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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-9360
ASSET INVESTORS CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 84-1038736
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3600 South Yosemite Street, Suite 350 80237
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
(303) 793-2703
(Registrant's telephone number, including area code)
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 August 1, 1997, 25,240,926 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, 1997
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of June 30, 1997 (unaudited)
and December 31, 1996................................ 1
Statements of Income for the three and six
months ended June 30, 1997 and 1996 (unaudited)...... 2
Statements of Cash Flows for the six months ended
June 30, 1997 and 1996 (unaudited)................... 3
Notes to Financial Statements (unaudited)............ 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 12
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K..................... 21
(i)
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
June 30, December 31,
1997 1996
------------ -------------
(Unaudited)
Assets
<S> <C> <C>
Investment in rental properties, net $ 26,442 $ --
Cash and cash equivalents 42,943 417
Non-agency MBS Bonds -- 68,079
Investment in Commercial Assets 19,895 19,361
Other assets, net 4,724 2,487
------------ ------------
Total Assets $ 94,004 $ 90,344
============ ============
Liabilities
Mortgage notes payable $ 4,940 $ --
Short-term borrowings -- 3,000
Accounts payable and accrued liabilities 1,276 454
Management fees payable 249 525
------------ ------------
Total Liabilities 6,465 3,979
------------ ------------
Minority interest in Operating Partnership 322 --
Stockholders' Equity
Common Stock, par value $.01 per share, 50,000,000 shares authorized;
25,239,217 and 24,840,140 shares issued and
outstanding, respectively 252 248
Additional paid-in capital 230,112 228,753
Cumulative dividends (242,241) (238,367)
Cumulative net income 99,476 90,638
------------ ------------
Dividends in excess of net income (142,765) (147,729)
Unrealized holding (losses) gains on debt securities (382) 5,093
------------ ------------
Total Stockholders' Equity 87,217 86,365
------------ ------------
Total Liabilities and Stockholders' Equity $ 94,004 $ 90,344
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ---------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues
<S> <C> <C> <C> <C>
Rental income $ 568 $ -- $ 568 $ --
Property management income 23 -- 23 --
Non-agency MBS bonds 450 2,835 2,450 5,665
Equity in earnings of Commercial Assets 484 539 948 976
Interest and other income 795 43 847 129
--------- --------- --------- ---------
Total revenues 2,320 3,417 4,836 6,770
--------- --------- --------- ---------
Expenses
Property operations and maintenance 174 -- 174 --
Real estate taxes 53 -- 53 --
Property management expenses 31 -- 31 --
Management fees 97 350 374 802
General and administrative 87 157 423 655
Elimination of DERs -- 825 -- 825
Depreciation and amortization 149 -- 149 --
Interest 55 -- 81 --
--------- --------- --------- ---------
Total expenses 646 1,332 1,285 2,282
--------- --------- --------- ---------
Net income before gain on resecuritization of
non-agency MBS bonds 1,674 2,085 3,551 4,488
Gain on resecuritization of non-agency MBS
bonds -- -- 7,359 --
Management fees on resecuritization of
non-agency MBS bonds -- -- (2,072) --
--------- --------- --------- ---------
Net income $ 1,674 $ 2,085 $ 8,838 $ 4,488
========= ========= ========= =========
Net income per share $ .06 $ .08 $ .35 $ .18
========= ========= ========= =========
Weighted-average shares outstanding 25,062 24,500 24,952 24,433
Dividends per share $ .060 $ .090 $ .155 $ .180
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
---------------------------
1997 1996
--------- ---------
Cash Flows From Operating Activities
<S> <C> <C>
Net income $ 8,838 $ 4,488
Adjustments to reconcile net income to net cash flows from operating
activities:
Depreciation and amortization 149 --
Accretion of discounts on non-agency MBS bonds 469 1,294
Equity in earnings of Commercial Assets (948) (976)
Issuance of Common Stock for the elimination of DERs -- 825
Increase in other assets (197) (185)
Increase in accounts payable and accrued liabilities 107 310
Gain on resecuritization of non-agency MBS bonds (7,359) --
------- -------
Net Cash Provided By Operating Activities 1,059 5,756
------- -------
Cash Flows From Investing Activities
Acquisition of rental properties (22,871) --
Acquisition of non-agency MBS bonds -- (9,844)
Principal collections and indemnifications of non-agency MBS bonds 547 1,601
Dividends from Commercial Assets 939 469
Proceeds from the resecuritization of non-agency MBS bonds 69,743 --
--------- ---------
Net Cash Provided By (Used By) Investing Activities 48,358 (7,774)
--------- ---------
Cash Flows From Financing Activities
Dividends paid (3,874) (4,418)
Payment of minority interest distributions (6) --
(Decrease) increase in short-term borrowings, net (3,000) 1,400
Principal payments on mortgage notes payable (22) --
Issuance of Common Stock 11 159
---------- ----------
Net Cash Used By Financing Activities (6,891) (2,859)
---------- ----------
Cash and Cash Equivalents
Increase (decrease) 42,526 (4,877)
Beginning of period 417 5,328
---------- ----------
End of period $ 42,943 $ 451
========== ==========
</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)
A. The Company
Asset Investors Corporation (the "Company") is a real estate investment
trust ("REIT") that was incorporated under Maryland law in 1986. Its shares of
common stock, par value $.01 per share ("Common Stock"), are listed on the New
York Stock Exchange under the symbol "AIC." In May 1997, the Company contributed
its net assets to Asset Investors Operating Partnership, L.P. (the "Operating
Partnership") in exchange for an interest in the Operating Partnership. The
Company acts as the sole general partner of the Operating Partnership which
invests in real estate assets, primarily manufactured housing communities. The
Operating Partnership also owns the preferred stock and non-voting common stock
of AIC Manufactured Housing Corp. ("AICMHC") and approximately 27% of the common
stock of Commercial Assets, Inc. ("Commercial Assets"). AICMHC, which was formed
in May 1997, owns interests in manufactured housing community management
contracts. Commercial Assets is a publicly-traded REIT (American Stock Exchange,
Inc.: CAX) formed by the Company in August 1993 which invests in commercial
mortgage-backed securities ("CMBS bonds").
The Company's asset acquisition and other policies are determined by
its Board of Directors. The Company's By-laws, as amended, require that a
specified number of the Board of Directors and each committee thereof be
comprised of persons constituting Independent Directors. Pursuant to the
Company's By-laws, an Independent Director is a person "who is not affiliated,
directly or indirectly, with the person or entity responsible for directing or
performing the day-to-day business affairs of the corporation (the "advisor"),
including a person or entity to which the advisor subcontracts substantially all
of such functions, whether by ownership of, ownership interest in, employment
by, any material business or professional relationship with, or by serving as an
officer of the advisor or an affiliated business entity of the advisor."
Multi-Step Plan to Maximize Stockholder Value - The Company previously
owned debt interests in residential mortgage loan securitizations collateralized
by pools of non-conforming (non-agency guaranteed) single-family mortgage loans
("non-agency MBS bonds"). In February 1997, the Board of Directors adopted a
multi-step plan (the "1997 Plan") to restructure the Company's asset base and
redeploy its assets in order to reduce risks associated with the Company's
non-agency MBS bond portfolio and maximize long-term, risk-adjusted returns to
stockholders. In March 1997, under the first step of the 1997 Plan, the Company
contributed its portfolio of non-agency MBS bonds into an owner trust in a
structured transaction in which the Company received cash proceeds and retained
a small equity interest.
In May 1997, the Company formed the Operating Partnership and acquired
seven manufactured housing communities, a 50% joint venture interest in another
manufactured housing community and certain manufactured housing community
management contracts. In July 1997, the Company acquired a joint venture
interest in an additional four manufactured housing communities. The Company
plans to invest its remaining cash from the resecuritization of non-agency MBS
bonds in additional manufactured housing communities and related assets. This
will likely reduce the Company's return on assets from 1996 levels, shift its
strategic emphasis to the management of income producing real estate with the
potential of achieving capital appreciation, and also reduce the risk borne by
the Company in its portfolio.
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A special committee of Independent Directors has been evaluating the
Company's acquisition of the Company's advisor, Financial Asset Management LLC
(the "Manager"), a step which would result in the Company becoming self-managed
and fully integrated. The special committee has engaged a financial advisor to
assist them in their evaluation of this acquisition.
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, 1997, and for the periods then ended and for all
prior periods presented. These statements are condensed and do not include all
the information required by generally accepted accounting principles ("GAAP") in
a full set of financial statements. These 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 year ended
December 31, 1996.
Certain reclassifications have been made in the 1996 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, the Operating Partnership and
all majority owned subsidiaries. The minority interest in the Operating
Partnership represents the limited partnership units ("OP Units") which are
convertible, at the option of the holder, into cash or shares of the Company's
Common Stock, as determined by the Company. The conversion of OP Units into
shares of Common Stock would have no effect on earnings per share since the
allocation of earnings to an OP Unit is equal to the allocation of earnings to a
share of Common Stock. 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, as defined under the
Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the
Company's taxable income ("REIT income") is not subject to 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 (as determined under the
Code) to its stockholders at least 95% of its REIT income prior to the
"dividends paid deduction." The Company also is required to meet certain asset,
income and stock ownership tests.
Rental Properties and Depreciation - Rental properties are recorded at
cost less accumulated depreciation. Depreciation is computed using the straight
line method over an estimated useful life of 25 years for land improvements and
buildings and five years for furniture and other equipment. Significant
renovations and improvements, which improve and/or extend the useful life of the
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asset are capitalized and depreciated over the remaining estimated life.
Maintenance, repairs and minor improvements are expensed as incurred.
When conditions exist which indicate that the carrying amount of a
property may be impaired, the Company will evaluate the recoverability of its
net investment in the property by assessing current and future levels of income
and cash flows, as well as other factors such as business trends and prospects,
and market and economic conditions. As of June 30, 1997, there has been no
impairment of the Company's investment in rental properties.
Revenue Recognition - The Company derives its income from the rental of
home sites. The leases entered into by residents for the rental of the site are
generally for terms not longer than one year and the rental revenues associated
with the leases are recognized when earned and due from residents. Property
management income for services provided to communities not owned by the Company
are also recognized when earned.
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 $63,000 during the six months ended June 30, 1997.
Non-cash investing and financing activities for the six months ended
June 30, 1997 and 1996 were as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Dividends declared but not yet received from Commercial Assets $ -- $ 469
Unrealized holding gains on debt securities $ 5,475 $ 135
Distributions of Common Stock $ 101 $ 87
Distributions of Common Stock as consideration for the elimination of DERs $ -- $ 825
Consideration for the acquisition of rental properties:
Issuance of Common Stock $ 1,250 $ --
Issuance of minority interests in the Operating Partnership $ 316 $ --
Assumption of mortgage notes payable $ 4,962 $ --
</TABLE>
D. Acquisitions of Rental Properties
On May 14, 1997, the Company acquired seven manufactured housing
communities, a 50% joint venture interest in another manufactured housing
community and certain manufactured housing community management contracts for an
aggregate purchase price of $29,399,000. The consideration was $22,871,000 of
cash, the assumption of $4,962,000 of existing debt, the issuance of 363,372
shares of the Company's Common Stock and 91,760 limited partnership units issued
by the Operating Partnership.
The eight communities are located in the Tampa, Florida area and
consisted of 1,540 home sites with the opportunity to develop and lease an
additional 364 home sites on an earn-out basis. Under the earn-out agreement,
the Company will advance all development costs to bring the home sites on line
and earn a 10% per annum return on such advances. The Company will then acquire
the developed home sites as they are absorbed at a cost of 50% of the value of
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the home sites, as prescribed in the earn-out agreements. The manufactured
housing community management contracts acquired cover the eight communities
acquired plus an additional four communities with 477 home sites located in the
same market area.
The Company also agreed to joint venture with the seller on
manufactured housing communities and manufactured housing community management
operations identified by the seller for acquisition. The Company will receive a
10% preferred return on any advances made for such acquisitions.
The acquisition of the manufactured housing communities and management
contracts was accounted for as a purchase as of May 14, 1997, and the results of
operations of the manufactured housing communities and management contracts have
been included in the Company's results of operations since that date. The
following unaudited pro-forma information has been prepared assuming the
re-securitization of the non-agency MBS bonds and the acquisition of the
manufactured housing communities and management contracts had been completed at
the beginning of the periods presented. The pro-forma information is presented
for information purposes only and is not necessarily indicative of what would
have occurred if the re-securitization and acquisition had been completed as of
those dates. In addition, the pro-forma information is not intended to be a
projection of future results. The unaudited, pro-forma results of operations for
the six months ended June 30, 1997 and 1996 is as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revenues $ 5,068 $ 4,540
========== ==========
Net income before gain on resecuritization of non-agency MBS bonds $ 2,615 $ 1,297
Gain on resecuritization of non-agency MBS bonds, net of management fees 5,287 5,287
---------- ----------
Net income $ 7,902 $ 6,584
========== ==========
Net income per share $ 0.32 $ .27
========== ==========
</TABLE>
E. Investment in Rental Properties
The net carrying value of the Company's investment in rental properties
at June 30, 1997, is as follows (in thousands):
Land $ 3,520
Land improvements and buildings 22,702
Furniture and other equipment 350
----------
26,572
Less accumulated depreciation (130)
Investment in rental properties, net $ 26,442
==========
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<PAGE>
Land improvements and buildings consist primarily of infrastructure,
roads, landscaping and clubhouses, maintenance buildings and common amenities.
In connection with the acquisition of two manufactured housing communities, the
Company assumed the obligations under the existing ground leases. Accordingly,
no portion of the purchase price of these communities was allocated to land.
F. Non-agency MBS Bonds
In March 1997, the Company resecuritized its portfolio of non-agency
MBS bonds by contributing them to a trust in which it retained the equity
interest. In a private placement, the trust sold $199,894,000 principal amount
of debt securities representing senior interests in the trust's assets. The debt
securities are without recourse to the Company. The Company's equity interest
represents the first-loss class of the portfolio, providing credit support for
the senior debt securities. The future cash flow from the equity interest is not
determinable, and accordingly, no carrying value has been assigned to the equity
interest in the financial statements. During the three months ended June 30,
1997, the Company had revenues of $450,000 from the equity interest.
The outstanding principal balance of the 214 non-agency MBS bonds owned
by the Company at December 31, 1996, was $224,579,000, less total unamortized
discounts and allowance for credit losses of $162,500,000 for a net amortized
cost of $62,079,000. The portfolio was classified as available-for-sale and
included $6,000,000 of unrealized holding gains at December 31, 1996. The
Company realized a gain of $7,359,000 from the resecuritization of non-agency
MBS bonds in a structured transaction during the six months ended June 30, 1997.
G. Investment in Commercial Assets
On June 30, 1997 and December 31, 1996, the Company owned 2,761,126
shares (approximately 27%) of the common stock of Commercial Assets. Commercial
Assets is a REIT which manages ownership interests in commercial mortgage loan
securitizations of multi-family real estate. The mortgages which comprise the
collateral for Commercial Assets' CMBS bonds are secured by apartment
communities in 36 states. Approximately 25%, 13% 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,
1997 1996
---------- ------------
(Unaudited)
<S> <C> <C>
CMBS bonds, net of $1,431 and $3,389 of unrealized holding losses $ 68,460 $ 61,460
Cash and other assets 6,080 10,946
---------- ----------
Total Assets 74,540 72,406
Total Liabilities 464 487
---------- ----------
Stockholders' Equity $ 74,076 $ 71,919
========== ==========
</TABLE>
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<TABLE>
<CAPTION>
Statements of Income Three Months Ended Six Months Ended
(Unaudited) June 30, June 30,
---------------------------- ----------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CMBS bonds $ 2,193 $ 3,462 $ 4,237 $ 5,773
Other revenues 49 64 160 71
---------- ---------- ---------- ----------
Total revenues 2,242 3,526 4,397 5,844
---------- ---------- ---------- ----------
Management fees 311 452 608 830
General and administrative 121 114 244 444
Elimination of dividend equivalent rights -- 966 -- 966
Interest -- 2 -- 5
---------- ---------- ---------- ----------
Total expenses 432 1,534 852 2,245
---------- ---------- ---------- ----------
Net Income $ 1,810 $ 1,992 $ 3,545 $ 3,599
========== ========== ========== ==========
</TABLE>
According to Commercial Assets, at June 30, 1997 and December 31, 1996,
it had $1,431,000 and $3,389,000, respectively, of unrealized holding losses on
its CMBS bonds. The Company's share of these unrealized holding losses on CMBS
bonds of $382,000 and $907,000, respectively, is recorded as a reduction in the
carrying value of its investment in Commercial Assets and as a component of
stockholders' equity.
H. Mortgage Notes Payable
Mortgage notes payable at June 30, 1997, consist of $4,940,000 of notes
outstanding which bear interest at 8.25% and mature in October 2000. The notes
are secured by two manufactured housing communities which have a net carrying
value of $12,814,000 at June 30, 1997. The scheduled payments of principal on
the mortgage notes payable subsequent to June 30, 1997, are as follows: 1997 -
$136,000, 1998 - $286,000, 1999 - $311,000, and 2000 - $4,207,000.
The mortgage notes payable require escrow payments for the payment of
property taxes. At June 30, 1997, $125,000 was held in such escrow accounts.
I. Short-Term Borrowings
On July 24, 1996, the Company secured a $10,000,000 revolving credit
and term loan agreement with a bank. The loan was collateralized by certain of
the Company's non-agency MBS bonds with a net carrying value of $19,461,000 at
December 31, 1996. At December 31, 1996, $3,000,000 was borrowed under this
credit facility at an average effective interest rate of 8.25%. The loan was
repaid and agreement canceled on March 18, 1997, as a result of the
resecuritization of the non-agency MBS bonds. One of the Company's Independent
Directors is a member of the Board of Directors of the parent holding company of
the bank.
J. Other Matters
The Company's day-to-day operations are performed by its Manager
pursuant to a management agreement (the "Management Agreement") which is
extended annually and currently is in effect through December 31, 1997. The
Management Agreement was approved by a majority of the Independent Directors.
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Pursuant to the Management Agreement, the Manager advises the Company on its
business and oversees its day-to-day operations subject to the supervision of
the Company's Board of Directors. The Manager also is obligated to present to
the Company asset acquisition opportunities consistent with the policies and
objectives of the Company and to furnish the Board of Directors of the Company
with information concerning the acquisition, holding and disposition of assets.
The terms appearing in quotes below which are not defined herein are defined in
the Management Agreement.
The Manager receives various fees for the advisory and other services
performed in connection with the Management Agreement. The Manager provides all
personnel and certain overhead items (at its expense) necessary to conduct the
regular business of the Company.
Pursuant to the Management Agreement, through March 31, 1997, the
Manager received a "Base Fee," an "Incentive Fee" and an "Administrative Fee,"
all of which were payable quarterly per the terms of the Management Agreement.
The Base Fee was an annual fee equal to 3/8 of 1% of the "average invested
assets" of the Company and its subsidiaries for such year. The Incentive Fee was
equal to 20% of the amount of the Company's net book income, calculated in
accordance with GAAP, which was in excess of the return on the Company's
"average net worth" equal to the "Ten-Year U.S. Treasury Rate" plus 1%. The
Manager performed certain bond administration and other related services for the
Company pursuant to the Management Agreement and received an Administrative Fee
of up to $3,500 per annum per non-agency MBS bond for such services.
In connection with the change in portfolio assets pursuant to the 1997
Plan, the Independent Directors of the Company approved an amendment to the
Management Agreement, effective April 1, 1997, that: (i) increased the Base Fee
from 3/8 of 1% to 1% per annum of "average invested assets;" (ii) provided for
an acquisition fee (the "Acquisition Fee") of 1/2 of 1% of the cost of real
estate investments; and (iii) changed the Incentive Fee to be calculated from
Cash Earned for Stockholders ("CEFS") rather than net book income. CEFS is equal
to the Company's net book income adjusted by: (i) depreciation and amortization
of rental properties and management contracts; (ii) capital replacement
reserves; and (iii) certain other non-cash expenditures. The Administrative Fee
was substantially eliminated as a result of the resecuritization of the
non-agency MBS bonds.
During the six months ended June 30, 1997 and 1996, the Company
incurred Management Fees of $526,000 and $802,000, respectively, including: (i)
Base Fees of $97,000 and $110,000, respectively; (ii) Incentive Fees of $53,000
and $348,000, respectively; (iii) Administrative Fees of $224,000 and $344,000,
respectively; and (iv) Acquisition Fees of $152,000 and $0, respectively.
Acquisition Fees are capitalized as part of the cost of the acquired rental
properties.
The Company also incurred $1,472,000 of Incentive Fees during the six
months ended June 30, 1997, from the gain on the resecuritization of the
non-agency MBS bonds and an added value fee of $600,000 to compensate the
Manager for agreeing to continue as a loss mitigation advisor on the non-agency
MBS bonds. Because the Manager agreed to continue on as the loss mitigation
advisor on the non-agency MBS bonds, the Company was able to realize more
proceeds and a higher gain from the structured transaction than if the Manager
did not continue as the loss mitigation advisor. The added value fee paid to the
Manager was approved by the Independent Directors and represents a portion of
the increased proceeds and higher gain. The Manager also receives a fee for
services as loss mitigation advisor from the resecuritization trust in which the
Company owns the equity interest. The fee is equal to 0.03% per annum of the
outstanding principal balance of the non-agency MBS bonds. During the three
months ended June 30, 1997, the Manager received $164,000 of fees as loss
mitigation advisor.
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A special committee of Independent Directors has been evaluating the
Company's acquisition of its Manager, a step which would result in the Company
becoming self-managed and fully integrated. The special committee engaged a
financial advisor to assist them in their evaluation of this acquisition.
At June 30, 1997, the Company's net operating loss ("NOL") carryover
was approximately $96,000,000 and its capital loss carryover was approximately
$35,000,000. The NOL carryover may be used to offset all or a portion of the
Company's REIT income, and as a result, to reduce the amount of income that the
Company must distribute to stockholders to maintain its status as a REIT. The
NOL carryover is scheduled to expire between 2007 and 2009 and the capital loss
carryover is scheduled to expire between 1998 and 2000.
K. Subsequent Event
On July 30, 1997, the Company invested $10,000,000 in four contiguous
adult manufactured housing communities with 760 home sites in the Phoenix,
Arizona metropolitan area. The investment consists of a $5,398,000 first
mortgage loan bearing interest at 10% per annum, due in April 2001 and a
$4,602,000 second mortgage loan convertible into a 50% ownership interest in the
properties. The second mortgage loan accrues interest at 15% per annum and pays
interest at 9% per annum, increasing 1% each year to a maximum of 12% per annum.
The Company will receive additional interest of 3% of gross revenues, increasing
to 13% of gross revenues in the event of a refinancing of the properties, and
50% of net proceeds from a sale or refinancing. The Company also has the right
to purchase the properties at fair value in ten years, or earlier, based on
certain events. Due to the conversion features, participation in gross revenues,
and the right to acquire the properties, the mortgages, for GAAP purposes, will
be accounted for as an equity investment in real estate.
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The Company is a REIT that was incorporated under Maryland law in 1986.
Its shares of Common Stock are listed on the New York Stock Exchange under the
symbol "AIC." The Company invests in manufactured housing communities and
related assets and owns 27% of the common stock of Commercial Assets, a
publicly-traded REIT formed by the Company in August 1993.
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 is required, among other things, to distribute annually (as
determined under the Code) to its stockholders at least 95% of its REIT income
prior to the "dividends paid deduction." The Company must also meet certain
asset, income and stock ownership tests.
The Company's asset acquisition and other policies are determined by
its Board of Directors. The Company's By-laws, as amended, require that a
specified number of the Board of Directors and each committee thereof be
comprised of persons constituting Independent Directors. Pursuant to the
Company's By-laws, an Independent Director is a person "who is not affiliated,
directly or indirectly, with the person or entity responsible for directing or
performing the day-to-day business affairs of the corporation (the "advisor"),
including a person or entity to which the advisor subcontracts substantially all
of such functions, whether by ownership of, ownership interest in, employment
by, any material business or professional relationship with, or by serving as an
officer of the advisor or an affiliated business entity of the advisor."
The Company's day-to-day operations are performed by the Manager,
pursuant to the Management Agreement which is extended annually subject to the
approval of a majority of the Independent Directors. The Manager is subject to
the supervision of the Board of Directors. As part of its duties, the Manager
presents the Company with asset acquisition opportunities consistent with the
policies and objectives of the Company and furnishes the Board of Directors with
information concerning the acquisition, holding and disposition of assets. The
Company has no employees. Certain employees of the Manager have been designated
as officers of the Company.
The Company has previously conducted its operations so as not to become
regulated as an investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"). The 1940 Act exempts entities that, directly or
through majority-owned subsidiaries, are "primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate" ("Qualifying Interests"). In order to qualify for this exemption,
the Company, among other things, must maintain at least 55% of its assets in
Qualifying Interests and may also be required to maintain an additional 25% in
Qualifying Interests or other real estate-related securities. As a result of the
resecuritization, the Company holds insufficient Qualifying Interests to claim
this exemption. The Company does not now engage, nor has it engaged or intended
to engage in the business of investing, reinvesting, owning, holding or trading
of securities. Since the closing of resecuritization, the Company has taken the
steps necessary to give itself the benefits of a temporary exemption under the
1940 Act. In carrying out the 1997 Plan, the Company intends that any new real
estate assets acquired will be Qualifying Interests. See "FORWARD LOOKING
INFORMATION" below.
Multi-Step Plan to Maximize Stockholder Value - In February 1997, the
Board of Directors adopted the 1997 Plan to restructure the Company's asset base
and redeploy its assets in order to reduce risk associated with the Company's
- 12 -
<PAGE>
non-agency MBS bond portfolio and maximize long-term, risk-adjusted returns to
shareholders. Under the first step of the 1997 Plan, the Company completed the
resecuritization of its portfolio of non-agency MBS bonds in March 1997. The
Company contributed its non-agency MBS bonds to an owner trust in which it
retained an equity interest. The owner trust then sold debt securities
representing senior interests in the trust's assets. The Company's equity
interest in the trust represents the first-loss class of the portfolio,
providing credit support for the senior debt securities. Future earnings from
the retained equity interest are not considered probable because they are
dependent upon the credit losses on the underlying mortgage collateral.
Accordingly, the Company's equity interest in the trust has no carrying value in
the financial statements.
In addition, under the 1997 Plan, the Company converted to an umbrella
partnership real estate investment trust ("UPREIT") by contributing its assets
to the Operating Partnership and retaining the general partner's interest. The
Company anticipates that the Operating Partnership will facilitate the future
acquisition of real estate.
On May 14, 1997, the Company acquired interests in eight manufactured
housing communities and a certain manufactured housing community management
contracts for an aggregate purchase price of $29,399,000. The consideration was
$22,871,000 of cash, the assumption of approximately $4,962,000 of existing
debt, 363,372 shares of Common Stock of the Company and 91,760 Operating
Partnership units. The eight communities are located in the Tampa, Florida area
and consisted of 1,540 home sites with the opportunity to develop and lease an
additional 364 home sites on an earn-out basis. The management contracts
acquired serve these eight communities plus an additional four communities with
477 home sites located in the same market area. On July 30, 1997, the Company
invested $10,000,000 of cash in four manufactured housing communities with 760
home sites in the Phoenix, Arizona metropolitan area.
The Company plans to reinvest the remaining cash proceeds from the
resecuritization in manufactured housing communities and related assets, a step
which would likely reduce its return on assets from 1996 levels, shift the
Company's strategic emphasis to the management of income producing real estate
with the potential of achieving capital appreciation, and also reduce the
investment risk borne by the Company in its portfolio. See "FORWARD LOOKING
INFORMATION" below.
The 1997 Plan also provides for consideration of the Company's
acquisition of its Manager, a step which would result in the Company becoming
self-managed and fully integrated. A special committee of Independent Directors
has been established to evaluate this acquisition and has engaged a financial
advisor to assist them in their evaluation.
- 13 -
<PAGE>
RESULTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
The table below summarizes the Company's results of operations for GAAP
purposes, or book income, its estimated REIT income and dividends during the
three and six months ended June 30, 1997 and 1996 (in thousands, except per
share data).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ --------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues
<S> <C> <C> <C> <C>
Rental Income $ 568 $ -- $ 568 $ --
Property management income 23 -- 23 --
Non-agency MBS bonds 450 2,835 2,450 5,665
Equity in earnings of Commercial Assets 484 539 948 976
Interest and other income 795 43 847 129
--------- --------- --------- ---------
Total revenues 2,320 3,417 4,836 6,770
--------- --------- --------- ---------
Expenses
Property operations and maintenance 174 -- 174 --
Real estate taxes 53 -- 53 --
Property management expenses 31 -- 31 --
Management fees 97 350 374 802
General and administrative 87 157 423 655
Elimination of DERs -- 825 -- 825
Depreciation and amortization 149 -- 149 --
Interest 55 -- 81 --
--------- --------- --------- ---------
Total expenses 646 1,332 1,285 2,282
--------- --------- --------- ---------
Net income before gain on resecuritization of
non-agency MBS bonds 1,674 2,085 3,551 4,488
Gain on resecuritization of non-agency MBS bonds -- -- 7,359 --
Management fees on resecuritization of
non-agency MBS bonds -- -- (2,072) --
--------- --------- --------- ---------
Book income $ 1,674 $ 2,085 $ 8,838 $ 4,488
========= ========= ========= ========
Book income per share $ .06 $ .08 $ .35 $ .18
========= ========= ========= ========
Estimated REIT income $ (201) $ 2,760 $ 743 $ 6,620
========= ========= ========= ========
Estimated REIT income per share $ (.01) $ .11 $ .03 $ .27
========= ========= ========= ========
Dividends $ 1,514 $ 2,226 $ 3,874 $ 4,418
========= ========= ========= ========
Dividends per share $ .060 $ .090 $ .155 $ .180
========= ========= ========= ========
Weighted-average shares outstanding 25,062 24,500 24,952 24,433
</TABLE>
- 14 -
<PAGE>
Book Income
Manufactured Housing Communities - In May 1997, the Company acquired
seven manufactured housing communities, a 50% joint venture interest in another
manufactured housing community and certain manufactured housing community
management contracts. At June 30, 1997, the eight communities consisted of 1,546
home sites with the opportunity to develop and lease an additional 361 home
sites on an earn-out basis. The management contracts acquired cover these eight
communities plus an additional four communities with 548 home sites located in
the same market area.
From May 14, 1997, the date of acquisition, to June 30, 1997, the
Company earned $568,000 of rental income and incurred $174,000 of property
operations and maintenance expenses, $53,000 of real estate taxes and $130,000
of depreciation related to the acquired communities. In addition, the Company
earned $23,000 of property management income less $31,000 of expenses and
$19,000 of amortization related to the management contracts acquired during the
same period. The Company expects an initial cash-on-cash return of approximately
9% per annum from the communities and management operations. See "FORWARD
LOOKING INFORMATION" below.
Non-agency MBS Bonds - Income from the Company's non-agency MBS bonds
decreased to $2,450,000 during the first six months of 1997 compared with
$5,665,000 for the same period in 1996 primarily due to the resecuritization of
the bonds, completed in March 1997. Revenues from the non-agency MBS bonds
during the three months ended June 30, 1997, represent income from the retained
equity interest. Credit losses on the underlying collateral will likely reduce
earnings from the retained equity interest in the future. See "FORWARD LOOKING
INFORMATION" below.
In connection with the resecuritization transaction, the Company
realized net proceeds of $69,743,000 before related management fees. A gain of
$7,359,000 was recognized during the first quarter of 1997, along with
$1,472,000 of Incentive Fees related to the gain and an added value fee of
$600,000 to compensate the Manager for agreeing to continue as a loss mitigation
advisor on the non-agency MBS bonds. Because the Manager has agreed to continue
on as the loss mitigation advisor on the non-agency MBS bonds, the Company was
able to realize more proceeds and a higher gain from the structured transaction.
The added value fee paid to the Manager was approved by the Independent
Directors and represents a portion of the increased proceeds and higher gain.
The portfolio of non-agency MBS bonds was classified as available-for-sale and
included $6,000,000 of unrealized holding gains at December 31, 1996.
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, 1997, was $484,000 and $948,000, respectively, compared with $539,000 and
$976,000, respectively, for the same periods in 1996. Commercial Assets reported
to the Company that the decrease in income is primarily because 1996 results
include revenues from the early redemption of two CMBS bonds. The decreased
revenues are partially offset by a 1996 one-time, non-cash charge resulting from
the elimination of dividend equivalent rights under Commercial Assets' stock
option plan, in addition to lower management fees and general and administrative
expenses.
At June 30, 1997 and December 31, 1996, Commercial Assets' CMBS bonds
had outstanding principal balances of $94,806,000 and $89,297,000, respectively,
and weighted-average coupons of 8.05% and 8.15%, respectively. The increase in
the outstanding principal balance and decrease weighted-average coupon of the
CMBS bonds from December 31, 1996 to June 30, 1997, was primarily the result of
Commercial Assets' March 1997 contribution of two CMBS bonds into a newly
created trust. Interests in bond classes within the same CMBS issuance which
- 15 -
<PAGE>
were owned by another party were also contributed into the trust. The trust then
issued seven classes of CMBS bonds collateralized by the CMBS bond classes
contributed into the trust. Commercial Assets received an interest in five of
the new bond classes which corresponded to its' ownership interests in the two
bonds contributed to the trust. Commercial Assets also acquired the remaining
$5,737,000 principal balance of two of the new bond classes rated "BB" and "B"
at a cost of $4,801,000, which resulted in it having 100% ownership in the five
new subordinate classes. The coupon on the new classes is 6.42% compared to the
coupon of 6.50% on the original two classes.
According to Commercial Assets, at June 30, 1997 and December 31, 1996,
it had $1,431,000 and $3,389,000, respectively, of unrealized holding losses on
its CMBS bonds. The Company's share of these unrealized holding losses, $382,000
and $907,000 as of June 30, 1997 and December 31, 1996, 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 increased
significantly during the three and six months ended June 30, 1997, compared with
the same periods in 1996 because of higher cash balances from the
resecuritization of the non-agency MBS bonds. The average interest rate on the
Company's cash investments during the three months ended June 30, 1997 was 5.5%
per annum.
Management Fees - In connection with the change in portfolio assets
pursuant to the 1997 Plan, the Independent Directors of the Company approved an
amendment to the Management Agreement, effective April 1, 1997, that: (i)
increased the Base Fee from 3/8 of 1% to 1% per annum of "average invested
assets;" (ii) provided for an acquisition fee (the "Acquisition Fee") of 1/2 of
1% of the cost of real estate investments; and (iii) changed the Incentive Fee
to be calculated from Cash Earned for Stockholders ("CEFS") rather than net book
income. CEFS is equal to the Company's net book income adjusted by: (i)
depreciation and amortization of rental properties and management contracts;
(ii) capital replacement reserves; and (iii) certain other non-cash
expenditures. The Administrative Fee was substantially eliminated as a result of
the resecuritization of the non-agency MBS bonds.
Included in Management Fee expense is Incentive Fees incurred by the
Company along with Base Fees and Administrative Fees applicable to the
non-agency MBS bonds prior to the resecuritization. Management Fees decreased to
$97,000 and $374,000, respectively, during the three and six months ended June
30, 1997 compared with $350,000 and $802,000, respectively, for the same periods
in 1996 primarily due to the resecuritization of the non-agency MBS bonds in
March 1997 which eliminated Administrative Fees and resulted in lower Base Fees
and lower income for purposes of calculating Incentive Fees. In addition, an
increase in the average Ten-Year U.S. Treasury Rate had the effect of raising
the threshold above which Incentive Fees are paid.
The Company also incurred $152,000 of Acquisition Fees during the three
months ended June 30, 1997, relating to the acquisition of manufactured housing
communities and management contracts. These Acquisition Fees are capitalized and
will be amortized over the estimated life of the related assets. No Acquisition
Fees were incurred in 1996.
The Company also incurred $1,472,000 of Incentive Fees during the six
months ended June 30, 1997, from the gain on the resecuritization of the
non-agency MBS bonds and an added value fee of $600,000 to compensate the
Manager for agreeing to continue as a loss mitigation advisor on the non-agency
MBS bonds. Because the Manager agreed to continue on as the loss mitigation
advisor on the non-agency MBS bonds, the Company was able to realize more
proceeds and a higher gain from the structured transaction than if the Manager
- 16 -
<PAGE>
did not continue as the loss mitigation advisor. The added value fee paid to the
Manager was approved by the Independent Directors and represents a portion of
the increased proceeds and higher gain. The Manager also receives a fee for
services as loss mitigation advisor from the resecuritization trust in which the
Company owns the equity interest. The fee is equal to 0.03% per annum of the
outstanding principal balance of the non-agency MBS bonds. During the three
months ended June 30, 1997, the Manager received $164,000 of fees as loss
mitigation advisor.
The 1997 Plan provides for consideration of the Company's acquisition
of the Manager, a step which would result in the Company becoming self-managed
and fully integrated. A special committee of the Board of Directors has been
established to evaluate this transaction. If the Company acquires the Manager,
management fees will be discontinued, and the Company will assume the expenses
of the Manager. In addition, the Company will be the manager of Commercial
Assets. The impact of the potential acquisition on the Company's earnings and
cashflow is, in part, dependent upon the consideration paid for the Manager and
currently cannot be estimated. See "FORWARD LOOKING INFORMATION" below.
General and Administrative Expenses - General and administrative
expenses decreased during the three and six months ended June 30, 1997, compared
with the same periods in 1996 due primarily to the elimination of Dividend
Equivalent Rights ("DER") expense in the second quarter of 1996, reductions in
accounting 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 Company's Stock Option Plan which eliminated the future
accrual of DERs on outstanding stock options. At their annual meeting in May
1996, the Company's stockholders 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.
Interest Expense - Interest expense during the three months ended June
30, 1997, was on the mortgage notes payable assumed with the acquisition of two
manufactured housing communities. In addition, the six months ended June 30,
1997 includes interest on the $3,000,000 of short-term borrowings outstanding at
December 31, 1996, which was repaid during the first quarter of 1997.
REIT Income
The decrease in estimated REIT income during 1997 as compared to 1996
was primarily due to the resecuritization of the non-agency MBS bonds. For REIT
income purposes, the resecuritization of the non-agency MBS bonds was treated as
a financing. The Company recognizes REIT income from the non-agency MBS bonds
contributed to the owner trust and incur interest expense on the senior bond
classes issued by the trust and other expenses of the trust. The net REIT loss
generated by the non-agency MBS bonds and other residuals during the three and
six months ended June 30, 1997, was $1,456,000 and $664,000, respectively,
compared to REIT income of $3,721,000 and $7,495,000, respectively, during the
same periods in 1996. The REIT losses generated by the non-agency MBS bonds
offset REIT income from the Company's investments in Commercial Assets and
manufactured housing communities and related assets.
- 17 -
<PAGE>
Reconciliation of REIT Income and Book Income
Substantially all of the difference between REIT income and book is due
to: (i) the method of accounting for the retained equity interest from the
resecuritization of the non-agency MBS bonds; (ii) differences in methods and
estimated lives for the calculation of depreciation on rental properties and
amortization of goodwill on management contracts; (iii) gains on the sales of
assets recorded for book income purposes that were treated as financings for
REIT income purposes or that resulted in either capital losses or capital gains
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.
NOL and Capital Loss Carryovers
At June 30, 1997, the Company's NOL carryover was approximately
$96,000,000 and its capital loss carryover was approximately $35,000,000. The
NOL carryover may be used to offset all or a portion of the Company's REIT
income, and as a result, to reduce the amount of income that the Company must
distribute to stockholders to maintain its status as a REIT. The NOL carryover
is scheduled to expire between 2007 and 2009 and the capital loss carryover is
scheduled to expire between 1998 and 2000.
Dividend Distributions
On May 21, 1997, the Company declared second quarter dividends of
$1,514,000 ($.06 per share), compared with $2,226,000 ($.09 per share), for the
same period in 1996. The 1997 second quarter dividend was paid on June 30, 1997,
to stockholders of record on June 16, 1997.
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 stockholders, for the acquisition of assets and for
the repayment of borrowings.
The table below summarizes the Company's operating cash flows and uses
of those cash flows for the six months ended June 30, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
Cash Generated by (Used in) Operations:
Non-agency MBS bonds:
<S> <C> <C>
Interest $ 2,919 $ 6,959
Principal and indemnifications 547 1,601
Manufactured Housing Communities 333 --
Dividends from Commercial Assets 939 469
Total Expenses, Net of Interest Income and Other (2,193) (1,203)
--------- ---------
Cash Generated by Operations $ 2,545 $ 7,826
========= =========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Net proceeds from the resecuritization of non-agency MBS bonds $ 69,743 $ --
Issuance of Common Stock $ 11 $ 159
Dividends and minority interest distributions paid $ 3,880 $ 4,418
Acquisition of non-agency MBS bonds $ -- $ 9,844
Acquisition of manufactured housing communities and related assets $ 22,871 $ --
(Repayment) borrowings of short-term debt and mortgage notes $ (3,022) $ 1,400
</TABLE>
In March 1997, the Company completed the resecuritization of its
non-agency MBS bonds which provided the Company with approximately $67,671,000
of cash after payment of transaction costs and $2,072,000 of related management
fees.
In May 1997, the Company acquired interests in eight manufactured
housing communities and certain manufactured housing community management
contracts for an aggregate purchase price of approximately $29,399,000. The
consideration was approximately $22,871,000 of cash, the assumption of
approximately $4,962,000 of existing debt, 363,372 shares of Common Stock of the
Company and 91,760 OP Units issued by the Operating Partnership. In addition, on
July 30, 1997, the Company invested $10,000,000 of cash in four manufactured
housing communities with 760 home sites in the Phoenix, Arizona metropolitan
area.
The Company plans to reinvest the remaining cash from the
resecuritization in manufactured housing communities. Investments in real estate
will likely reduce the Company's return on assets from 1996 levels. However,
such investments may result in increased opportunities for capital appreciation
and reduce portfolio risk. The Company's goal is to invest in manufactured
housing communities and related assets with: (i) future growth potential; and
(ii) a stable, unlevered return of approximately 9%. There is no assurance that
the Company will achieve this goal. Until the remaining proceeds from the
structured transaction can be reinvested into real estate, the Company will
invest in short-term investments which generate lower returns. See "FORWARD
LOOKING INFORMATION" below.
The Company declared $3,874,000 ($.155 per share) in dividends during
the first six months of 1997. The Board of Directors will continue its policy of
reviewing its dividends on a quarter-to-quarter basis and will adjust
distribution levels as it considers necessary. The Board decreased the second
quarter dividend to $0.06 per share from $0.095 per share in the first quarter.
The Company expects lower earnings and cashflow for the remainder of 1997
compared to 1996 and the first quarter of 1997 as the Company invests in
low-yielding short-term investments during this period of portfolio transition.
See "FORWARD LOOKING INFORMATION" below.
FORWARD LOOKING INFORMATION
Some of the statements in this Form 10-Q, as well as statements made by
the Company in periodic press releases, and oral statements made by the
Company's officials to analysts and stockholders 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 statements include projections of
the Company's cash flow and dividends. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. Such factors include the following:
- 19 -
<PAGE>
general economic and business conditions; interest rate changes; risks inherent
in owning real estate or debt secured by real estate; competition; the
availability of real estate assets at prices which meet the Company's investment
criteria; the Company's ability to maintain or reduce expense levels and the
Company's ability to complete the 1997 Plan.
- 20 -
<PAGE>
PART II
OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
10.1(d)* Amendment to the Management Agreement dated as of April 1,
1997 between the Registrant and Financial Asset Management,
LLC.
10.3* Stock Option and Incentive Compensation Plan of the Registrant
as amended and restated May 20, 1997.
27 Financial Data Schedule.
- ------------------------
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed by the
Registrant during the period covered by this Quarterly Report
on Form 10-Q:
Form 8-K dated March 27, 1997, reporting the resecuritization
of the registrant's non-agency MBS bonds.
Form 8-K dated May 14, 1997, reporting the acquisition of
manufactured housing community assets which included: (i)
Combined Statements of Excess of Revenue Over Specific
Operating Expenses of the Brandywine Manufactured Home
Communities for the year Ended December 31, 1996 (audited) and
the Period from January 1, 1997 to March 31, 1997 (unaudited);
and (ii) Statements of Excess Revenues Over Specific Operating
Expenses of the Royal Palm Village Manufactured Home Community
for the Year Ended December 31, 1996 (audited) and the Period
from January 1, 1997 to March 31, 1997 (unaudited).
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, 1997 By /s/Kevin J. Nystrom
-------------------
Kevin J. Nystrom
Chief Financial Officer
- 21 -
AMENDMENT TO MANAGEMENT AGREEMENT
AMENDMENT as of April 1, 1997, to the Management Agreement dated as of
January 1, 1995, as amended, (the "Management Agreement"), between ASSET
INVESTORS CORPORATION, a Maryland corporation (the "Company"), and FINANCIAL
ASSET MANAGEMENT LLC, a Colorado corporation (the "Manager"), assigned from
Financial Asset Management Corporation on April 1, 1996.
RECITALS
A. The Company and the Manager entered into the Management
Agreement pursuant to which the Manager performs the duties and responsibilities
set forth in the Management Agreement, subject to the supervision of the
Company's Board of Directors; and
B. The Company has received a substantial amount of cash
through a restructuring of its interests in Mortgage Assets and plans in the
future to invest its available funds in equity investments in real estate.
NOW, THEREFORE, in consideration for the mutual agreements herein set
forth, the parties hereto agree as follows:
1. A new definition of "Cash Earned for Stockholders for incentive fee
purposes" shall be added to the Management Agreement as follows:
(ss)Except as otherwise provided in Section 9(b)(2), "Incentive
Compensation" with respect to any fiscal year means an amount
equal to the sum of (x) .2 times the sum of (A) the Company's
Cash Earned for Incentive Fee minus (B) Adjusted Equity minus
(y) Incentive Compensation paid in respect of prior fiscal
quarters in such year.
For purposes of this definition:
(1) "Adjusted Equity" means Stockholders Equity at
the end of a fiscal quarter with respect to which Incentive
Compensation is being determined less the Company's
investment in CAI, multiplied by the Annualized Adjusted
Treasury Rate plus one percentage point;
(2) the "Annualized Adjusted Treasury Rate" means
(x) the Ten Year U.S. Treasury Rate plus one percentage point
multiplied by (y) a fraction, the numerator of which is the
number of quarters in the fiscal year elapsed at the end of
the fiscal quarter for which Incentive Compensation is being
determined and the denominator of which is four.
(3) the "Company's Cash Earned for Incentive Fee
purposes" means GAAP Net Income as reported by the Company
for each of its first three fiscal quarters as reported in
its quarterly report of Form 10-Q as filed with the
<PAGE>
Securities and Exchange Commission, and for its fiscal year
as reported in its annual report on Form 10-K as filed with
the Securities and Exchange Commission, reduced by (A) the
Company's share of CAI's net income for the quarter then
ended, or the year then ended as the case may be, and (B) a
provision for capital replacements for manufactured housing
communities, and increased by (C) real estate depreciation
and goodwill amortization associated with purchased property
management companies, and (D) the Incentive Compensation paid
in respect of all prior fiscal quarters in the fiscal year
for which the Company's Cash Earned for Incentive Fee
purposes is being computed.
2. Section 9(a) of the Management Agreement is amended and restated
hereby as follows:
(a) Base Fee. (i) Subject to Sections 9(c) and 9(e) hereof,
the Company shall pay to the Manager, for services
rendered under this Agreement, an annual base management
fee, quarterly installments as provided in paragraph (ii)
below, in the amount equal to (x) 1% per annum of the
Average Invested Assets, 3/8 of 1%, with respect to
Mortgage Assets held by the Company during each fiscal
year.
(ii) An amount equal to 1/4 of 1% of the Average
Invested Assets, 3/32 of 1%, with respect to Mortgage
Assets for each fiscal quarter (pro rata based on the
number of days elapsed during any partial fiscal quarter),
shall be paid to the Manager, as provided by, and subject
to adjustment under, Section 9(e) of this Agreement.
3. Section 9(b) of the Management Agreement is amended and restated
hereby as follows:
(b) Incentive Compensation.
(1) Incentive Compensation may be earned by the Manager for
each fiscal year and shall be paid to the Manager or
refunded by the Manager to the Company (as provided in (3)
below) quarterly during each fiscal year on a cumulative
basis, as provided in Section 9(e).
(2) For purposes of the fiscal quarter ended March 31, 1997,
Incentive Compensation shall mean .2 times the sum of (x)
the Company's GAAP Net Income minus (y) Adjusted Equity.
(3) During any fiscal year, the Manager will be required to
refund to the Company Incentive Compensation previously
paid in that fiscal year if, as to any fiscal quarter for
which Incentive Compensation is being determined, the
amount of Incentive Compensation earned is less than the
Incentive Compensation for the comparable period in the
prior fiscal year. The amount refunded by the Manager to
<PAGE>
the Company shall be the lesser of (x) the difference
between the Incentive Compensation paid for the comparable
period in the prior fiscal year and the determination is
being made and (y) the Incentive Compensation paid with
respect to fiscal quarter immediately preceding the
quarter for which the determination is being made.
Quarterly payment shall be paid to the Manager, or
refunded to the Company, as provided by, and subject to
adjustment under, Section 9(e) of this Agreement.
4. A new section, designated Section 9d(i) shall be added to the
Management Agreement as follows:
d(i) Acquisition Fee. Unless otherwise agreed, in addition to
any other fee payable to the Manager under this
Agreement, the Company shall pay the Manager, at the end
of each fiscal quarter of the Company, an Acquisition
Fee equal to 0.5% of the cost of acquisition of the real
estate assets acquired during such fiscal quarter of the
Company.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
[CORPORATE SEAL] ASSET INVESTORS CORPORATION
ATTEST: By: /s/Kevin J. Nystrom_________________________
Name: Kevin J. Nystrom
/s/John C. Singer Title: Senior Vice President and Chief
John C. Singer, Secretary Financial Officer
FINANCIAL ASSET MANAGEMENT LLC
By: Terry Considine_____________________________
Name: Terry Considine
Title: Member
ASSET INVESTORS CORPORATION
STOCK OPTION AND INCENTIVE COMPENSATION PLAN
AS AMENDED AND RESTATED MAY 20, 1997
This Stock Option and Incentive Compensation Plan (the "Plan"), was
originally titled the 1986 Stock Option Plan, restated as of November 15, 1990
and amended May 1, 1992, July 1, 1992, August 19, 1993, March 11, 1996 and
September 25, 1996. The Plan was amended and restated by the Asset Investors
Corporation Board of Directors on May 20, 1997 and retitled the Asset Investors
Corporation Stock Option and Incentive Compensation Plan. Nothing contained in
this amended and restated plan is intended to alter in any respect any awards
granted under the Plan as formerly in effect, including without limitation
incentive stock options, dividend incentive rights and stock grants granted in
consideration of the cancellation of dividend incentive rights.
1. Purpose.
The Plan is intended to encourage stock ownership by
directors, officers and employees of Asset Investors Corporation (the
"Corporation"), its divisions and Subsidiary Corporations (as defined below), so
that they may acquire or increase their proprietary interest in the Corporation,
and to encourage such directors, officers and employees to remain in the employ
of the Corporation and to put forth maximum efforts for the success of the
business. It is further intended that options granted by the Committee (as
defined below) pursuant to this Plan ("Options") shall constitute "nonqualified
stock options" and not "incentive stock options" within in the meaning of the
Internal Revenue Code of 1986, as amended, and the regulations issued thereunder
(the "Code"). Options may be accompanied by either stock appreciation rights
("Rights") or limited stock appreciation rights ("Limited Rights"), or both, as
hereinafter set forth. The Plan also authorizes the grant of shares in lieu of
Meeting Fees (as defined below).
2. Definitions.
As used in this Plan, the following words and phrases shall
have the meanings indicated:
(a) "Disability" shall mean a Recipient's inability to engage
in any substantial gainful activity by reason of any medically
determinable physical or mental impairment that can be expected to
result in death or that has lasted or can be expected to last for a
continuous period of not less than 12 months.
(b) "Fair Market Value" per share as of a particular date
shall mean the closing sales price per share of Common Stock on the New
York Stock Exchange on that date or, if no price is reported, on the
last preceding date on which there was a sale of such Common Stock on
such exchange.
(c) "Subsidiary Corporation" shall mean any corporation (other
<PAGE>
than the employer corporation) in an unbroken chain of corporations
beginning with the employer corporation if, at the time of granting an
Option, each of the corporations other than the last corporation in the
unbroken chain owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations
in such chain.
3. Administration.
The Plan shall be administered by the Compensation Committee
(the "Committee"), consisting of not less than three members of the Board of
Directors of the Corporation (the "Board"). If no Committee is appointed by the
Board, the Board shall serve as the Committee. Members of the Committee will be
eligible to participate in the Plan.
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 the 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 (i) to
grant Options; (ii) to determine which Options (if any) shall be accompanied by
Rights or Limited Rights; (iii) to determine the purchase price of the shares of
Common Stock covered by each option (the "Option Price"); (iv) to determine the
persons to whom, and the time or times at which, Options shall be granted; (v)
to determine the number of shares to be covered by each option; (vi) to
interpret the Plan; to prescribe, amend and rescind rules and regulations
relating to the Plan; (vii) 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 (the "Option Agreements"); and (viii) to make all other
determinations deemed necessary or advisable for the administration of the Plan.
The Committee may delegate to one or more of its members or to one or more
agents such administrative duties as it may deem advisable, and the Committee or
any person to whom it has delegated duties as aforesaid may employ one or more
persons to render advice with respect to any responsibility the Committee or
such person may have under the Plan.
The Board shall fill all vacancies, however caused, in the
Committee. The Board may from time to time appoint additional members to the
Committee, and may at any time remove one or more Committee members and
substitute others. One member of the Committee shall be selected by the Board as
chairman. The Committee shall hold its meetings at such times and places as it
shall deem advisable. All determinations of the Committee shall be made by a
majority of its members either present in person or participating by conference
telephone at a meeting or by written consent. The Committee may appoint a
secretary and make such rules and regulations for the conduct of its business as
it shall deem advisable, and shall keep minutes of its meetings.
No member of the Board or Committee shall be liable for any
action taken or determination made in good faith with respect to the Plan or any
Option, Right, Limited Right or shares in lieu of Meeting Fees granted
hereunder.
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<PAGE>
4. Eligibility.
Subject to certain limitations hereinafter set forth, Options
may be granted 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 person
to whom an Option has been granted hereunder is sometimes referred to herein as
an "Recipient."
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 to any person who, upon the exercise
of the Option, would own more than 9.8% of the Common Stock outstanding of the
Corporation. Prior to the grant of an Option by the Corporation, any director,
officer or employee who is to receive the Option must provide an affidavit to
the Corporation that the grant of the Option 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.
5. Stock Reserved.
The stock subject to Options, Rights, Limited Rights and
shares in lieu of Meeting Fees 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, Limited Rights and shares in
lieu of Meeting Fees may be granted 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'). The maximum number of shares of Common
Stock which may be subject to Options, Rights, Limited Rights and shares in lieu
of Meeting Fees 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.
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
<PAGE>
6. Options.
Options granted pursuant to this Plan constitute nonqualified
stock options and not incentive stock options within the meaning of the Code,
and shall be subject only to the general terms and conditions specified in this
Section 6. Each Option granted pursuant to the Plan shall be evidenced by a
written Option Agreement between the Corporation and the Recipient, which
agreement shall comply with and be subject to the following terms and
conditions:
(a) Number of Shares. Each Option Agreement shall state the
number of shares of Common Stock to which the Option relates.
(b) Option Price. Each Option Agreement shall state the Option
Price, which shall be not less than 100% of the Fair Market Value of the shares
on the date of grant of the Option. The Option Price shall be subject to
adjustment as provided in Section 6(h). The date on which the Committee adopts a
resolution expressly granting an Option shall be considered the day on which
such Option is granted.
(c) Medium and Time of Payment. The Option Price shall be paid
in full, at the time of exercise, in cash or in shares of Common Stock having a
Fair Market Value equal to such Option Price or in a combination of cash and
such shares, and may be effected in whole or in part (i) with monies received
from the Corporation at the time of exercise as a compensatory cash payment, or
(ii) with monies borrowed from the Corporation pursuant to repayment terms and
conditions as shall be determined from time to time by the Committee, in its
discretion, separately with respect to each exercise of Options and each
Recipient; provided, however, that each such method and time for payment and
each such borrowing and terms and conditions of repayment shall be permitted by
and be in compliance with applicable law.
(d) Term and Exercise of Options. Options shall be exercisable
over the exercise period as and at the times the Committee may determine, as
reflected in the Option Agreement; provided, however, that the Committee shall
have the authority to accelerate the exercisability of any outstanding Option at
such time and under such circumstances as it, in its sole discretion, deems
appropriate. The exercise period for any Option shall in all cases be no more
than (10) years and one day from the date of grant of such Option. The exercise
period shall be subject to earlier termination as provided in Sections 6(e) and
6(f). An Option may be exercised, as to any or all full shares of Common Stock
as to which the Option has become exercisable, by giving written notice of such
exercise to the Committee; provided, however, that an Option may not be
exercised at any one time as to fewer than 100 shares (or such number of shares
as to which the Option is then exercisable if such number of shares is less than
100).
(e) Termination. Except as provided in this Section 6(e) and
in Sections 6(f) and 6(g) below, an Option may not be exercised unless the
Recipient is then a director, officer or employee of the Corporation or a
division or Subsidiary Corporation thereof, and unless the Recipient has
4
<PAGE>
remained continuously as a director, officer or employee of the Corporation
since the date of grant of the Option. In the event that the Recipient ceases to
be a director, officer or employee of the Corporation (other than by reason of
death, Disability or retirement), all Options granted to such Recipient that are
exercisable at the time of such cessation may, unless earlier terminated in
accordance with their terms, be exercised within three months after such
cessation (or such longer period of time authorized by the Committee); provided,
however, that if the employment of a Recipient shall terminate for cause, or if
a director or officer shall be removed for cause, all Options theretofore
granted to such Recipient shall, to the extent not theretofore exercised,
terminate immediately except as otherwise authorized by the Committee. Nothing
in the Plan or in any Option granted pursuant hereto shall confer upon an
individual any right to continue in the employ of the Corporation or any of its
divisions or Subsidiary Corporations or interfere in any way with the right of
the Corporation or its stockholders or any such division or Subsidiary
Corporation to terminate such employment.
(f) Death, Disability or Retirement of Recipient. If a
Recipient shall die while a director or officer of, or employed by, the
Corporation or a Subsidiary Corporation thereof, or within three months after
the termination of such Recipient's employment, director or officer status,
other than termination for cause, or if the Recipient's employment, director or
officer status shall terminate by reason of Disability or retirement, all
Options theretofore granted to such Recipient (whether or not otherwise
exercisable) may, unless earlier terminated in accordance with their terms, be
exercised by the Recipient or by the Recipient's estate or by a person who
acquired the right to exercise such option by bequest or inheritance or
otherwise by reason of the death or Disability of the Recipient, at any time
within five years after the date of death, Disability or retirement of the
Recipient or such longer period of time as authorized by the Committee..
(g) Limited Transferability of Options. Options granted under
the Plan shall not be transferable other than (i) by will or by the laws of
descent and distribution, (ii) pursuant to a qualified domestic relations order
as defined by the Code or Title I of the Employee Retirement Income Security
Act, or the rules thereunder, (iii) with the consent of the Committee and
without payment of consideration, to immediate family members of the Recipient
or to trusts of partnerships for such family members, or (iv) with the consent
of the Committee and solely to the extent such Options are then exercisable (or
will become exercisable solely with the lapse of time), to another officer,
director or employee of the Corporation. Awards may be exercised or otherwise
realized only by the Recipient or by his guardian or legal representative or
permitted transferee.
(h) Effect of Certain Changes.
(1) If there is any change in the number of shares of
Common Stock through the declaration of stock dividends or the issuance
of rights or warrants to purchase shares of Common Stock, or through
recapitalization resulting in stock splits, or combinations or
exchanges of such shares, the number of shares of Common Stock
5
<PAGE>
available for Options, Rights and Limited Rights, the number of shares
of Common Stock covered by outstanding Options, Rights and Limited
Rights, and the price per share of such Options or the applicable
market value of Rights or Limited Rights, shall be proportionately
adjusted by the Committee to reflect any increase or decrease in the
number of issued shares of Common Stock, provided, however, that any
fractional shares resulting from such adjustment shall be eliminated.
(2) In the event of the proposed dissolution or
liquidation of the Corporation, in the event of any corporate
separation or division, including, but not limited to, split-up,
split-off or spin-off, or in the event of a merger or consolidation of
the Corporation with another corporation, the Committee may provide
that the holder of each Option then exercisable shall have the right to
exercise such Option (at its then Option Price) solely for the kind and
amount of shares of stock and other securities, property, cash or any
combination thereof receivable upon such dissolution, liquidation, or
corporate separation or division, or merger or consolidation by a
holder of the number of shares of Common Stock for which such Option
might have been exercised immediately prior to such dissolution,
liquidation, or corporate separation or division, or merger or
consolidation, or the Committee may provide, in the alternative, that
each Option granted under the Plan shall terminate as of a date to be
fixed by the Committee, provided, however, that not less than 30 days'
written notice of the date so fixed shall be given to each Recipient,
who shall have the right, during the period of 30 days preceding such
termination, to exercise the Options as to all or any part of the
shares of Common Stock covered thereby, including shares as to which
such Options would not otherwise be exercisable.
(3) If while unexercised Options remain outstanding
under the Plan --
(i) any corporation, person or other entity (other
than the Corporation) makes a tender or exchange
offer for shares of the Corporation's Common Stock
pursuant to which purchases are made ("Offer"), or
(ii) the stockholders of the Corporation approve a
definitive agreement to merge or consolidate the
Corporation with or into another corporation or to
sell or otherwise dispose of all or substantially all
of its assets, or adopt a plan of liquidation, or
(iii) any person, within the meaning of Section
3(a)(g) or Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended, acquires more than
9.8% of the Corporation's outstanding voting
securities, or
(iv) during any period of two consecutive years,
individuals who at the beginning of such period were
members of the Board cease for any reason to
constitute at least a majority thereof (unless the
election, or the nominating for election by the
6
<PAGE>
Corporation's stockholders, of each new director was
approved by a vote of at least two-thirds of the
directors then still in office who were directors at
the beginning of such period other than approval
given in connection with an actual or threatened
proxy or election contest),
then from and after the date of the first purchase of Common Stock
pursuant to such Offer, or the date of any such stockholder approval or
adoption, or the date on which public announcement of the acquisition
of such percentage shall have been made or the date such person files a
Schedule 13D or amendment thereto reporting such acquisition (whichever
first occurs), or the date on which the change in the composition of
the Board set forth above shall have occurred, whichever is applicable
(the applicable date being referred to herein as the "Acceleration
Date"), all Options shall be exercisable in full, whether or not
otherwise exercisable. Following the Acceleration Date, (a) the
Committee shall, in the case of a merger, consolidation or sale or
disposition of assets, promptly make an appropriate adjustment to the
number and class of shares of Common Stock available for Options, and
to the amount and kind of shares or other securities or property
receivable upon exercise of any outstanding Options after the effective
date of such transaction, and the price thereof, and (b) the Committee
may, in its discretion, permit the cancellation of outstanding Options
in exchange for a cash payment in an amount per share subject to any
such Option equal to the amount that would be payable pursuant to
Section 8(b) of this Plan upon exercise of a Limited Right under those
circumstances.
(4) Paragraphs (2) and (3) of this Section 6(h) shall
not apply to a merger or consolidation in which the Corporation is the
surviving corporation and shares of Common Stock are not converted into
or exchanged for stock, securities of any other corporation, cash or
any other thing of value. Notwithstanding the preceding sentence, in
case of any consolidation or merger of another corporation into the
Corporation in which the Corporation is the surviving corporation and
in which there is a reclassification or change (including a change
which results in the right to receive cash or other property) of the
shares of Common Stock (other than a change in par value, or from par
value to no par value, or as a result of a subdivision or combination,
but including any change in such shares into two or more classes or
series of shares), the Committee may provide that the holder of each
Option then exercisable shall have the right to exercise such Option
solely for the kind and amount of shares of stock and other securities
(including those of any new direct or indirect parent of the
Corporation), property, cash or any combination thereof receivable upon
such reclassification, change, consolidation or merger by the holder of
the number of shares of Common Stock for which such Option might have
been exercised.
(5) In the event of a change in the Common Stock of
the Corporation as presently constituted, which is limited to a change
of all of its authorized shares with par value into the same number of
shares with a different par value or without par value, the shares
7
<PAGE>
resulting from any such change shall be deemed to be the Common Stock
within the meaning of the Plan.
(6) To the extent that the foregoing adjustments
relate to stock or securities of the Corporation, such adjustments
shall be made by the Committee, whose determination in that respect
shall be final, binding and conclusive.
(7) Except as hereinbefore expressly provided in this
Section 6(h), the Recipient shall have no rights by reason of any
subdivision or consolidation of shares of stock of any class or the
payment of any stock dividend or any other increase or decrease in the
number of shares of stock of any class or by reason of any dissolution,
liquidation, merger, or consolidation or spin-off of assets or stock of
another corporation; and any issue by the Corporation of shares of
stock of any class, or securities convertible into shares of stock of
any class, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock
subject to the Option. The grant of an Option pursuant to the Plan
shall not affect in any way the right or power of the Corporation to
make adjustments, reclassifications, reorganizations or changes of its
capital or business structures or to merge or to consolidate or to
dissolve, liquidate or sell, or transfer all or part of its business or
assets.
(i) Rights as a Stockholder. A Recipient or a transferee of an
Option shall have no rights as a stockholder with respect to any shares covered
by the Option until the date of the issuance of a stock certificate to him or
her for such shares. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distribution or
other rights for which the record date is prior to the date such stock
certificate is issued, except as provided in Sections 6(h) and 6(j) hereof.
(j) Other Provisions. The Option Agreements authorized under
the Plan shall contain such other provisions as the Committee shall deem
advisable, including, without limitation, (i) the granting of either Rights or
Limited Rights, or both, and (ii) the imposition of restrictions upon the
exercise of an Option.
(k) Formula Grants to Directors. Notwithstanding any other
provision in the Plan to the contrary, participation in the Plan by members of
the Board 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, and the right to receive shares in lieu of Meeting
Fees as provided in Section 10 of this Plan. 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 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.
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<PAGE>
(ii) The Option Price shall be set at 100% of the
Fair Market Value of the shares on the date of automatic grant;
(iii) The number of shares covered by the Option and
the Option Price shall be subject to adjustment as provided in Section
6(h) of this Plan; and
(iv) The Options automatically granted hereunder
shall be exercisable for five years after the date of automatic grant.
7. Stock Appreciation Rights.
(a) Authority to Grant Rights. The Committee shall have
authority to grant Rights to the holder of any Option granted under the Plan
(the "Related SAR Option") with respect to all or some of the shares of Common
Stock covered by such Related SAR Option. A Right may be granted either at the
time of grant of the Related SAR Option or any time thereafter during its term
(except as otherwise provided in Section 11 of this Plan). Each Right shall be
exercisable only if, and to the extent that, the Related SAR Option is
exercisable. Upon the exercise of a Right, the Related SAR Option shall cease to
be exercisable to the extent of the shares of Common Stock with respect to which
such Right is exercised, but shall be considered to have been exercised to that
extent for purposes of determining the number of shares available for the grant
of further Options, Rights and Limited Rights pursuant to the Plan. Upon the
exercise or termination of a Related SAR Option, the Right with respect to such
Related SAR Option shall terminate to the extent of the shares of Common Stock
with respect to which the Related SAR Option was exercised or terminated.
(b) Exercise of Rights. Upon the exercise of a Right, the
holder thereof, subject to paragraph (e) of this Section 7, shall be entitled at
the holder's election to receive either--
(i) that number of shares of Common Stock equal to
the quotient computed by dividing the Spread (as defined in Section
7(c) below) by the Fair Market Value per share of Common Stock on the
date of exercise of the Right; provided, however, that in lieu of
fractional shares, the Corporation shall pay cash equal to the same
fraction of the Fair Market Value per share of Common Stock on the date
of exercise of the Right, or
(ii) an amount in cash equal to the Spread, or
(iii) a combination of cash and a number of shares
calculated as provided in clause (i) of this Section 7(b) (after
reducing the Spread by such cash amount), plus cash in lieu of any
fractional shares as above provided.
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(c) Spread. The term "Spread" as used in this Section 7 shall
mean an amount equal to the product computed by multiplying (i) the excess of
(A) the Fair Market Value per share on the date the Right is exercised over (B)
the Option Price per share at which the Related SAR Option is exercisable, by
(ii) the number of shares of Common Stock with respect to which such Right is
exercised.
(d) Limitation on Exercise. Notwithstanding the provisions of
this Section 7, except as otherwise determined by the Committee, a Right may not
be exercised until the expiration of six months from the date of grant of such
Right unless, prior to the expiration of such six month period, the Recipient of
such Right ceases to be a director, officer or employee of the Corporation or a
division or Subsidiary Corporation thereof by reason of such Recipient's death
or Disability.
(e) Cash Election. Notwithstanding the provisions of Section
7(b), the Committee shall have sole discretion to consent to or disapprove an
election to receive cash in whole or in part ("Cash Election") upon the exercise
of a Right. A Cash Election and related exercise may be made only during the
period beginning on the third business day following the date of release for
publication of the quarterly and annual summary statements of sales and earnings
of the Corporation and ending on the twelfth business day following such date.
(f) Grant of Limited Rights. A Right may be granted to a
Recipient irrespective of whether such Recipient is being granted or has been
granted a Limited Right.
(g) Limited Transferability. A Right shall not be transferable
except under circumstances described in Section 6(g) with respect to Options.
The Right shall be exercisable only by such Recipient or by the Recipient's
guardian or legal representative or permitted transferees.
(h) Other Terms and Conditions. Each Right shall be granted
on such terms and conditions not inconsistent with the Plan as the Committee may
determine.
(i) Exercise Procedure. To exercise a Right, the Recipient
shall (i) give written notice thereof to the Committee in form satisfactory to
the Committee specifying (A) the number of shares of Common Stock with respect
to which the Right is being exercised and (B) the amount the Recipient elects to
receive in cash and shares of Common Stock with respect to the exercise of the
Right, and (ii) if requested by the Committee, deliver the Option Agreement to
the Committee, who shall endorse thereon a notation of such exercise and return
the Option Agreement to the Recipient. The date of exercise of a Right that is
validly exercised shall be deemed to be the date on which there shall have been
delivered the instruments referred to in the first sentence of this Section
7(i).
(j) Amendments of this Section. The Corporation intends that
this Section 7 shall comply with the requirements of Rule 16b-3 and any future
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<PAGE>
rules promulgated in substitution therefor (the "Rule") under the Act during the
term of the Plan. Should any provisions of this Section 7 not be necessary to
comply with the requirements of the Rule, the Board may amend the Plan to add to
or modify the provisions of the Plan accordingly.
8. Limited Stock Appreciation Rights.
(a) Authority to Grant Limited Rights. The Committee shall
have authority to grant a Limited Right to the holder of any Option granted
under the Plan (referred to herein as the "Related LSAR Option") with respect to
all or some of the shares of Common Stock covered by such Related LSAR Option. A
Limited Right may be granted either at the time of grant of the Related LSAR
Option or any time thereafter during its term (except as otherwise provided in
Section 11 of this Plan). A Limited Right may be exercised only during the 60
day period beginning on an "Acceleration Date" (as defined in Section 6(h)(3) of
this Plan). Each Limited Right shall be exercisable only if, and to the extent
that, the Related LSAR Option is exercisable. Notwithstanding the provisions of
the two immediately preceding sentences, except as otherwise determined by the
Committee, no Limited Right may be exercised until the expiration of six months
from the date of grant of the Limited Right unless, prior to the expiration of
such six month period, the Recipient of such Limited Right ceases to be a
director, officer or employee of the Corporation or a division or Subsidiary
Corporation thereof by reason of such Recipient's death or Disability. Upon the
exercise of a Limited Right, the Related LSAR Option shall cease to be
exercisable to the extent of the shares of Common Stock with respect to which
such Limited Right is exercised, but shall be considered to have been exercised
to that extent for purposes of determining the number of shares of Common Stock
available for the grant of further Options, Rights and Limited Rights pursuant
to this Plan. Upon the exercise or termination of a Related LSAR Option, the
Limited Right with respect to such Related LSAR Option shall terminate to the
extent of the shares of Common Stock with respect to which the Related LSAR
Option was exercised or terminated.
(b) Exercise of Limited Rights. Upon the exercise of a
Limited Right, the holder thereof shall receive in cash whichever of the
following amounts is applicable:
(i) in the case of an exercise of Limited Rights by
reason of the occurrence of an Offer (as defined in Section 6(h)(3)(i)
of this Plan), an amount equal to the Offer Spread (as defined in
Section 8(d) below);
(ii) in the case of an exercise of Limited Rights by
reason of stockholder approval of an agreement described in Section
6(h)(3)(ii), an amount equal to the Merger Spread (as defined in
Section 8(f) below);
(iii) in the case of an exercise of Limited Rights by
reason of an acquisition of Common Stock described in Section
6(h)(3)(iii), an amount equal to the Acquisition Spread (as defined in
Section 8(h) below); or
11
<PAGE>
(iv) in the case of an exercise of Limited Rights by
reason of the change in composition of the Board described in Section
6(h)(3)(iv), an amount equal to the Spread (as defined in Section 8(i)
below).
(c) Offer Price per Share. The term "Offer Price per Share"
as used in this Section 8 shall mean, with respect to the exercise of any
Limited Right by reason of the occurrence of an Offer, the greater of (i) the
highest price per share of Common Stock paid in any Offer, which Offer is in
effect at any time during the 60 day period ending on the date on which such
Limited Right is exercised, or (ii) the highest Fair Market Value per share
during such 60 day period. Any securities or property that are part or all of
the consideration paid for shares of Common Stock in the Offer shall be valued
in determining the Offer Price per Share at the higher of (A) the valuation
placed on such securities or property by the corporation, person or other entity
making such Offer or (B) the valuation placed on such securities or property by
the Committee.
(d) Offer Spread. The term "Offer Spread" as used in this
Section 8 shall mean an amount equal to the product computed by multiplying (i)
the excess of (A) the Offer Price per Share over (B) the Option Price per share
of Common Stock at which the Related LSAR Option is exercisable by (ii) the
number of shares of Common Stock with respect to which such Limited Right is
being exercised.
(e) Merger Price per Share. The term "Merger Price per Share"
as used in this Section 8 shall mean, with respect to the exercise of any
Limited Right by reason of stockholder approval of an agreement described in
Section 6(h)(3)(ii), the greater of (i) the fixed or formula price for the
acquisition of shares of Common Stock specified in such agreement, if such fixed
or formula price is determinable on the date on which such Limited Right is
exercised, and (ii) the highest Fair Market Value per share during the 60 day
period ending on the date on which such Limited Right is exercised.
(f) Merger Spread. The term "Merger Spread" as used in this
Section 8 shall mean an amount equal to the product computed by multiplying (i)
the excess of (A) the Merger Price per Share over (B) the Option Price per share
of Common Stock at which the Related LSAR Option is exercisable by (ii) the
number of shares of Common Stock with respect to which such Limited Right is
being exercised.
(g) Acquisition Price per Share. The term "Acquisition Price
per Share" as used in this Section 8 shall mean, with respect to the exercise of
any Limited Right by reason of an acquisition of Common Stock described in
Section 6(h)(3)(iii), the greater of (i) the highest price per share shown on
the Statement of Schedule 13D or amendment thereto filed by the holder of 9.8%
or more of the Corporation's Common Stock which gives rise to the exercise of
such Limited Right, and (ii) the highest Fair Market Value per share during the
60 day period ending on the date the Limited Right is exercised.
12
<PAGE>
(h) Acquisition Spread. The term "Acquisition Spread" as used
in this Section 8 shall mean an amount equal to the product computed by
multiplying (i) the excess of (A) the Acquisition Price per Share over (B) the
Option Price per share of Common Stock at which the Related LSAR Option is
exercisable by (ii) the number of shares of Common Stock with respect to which
such Limited Right is being exercised.
(i) Spread. The term "Spread" as used in this Section 8 shall
mean, with respect to the exercise of any Limited Right by reason of a change in
the composition of the Board described in Section 6(h)(3)(iv), an amount equal
to the product computed by multiplying (i) the excess of (A) the highest Fair
Market Value per share of Common Stock during the 60 day period ending on the
date the Limited Right is exercised over (B) the Option Price per share at which
the Related LSAR Option is exercisable by (ii) the number of shares of Common
Stock with respect to which the Limited Right is being exercised.
(j) Limited Transferability. A Limited Right shall not be
transferable except in the circumstances described in Section 6(g) in connection
with Options. The Limited Right shall be exercisable only by such Recipient or
by the Recipient's guardian or legal representative or permitted transferees.
(k) Other Terms and Conditions. Each Limited Right shall be
granted on such terms and conditions not inconsistent with the Plan as the
Committee may determine.
(l) Exercise Procedure. To exercise a Limited Right, the
Recipient shall (i) give written notice thereof to the Committee in form
satisfactory to the Committee specifying the number of shares of Common Stock
with respect to which the Limited Right is being exercised, and (ii) if
requested by the Committee, deliver the Option Agreement to the Committee who
shall endorse thereon a notation of such exercise and return the Option
Agreement to the Recipient. The date of exercise of a Limited Right that is
validly exercised shall be deemed to be the date on which there shall have been
delivered the instruments referred to in the first sentence of this paragraph
(l).
(m) Amendments of this Section. The Corporation intends that
this Section 8 shall comply with the requirements of the Rule. Should any
provisions of this Section 8 not be necessary to comply with the requirements of
the Rule, or should any additional provisions be necessary for this Section 8 to
comply with requirements of the Rule, the Board may amend the Plan to add to or
modify the provisions of the Plan accordingly.
9. Agreement by Recipient Regarding Withholding Taxes.
If the Committee shall so require, as a condition of exercise,
each Recipient shall agree that:
(i) No later than the date of exercise of any Option, Right or
Limited Right granted hereunder, or the receipt of any shares in lieu
of Meeting Fees, the person exercising such Option, Right or Limited
13
<PAGE>
Right or receiving such shares will pay to the Corporation or make
arrangements satisfactory to the Committee regarding payment of any
federal or local taxes of any kind required by law to be withheld upon
the exercise of such Option, Right or Limited Right or receipt of such
shares, and
(ii) 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 the exercise of
Option, Right or Limited Right or receipt of shares in lieu of Meeting
Fees from any payment of any kind otherwise due to the person
exercising such Option, Right or Limited Right or receiving such
shares.
10. Meeting Fees.
(a) Election to Receive Common Stock. Commencing May 1, 1997,
each Independent Director of the Corporation, as defined in the Corporation's
bylaws (an "Independent Director"), may elect to receive all or any portion of
any Meeting Fees in cash, in shares of Common Stock, or in a combination
thereof. "Meeting Fees" shall mean all annual retainers and other fees paid for
attendance at each regular or special meeting of the Board or any committees
attended by an Independent Director. Such election shall be irrevocable, shall
be made in writing and delivered to the Corporation's Secretary on or prior to
May 1, 1997 (and thereafter on or prior to each Annual Meeting of the
Corporation's Shareowners commencing in 1998) (the "Election Date"), and shall
apply to the period commencing on the Election Date and terminating on the
Annual Meeting of Shareowners for the year following the Election Date (the
"Election Period"). If no such election is timely received, an Independent
Director shall receive any Meeting Fees during such Election Period in cash.
(b) Cash Meeting Fees. Meeting Fees paid in cash shall be
paid on or as soon as practicable after any regular or special meeting attended
by an Independent Director.
(c) Shares in lieu of Cash Meeting Fees. Meeting fees paid in
shares of Common Stock shall be evidenced by certificates for such shares,
delivered to the Independent Directors as soon as practicable following the
determination of the number of shares to be paid in connection with any Election
Period. Such certificates shall be registered in the name of the Independent
Director, and all shares so issued shall be fully paid and nonassessable. The
Corporation will pay any issuance or transfer taxes with respect to the issuance
of such shares. Any fractions of shares otherwise issuable under this Section 10
shall be paid in cash, or, if an Independent Director has elected to receive
shares for the next Election Period, added to the amount to the number of shares
to be issued in connection with the next Election Period. Notwithstanding any
provision of the Plan to the contrary, no Independent Director may receive more
than 100,000 shares of Common Stock in lieu of Meeting Fees in any year.
(d) Administration. Notwithstanding any provision of the Plan
to the contrary, the members of the Board other than the Independent Directors
shall administer this Section 10 and have all authority of the Committee
14
<PAGE>
provided in Section 3 of this Plan or otherwise with respect to this Section 10.
Such authority shall include, without limitation, the authority to set the
amount of Meeting Fees and the cash, shares of Common Stock and combinations
thereof to be paid pursuant to this Section 10.
11. Term of Plan.
Options, Rights, Limited Rights and shares in lieu of Meeting
Fees may be granted pursuant to the Plan from time to time until the Plan is
terminated by the Board.
12. Amendment and Termination of the Plan.
The Board at any time and from time to time may suspend,
terminate, modify or amend the Plan; provided, however, that any amendment that
(i) would materially increase the aggregate number of shares of Common Stock
that may be granted under the Plan or as to which Options, Rights and Limited
Rights may be granted under the Plan or (ii) would materially increase the
benefits accruing to the participants. under the Plan or (iii) would materially
modify the requirements as to eligibility for participation in the Plan shall be
subject to the 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 6(h) hereof shall not require such approval. Except as provided in
Section 6 of this Plan, no suspension, termination, modification or amendment of
the Plan may adversely affect any Option, Right or Limited Right previously
granted, unless the written consent of the Recipient is obtained.
13. Assumption.
The terms and conditions of any outstanding Options granted
pursuant to this Plan shall be assumed by, be binding upon and inure to the
benefit of any successor corporation to the 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. Termination of Right of Action.
Every right of action arising out of or in connection with the
Plan by or on behalf of the Corporation or of any Subsidiary Corporation, or by
any shareholder of the Corporation or of any Subsidiary Corporation against any
past, present or future member of the Board or the Committee, or against any
officer or employee, or by an officer or employee (past, present or future)
against the Corporation or any Subsidiary Corporation, will, irrespective of the
place where an action may be brought and irrespective of the place of residence
of any such shareholder, director, officer or employee, cease and be barred by
the expiration of three years from the date of the act or omission in respect of
which such right of action is alleged to have arisen.
15
<PAGE>
15. Tax Litigation.
The Corporation shall have the right to contest, at its
expense, any tax ruling or decision, administrative or judicial, on any issue
which is related to the Plan and which the Board believes to be important to
holders of Options issued or shares received under the Plan and to conduct any
such contest or any litigation arising therefrom to a final decision.
24272
16
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