, payable on the last day of each month, commencing on the
last day of the month during which the Amortization Event shall have
occurred, each equal to one twenty-fourth of the amount of the Loan.
The Bank shall enter in its records the amount of each such payment,
and such records shall be conclusive evidence of the subject matter
thereof, absent manifest error.
(b) if such Amortization Event shall occur after the Conversion Date,
but prior to the commencement of installment payments as provided in
Section 2.5(b), the Term Loan shall continue to be evidenced by the
Term Note, but shall be payable in 24 consecutive, equal monthly
installments, payable on the last day of each month, of the month
during which the Amortization Event shall have occurred, each equal to
one twenty-fourth (1/24) of the initial amount of the Term Loan.
Section 4.6 Payments. Payments and prepayments of principal of, and
interest on, the Notes and all fees, expenses and other obligations under the
Loan Documents shall be made without set-off or counterclaim in immediately
available funds not later than 2:00 p.m., Minneapolis time, on the dates due at
the main office of the Bank in Minneapolis, Minnesota. Funds received on any day
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after such time shall be deemed to have been received on the next Business Day.
Subject to the definition of the term "Interest Period", whenever any payment to
be made hereunder or on the Notes shall be stated to be due on a day which is
not a Business Day, such payment shall be made on the next succeeding Business
Day and such extension of time shall be included in the computation of any
interest or fees.
ARTICLE V ADDITIONAL PROVISIONS RELATING TO LOANS
Section 5.1 Increased Costs. If, as a result of any law, rule,
regulation, treaty or directive, or any change therein or in the interpretation
or administration thereof, or compliance by the Bank with any request or
directive (whether or not having the force of law) from any court, central bank,
governmental authority, agency or instrumentality, or comparable agency:
(a) any tax, duty or other charge with respect to any Loan, the Notes
or the Commitment is imposed, modified or deemed applicable, or the
basis of taxation of payments to the Bank of interest or principal of
the Loans or of the Facility Fees (other than taxes imposed on the
overall net income of the Bank) is changed;
(b) any reserve, special deposit, special assessment or similar
requirement against assets of, deposits with or for the account of, or
credit extended by, the Bank is imposed, modified or deemed applicable;
(c) any increase in the amount of capital required or expected to be
maintained by the Bank or any Person controlling the Bank is imposed,
modified or deemed applicable; or
(d) any other condition affecting this Agreement or the Commitment is
imposed on the Bank or the relevant funding markets;
and the Bank determines that, by reason thereof, the cost to the Bank of making
or maintaining the Loans or the Commitment is increased, or the amount of any
sum receivable by the Bank hereunder or under the Notes in respect of any Loan
is reduced;
then, the Borrower shall pay to the Bank upon demand such additional amount or
amounts as will compensate the Bank (or the controlling Person in the instance
of (c) above) for such additional costs or reduction (provided that the Bank has
not been compensated for such additional cost or reduction in the calculation of
the Eurodollar Reserve Rate or pursuant to Section 2.6). Determinations by the
Bank for purposes of this Section 5.1 of the additional amounts required to
compensate the Bank shall be conclusive in the absence of manifest error. In
determining such amounts, the Bank may use any reasonable averaging, attribution
and allocation methods.
Section 5.2 Deposits Unavailable or Interest Rate Unascertainable or
Inadequate; Impracticability. If the Bank determines (which determination shall
be conclusive and binding on the parties hereto) that:
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(a) deposits of the necessary amount for the relevant Interest Period
for any Eurodollar Advance are not available to the Bank in the
relevant markets or that, by reason of circumstances affecting such
market, adequate and reasonable means do not exist for ascertaining the
Eurodollar Rate for such Interest Period;
(b) the Eurodollar Rate (Reserve Adjusted) will not adequately and
fairly reflect the cost to the Bank of making or funding the Eurodollar
Advances for a relevant Interest Period; or
(c) the making or funding of Eurodollar Advances has become
impracticable as a result of any event occurring after the date of this
Agreement which, in the opinion of the Bank, materially and adversely
affects such Advances or the Bank's Commitment to make such Advances or
the relevant market;
the Bank shall promptly give notice of such determination to the Borrower, and
(i) any notice of a new Eurodollar Advance previously given by the Borrower and
not yet borrowed or converted shall be deemed to be a notice to make a Reference
Rate Advance, and (ii) the Borrower shall be obligated to either prepay in full
any outstanding Eurodollar Advances without premium or penalty on the last day
of the current Interest Period with respect thereto or convert any such Advance
to a Reference Rate Advance, on such last day.
Section 5.3 Changes in Law Rendering Eurodollar Advances Unlawful. If
at any time due to the adoption of any law, rule, regulation, treaty or
directive, or any change therein or in the interpretation or administration
thereof by any court, central bank, governmental authority, agency or
instrumentality, or comparable agency charged with the interpretation or
administration thereof, or for any other reason arising subsequent to the date
of this Agreement, it shall become unlawful or impossible for the Bank to make
or fund any Eurodollar Advance, the obligation of the Bank to provide such
Advance shall, upon the happening of such event, forthwith be suspended for the
duration of such illegality or impossibility. If any such event shall make it
unlawful or impossible for the Bank to continue any Eurodollar Advance
previously made by it hereunder, the Bank shall, upon the happening of such
event, notify the Borrower thereof in writing, and the Borrower shall, at the
time notified by the Bank, either convert each such unlawful Advance to a
Reference Rate Advance or repay such Advance in full, together with accrued
interest thereon, subject to the provisions of Section 2.6.
Section 5.4 Funding. Notwithstanding any provision of this Agreement to
the contrary, the Bank shall be entitled to fund and maintain its funding of all
or any part of the Loans in any manner it elects; it being understood, however,
that for purposes of this Agreement, all determinations hereunder shall be made
as if the Bank had actually funded and maintained each Eurodollar Advance during
the Interest Period for such Advance through the purchase of deposits having a
term corresponding to such Interest Period and bearing an interest rate equal to
the Eurodollar Rate for such Interest Period (whether or not the Bank shall have
granted any participations in such Advances).
ARTICLE VI CONDITIONS PRECEDENT
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Section 6.1 Conditions of Initial Loan. The obligation of the Bank to
make the initial Revolving Loan hereunder shall be subject to the satisfaction
of the conditions precedent, in addition to the applicable conditions precedent
set forth in Section 6.2 below, that the Bank shall have received all of the
following and the following shall have been completed, in form and substance
satisfactory to the Bank, each duly executed and certified or dated the date of
the initial Revolving Loan or such other date as is satisfactory to the Bank:
(a) The Revolving Note executed by a duly authorized officer (or
officers) of the Borrower.
(b) A copy of the corporate resolution of the Borrower authorizing the
execution, delivery and performance of the Loan Documents, certified by
the Secretary or an Assistant Secretary of the Borrower.
(c) An incumbency certificate showing the names and titles, and bearing
the signatures of, the officers of the Borrower authorized to execute
the Loan Documents and to request Loans hereunder, certified by the
Secretary or an Assistant Secretary of the Borrower.
(d) A copy of the Articles or Certificate of Incorporation of the
Borrower with all amendments thereto, certified by the Secretary or an
Assistant Secretary of the Borrower.
(e) A Certificate of Good Standing for the Borrower in the jurisdiction
of its incorporation, certified by the appropriate governmental
officials.
(f) A copy of the By-Laws of the Borrower with all amendments thereto,
certified by the Secretary or an Assistant Secretary of the Borrower.
(g) An opinion of counsel to the Borrower, addressed to the Bank, in
substantially the form of Exhibit F.
(h) Payment of a closing fee of $37,500 to the Bank.
Section 6.2 Conditions Precedent to all Loans. The obligation of the
Bank to make any Loan hereunder (including the initial Revolving Loan) shall be
subject to the satisfaction of the following conditions precedent (and the
request for a Loan shall be deemed a representation and warranty that the
following are true and correct):
(a) Before and after giving effect to such Loan, the representation and
warranties contained in Article VII shall be true and correct, as
though made on the date of such Loan;
(b) Before and after giving effect to such Loan, no Default or Event of
Default shall have occurred and be continuing;
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(c) In the instance of the Term Loan, the borrower shall have delivered
the Term Note executed by a duly authorized officer (or officers) of
the Borrower;
(d) The Adjusted Portfolio Value shall equal or exceed $100,000,000;
and
(e) The most recent Borrowing Base Certificate shall show that after
giving effect to the Loan, the Loans outstanding shall not exceed the
Borrowing Base.
ARTICLE VII REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Agreement, to grant the
Commitment and to make Loans hereunder, the Borrower represents and warrants to
the Bank:
Section 7.1 Organization, Standing, Etc. The Borrower and each of the
Restricted Subsidiaries are corporations duly incorporated and validly existing
and in good standing under the laws of the jurisdiction of their respective
incorporation and have all requisite corporate power and authority to carry on
their respective businesses as now conducted, to (in the instance of the
Borrower) enter into the Loan Documents and to perform its obligations under the
Loan Documents. The Borrower and each of the Restricted Subsidiaries are duly
qualified and in good standing as a foreign corporation in each jurisdiction in
which the character of the properties owned, leased or operated by it or the
business conducted by it makes such qualification necessary.
Section 7.2 Authorization and Validity. The execution, delivery and
performance by the Borrower of the Loan Documents have been duly authorized by
all necessary corporate action by the Borrower, and the Loan Documents
constitute the legal, valid and binding obligations of the Borrower, enforceable
against the Borrower in accordance with their respective terms, subject to
limitations as to enforceability which might result from bankruptcy, insolvency,
moratorium and other similar laws affecting creditors' rights generally and
subject to limitations on the availability of equitable remedies.
Section 7.3 No Conflict; No Default. The execution, delivery and
performance by the Borrower of the Loan Documents will not (a) violate any
provision of any law, statute, rule or regulation or any order, writ, judgment,
injunction, decree, determination or award of any court, governmental agency or
arbitrator presently in effect having applicability to the Borrower, (b) violate
or contravene any provisions of the Articles (or Certificate) of Incorporation
or by-laws of the Borrower, or (c) result in a breach of or constitute a default
under any indenture, loan or credit agreement or any other agreement, lease or
instrument to which the Borrower is a party or by which it or any of its
properties may be bound or result in the creation of any Lien on any asset of
the Borrower or any Subsidiary. Neither the Borrower nor any Restricted
Subsidiary is in default under or in violation of any such law, statute, rule or
regulation, order, writ, judgment, injunction, decree, determination or award or
any such indenture, loan or credit agreement or other agreement, lease or
instrument in any case in which the consequences of such default or violation
could constitute an Adverse Event.
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Section 7.4 Government Consent. No order, consent, approval, license,
authorization or validation of, or filing, recording or registration with, or
exemption by, any governmental or public body or authority is required on the
part of the Borrower to authorize, or is required in connection with the
execution, delivery and performance of, or the legality, validity, binding
effect or enforceability of, the Loan Documents.
Section 7.5 Financial Statements and Condition. The Borrower's audited
consolidated financial statements as at December 31, 1995, and its unaudited
consolidated financial statements as at March 31, 1996, as heretofore furnished
to the Bank, have been prepared in accordance with GAAP on a consistent basis
and fairly present the financial condition of the Borrower and its Subsidiaries
as at such dates and the results of their operations for the respective periods
then ended. As of the dates of such financial statements, neither the Borrower
nor any Restricted Subsidiary had any material obligation, contingent liability,
liability for taxes or long-term lease obligation which is not reflected in such
financial statements or in the notes thereto. Since December 31, 1995, no
Adverse Event has occurred.
Section 7.6 Litigation. Except as described in Exhibit G, there are no
actions, suits or proceedings pending or, to the knowledge of the Borrower,
threatened against or affecting the Borrower or any Restricted Subsidiary or any
of their properties before any court or arbitrator, or any governmental
department, board, agency or other instrumentality which would be reasonably
likely to constitute an Adverse Event.
Section 7.7 Compliance. The Borrower and its Restricted Subsidiaries
are in material compliance with all statutes and governmental rules and
regulations applicable to them.
Section 7.8 Environmental, Health and Safety Laws. There does not exist
any violation by the Borrower or any Restricted Subsidiary of any applicable
federal, state or local law, rule or regulation or order of any government,
governmental department, board, agency or other instrumentality relating to
environmental, pollution, health or safety matters which will or threatens to
impose a material liability on the Borrower or a Restricted Subsidiary or which
would require a material expenditure by the Borrower or such Restricted
Subsidiary to cure. Neither the Borrower nor any Restricted Subsidiary has
received any notice to the effect that any part of its operations or properties
is not in material compliance with any such law, rule, regulation or order or
notice that it or its property is the subject of any governmental investigation
evaluating whether any remedial action is needed to respond to any release of
any toxic or hazardous waste or substance into the environment, the consequences
of which non-compliance or remedial action could constitute an Adverse Event.
Section 7.9 ERISA. Each Plan complies with all material applicable
requirements of ERISA and the Code and with all material applicable rulings and
regulations issued under the provisions of ERISA and the Code setting forth
those requirements. No Reportable Event, other than a Reportable Event for which
the reporting requirements have been waived by regulations of the PBGC, has
occurred and is continuing with respect to any Plan. All of the minimum funding
standards applicable to such Plans have been satisfied and there exists no event
or condition which would permit the institution of proceedings to terminate any
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Plan under Section 4042 of ERISA. The current value of the Plans' benefits
guaranteed under Title IV or ERISA does not exceed the current value of the
Plans' assets allocable to such benefits.
Section 7.10 Regulation U. The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock (as
defined in Regulation U of the Board of Governors of the Federal Reserve System)
and no part of the proceeds of any Loan will be used to purchase or carry margin
stock or for any other purpose which would violate any of the margin
requirements of the Board of Governors of the Federal Reserve System.
Section 7.11 Ownership of Property; Liens. Each of the Borrower and the
Restricted Subsidiaries has good and marketable title to its real properties and
good and sufficient title to its other properties, including all properties and
assets referred to as owned by the Borrower and its Restricted Subsidiaries in
the audited financial statement of the Borrower referred to in Section 7.5
(other than property disposed of since the date of such financial statement in
the ordinary course of business). None of the properties, revenues or assets of
the Borrower or any of its Restricted Subsidiaries is subject to a Lien, except
for (a) Liens disclosed in the financial statements referred to in Section 7.5,
(b) Liens listed on Exhibit H, or (c) Liens allowed under Section 9.9.
Section 7.12 Taxes. Each of the Borrower and the Restricted
Subsidiaries has filed all federal, state and local tax returns required to be
filed and has paid or made provision for the payment of all taxes due and
payable pursuant to such returns and pursuant to any assessments made against it
or any of its property and all other taxes, fees and other charges imposed on it
or any of its property by any governmental authority (other than taxes, fees or
charges the amount or validity of which is currently being contested in good
faith by appropriate proceedings and with respect to which reserves in
accordance with GAAP have been provided on the books of the Borrower). No tax
Liens have been filed and no material claims are being asserted with respect to
any such taxes, fees or charges. The charges, accruals and reserves on the books
of the Borrower in respect of taxes and other governmental charges are adequate.
Section 7.13 Trademarks, Patents. Each of the Borrower and the
Restricted Subsidiaries possesses or has the right to use all of the patents,
trademarks, trade names, service marks and copyrights, and applications
therefor, and all technology, know-how, processes, methods and designs used in
or necessary for the conduct of its business, without known conflict with the
rights of others.
Section 7.14 Investment Company Act. Neither the Borrower nor any
Subsidiary is an "investment company" or a company "controlled" by an investment
company within the meaning of the Investment Company Act of 1940, as amended.
Section 7.15 Public Utility Holding Company Act. Neither the Borrower
nor any Subsidiary is a "holding company" or a "subsidiary company" of a holding
company or an "affiliate" of a holding company or of a subsidiary company of a
holding company within the meaning of the Public Utility Holding Company Act of
1935, as amended.
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Section 7.16 Subsidiaries. Exhibit I sets forth as of the date of this
Agreement a list of all Subsidiaries and the number and percentage of the shares
of each class of capital stock owned beneficially or of record by the Borrower
or any Subsidiary therein, and the jurisdiction of incorporation of each
Subsidiary.
Section 7.17 Partnerships and Joint Ventures. Exhibit J sets forth as
of the date of this Agreement a list of all partnerships or joint ventures in
which the Borrower or any Subsidiary is a partner (limited or general) or joint
venturer.
ARTICLE VIII AFFIRMATIVE COVENANTS
From the date of this Agreement and thereafter until the Commitment is
terminated or expires and the Loans and all other liabilities of the Borrower to
the Bank hereunder and under the Notes have been paid in full, unless the Bank
shall otherwise expressly consent in writing, the Borrower will do, and will
cause each Restricted Subsidiary (except in the instance of Section 8.1) to do,
all of the following:
Section 8.1 Financial Statements and Reports. Furnish to the Bank:
(a) As soon as available and in any event within 95 days after the end
of each fiscal year of the Borrower: (i) the annual audit report of the
Borrower and its Subsidiaries prepared on a consolidated basis and in
conformity with GAAP, consisting of at least statements of income, cash
flow, changes in stockholders' equity, and a consolidated balance sheet
as at the end of such year, setting forth in each case in comparative
form corresponding figures from the previous annual audit, certified by
independent certified public accountants of recognized standing
selected by the Borrower and acceptable to the Bank, and if such
certification is qualified, such additional information related to the
qualification as the Banks shall reasonably request, and (ii) the
unaudited consolidating balance sheet and statement of profits and
losses of the Borrower and its Subsidiaries for such fiscal year.
(b) As soon as available and in any event within 50 days after the end
of each of the first three fiscal quarters of each fiscal year, a copy
of the unaudited consolidated financial statement of the Borrower
prepared under the same accounting policies and procedures (unless
otherwise noted) as are used to prepare the Borrower's audited
financial statements referred to in Section 8.1(a), signed by the
Borrower's chief financial officer or other appropriate officer
(including the Borrower's chief accounting officer), consisting of at
least consolidated statements of income, cash flow, changes in
stockholders' equity for the Borrower and the Subsidiaries for such
quarter and for the period from the beginning of such fiscal year to
the end of such quarter, and a consolidated balance sheet of the
Borrower as at the end of such quarter.
(c) Together with the financial statements furnished by the Borrower
under Sections 8.1(a) and 8.1(b), a statement signed by the chief
financial officer of the Borrower or other appropriate officer
(including the Borrower's chief accounting officer) demonstrating in
reasonable detail compliance (or noncompliance, as the case may be)
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with each of the financial ratios and restrictions contained in Article
IX and stating that as at the date of each such financial statement
there did not exist any Default or Event of Default or, if such Default
or Event of Default existed, specifying the nature and period of
existence thereof and what action the Borrower proposes to take with
respect thereto, together with a statement showing amounts added to or
deducted from Consolidated Tangible Net Worth in respect of
Unrestricted Subsidiaries (as described in the definition of
Consolidated Tangible Net Worth).
(d) Within 30 days after the end of each month, a Borrowing Base
Certificate and a Portfolio Certificate as of the last day of such
month, duly certified by the Borrower's chief financial officer or
other appropriate officer (including the Borrower's chief accounting
officer).
(e) Annual and quarterly financial statements of Commercial Assets,
Incorporated as soon as available and in any event within the time
periods for delivery of statements of the Borrower set forth above.
(f) Promptly upon becoming aware of any Default or Event of Default, a
notice describing the nature thereof and what action the Borrower
proposes to take with respect thereto.
(g) Promptly upon becoming aware of the occurrence, with respect to any
Plan, of any Reportable Event (other than a Reportable Event for which
the reporting requirements have been waived by PBGC regulations) or any
"prohibited transaction" (as defined in Section 4975 of the Code), a
notice specifying the nature thereof and what action the Borrower
proposes to take with respect thereto, and, when received, copies of
any notice from the PBGC of intention to terminate or have a trustee
appointed for any Plan.
(h) Promptly upon the mailing or filing thereof, copies of all
financial statements, reports and proxy statements mailed to the
Borrower's shareholders, and copies of all registration statements,
periodic reports and other documents filed with the Securities and
Exchange Commission (or any successor thereto) or any national
securities exchange (excluding Forms 3, 4 and 5, unless otherwise
requested by the Bank).
(i) Promptly upon becoming aware of the occurrence thereof, notice of
the institution of any litigation, arbitration or governmental
proceeding, or the rendering of a judgment or decision in such
litigation or proceeding, which could constitute an Adverse Event, and
the steps being taken by the Person(s) affected by such proceeding.
(j) Promptly upon becoming aware of the occurrence thereof, notice of
any violation as to any environmental matter by the Borrower or any
Subsidiary and of the commencement of any judicial or administrative
proceeding relating to health, safety or environmental matters (i) in
which an adverse determination or result could result in the revocation
of or have a material adverse effect on any operating permits, air
emission permits, water discharge permits, hazardous waste permits or
other permits held by the Borrower or any Subsidiary which are material
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to the operations of the Borrower or such Subsidiary, or (ii) which
will or threatens to impose a material liability on the Borrower or
such Subsidiary to any Person or which will require a material
expenditure by the Borrower or such Subsidiary to cure any alleged
problem or violation.
(k) From time to time, such other information regarding the business,
operation and financial condition of the Borrower and the Subsidiaries
as the Bank may reasonably request.
Section 8.2 Corporate Existence. Subject to Section 9.1 in the instance
of a Restricted Subsidiary, maintain its corporate existence in good standing
under the laws of its jurisdiction of incorporation and its qualification to
transact business in each jurisdiction in which the character of the properties
owned, leased or operated by it or the business conducted by it makes such
qualification necessary.
Section 8.3 Insurance. Maintain with financially sound and reputable
insurance companies such insurance as may be required by law and such other
insurance in such amounts and against such hazards as is customary in the case
of reputable corporations engaged in the same or similar business and similarly
situated.
Section 8.4 Payment of Taxes and Claims. File all tax returns and
reports which are required by law to be filed by it and pay before they become
delinquent all taxes, assessments and governmental charges and levies imposed
upon it or its property and all claims or demands of any kind (including,
without limitation, those of suppliers, mechanics, carriers, warehouses,
landlords and other like Persons) which, if unpaid, might result in the creation
of a Lien upon its property; provided that the foregoing items need not be paid
if they are being contested in good faith by appropriate proceedings, and as
long as the Borrower's or such Subsidiary's title to its property is not
materially adversely affected, its use of such property in the ordinary course
of its business is not materially interfered with and adequate reserves with
respect thereto have been set aside on the Borrower's or such Restricted
Subsidiary's books in accordance with GAAP.
Section 8.5 Inspection. Permit any Person designated by the Bank to
visit and inspect any of its properties, corporate books and financial records,
to examine and to make copies of its books of accounts and other financial
records, and to discuss the affairs, finances and accounts of the Borrower and
the Subsidiaries with, and to be advised as to the same by, its officers at such
reasonable times and intervals as the Bank may designate. So long as no Event of
Default exists, the expenses of the Bank for such visits, inspections and
examinations shall be at the expense of the Bank, but any such visits,
inspections, and examinations made while any Event of Default is continuing
shall be at the expense of the Borrower.
Section 8.6 Maintenance of Properties. Maintain its properties used or
useful in the conduct of its business in good condition, repair and working
order, and supplied with all necessary equipment, and make all necessary
repairs, renewals, replacements, betterments and improvements thereto, all as
may be necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times.
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Section 8.7 Books and Records. Keep adequate and proper records and
books of account in which full and correct entries will be made of its dealings,
business and affairs.
Section 8.8 Compliance. Comply in all material respects with all laws,
rules, regulations, orders, writs, judgments, injunctions, decrees or awards to
which it may be subject.
Section 8.9 ERISA. Maintain each Plan in compliance with all material
applicable requirements of ERISA and of the Code and with all material
applicable rulings and regulations issued under the provisions of ERISA and of
the Code.
Section 8.10 Environmental Matters. Observe and comply with all laws,
rules, regulations and orders of any government or government agency relating to
health, safety, pollution, hazardous materials or other environmental matters to
the extent non-compliance could result in a material liability or otherwise
constitute an Adverse Event.
ARTICLE IX NEGATIVE COVENANTS
From the date of this Agreement and thereafter until the Commitment is
terminated or expires and the Loans and all other liabilities of the Borrower to
the Bank hereunder and under the Notes have been paid in full, unless the Bank
shall otherwise expressly consent in writing, the Borrower will not, and will
not permit any Restricted Subsidiary to, do any of the following:
Section 9.1 Merger. Merge or consolidate or enter into any analogous
reorganization or transaction with any Person; provided, however, any Restricted
Subsidiary may be merged with or liquidated into the Borrower (if the Borrower
is the surviving corporation) or any other Restricted Subsidiary.
Section 9.2 Sale of Assets. Sell, transfer, lease or otherwise convey
all or any substantial part of its assets except for sales and transfers of
investments in the ordinary course of business and except for sales or other
transfers by a Restricted Subsidiary to the Borrower or another Restricted
Subsidiary.
Section 9.3 Purchase of Assets. Purchase or lease or otherwise acquire
all or substantially all of the assets of any Person, except for purchases or
other transfers by the Borrower or a Restricted Subsidiary from a Restricted
Subsidiary provided, that the Borrower or a Restricted Subsidiary may, provided
that no Default or Event of Default shall have occurred and continued, acquire
any corporation that would, by such acquisition, become a Restricted Subsidiary
in the course of their investment business, and provided, further, that the
Borrower shall promptly notify the Bank of such acquisition.
Section 9.4 Plans. Permit any condition to exist in connection with any
Plan which might constitute grounds for the PBGC to institute proceedings to
have such Plan terminated or a trustee appointed to administer such Plan, permit
any Plan to terminate under any circumstances which would cause the lien
provided for in Section 4068 of ERISA to attach to any property, revenue or
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asset of the Borrower or any Subsidiary or permit the underfunded amount of Plan
benefits guaranteed under Title IV of ERISA to exceed $100,000.
Section 9.5 Change in Nature of Business. Make any material change in
the nature of the business of the Borrower or such Restricted Subsidiary, as
carried on at the date hereof.
Section 9.6 Subsidiaries, Partnerships, Joint Ventures and Ownership of
Stock. Do any of the following: (a) form or acquire any corporation which would
thereby become a Restricted Subsidiary, except at provided in Section 9.3; (b)
permit any Restricted Subsidiary to purchase or otherwise acquire any shares of
the stock of the Borrower; or (c) take any action, or permit any Restricted
Subsidiary to take any action, which would result in a decrease in the
Borrower's or any Restricted Subsidiary's ownership interest in any Restricted
Subsidiary (including, without limitation, decrease in the percentage of the
shares of any class of stock owned).
Section 9.7 Other Agreements. Enter into any agreement, bond, note or
other instrument with or for the benefit of any Person other than the Bank which
would: (a) prohibit the Borrower or such Restricted Subsidiary from granting, or
otherwise limit the ability of the Borrower or such Restricted Subsidiary to
grant, to the Bank any Lien on any assets or properties of the Borrower or such
Restricted Subsidiary; or (b) be violated or breached by the Borrower's
performance of its obligations under the Loan Documents.
Section 9.8 Indebtedness. Incur, create, issue, assume or suffer to
exist any Indebtedness, except:
(a) Indebtedness under this Agreement;
(b) Current liabilities, other than for borrowed money, incurred in the
ordinary course of business;
(c) Indebtedness existing on the date of this Agreement and disclosed
on Exhibit K hereto;
(d) Indebtedness secured by Liens permitted under Section 9.9 hereof;
(e) Indebtedness consisting of endorsements for collection, deposit or
negotiation and warranties of products or services, in each case
incurred in the ordinary course of business; and
(f) Other Indebtedness in aggregate principal amount not to exceed
$2,000,000.
Section 9.9 Liens. Create, incur, assume or suffer to exist any Lien
with respect to any property, revenues or assets now owned or hereafter arising
or acquired, except:
(a) Liens in connection with the acquisition of property after the date
hereof by way of purchase money mortgage, conditional sale or other
title retention agreement, Capitalized Lease or other deferred payment
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contract, and attaching only to the property being acquired if the
Indebtedness secured thereby does not exceed the fair market value of
such property at the time of acquisition thereof nor $1,000,000 in the
aggregate for the Borrower and all Restricted Subsidiaries at any one
time outstanding;
(b) Liens on financial assets of the Borrower securing Indebtedness
permitted under Section 9.8(f), provided that such Liens shall not
encumber assets having Adjusted Cost Basis of greater than 2.5 times
the principal amount of the Indebtedness secured (i.e., the advance
rates of such Indebtedness against collateral shall be similar to the
advance rates under this Agreement);
(c) Liens existing on the date of this Agreement and disclosed on
Exhibit H hereto;
(d) Deposits or pledges to secure payment of workers' compensation,
unemployment insurance, old age pensions or other social security
obligations, in the ordinary course of business of the Borrower or a
Restricted Subsidiary;
(e) Liens for taxes, fees, assessments and governmental charges not
delinquent or to the extent that payments therefor shall not at the
time be required to be made in accordance with the provisions of
Section 8.4;
(f) Liens of carriers, warehousemen, mechanics and materialmen, and
other like Liens arising in the ordinary course of business, for sums
not due or to the extent that payment therefor shall not at the time be
required to be made in accordance with the provisions of Section 8.4;
(g) Deposits to secure the performance of bids, trade contracts,
leases, statutory obligations and other obligations of a like nature
incurred in the ordinary course of business; and
(h) Liens on assets pledged by the Borrower or a Restricted Subsidiary
in connection with removal of mortgages from asset pools backing
collateralized mortgage obligations or other mortgage-backed securities
for purposes of foreclosures, which Liens shall not cover collateral in
excess of 150% of the principal balance of such mortgages.
Section 9.10 Contingent Liabilities. Either: (i) endorse, guarantee,
contingently agree to purchase or to provide funds for the payment of, or
otherwise become contingently liable upon, any obligation of any other Person,
except by the endorsement of negotiable instruments for deposit or collection
(or similar transactions) in the ordinary course of business, or (ii) agree to
maintain the net worth or working capital of, or provide funds to satisfy any
other financial test applicable to, any other Person other than Restricted
Subsidiaries. Notwithstanding the foregoing, the Borrower and the Restricted
Subsidiaries may enter into commitments to purchase investments.
Section 9.11 Use of Proceeds. Permit any proceeds of the Loans to be
used, either directly or indirectly, for the purpose, whether immediate,
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incidental or ultimate, of "purchasing or carrying any margin stock" within the
meaning of Regulation U of the Federal Reserve Board, as amended from time to
time, and furnish to the Bank, upon its request, a statement in conformity with
the requirements of Federal Reserve Form U-1 referred to in Regulation U.
Section 9.12 Tangible Net Worth. Permit the Consolidated Tangible Net
Worth of the Borrower and its Subsidiaries (adjusted for Unrestricted
Subsidiaries as provided in the definition thereof) at any time to be less than
$45,000,000.
Section 9.13 Loss Carry-Forward. Permit the net operating loss
carry-forward balance of the Borrower, calculated in accordance with relevant
provisions of the Code, to be less than $20,000,000.
ARTICLE X EVENTS OF DEFAULT AND REMEDIES
Section 10.1 Events of Default. The occurrence of any one or more of
the following events shall constitute an Event of Default:
(a) The Borrower shall fail to make when due, whether by acceleration
or otherwise, any payment of (i) principal, if such failure shall
continue for more than one Business Day, or (ii) interest on the Notes
or any fee or other amount required to be made to the Bank pursuant to
the Loan Documents, if such failure shall continue for more than five
days after notice by the Bank to the Borrower;
(b) Any representation or warranty made or deemed to have been made by
or on behalf of the Borrower or any Restricted Subsidiary in the Loan
Documents or on behalf of the Borrower or any Restricted Subsidiary in
any certificate, statement, report or other writing furnished by or on
behalf of the Borrower to the Bank pursuant to the Loan Documents or
any other instrument, document or agreement shall prove to have been
false or misleading in any material respect on the date as of which the
facts set forth are stated or certified or deemed to have been stated
or certified, subject to the provisions respecting representations
concerning Eligible Bonds set forth in Section 5.10 of the Pledge
Agreement, and compliance with the notice and correction provisions of
such Section;
(c) The Borrower shall fail to comply with any agreement, covenant,
condition, provision or term contained in the Loan Documents (and such
failure shall not constitute an Event of Default under any of the other
provisions of this Section 10.1) and such failure to comply shall
continue for 30 calendar days after notice thereof to the Borrower by
the Bank;
(d) The Borrower or any Restricted Subsidiary shall become insolvent or
shall generally not pay its debts as they mature or shall apply for,
shall consent to, or shall acquiesce in the appointment of a custodian,
trustee or receiver of the Borrower or such Restricted Subsidiary or
for a substantial part of the property thereof or, in the absence of
such application, consent or acquiescence, a custodian, trustee or
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receiver shall be appointed for the Borrower or a Restricted Subsidiary
or for a substantial part of the property thereof and shall not be
discharged within 60 days;
(e) Any bankruptcy, reorganization, debt arrangement or other
proceedings under any bankruptcy or insolvency law shall be instituted
by or against the Borrower or a Restricted Subsidiary, and, if
instituted against the Borrower or a Restricted Subsidiary, shall have
been consented to or acquiesced in by the Borrower or such Restricted
Subsidiary, or shall remain undismissed for 60 days, or an order for
relief shall have been entered against the Borrower or such Restricted
Subsidiary, or the Borrower or any Restricted Subsidiary shall take any
corporate action to approve institution of, or acquiescence in, such a
proceeding;
(f) Any dissolution or liquidation proceeding shall be instituted by or
against the Borrower or a Restricted Subsidiary and, if instituted
against the Borrower or such Restricted Subsidiary, shall be consented
to or acquiesced in by the Borrower or such Restricted Subsidiary or
shall remain for 60 days undismissed, or the Borrower or any Restricted
Subsidiary shall take any corporate action to approve institution of,
or acquiescence in, such a proceeding;
(g) A judgment or judgments for the payment of money in excess of the
sum of $100,000 in the aggregate shall be rendered against the Borrower
or a Restricted Subsidiary and the Borrower or such Restricted
Subsidiary shall not discharge the same or provide for its discharge in
accordance with its terms, or procure a stay of execution thereof,
prior to any execution on such judgments by such judgment creditor,
within 30 days from the date of entry thereof, and within said period
of 30 days, or such longer period during which execution of such
judgment shall be stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal;
(h) The institution by the Borrower or any ERISA Affiliate of steps to
terminate any Plan if in order to effectuate such termination, (i) the
Borrower or any ERISA Affiliate would be required to make a
contribution to such Plan or would incur a liability or obligation to
such Plan, and (ii) immediately after giving effect to the payment or
satisfaction of such contribution, liability or obligation (if made or
undertaken by the Borrower or any Subsidiary) a Default or Event of
Default would exist and be continuing, or the institution by the PBGC
of steps to terminate any Plan;
(i) The maturity of any Indebtedness of the Borrower (other than
Indebtedness under this Agreement) or a Restricted Subsidiary in excess
of $1,000,000 for all such Indebtedness shall be accelerated, or the
Borrower or a Restricted Subsidiary shall fail to pay any such
Indebtedness (in excess of such amount in the aggregate) when due or,
in the case of such Indebtedness payable on demand, when demanded, or
any event shall occur or condition shall exist and shall continue for
more than the period of grace, if any, applicable thereto and shall
have the effect of causing, or permitting (any required notice having
been given and grace period having expired) the holder of any such
Indebtedness or any trustee or other Person acting on behalf of such
holder to cause, such Indebtedness (in excess of such amount in the
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aggregate) to become due prior to its stated maturity or to realize
upon any collateral given as security therefor;
(j) The Adjusted Portfolio Value shall not exceed $75,000,000; or
(k) Any Person, or group of Persons acting in concert, that owned less
than 5% of the shares of any voting class of stock of the Borrower
shall have acquired more than 50% of the shares of such voting stock.
Section 10.2 Remedies. If (a) any Event of Default described in
Sections 10.1(e), (f) or (g) shall occur with respect to the Borrower, the
Commitment shall automatically terminate and the outstanding unpaid principal
balance of the Notes, the accrued interest thereon and all other obligations of
the Borrower to the Bank under the Loan Documents shall automatically become
immediately due and payable; or (b) any other Event of Default shall occur and
be continuing, then the Bank may take any or all of the following actions: (i)
declare the Commitment terminated, whereupon the Commitment shall terminate,
(ii) declare the outstanding unpaid principal balance of the Notes, the accrued
and unpaid interest thereon and all other obligations of the Borrower to the
Bank under the Loan Documents to be forthwith due and payable, whereupon the
Notes, all accrued and unpaid interest thereon and all such obligations shall
immediately become due and payable, in each case without demand or notice of any
kind, all of which are hereby expressly waived, anything in this Agreement or in
the Notes to the contrary notwithstanding, (iii) exercise all rights and
remedies under any other instrument, document or agreement between the Borrower
and the Bank, and (iv) enforce all rights and remedies under any applicable law.
ARTICLE XI MISCELLANEOUS
Section 11.1 Waiver and Amendment. No failure on the part of the Bank
or the holder of the Notes to exercise and no delay in exercising any power or
right hereunder or under any other Loan Document shall operate as a waiver
thereof; nor shall any single or partial exercise of any power or right preclude
any other or further exercise thereof or the exercise of any other power or
right. The remedies herein and in any other instrument, document or agreement
delivered or to be delivered to the Bank hereunder or in connection herewith are
cumulative and not exclusive of any remedies provided by law. No notice to or
demand on the Borrower not required hereunder or under the Notes shall in any
event entitle the Borrower to any other or further notice or demand in similar
or other circumstances or constitute a waiver of the right of the Bank or the
holder of the Notes to any other or further action in any circumstances without
notice or demand. No amendment, modification or waiver of any provision of this
Agreement or consent to any departure by the Borrower therefrom shall be
effective unless the same shall be in writing and signed by the Bank, and then
such amendment, modification, waiver or consent shall be effective only in the
specific instances and for the specific purpose for which given.
Section 11.2 Expenses and Indemnities. Whether or not any Loan is made
hereunder, the Borrower agrees to reimburse the Bank upon demand for all
reasonable expenses paid or incurred by the Bank (including filing and recording
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costs and fees and expenses of legal counsel, who may be employees of the Bank)
in connection with the preparation, review, execution, delivery, amendment,
modification, interpretation, collection and enforcement of the Loan Documents.
The Borrower agrees to pay, and save the Bank harmless from all liability for,
any stamp or other taxes which may be payable with respect to the execution or
delivery of the Loan Documents. The Borrower agrees to indemnify and hold the
Bank harmless from any loss or expense which may arise or be created by the
acceptance of telephonic or other instructions for making Loans or disbursing
the proceeds thereof. The obligations of the Borrower under this Section 11.2
shall survive any termination of this Agreement.
Section 11.3 Notices. Except when telephonic notice is expressly
authorized by this Agreement, any notice or other communication to any party in
connection with this Agreement shall be in writing and shall be sent by manual
delivery, telegram, telex, facsimile transmission, overnight courier or United
States mail (postage prepaid) addressed to such party at the address specified
on the signature page hereof, or at such other address as such party shall have
specified to the other party hereto in writing. All periods of notice shall be
measured from the date of delivery thereof if manually delivered, from the date
of sending thereof if sent by telegram, telex or facsimile transmission, from
the first Business Day after the date of sending if sent by overnight courier,
or from four days after the date of mailing if mailed; provided, however, that
any notice to the Bank under Article II hereof shall be deemed to have been
given only when received by the Bank.
Section 11.4 Successors. This Agreement shall be binding upon the
Borrower and the Bank and their respective successors and assigns, and shall
inure to the benefit of the Borrower and the Bank and the successors and assigns
of the Bank. The Borrower shall not assign its rights or duties hereunder
without the written consent of the Bank, and the Bank shall not assign its
obligation to fund Loans in accordance with this Agreement without the written
consent of the Borrower.
Section 11.5 Participations and Information. The Bank may sell
participation interests in any or all of the Loans and in all or any portion of
the Commitment to any Person. The Bank may furnish any information concerning
the Borrower in the possession of the Bank from time to time to participants and
prospective participants who shall have agreed to the confidentiality provisions
of this Agreement and may furnish information in response to credit inquiries
consistent with general banking practice.
Section 11.6 Confidentiality. The Bank may have received, and may
hereafter receive, confidential financial and business information concerning
the Borrower. The Bank agrees to hold non-public information received from the
Borrower in confidence, and not disclose such information to persons other than
the Bank's officers, employees, agents and other representatives except: (a) as
required to disclose such information to a bank regulatory agency or in
connection with an examination of its records by bank examiners or at the
express direction of any other authorized government agency; (b) pursuant to a
subpoena or other court order; (c) in connection with legal process in the
Bank's lending capacity; or (d) to participants, assignees, potential
participants and potential assignees with respect to the financing who agree to
be bound by confidentiality provisions substantially similar to this paragraph.
Confidential information shall not include (i) information already in the Bank's
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possession prior to receipt from the Borrower, or (ii) information which becomes
generally available to the public, other than as a result of disclosure by a
Bank, or its directors, officers, employees, advisors or agents or becomes
available to a Bank on a non confidential basis from a source other than the
Borrower or its advisors, provided that such source is not known by the Bank to
be bound by a confidentiality agreement with, or other obligation of
confidentiality to, the Borrower or another party.
Section 11.7 Severability. Any provision of the Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction.
Section 11.8 Subsidiary References. The provisions of this Agreement
relating to Subsidiaries shall apply only during such times as the Borrower has
one or more Subsidiaries.
Section 11.9 Captions. The captions or headings herein and any table of
contents hereto are for convenience only and in no way define, limit or describe
the scope or intent of any provision of this Agreement.
Section 11.10 Entire Agreement. This Agreement and the Notes embody the
entire agreement and understanding between the Borrower and the Bank with
respect to the subject matter hereof and thereof. This Agreement supersedes all
prior agreements and understandings relating to the subject matter hereof.
Section 11.11 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument, and either of the parties hereto may execute this Agreement by
signing any such counterpart.
Section 11.12 Governing Law. THE VALIDITY, CONSTRUCTION AND
ENFORCEABILITY OF THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY THE INTERNAL
LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS
PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES
APPLICABLE TO NATIONAL BANKS.
Section 11.13 Consent to Jurisdiction. AT THE OPTION OF THE BANK, THIS
AGREEMENT AND THE NOTES MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE
COURT SITTING IN MINNEAPOLIS OR ST. PAUL, MINNESOTA; AND THE BORROWER CONSENTS
TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT
VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE BORROWER COMMENCES ANY
ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY
ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT,
THE BANK AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF
THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE
ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT
PREJUDICE.
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Section 11.14 Waiver of Jury Trial. THE BORROWER AND THE BANK EACH
WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR
DEFEND ANY RIGHTS (a) UNDER THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT,
DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN
CONNECTION HEREWITH OR (b) ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN
CONNECTION WITH THIS AGREEMENT, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING
SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above.
ASSET INVESTORS CORPORATION
By: /s/ Spencer I. Browne
-------------------------------
Its: President
------------------------------
By: /s/ Kevin J. Nystrom
-------------------------------
Its: Vice President and Chief
Accounting Officer
------------------------------
3600 South Yosemite
Suite 300
Denver, CO 80237
Attention: President, with copy to
Chief Accounting Officer
Telephone: (303) 793-2703
Fax: (303) 771-3461
FIRST BANK NATIONAL ASSOCIATION
By: /s/Charles I. Broadnax
--------------------------------
Its: Vice President
-------------------------------
601 2nd Ave. S.
Minneapolis, MN 55402-4302
Attention: Charles I. Broadnax
Telephone: (612) 973-0783
Fax: (612) 973-0826
31
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (this "Agreement") dated as of July 24, 1996, is
by and between ASSET INVESTORS CORPORATION, a Maryland corporation (the
"Borrower) and FIRST BANK NATIONAL ASSOCIATION, a national banking association
(the "Bank").
W I T N E S S E T H
WHEREAS, the Bank has made or may make loans, advances or otherwise
extend credit to the Borrower pursuant to a certain Revolving Credit and Term
Loan Agreement, dated as of July 24, 1996 (as amended, modified, assigned or
restated from time to time called the "Credit Agreement") between the Borrower
and the Bank and the Borrower has requested, or may concurrently or hereafter
request, other loans, advances or extensions of credit from the Bank;
NOW, THEREFORE, for and in consideration of loans, advances or other
extensions of credit under the Credit Agreement, the parties hereto agree as
follows:
SECTION 1. Definitions. All terms defined in the Credit Agreement shall
have their respective defined meanings when used herein. Certain terms defined
in Article 8 and Article 9 of the Uniform Commercial Code shall have the
meanings assigned to them therein, including "certificated securities",
"commodity account", "entitlement holder", "investment property", "securities
account", "securities entitlements", "securities intermediary", and
"uncertificated securities". In addition, as used herein:
"Adjusted Cost Basis" shall have the meaning set forth in the Credit
Agreement.
"Assigned Rights" shall mean all rights and remedies, including any
right to payment or to recourse to collateral, arising in connection with the
Pledged Securities.
"Agreement" shall mean this Pledge Agreement, as it may be amended,
modified, supplemented, assigned, restated or replaced from time to time.
"Collateral" shall mean all property or rights in which a security
interest is granted hereunder.
"Collateral Certificate" shall mean a certificate substantially similar
to that attached as Exhibit A, identifying the Pledged Securities (provided that
the failure by the Borrower to supply any of the information or documentation
required by such certificate shall not impair the security interest hereby
granted, but shall be deemed a covenant by the Borrower to supply such
information or documentation within five Business Days after the date of such
certificate).
"Collection Account" shall have the meaning set forth in Section 4
hereof.
"Credit Documents" shall mean the Credit Agreement and any promissory
note or notes issued from time to time under the Credit Agreement.
"Default" shall mean: (a) the occurrence of any "Event of Default" or
similar occurrence under any Credit Document, including the occurrence of any
Event of Default as defined in the Credit Agreement; (b) nonpayment, when due or
demanded (if under a demand instrument) of any amount of the Liabilities; (c)
<PAGE>
failure to perform any agreement of the Borrower hereunder or under any Credit
Document and such failure shall continue beyond any grace period expressly
applicable thereto; or (d) any representation made, or deemed to be made, by the
Borrower hereunder or under any Credit Document is untrue or incorrect in any
material respect when made or deemed to be made.
"Eligible Bonds" shall have the meaning set forth in the Credit
Agreement.
"Issuers" shall mean the issuers of the Pledged Securities.
"Liabilities" shall mean all obligations of the Borrower under any
Credit Document and under this Agreement, whether now or hereafter existing, or
due or to become due.
"Lien" shall mean any lien, charge, mortgage, security interest,
hypothecation, conditional sale or other title retention arrangement or other
encumbrance of any kind.
"Pledged Securities" shall mean all securities now or hereafter owned,
purchased or otherwise acquired by the Borrower with respect to which the
Borrower delivers a Collateral Certificate to the Bank. It is intended that the
Pledged Securities shall be Eligible Bonds, but any Pledged Security pledged in
accordance with the terms hereof shall be Collateral subject hereto whether or
not it met at the time of the pledge hereunder, or continued to meet thereafter,
the requirements for an Eligible Bond.
"Pledged Documents" shall mean all certificates, notes, loan
agreements, debentures, trust agreements, security agreements, pledge
agreements, mortgages, collateral mortgages, title retention documents,
financing statements, participation agreements, participation certificates,
guaranties, or other instruments or agreements which evidence or secure any of
the Pledged Securities, or which are related to the Assigned Rights, all as
amended, extended, modified renewed or replaced from time to time.
"Uniform Commercial Code" shall mean the Uniform Commercial Code as in
effect in the State of Minnesota from time to time.
Section 1.2 Interpretation. A Section or a Schedule is, unless
otherwise stated, a reference to a section hereof or a schedule hereto, as the
case may be. Section captions used in this Agreement are for convenience only,
and shall not affect the construction of this Agreement. The word "including"
shall, in each instance, be deemed to mean "including but not limited to".
Section 2 - Grant of Security Interest
Section 2 Grant of Security Interest. As security for the payment of
all Liabilities, the Borrower hereby assigns to the Bank, and grants to the Bank
a continuing security interest in, the following, whether now owned or hereafter
arising or acquired:
(a) all right, title, interest and claims of the Borrower in, to, under
and in connection with the Pledged Securities, the Assigned Rights and
the Pledged Documents, all rights to payments of the Pledged
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Securities, and the Assigned Rights and all rights to indemnities,
damages and every other right in connection with the Pledged
Securities, the Assigned Rights and the Pledged Documents, and all bond
powers with respect thereto;
(b) all other instruments, notes, securities or investments
constituting proceeds of any Pledged Securities or purchased with
proceeds (direct or indirect) of any Pledged Securities or exchanged
for any Pledged Securities, together with the certificates evidencing
the same and all stock or bond powers with respect thereto (sale or
exchange of the Pledged Securities may be restricted by other
provisions herein or in any other document, and this subsection is
intended to describe the Collateral, and not to supersede any such
other provisions);
(c) all moneys or property representing dividends or interest or
premium payments on the Pledged Securities or representing a
distribution or return of capital upon or in respect of the Pledged
Securities or any part thereof, or resulting from a split-up, revision,
reclassification or other like change of the Pledged Securities, or
otherwise received in exchange therefor, and any subscription warrants,
rights or options issued to the holders of, or otherwise in respect of
the Pledged Securities;
(d) all securities or commodities accounts with any broker, securities
intermediary or commodity intermediary to the extent that the Pledged
Securities are held in any such account and all securities entitlements
of whatever type arising in connection with the Pledged Securities;
(e) all right, title and interest of the Borrower in and to all
insurance policies (including, without limitation, any credit
insurance), participation agreements and any other agreement,
instrument or document pertaining to, affecting, obtained by the
Borrower in connection with, or arising out of, the Pledged Securities,
Assigned Rights or Pledged Documents;
(f) all now existing and hereafter arising accounts, contract rights
and general intangibles constituting or relating to any of the
foregoing;
(g) all files, surveys, certificates, correspondence, appraisals,
computer programs, tapes, discs, cards, accounting records, and other
records, information, and data of the Borrower relating to the Pledged
Securities (including all information, data, programs, tapes, discs and
cards necessary or helpful in the administration or servicing of any of
the foregoing Collateral); and
(h) all proceeds of any of the foregoing.
Section 3 - Representations and Warranties
The Borrower represents and warrants to the Bank that:
Section 3.1 Power and Authority; Valid and Binding Obligation. The
execution and delivery of this Agreement, and the performance by the Borrower of
its obligations hereunder, are within the Borrower's corporate powers and have
been duly authorized by all necessary corporate action. This Agreement is the
Borrower's legal, valid and binding obligation, enforceable in accordance with
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<PAGE>
its terms, the making and performance of which do not and will not contravene or
conflict with the Borrower's charter or by-laws or violate or constitute a
default under any law, any presently existing requirement or restriction imposed
by judicial, arbitral or other governmental instrumentality or any agreement,
instrument or indenture by which the Borrower or its property is bound.
Section 3.2 Owner, No Other Financing Statements. The Borrower is and
will be the lawful owner of all Collateral, free of all liens and claims
whatsoever, other than the security interest hereunder. No financing statement
(other than any which may have been filed on behalf of the Bank) covering any of
the Collateral is on file in any public office.
Section 3.3 Names, Offices and Locations. The Borrower does business
solely under its own name and the trade names and styles, if any, set forth on
the signature page hereof. The Borrower's chief place of business and chief
executive office and the office where it keeps its books and records concerning
the Collateral are located at its address set forth on the signature page
hereof.
Section 3.4 Representations Concerning Pledged Securities and Assigned
Rights. All Pledged Securities, Assigned Rights and Pledged Documents (unless
otherwise disclosed by the Borrower to the Bank in writing) are genuine, are in
all respects what they purport to be, are not evidenced by a judgment and
represent undisputed, bona fide transactions completed or to be completed in
accordance with the terms and conditions of any document related thereto; (ii)
none of the Pledged Securities, Assigned Rights or Pledged Documents have been
sold or pledged to any other person or entity; (iii) no Person obligated thereon
has any defense, setoff, claim or counterclaim against the Borrower which can be
asserted against the Bank to reduce payment of the Pledged Securities or
Assigned Rights; and (iv) the Borrower has no knowledge of any fact or
circumstance which would impair the validity or collectibility of any right to
payment of the Pledged Securities, Assigned Rights or Pledged Documents.
Section 4 - Sale and Collection; Retention of Payments
Section 4.1 Collection of Pledged Securities. Until such time as the
Bank shall notify the Borrower of the revocation of such authority, the Borrower
will endeavor to collect, as and when due, all amounts due under the Pledged
Securities, and shall take any action in connection with such collection as the
Bank may reasonably request.
Section 4.2 Collection by the Bank. The Bank may, but shall not be
obligated to, at any time, upon notice to the Borrower following the occurrence
of any Default (a) notify the Issuers or any other parties obligated on any of
the Pledged Securities to make payment directly to the Bank, (b) enforce
collection of any of the Pledged Securities by suit or otherwise, and (c)
surrender, release, exchange, compromise, extend or renew all or any part of the
Pledged Securities or Assigned Rights. Upon request of the Bank following the
occurrence of any Default, the Borrower shall, at its own expense, notify all
Issuers obligated on any of the Pledged Securities to make all payments
thereunder directly to the Bank.
Section 4.3 Transmittal of Items to the Bank. The Borrower will, upon
request of the Bank following the occurrence of any Default, upon receipt,
transmit and deliver to the Bank, in the form received, all cash, checks,
drafts, and any other form of payment (properly endorsed, where required, so
that such items may be collected by the Bank) received as proceeds of any of the
Collateral. Following occurrence of any Default, the Bank is authorized to
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<PAGE>
endorse, in the name of the Borrower, any item received by the Bank constituting
a proceed of any of the Collateral. After such request by the Bank, any such
items received by the Borrower will not be commingled with any other of its
funds or property, but will be held separate and apart from its own funds or
property and upon express trust for the Bank until delivered to the Bank.
Section 4.4 Collection Account. All items or amounts which are received
by the Bank as proceeds of the Collateral shall be deposited to the credit of a
deposit account of the Borrower with the Bank, securing the Liabilities (the
"Collection Account"). The Borrower shall have no right to make withdrawals from
the Collection Account.
Section 4.5 Voting and Consensual Rights Prior to Default. So long as
no Default shall have occurred and be continuing (and after any Default until,
by notice to the Borrower, the Bank elects to exercise the right to vote or
consent), the Borrower shall retain the right to exercise all voting, consensual
and other power of ownership pertaining to the Pledged Securities owned by it
for all purposes not inconsistent with the terms of this Agreement or any other
Credit Document; and the Bank shall execute and deliver to the Borrower or cause
to be executed and delivered to the Borrower all such proxies, powers of
attorney, dividend and other orders and all such instruments, without recourse,
as the Borrower may reasonably request for the purpose of enabling the Borrower
to exercise the rights and powers which it is entitled to exercise pursuant to
this Section.
Section 4.6 Interest Payments Prior to Default. Unless and until a
Default has occurred and is continuing, the Borrower shall be entitled to
receive and retain any interest payments or principal amortization payments on
the Pledged Securities owned by it, and any such payments that the Bank receives
(whether because the Pledged Securities are registered in the name of the Bank
or otherwise) shall be promptly forwarded by the Bank to the Borrower in the
form received.
Section 5 - Agreements of Borrower
The Borrower agrees that, unless otherwise agreed in writing by the
Bank, it will:
Section 5.1 Delivery and Other Perfection. The Borrower shall:
(a) deliver to the Bank any Pledged Securities consisting of
certificated securities, together with assignments separate from
certificates (bond powers) for each such certificate, and upon request
of the Bank cause the certificate to be registered in the name of the
Bank or its nominee;
(b) for any Pledged Securities consisting of an uncertificated
securities, upon request of the Bank either cause such securities to be
registered in the name of the Bank or its nominee or cause the issuer
or any securities intermediary that is the registered holder of such
securities to enter into an agreement satisfactory to the Bank that
provides that such issuer or securities intermediary will comply with
instructions originated by the Bank without further consent by the
registered owner of such securities;
(c) for any Pledged Securities consisting of certificated securities
held in the name of a securities intermediary or of other securities
entitlements, upon request of the Bank take such actions as shall be
requested by the Bank to cause the bank to become the entitlement
5
<PAGE>
holder of such securities or cause such securities intermediary of such
securities to enter into an agreement satisfactory to the Bank that
provides that such securities intermediary will comply with
instructions originated by the Bank without further consent by the
entitlement holder;
(d) at any time or times hereafter execute and deliver such other
documents and perform such other acts as the Bank may reasonably
request to establish, maintain, perfect and enforce the Bank's security
interest in the Pledged Securities and rights under this Agreement; and
(e) keep full and accurate books and records relating to the Pledged
Securities.
Section 5.2 Other Financing Statements and Liens. Without the prior
written consent of the Bank, the Borrower shall not file or suffer to be on
file, or authorize or permit to be filed or to be on file, in any jurisdiction
any financing statement or like instrument with respect to the Collateral in
which the Bank is not named as the sole secured party. Sole beneficial ownership
of the Pledged Securities shall at all times remain with the Borrower, and the
Borrower shall not at any time incur or permit to exist any Liens on the Pledged
Securities or any other Collateral except for those Liens in favor of the Bank
created or provided for herein.
Section 5.3 Amendment to Pledged Documents. Except to the extent
expressly permitted under Section 4 hereof, not amend or modify in any material
respect, compromise, extend, rescind or cancel any Pledged Documents or waive
any provision thereof or consent to a postponement of strict compliance on the
part of any party thereto to any term or provision thereof
Section 5.4 Schedules and Reports. Furnish to the Bank, in form and
detail satisfactory to the Bank from time to time, as the Bank may request, such
schedules, certificates and reports concerning the Collateral as the Bank may
reasonably request.
Section 5.5 Inspection. Permit the Bank and its agents or its
designees, from time to time, to inspect, audit and make copies of all books and
records constituting or otherwise concerning the Collateral, and will, upon
request of any Bank, deliver to the Bank all of such records which pertain to
the Collateral. All information obtained by the Bank shall be subject to the
confidentiality provisions of the Credit Agreement.
Section 5.6 Financing Statements and Filing. Upon request of the Bank,
execute such financing statements and other documents (and pay the cost of
recording the same in all offices requested by the Bank) and do such other acts
as the Bank may from time to time request to establish and maintain a valid
perfected security interest in the Collateral. The Borrower agrees that any
carbon, photographic or other reproduction of this Agreement or of any such
financing statement may be filed as a financing statement.
Section 5.7 Location of Records. Keep the records concerning the
Collateral at the address shown on the signature page hereof and not remove the
records from such location without the prior written consent of Bank;
Section 5.8 Transfer, Sale or Security Interest. Except as expressly
authorized under Section 4 and Section 6 hereof (subject to the limits therein),
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<PAGE>
not sell, lease, transfer, consume, assign or otherwise dispose of, or create or
permit to exist any lien on or security interest (other than the Bank's security
interest) in, any Collateral.
Section 5.9 Payment of Taxes, etc. Pay, when due, all taxes,
assessments, governmental charges and other similar charges levied against any
of the Collateral, except and so long as the Borrower is contesting such taxes,
assessments or charges in good faith and, by appropriate proceedings and the
Borrower has set aside on its books such reserves or other appropriate
provisions therefor as may be required by generally accepted accounting
principles, and so long as no enforcement action is being taken that would
interfere with the Borrower's use of such Collateral or the enforcement of the
Bank's rights hereunder.
Section 5.10 Eligible Bonds. The Borrower has examined and will examine
all Pledged Securities and all documents pertaining to the Pledged Securities,
and shall complete requisite due diligence necessary to determine whether the
Pledged Securities constitute Eligible Bonds. The Borrower shall notify the Bank
in writing to be delivered with the relevant Collateral Certificate of any
Pledged Securities that are not Eligible Bonds and shall represent, warrant and
certify that except as identified in such notice, all Pledged Securities are
Eligible Bonds If the Borrower has performed such requisite due diligence, and
if the Borrower shall thereafter become aware that any Pledged Securities are
not Eligible Bonds, or that for any reason any Pledged Securities have ceased to
be Eligible Bonds, then (a) the Borrower shall promptly notify the Bank, and
identify such Pledged Securities, (b) recalculate the Borrowing Base without
such Pledged Securities as Eligible Bonds, and (c) comply with the provisions of
Section 4.4 of the Credit Agreement respecting delivery of additional Pledged
Collateral or payment of the Loans. Provided that the Borrower shall comply with
the provisions of this Section, the inaccuracy of the Borrower's initial
representation, warranty and certification shall not be deemed a default under
Section 10.1(b) of the Credit Agreement.
Section 6 - Release of Collateral Prior to Default
The Borrower may request at any time and from time to time that certain
specified Pledged Securities be released by the Bank, and the Bank will release
such Pledged Securities, subject to the following: (a) at the time of such
request and such release, no Default and no Event of Default shall have occurred
and be continuing under the Credit Agreement (as the terms "Default" and "Event
of Default" are defined in the Credit Agreement), (b) together with its request
specifying the Pledged Securities to be released, the Borrower shall have
submitted a Borrowing Base Certificate, updated to the day of the request,
showing that after giving effect to the release of such Pledged Securities, the
Loans will not exceed the Borrowing Base. If such conditions are met, the Bank
will promptly release such Pledged Securities by delivering the certificates
representing such Pledged Securities to the Borrower by air courier or other
means mutually agreed upon, and upon such delivery, such securities shall cease
to be Pledged Securities hereunder.
Section 7 - Bank's Performance of Duties and Power of Attorney
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Section 7.1 Bank's Performance of Agreements and Reimbursement. The
Bank may, from time to time, at its option, perform any agreement of the
Borrower hereunder which the Borrower shall fail to perform and take any other
action which the Bank deems necessary for the maintenance or preservation of the
Collateral or its interest therein, and the Borrower shall reimburse the Bank
for all expenses of the Bank in connection with the foregoing, together with
interest thereon at the highest rate of interest borne by any of the Liabilities
at such time from the date incurred until reimbursed by the Borrower.
Section 7.2 Power of Attorney. The Borrower hereby irrevocably appoints
the Bank as the Borrower's attorney-in-fact, with full authority in the place
and stead of the Borrower and in the name of the Borrower, the Bank or
otherwise, from time to time in the Bank's discretion, to take any action and to
execute any instrument which the Bank may deem advisable to accomplish the
purposes of Section 7.1 and to exercise any right and remedy otherwise permitted
under the Credit Documents upon the occurrence of a Default. The Borrower hereby
ratifies all that such attorney shall lawfully do or cause to be done by virtue
hereof. This power of attorney is irrevocable and is coupled with an interest.
Section 7.3 No Liability on Collateral. The rights and powers of the
Bank hereunder are conferred solely to protect its interest in the Collateral
and shall not impose any duty upon it to exercise any such rights or powers. The
Bank does not in any way assume any of the Borrower's obligations under, or with
respect to, the Collateral. The Borrower shall remain liable with respect to the
Collateral to the same extent as if this Agreement had not been executed.
Section 7.4 Care of Collateral. Except for the safe custody of any
Collateral in its possession, the Bank shall have no duty as to any Collateral
or as to the taking of any steps to preserve rights against any other party. The
Bank shall be deemed to have exercised reasonable care in the custody and
preservation of any Collateral in its possession if such Collateral is accorded
treatment substantially equal to that which the Bank accords its own property,
or is accorded treatment complying with any provision of any other document
setting forth a standard of care for such Collateral.
Section 8 - Default and Remedies
During the time a Default shall have occurred and be continuing:
Section 8.1 Rights under Uniform Commercial Code. The Bank shall have
all of the rights and remedies with respect to the Collateral of a secured party
under the Uniform Commercial Code (whether or not said Code is in effect in the
jurisdiction where the rights and remedies are asserted).
Section 8.2 Sale of Collateral. The Bank may, upon 15 business days'
prior written notice to the Borrower of the means and, if relevant, time and
place, sell, lease, assign or otherwise dispose of all or any of such
Collateral, at such place or places as the Bank deems best, and for cash or on
credit or for future delivery, at public or private sale, and the Bank or anyone
else may be the purchaser, lessee, assignee or recipient of any or all of the
Collateral so disposed of, and thereafter hold the same absolutely, free from
any claim or right of whatsoever kind, including any equity of redemption, of
the Borrower, any such demand, notice or right and equity being hereby expressly
waived and released. The Bank may resort to the Collateral for payment of any of
8
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the Liabilities whether or not the Bank shall have resorted to any other
property securing any of the Liabilities or shall have proceeded against any
party primarily or secondarily liable on any of the Liabilities.
Section 8.3. Deficiency. If the proceeds of the sale, collection or
other realization of or upon the Collateral are insufficient to cover the costs
and expenses of such realization and the payment in full of the Liabilities, the
Borrower shall remain liable for any deficiency.
Section 8.4. Private Sale and Compliance with Law.
(a) The Bank shall incur no liability as a result of the sale of the
Collateral, or any part thereof, at any private sale conducted in a
commercially reasonable manner. The Borrower hereby waives any claim
against the Bank arising by reason of the fact that the price at which
the Collateral may have been sold at such a private sale conducted in a
commercially reasonable manner was less than the price which might have
been obtained at a public sale or was less than the aggregate amount of
the Liabilities, even if the Bank accepts the first offer received and
does not offer the Collateral to more than one offeree.
(b) The Borrower agrees that in any sale of any the Collateral whenever
a Default hereunder shall have occurred and be continuing, the Bank is
hereby authorized to comply with any limitation or restriction in
connection with such sale as it may be advised by counsel is necessary
in order to avoid any violation of applicable law (including, without
limitation, compliance with such procedures as may restrict the number
of prospective bidders and purchasers or require that such prospective
bidders and purchasers be persons who will represent and agree that
they are purchasing for their own account for investment and not with a
view to the distribution or resale of such Collateral), or in order to
obtain any required approval of the sale or of the purchaser by any
governmental regulatory authority or official, and the Borrower further
agrees that such compliance shall not result in such sale being
considered or deemed not to have been made in a commercially reasonable
manner, nor shall the Bank be liable nor accountable to the Borrower
for any discount allowed by the reason of the fact that such Collateral
is sold in compliance with any such limitation or restriction.
Section 8.5. Application of Proceeds. Except as otherwise herein
expressly provided, the proceeds of any collection, sale or other realization of
all or any part of the Collateral, and any other cash at the time held by the
Bank under this Agreement, including without limitation proceeds held in the
Collection Account, shall be applied by the Bank:
First, to the payment in full of all costs and expenses of such
collection, sale or other realization, including reasonable attorneys'
fees and legal expenses incurred by the Bank in connection therewith,
and all expenses and/or advances made or incurred by the Bank in
connection therewith or incidental thereto or to the care or
safekeeping of any of the Collateral or in any way relating to the
rights of the Bank hereunder, including reasonable attorneys' fees and
legal expenses;
Second, to the payment in full of the Liabilities; and
Third, but only if all the Bank's commitments to the Borrower shall
have expired or been terminated, to the payment to the Borrower, or its
successors or assigns, or as a court of competent jurisdiction may
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direct, of any surplus then remaining from such proceeds which relate
to the Collateral.
As used in this Section, "proceeds" of Collateral shall mean cash,
securities and other property realized in respect of, and distributions in kind
of, collateral, including any thereof received under any reorganization,
liquidation or adjustment of debt of any Company or any issuer of or obligor on
any of the Collateral.
Section 9- General Provisions
Section 9.1 Reimbursement of Expenses. The Borrower shall reimburse the
Bank upon demand for all costs and expenses, including reasonable fees of
attorneys for the Bank (who may be employees of the Bank) and legal expenses,
incurred by the Bank in seeking to collect or enforce any rights under the
Collateral and its rights hereunder.
Section 9.2 Notices. Any notice from the Borrower to the Bank or from
the Bank to the Borrower shall be given, and deemed received, as provided in the
Credit Agreement.
Section 9.3 Waivers and Amendments. No failure or delay on the part of
the Bank in the exercise of any power, right or remedy, and no course of dealing
between the Borrower and the Bank, shall operate as a waiver of such power,
right or remedy, nor shall any single or partial exercise of any power, right or
remedy preclude other or further exercise thereof or the exercise of any other
power, right or remedy. No notice to or demand on the Borrower not required
hereunder shall in any event entitle the Borrower to any other or further notice
or demand in similar or other circumstances or constitute a waiver of the right
of the Bank to any other or further action in any circumstances without notice
or demand. No amendment, modification or waiver of, or consent with respect to,
any provision of this Agreement shall in any event be effective unless the same
shall be in writing and signed and delivered by the Bank. Any waiver of any
provision of this Agreement, and any consent to any departure by the Borrower
from the terms of any provision of this Agreement, shall be effective only in
the specific instance and for the specific purpose for which given.
Section 9.4 Remedies Cumulative. The remedies provided for herein are
cumulative and not exclusive of any remedies which may be available to the Bank
at law or in equity.
Section 9.5 Termination of Agreement. Unless sooner terminated by the
Bank, this Agreement shall terminate when all of the Credit Documents shall have
expired or been terminated and all Liabilities shall have been paid in full.
This Agreement shall continue notwithstanding that there may be, from time to
time, no outstanding loans or extensions of credit from the Bank to the
Borrower. Any return of Collateral upon termination of this Agreement and any
instruments of transfer or termination shall be at the expense of the Borrower
and shall be without warranty by, or recourse against, the Bank.
Section 9.6 Successors and Assigns. This Agreement shall be binding
upon the Borrower, its successors and assigns (and, if an individual, the
Borrower's heirs, estate and personal representatives), and shall inure to the
benefit of, and be enforceable by, the Bank and its successors, transferees, and
assigns.
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Section 9.7 Choice of Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Minnesota.
Section 9.8 Severance. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
Section 9.9 Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument.
Section 9.10 Consent to Jurisdiction. AT THE OPTION OF THE BANK, THIS
AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING
IN MINNEAPOLIS OR ST. PAUL, MINNESOTA; AND THE BORROWER CONSENTS TO THE
JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN
SUCH FORUMS IS NOT CONVENIENT.
Section 9.11 Waiver of Jury Trial. THE BORROWER AND THE BANK WAIVE ANY
RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY
RIGHTS UNDER THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR
AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION
HEREWITH AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A
COURT AND NOT A JURY.
IN WITNESS WHEREOF, this Agreement has been duly executed as of the day
and year first above written.
ASSET INVESTORS CORPORATION
By: /s/ Spencer I. Browne
-------------------------------
Its: President
------------------------------
By: /s/ Kevin J. Nystrom
-------------------------------
Its: Vice President and Chief
Accounting Officer
------------------------------
Address:
3600 South Yosemite
Suite 300
Denver, CO 80237
Attention: President, with copy to
Chief Accounting Officer
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Telephone: (303) 793-2703
Fax: (303) 771-3461
Trade Names (see Section 3.3): NONE
FIRST BANK NATIONAL ASSOCIATION
By: /s/Charles I. Broadnax
--------------------------------
Its: Vice President
-------------------------------
Address:
601 2nd Ave. S.
Minneapolis, Minnesota 55402-4302
Attention: Mr. Charles I. Broadnax
Telephone: (612) 973-0783
Fax: (612) 973-0824
12
FOURTH AMENDMENT TO
ASSET INVESTORS CORPORATION
1986 STOCK OPTION PLAN
AS RESTATED NOVEMBER 15, 1990, AS AMENDED
Fourth Amendment, dated March 11, 1996, to the Asset Investors
Corporation 1986 Stock Option Plan as restated November 15, 1990 and as further
amended by a First Amendment dated May 1, 1992 as approved by the Board of
Directors of the Corporation (the "Board") on May 1, 1992, and by a Second
Amendment dated July 1, 1992 as approved by the Board on July 1, 1992, and by a
Third Amendment dated August 19, 1993 as approved by the Board on August 19,
1993 (the "Plan"). Capitalized terms used herein shall have the meanings
ascribed in the Plan unless otherwise defined herein.
The following amendments were adopted by the Board on March 11, 1996
subject to receipt of stockholder approval, which approval was received at the
Annual Meeting of Shareowners of the Corporation held on May 28, 1996 and became
effective on March 11, 1996.
1. Subsection (k) of Section "8. Terms and Conditions of Options" is
amended by deleting the text of such subsection and inserting in its stead the
following: "Provision rescinded by the Fourth Amendment to this Plan dated March
11, 1996."
2. Section "5. Stock Reserved" hereby is amended to add appropriate
reference to stock grants under the Plan by deleting Section 5 in its entirety
and substituting the following:
The stock subject to Options, Rights, Limited Rights and Stock
Grants hereunder shall be shares of the Corporation's Common Stock,
with par value of $.01 per share ("Common Stock"). Such shares may, in
whole or in part, be authorized but unissued shares or shares that
shall have been or that may be reacquired by the Corporation. The
aggregate number of shares of Common Stock as to which Options, Rights
and Limited Rights may be granted and Stock Grants awarded under the
Plan shall not exceed the annual allocation for such year determined by
multiplying .0075 by the number of shares of Common Stock outstanding
as of midnight Denver time on December 31 of the previous year (the
"Annual Allocation"). Stock Grants shall be awarded to Participants
only in consideration of their consent to the elimination of future
dividend equivalent rights. The maximum number of shares of Common
Stock which may be subject to Options, Rights and Limited Rights
granted to directors as a group under the Plan during each calendar
year shall not exceed the Annual Allocation less 5,000 shares, as
adjusted for unallocated shares available from previous years.
1
<PAGE>
In the event that any outstanding Option under the Plan, for
any reason expires or is terminated without having been exercised in
full or surrendered in full in connection with the exercise of a Right
or Limited Right, the shares of Common Stock allocable to the
unexercised portion of the Option (unless the Plan shall have been
terminated) shall become available for subsequent grants of Options,
Rights and Limited Rights under the Plan.
3. The following new Section 11 is adopted and subsequent existing
sections of the Plan shall be renumbered accordingly.
Section 11. Stock Grants; Terms and Conditions of Stock Grants.
In consideration of Recipients consenting to the Corporation
eliminating their future dividend equivalent rights pursuant to
subsection (k) of Section 8, which subsection has been rescinded by the
Board of Directors, each Participant who holds an outstanding Option
with dividend equivalent rights shall be awarded hereunder a one time
fully vested stock grant based on the remaining term of the Option.
In addition to the foregoing amendments which were adopted
subject to receipt of shareholder approval, the Board of Directors of
the Corporation adopted the following amendments which were not subject
to shareholder approval and became effective on March 11, 1996.
4. Section "1. Purpose; Restrictions on Amount Available under the
Plan" hereby is amended to add the following sentence as the last sentence of
this section:
In addition to Options which may be granted hereunder, the
Committee in its discretion may authorize Stock Grants to Plan
Participants in consideration of their consent to eliminate future
dividend equivalent rights.
5. Section "2. Definitions" is amended to add the following definition
and renumber the existing definitions accordingly, so as to be in alphabetical
order.
(a) "PARTICIPANT" means any person awarded an Option or Stock
Grant hereunder.
6. Section "3. Administration" hereby is amended to add appropriate
references to Stock Grants in the first sentence of the second paragraph of the
section by deleting this sentence in its entirety and substituting the
following:
2
<PAGE>
The Committee shall have the authority in its discretion,
subject to and not inconsistent with the express provisions of the
Plan, to administer the Plan and to exercise all powers and authorities
either specifically granted to it under the Plan or necessary or
advisable in the administration of the Plan, including, without
limitation, the authority to grant Options or make Stock Grants in
consideration of the elimination of future dividend equivalent rights;
to determine which Options shall constitute Incentive Stock Options and
which Options shall constitute Nonqualified Stock Options; to determine
which Options (if any) shall be accompanied by Rights or Limited
Rights; to determine the purchase price of the shares of Common Stock
covered by each Option (the "Option Price"); to determine the persons
to whom, and the time or times at which, Options shall be granted; to
determine the number of shares to be covered by each Option; to
interpret the Plan; to prescribe, amend and rescind rules and
regulations relating the to Plan; to determine the terms and provisions
of the Option Agreements (which need not be identical) entered into in
connection with Options granted under the Plan; and to make all other
determinations deemed necessary or advisable for the administration of
the Plan.
7. Section "3. Administration" is further amended to add the words
"Stock Grant or" between the words "any" and "Option" in the fourth paragraph of
this section.
8. Section "4. Eligibility" is amended to add appropriate reference to
stock grants by deleting this section in its entirety and substituting the
following:
Subject to certain limitations hereinafter set forth, Options
may be granted or Stock Grants may be awarded to directors and officers
(whether or not such persons are employees) and employees of the
Corporation or its present or future divisions and Subsidiary
Corporations. In determining the persons to whom Options shall be
granted and the number of shares to be covered by each Option and any
accompanying Rights or Limited Rights, the Committee shall take into
account the duties of the respective persons, their present and
potential contributions to the success of the Corporation and such
other factors as the Committee shall deem relevant in connection with
accomplishing the purpose of the Plan.
A Recipient shall be eligible to receive more than one grant
of an Option during the term of the Plan, but only on the terms and
subject to the restrictions hereinafter set forth.
No Option may be granted, or Stock Grant awarded, to any
person who, upon exercise of the Option, or receipt of the Stock Grant,
would own more than 9.8% of the Common Stock outstanding of the
Corporation. Prior to the grant of an Option or Stock Grant award by
the Corporation, any director, officer or employee who is to receive
the Option or Stock Grant must provide an affidavit or otherwise
certify to the Corporation that the grant of the Option or award of the
Stock Grant to the director, officer or employee will not result in the
director, officer or employee, directly or indirectly, having ownership
of more than 9.8% of the outstanding shares of Common Stock, as
determined pursuant to the Corporation's Articles of Incorporation.
3
<PAGE>
9. Section "8. Terms and Conditions of Options is amended to add the
following new section (m):
(m) FORMULA GRANTS TO DIRECTORS. Notwithstanding any other
provision in the Plan to the contrary, except to the extent one time
Stock Grants are provided for in Section 11(b), participation in the
Plan by members of the Board of Directors shall be limited to their
individual right to receive an automatic grant of an Option to acquire
7,500 shares of Common Stock annually on the date the Annual Meeting of
Shareowners is convened, whether or not the meeting is adjourned for
any reason. Each Option automatically granted hereunder shall be
evidenced by a written Option Agreement between the Corporation and the
recipient containing the following material terms without variation:
(i) Each Non-Officer Director who is a member of the
Board as of May 28, 1996 will be granted automatically upon
the Effective Date, without action by the Committee, an Option
to purchase 7,500 shares of Common Stock. Each Non-Officer
Director who is initially elected to the Board subsequent to
May 28, 1996 will be granted automatically upon such election,
without action by the Committee, an Option to purchase 25,000
shares of Common Stock.
(ii) The Option shall be a Nonqualified Stock Option
to purchase shares of Common Stock;
(iii) The Option Price shall be set at 100% of the
Fair Market Value of the shares on the date of automatic
grant;
(iv) The number of shares covered by the Option and
the Option Price shall be subject to adjustment as provided in
Section 8(i) hereof; and
(v) The Options automatically granted hereunder shall
be exercisable for five years after the date of automatic
grant.
The foregoing formula provisions shall not be amended more than once
every six months other than to comport with changes in the Code, the Employee
Retirement Income Security Act, or rules thereunder.
4
<PAGE>
10. Section "11. Agreement by Optionee Regarding Withholding Taxes"
will be renumbered as Section 12 and is amended to add appropriate references to
Stock Grants by deleting this section in its entirety and substituting the
following:
If the Committee shall so require, as a condition of exercise,
each Recipient shall agree that:
(a) No later than the date of exercise of any Option, Right or
Limited Right granted hereunder, or the receipt of a Stock Grant, the
Recipient (other than a Non-Officer Director) shall pay to the
Corporation or make arrangements satisfactory to the Committee
regarding payment of any federal, state or local taxes of any kind
required by law to be withheld upon the receipt of such Stock Grant or
exercise of such Option, Right or Limited Right, and
(b) The Corporation shall, to the extent permitted or required
by law, have the right to deduct federal, state and local taxes of any
kind required by law to be withheld upon exercise of such Option, Right
or Limited Right or receipt of a Stock Grant from any payment of any
kind otherwise due to the Recipient.
11. Section "12. Term of Plan" will be renumbered as Section 13 and is
amended to add appropriate references to Stock Grants. The following is the text
of the provision as amended by the First Amendment, delayed by the Second
Amendment and which shall become effective with this Amendment:
Except as otherwise provided in Section 6 hereof, Options,
Rights and Limited Rights may be granted (and in consideration of the
elimination of future dividend equivalent rights the Stock Grants may
be awarded) pursuant to the Plan from time to time until the Plan is
terminated by the Board.
12. Section "13. Amendment and Termination of the Plan" will be
renumbered as Section 14 and hereby is amended to add appropriate references to
Stock Grants by deleting this section in its entirety and substituting the
following:
The Board at any time and from time to time may suspend,
terminate, modify or amend the Plan; provided, however, that any
amendment that would materially increase the aggregate number of shares
of Common Stock as to which Options, Rights and Limited Rights or Stock
Grants under the Plan, or materially increase the benefits accruing to
the participants under the Plan, or materially modify the requirements
as to eligibility for participation in the Plan shall be subject to
approval of the holders of Common Stock, as provided by the
Corporation's Articles of Incorporation and Bylaws and the Rule, except
that any such increase or modification that may result from adjustments
authorized by Section 8(i) hereof shall not require such approval.
Except as provided in Section 8 hereof, no suspension, termination,
modification or amendment of the Plan may adversely affect any Option,
5
<PAGE>
Right or Limited Right previously granted, or Stock Grant previously
awarded, unless the written consent of the Recipient is obtained.
The Committee shall be authorized to restate the Plan from
time to time provided that all amendments incorporated into any
restatement of the Plan first shall have been approved by the Board of
Directors of the Corporation and the shareholders of the Corporation,
to the extent required by applicable law.
13. Section "15. Assumption" will be renumbered as Section 16 and the
first sentence of the section is amended to add a reference to Stock Grants:
The terms and conditions of any outstanding Options granted
pursuant to this Plan and any outstanding Stock Grants awarded in
consideration of the elimination of future dividend equivalent rights
shall be assumed by, be binding upon and inure to the benefit of any
successor Corporation and shall continue to be governed by, to the
extent applicable, the terms and conditions of this Plan. Such
successor corporation shall not otherwise be obligated to assume this
Plan.
14. Section "17. Tax Litigation" is amended to add a reference to Stock
Grants. The phrase "or Stock Grants " shall be inserted between the word
"Options" and "issued" in said section.
15. Throughout the Plan, as applicable, references to "Optionee" shall
be deleted and replaced with "Recipient."
6
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