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, 1998
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.)
3410 South Galena Street, Suite 210 80231
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
(303) 614-9400
(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 7, 1998, 5,136,840 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, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements: Page
Balance Sheets as of June 30, 1998 (unaudited)
and December 31, 1997............................................ 1
Statements of Income for the three and six months ended
June 30, 1998 and 1997 (unaudited)............................... 2
Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 (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 4. Submission of Matters to a Vote of Security Holders.............. 23
Item 6. Exhibits and Reports on Form 8-K................................. 23
(i)
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
June 30 December 31,
1998 1997
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Real estate, net of accumulated depreciation of $1,581 and $693 $ 67,729 $ 40,726
Investments in participating mortgages 27,838 25,415
Cash and cash equivalents 1,971 21,802
Investment in CAX 21,037 20,866
Other assets, net 9,884 10,352
---------- ----------
Total Assets $ 128,459 $ 119,161
========== ==========
LIABILITIES
Secured notes payable $ 10,456 $ 10,677
Secured short-term financing 7,000 --
Accounts payable and accrued liabilities 2,882 2,607
---------- ----------
20,338 13,284
---------- ----------
MINORITY INTEREST IN OPERATING PARTNERSHIP 24,558 22,362
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share, 50,000 shares authorized 5,117
and 5,108 shares issued and outstanding, respectively 51 51
Additional paid-in capital 231,376 231,221
Dividends in excess of accumulated earnings (147,864) (147,757)
---------- ----------
83,563 83,515
---------- ----------
Total Liabilities and Stockholders' Equity $ 128,459 $ 119,161
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
<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,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
RENTAL PROPERTY OPERATIONS
<S> <C> <C> <C> <C>
Rental and other property revenues $ 2,108 $ 568 $ 3,852 $ 568
Interest on participating mortgages 764 -- 1,547 --
Property operating expenses (807) (243) (1,600) (243)
-------- -------- -------- --------
Income from property operations before depreciation 2,065 325 3,799 325
Depreciation (495) (130) (888) (130)
-------- --------- -------- --------
Income from rental property operations 1,570 195 2,911 195
-------- -------- -------- --------
SERVICE OPERATIONS
Property management fees and other income 62 23 139 23
Property management costs and other expenses (22) (15) (46) (15)
Amortization of management contracts (689) (19) (1,516) (19)
-------- -------- -------- --------
Loss from service operations (649) (11) (1,423) (11)
-------- -------- -------- --------
OTHER ACTIVITIES
Non-agency MBS bonds revenues -- 450 50 2,450
Equity in earnings of CAX 266 484 534 948
Management fees to former manager -- (97) -- (374)
-------- -------- -------- --------
Income from other activities 266 837 584 3,024
-------- -------- -------- --------
General and administrative expenses (336) (87) (658) (423)
Interest and other income 219 795 552 847
Interest expense (268) (55) (476) (81)
-------- -------- -------- --------
INCOME BEFORE GAIN ON RESTRUCTURING OF BONDS AND
MINORITY INTEREST 802 1,674 1,490 3,551
Gain on restructuring of bonds -- -- -- 5,287
-------- -------- -------- --------
INCOME BEFORE MINORITY INTEREST 802 1,674 1,490 8,838
Minority interest in Operating Partnership (175) -- (318) --
-------- -------- -------- --------
NET INCOME $ 627 $ 1,674 $ 1,172 $ 8,838
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ .12 $ .32 $ .23 $ 1.76
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ .12 $ .32 $ .23 $ 1.75
======== ======== ======== ========
DIVIDENDS DECLARED PER SHARE $ .250 $ .300 $ .250 $ .775
======== ======== ======== ========
Weighted-Average Common Shares Outstanding 5,115 5,012 5,112 4,990
Weighted-Average Common Shares and Common Share
Equivalents Outstanding 5,142 5,035 5,142 5,020
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,172 $ 8,838
Adjustments to reconcile net income to net cash flows from operating
activities:
Depreciation and amortization 2,404 149
Minority interest in Operating Partnership 318 --
Amortization of non-agency MBS bonds -- 469
Equity in earnings of CAX (534) (948)
Accrued interest on participating mortgages (394) --
Increase in other assets (639) (197)
Increase in accounts payable and accrued liabilities 47 107
Gain on restructuring of assets -- (7,359)
------- -------
Net cash provided by operating activities 2,374 1,059
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of real estate (25,556) (22,871)
Investments in participating mortgages, net (2,012) --
Capital replacements (175) --
Principal collections and indemnifications on non-agency MBS bonds
-- 547
Dividends from CAX 359 939
Proceeds from the restructuring of assets -- 69,743
--------- ---------
Net cash provided by (used in) investing activities (27,384) 48,358
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Common Stock dividends (1,279) (3,874)
Payment of distributions to minority interest in Operating Partnership
(356) (6)
Proceeds from secured short-term financing 7,000 --
Principal paydown on secured short-term financing -- (3,000)
Principal paydown on secured notes payable (221) (22)
Proceeds from the issuance of Common Stock 35 11
---------- ----------
Net cash provided by (used in) financing activities 5,179 (6,891)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(19,831) 42,526
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,802 417
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,971 $ 42,943
========== ==========
</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 ("AIC" and, together with its subsidiaries, the
"Company") is a Maryland corporation that owns and operates manufactured home
communities and has elected to be taxed as a real estate investment trust
("REIT"). The Company's Common Stock, par value $.01 per share, is 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 the sole general partner interest in
the Operating Partnership. AIC held a 78% interest in the Operating Partnership
as of June 30, 1998. The Operating Partnership also owns the non-voting capital
stock of both AIC Manufactured Housing Corp. ("AICMHC") and AIC Management Corp.
("Management Corp.") and approximately 27% of the Common Stock of Commercial
Assets, Inc. ("CAX"). AICMHC owns interests in manufactured home community
management contracts, and Management Corp. owns the management agreement
pursuant to which it manages CAX. CAX is a publicly-traded REIT (American Stock
Exchange, Inc.: CAX) formed by the Company in August 1993.
Prior to 1997, the Company owned debt interests in residential mortgage loan
securitizations collateralized by pools of non-conforming (non-agency
guaranteed) single-family mortgage loans ("non-agency MBS bonds"). In February
1997, the Company decided to restructure the Company's asset base and redeploy
its assets in an attempt to both reduce risks associated with the Company's
non-agency MBS bonds and maximize long-term, risk-adjusted returns to
stockholders. In March 1997, the Company contributed its portfolio of non-agency
MBS bonds into an owner trust in a structured transaction in which the Company
received $67,671,000 cash proceeds and retained a small equity interest.
Subsequently, the Company has acquired interests in 21 manufactured home
communities and two recreational vehicle parks with approximately 3,670
developed homesites, 380 recreational vehicle sites, 750 sites ready for homes
and 1,790 sites available for future development.
Prior to November 1997, the Company was managed by Financial Asset Management
LLC (the "Manager"). An investor group led by Terry Considine, Thomas L. Rhodes
and Bruce D. Benson acquired the Manager in September 1996. Mr. Considine is the
Chairman and Chief Executive Officer of both the Company and CAX. Mr. Rhodes is
Vice Chairman and Mr. Benson is a director of both the Company and CAX. In
November 1997, the Company's stockholders approved the acquisition of the assets
and operations of the Manager in order to become a self-managed and
self-administered REIT. The $11,692,000 purchase price was paid by issuing
676,700 limited partnership units of the Operating Partnership ("OP Units") plus
up to 240,000 additional OP Units if certain performance goals, including
investment and share price targets, are achieved by the Company within a
specified time period.
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, 1998, and for the three and six months then ended and for all prior
periods presented. These statements are condensed and do not include all the
- 4 -
<PAGE>
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,
1997.
Certain reclassifications have been made in the Condensed Consolidated Financial
Statements to conform to the classifications currently used. The effect of such
reclassifications on amounts previously reported is immaterial.
C. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the
Operating Partnership and all majority-owned subsidiaries. The minority interest
in the Operating Partnership represents the OP Units which are redeemable at the
option of the holder. When a holder elects to redeem OP Units, the Company
determines whether such OP Units will be redeemed for cash or shares of Common
Stock. The holders of OP Units receive the same amount per OP Unit in
distributions as the holders of Common Stock receive in dividends. As of June
30, 1998, 1,425,000 OP Units were outstanding. All significant intercompany
balances and transactions have been eliminated in consolidation. The Company's
investment in CAX is recorded under the equity method.
Rental Properties and Depreciation
Rental properties are recorded at cost less accumulated depreciation.
Depreciation is computed using the straight line method over an estimated useful
life of 25 years for land improvements and buildings and five years for
furniture and other equipment. Significant renovations and improvements, which
improve and/or extend the useful life of the asset, are capitalized and
depreciated over the remaining estimated life. Maintenance, repairs and minor
improvements are expensed as incurred.
When conditions exist which indicate that the carrying amount of a property may
be impaired, the Company will evaluate the recoverability of its net investment
in the property by assessing current and future levels of income and cash flows.
As of June 30, 1998, there has been no impairment of the Company's investment in
rental properties.
Amortization
Included in other assets is the cost related to the acquisition of management
contracts, which is being amortized over a period of three years.
Revenue Recognition
The Company derives its income from the rental of homesites. The leases entered
into by residents for the rental of the site are generally for terms not longer
than one year and the rental revenues associated with the leases are recognized
when earned and due from residents. Property management revenues for services
provided to communities not owned by the Company are recognized when earned.
- 5 -
<PAGE>
Income Taxes
The Company has elected to be taxed as a REIT as defined under the Internal
Revenue Code of 1986, as amended (the "Code"). In order for the Company to
qualify as a REIT, at least 95% of the Company's gross income in any year must
be derived from qualifying sources. The activities of AICMHC and Management
Corp. are not qualifying sources.
As a REIT, the Company generally will not be subject to federal income taxes at
the corporate level if it distributes at least 95% of its REIT taxable income to
its stockholders. REITs are also subject to a number of other organizational and
operational requirements. If the Company fails to qualify as a REIT in any
taxable year, its taxable income will be subject to federal income tax at
regular corporate rates (including any applicable alternative minimum tax). Even
if the Company qualifies as a REIT, it may be subject to certain state and local
income taxes and to federal income and excise taxes on its undistributed income.
At June 30, 1998, the Company's net operating loss ("NOL") carryover was
approximately $95,000,000 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 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.
In November 1997, the Company incorrectly documented a transaction. The effect
of which was that the Company was not in compliance with the requirements
necessary to maintain its status as a REIT. In June 1998, the Company received
confirmation from the Internal Revenue Service that its status as a REIT has not
been terminated as a result of the incorrect documentation of the transaction in
1997.
Earnings Per Share
Basic earnings per share for the three and six months ended June 30, 1998 and
1997 are based upon the weighted-average number of shares of Common Stock
outstanding during each such period. Diluted earnings per share reflect the
effect of any dilutive, unexercised stock options in each such period. In
November 1997, the Company's stockholders approved a one-for-five reverse split
of the Company's Common Stock. Accordingly, all historical weighted-average
share and per share amounts have been restated to reflect the reverse stock
split.
Statements of Cash Flows
For purposes of reporting cash flows, cash maintained in bank accounts, money
market funds and highly-liquid investments with an initial maturity of three
months or less are considered to be cash and cash equivalents. The Company paid
$417,000 and $63,000 in interest during the six months ended June 30, 1998 and
1997, respectively.
- 6 -
<PAGE>
Non-cash investing and financing activities for the six months ended June 30,
1998 and 1997 were (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Unrealized holding gains and losses on debt securities $ -- $ 5,475
Real estate acquired under earn-out agreements 52 --
Issuance of Common Stock for services 120 101
Consideration for acquisition of real estate:
Issuance of Common Stock -- 1,250
Assumption of secured notes payable -- 4,962
Issuance of OP Units 2,145 316
Issuance of OP Units for Participating Mortgages 17 --
Receivables from minority interest in subsidiaries 319 --
</TABLE>
D. Real Estate
Real estate at June 30, 1998 and December 31, 1997, was (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Land $ 7,704 $ 5,286
Land improvements and buildings 61,160 35,689
Furniture and other equipment 446 444
--------- ---------
69,310 41,419
Less accumulated depreciation (1,581) (693)
--------- ---------
Investment in real estate, net $ 67,729 $ 40,726
========= =========
</TABLE>
Land improvements and buildings consist primarily of infrastructure, roads,
landscaping, clubhouses, maintenance buildings and common amenities.
E. Investments in Participating Mortgages
As of December 31, 1997, the Company had investments in and notes receivable of
$15,872,000 from joint ventures in which the Company owned a 50% joint venture
interest. Effective January 1, 1998, the Company sold its interest in the
various joint ventures and consolidated the various notes into a single note
secured by a number of manufactured home communities. The note bears 10%
interest, matures in 20 years and provides for additional advances up to a
maximum of $20,000,000. In addition, the Company receives additional interest up
to 50% of the borrower's profit from such communities.
In addition, the Company has first and second mortgage loans secured by four
contiguous manufactured home communities in Arizona. The first mortgage loan
bears 10% interest. The second mortgage loan accrues 15% interest and pays 9%
interest through July 1998, with the pay rate increasing 1% each year thereafter
to a maximum of 12% per annum. Both loans mature in April 2001. The Company
receives additional interest of 3% of gross revenues, increasing to 11% of gross
revenues in the event of a refinancing of the communities, and 50% of net
proceeds from a sale or refinancing of the properties. In 1997, the mortgage
loans were accounted for as an equity investment in real estate. Effective
January 1, 1998, the Company reclassified the investment to participating
mortgages.
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<PAGE>
As of June 30, 1998, the Company had investments in participating mortgages of
$27,838,000. During the three and six months ended June 30, 1998, the Company
had earnings of $764,000 and $1,547,000, respectively, from these mortgages.
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 realized net
proceeds of $67,671,000 and recorded a net gain of $5,287,000 from the sale. The
Company's retained equity interest in the trust represents the first-loss class
of the portfolio, providing credit support for the senior debt securities. The
future cash flow from the retained equity interest is not determinable and,
accordingly, no carrying value has been assigned to it. During the three and six
months ended June 30 1997, the Company recognized $450,000 and $2,450,000 of
interest income from the non-agency MBS bonds, respectively. The Company
recorded revenues of $0 and $50,000, respectively, from the retained equity
interest during the three and six months ended June 30, 1998.
G. Investment in Commercial Assets
On June 30, 1998 and December 31, 1997, the Company owned 2,761,126 shares
(approximately 27%) of the Common Stock of CAX. In November 1997, CAX sold or
resecuritized its entire portfolio of commercial mortgage loan securitizations
of multi-family real estate ("CMBS bonds"). CAX received $77,693,000 of cash and
an equity interest in an owner trust arising from the resecuritization
transaction, and recognized a net gain of $5,786,000 in the fourth quarter of
1997. Summarized financial information of CAX as reported by CAX is (in
thousands):
<TABLE>
<CAPTION>
Balance Sheets June 30, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 14,322 $ 74,153
Short-term investments 57,978 --
Investment in and notes receivable from Westrec and affiliates 4,290 1,710
CMBS bonds 1,855 1,981
Other assets 583 304
----------- -----------
Total assets 79,028 78,148
Total liabilities 532 443
----------- -----------
Stockholders' equity $ 78,496 $ 77,705
=========== ===========
</TABLE>
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<TABLE>
<CAPTION>
Statements of Income Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest $ 1,042 $ 49 $ 2,095 $ 160
CMBS bonds 44 2,193 84 4,237
----------- ----------- ----------- -----------
Total revenues 1,086 2,242 2,179 4,397
----------- ----------- ----------- -----------
General and administrative 88 121 174 244
Management fees 12 311 17 608
----------- ----------- ----------- -----------
Total expenses 100 432 191 852
----------- ----------- ----------- -----------
Net income 986 1,810 1,988 3,545
Unrealized holding gains on CMBS bonds
-- 943 -- 1,958
----------- ----------- ----------- -----------
Comprehensive income $ 986 $ 2,753 $ 1,988 $ 5,503
=========== =========== =========== ===========
</TABLE>
H. Secured Notes Payable
Secured notes payable at June 30, 1998 and December 31, 1997 consist of
$4,665,000 and $4,805,000, respectively, of non-recourse notes payable which
bear 8.25% interest and $5,791,000 and $5,872,000, respectively, of non-recourse
notes payable which bear 7.5% interest. All of the notes mature in October 2000.
The notes are secured by four manufactured home communities, which have net
carrying values of $23,206,000 and $23,517,000, respectively, at June 30, 1998
and December 31, 1997. The scheduled payments of principal on the secured notes
payable subsequent to June 30, 1998 are as follows: 1998 - $216,000, 1999 -
$487,000, and 2000 - $9,753,000. The secured notes payable require escrow
payments for the payment of property taxes. At June 30, 1998 and December 31,
1997, $217,000 and $34,000, respectively, was held in escrow.
I. Secured Short-Term Financing
In June 1998, the Company borrowed $7,000,000 of secured short-term financing in
connection with the acquisition of a manufactured home community. The note bears
11% interest, secured by the acquired community and $10,000,000 of participating
mortgages, and matures in December 1998. In July 1998, the Company repaid this
note (see Note M).
In 1996, the Company had a $10,000,000 secured revolving credit and term loan
agreement with a bank. Borrowings of $3,000,000 under this credit facility were
repaid and the agreement was canceled during the first quarter of 1997.
J. Commitments and Contingencies
The Company has a $1,000,000 unsecured line of credit with a bank through July
31, 1998. Advances under this line bear interest at prime. At June 30, 1998 and
December 31, 1997, no advances were outstanding.
In connection with a participating mortgage on a manufactured home community,
the Company entered into an earn-out agreement with respect to unoccupied
homesites. The Company advances an additional $17,000 pursuant to the
participating mortgage for each newly occupied homesite either in the form of
cash or 946 OP Units, as determined by the borrower. One new homesite was
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<PAGE>
occupied during each of the first and second quarters of 1998 and the Company
advanced the applicable amount in the form of OP Units and cash during the first
and second quarters of 1998, respectively.
K. Common Stock and Dividends
In November 1997, the Company's stockholders approved a one-for-five reverse
split of the Company's Common Stock. The par value per share and number of
authorized shares were not changed as a result of the reverse stock split. In
connection with the split, $202,000 was transferred from common stock to
additional paid-in capital. All outstanding OP Units and options were also
adjusted to reflect the one-for-five reverse stock split.
In February 1998, the Company announced that it was changing the date on which
its quarterly dividends are declared from the last month of the quarter to the
first month of the subsequent quarter. This change was made to allow the
dividend to be based on actual results instead of estimated results.
Accordingly, no dividend was declared during the first quarter of 1998. In April
and July 1998, the Company declared a $0.25 per share dividend on the Common
Stock for the first and second quarters of 1998. Concurrently, the Operating
Partnership declared a $0.25 per OP Unit distribution for the first and second
quarters of 1998. During the three and six months ended June 30, 1997, the
Company declared $0.30 and $0.775, respectively, per share dividends on the
Common Stock, and the Operating Partnership declared a $0.30 per OP Unit
distribution for the second quarter of 1997. The Operating Partnership did not
exist during the first quarter of 1997.
L. Other Matters
Prior to November 1997, the Manager provided all personnel and related overhead
necessary to conduct the Company's activities in exchange for various fees
provided for in the management agreement between the Company and the Manager
(the "AIC Management Agreement"). In November 1997, the Company's stockholders
approved the purchase of the Manager's assets and operations for $11,692,000 in
order for the Company to become a self-managed and self-administered REIT. The
purchase price and related costs were allocated $6,553,000 to the AIC Management
Agreement and $5,936,000 to a management agreement pursuant to which the Company
now provides management services to CAX (the "CAX Management Agreement"). The
Manager is owned by an investor group involving Terry Considine, Thomas L.
Rhodes and Bruce D. Benson. Mr. Considine is Chairman of the Board of Directors
and Chief Executive Officer of both the Company and CAX. Mr. Rhodes is Vice
Chairman and Mr. Benson is a director of both companies. This investment group
acquired the Manager in September 1996 at the same price at which they sold its
assets and operations to the Company in November 1997.
As a result of such acquisition, the Company expensed the $6,553,000 allocated
to the AIC Management Agreement in the fourth quarter of 1997, and the employees
of the Manager are now employed by the Company. The CAX Management Agreement has
been extended through December 31, 1998, and the Company is amortizing such
agreement over 36 months. During the three and six months ended June 30, 1998,
the Company earned management fees of $9,000 and $12,000, respectively, under
the CAX Management Agreement (net of elimination for the Company's 27% ownership
of CAX). As of June 30, 1998 and December 31, 1997, the net book value of the
CAX Management Agreement was $4,733,000 and $5,722,000, respectively, and is
included in other assets. Certain officers and directors of the Company also
serve as officers, directors or both of CAX.
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<PAGE>
Through March 31, 1997, the Manager received a "Base Fee," an "Incentive Fee"
and an "Administrative Fee," all of which were payable quarterly. The Base Fee
was an annual fee equal to 3/8 of 1% of the "average invested assets" of the
Company for such year. The Incentive Fee was equal to 20% of the amount of the
Company's net income which was in excess of the return on the Company's "average
net worth" equal to the "Ten-Year U.S. Treasury rate" plus 1%. The Manager
received an Administrative Fee of up to $3,500 per annum per non-agency MBS bond
for certain bond administration and other related services.
In connection with the change in the Company's assets, the AIC Management
Agreement was amended effective April 1, 1997, to: (i) increase the Base Fee
from 3/8 of 1% to 1% per annum of "average invested assets;" (ii) provide for an
acquisition fee (the "Acquisition Fee") of 0.5% of the cost of real estate
investments acquired; and (iii) change the Incentive Fee to be calculated from
Adjusted Funds From Operations ("AFFO") rather than net income. AFFO is
generally equal to the Company's net income plus (a) depreciation of rental
properties, (b) amortization of management contracts and (c) minority interest
in the Operating Partnership; less capital replacement reserves. The
Administrative Fee was essentially eliminated as a result of the
resecuritization of the non-agency MBS bonds.
During the three and six months ended June 30, 1997, the Company incurred the
following fees under the AIC Management Agreement:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
------------------------ ------------------
<S> <C> <C>
Base Fees $ 51,000 $ 97,000
Incentive Fees 21,000 53,000
Administrative Fees 25,000 224,000
Acquisition Fees 152,000 152,000
----------- -----------
Total $ 249,000 $ 526,000
=========== ===========
</TABLE>
The Company incurred $1,472,000 of additional Incentive Fees during the six
months ended June 30, 1997 from its gain on the restructuring of its bonds plus
an additional fee of $600,000 in exchange for the Manager agreeing to continue
as a loss mitigation advisor on the non-agency MBS bonds. Such fees were charged
against the Company's gain from such restructuring.
M. Subsequent Events
In July 1998, the Company acquired three contiguous manufactured housing
communities in Orlando, Florida for approximately $32,500,000. The communities
have 919 developed homesites and expansion capacity for an additional 230
homesites. The Company funded the acquisition with proceeds from $39,000,000 of
non-recourse, secured short-term financing on both the acquired communities and
other communities in its portfolio which had a net carrying value at June 30,
1998 of $36,513,000. In addition, proceeds from the financing were used to repay
the $7,000,000 of secured short-term financing outstanding at June 30, 1998.
- 11 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Introduction
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements in certain circumstances. Certain information
included in this Report, the Company's Annual Report to Stockholders and other
Company filings (collectively "SEC Filings") under the Securities Act of 1933,
as amended, and the Securities Exchange Act of 1934, as amended (as well as
information communicated orally or in writing between the dates of such SEC
Filings) contains or may contain information that is forward looking, including,
without limitation, statements regarding projections of the Company's future
financial performance, cash flow, dividends and anticipated returns on real
estate investments. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause 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: general economic and business
conditions; interest rate changes; financing and refinancing risks; risks
inherent in owning real estate or debt secured by real estate; future
development rate of homesites; competition; the availability of real estate
assets at prices which meet the Company's investment criteria; the Company's
ability to reduce expense levels, implement rent increases and use leverage; and
other risks set forth in the Company's Securities and Exchange Commission
filings. Readers should carefully review the Company's financial statements and
the notes thereto, as well as the risk factors described in the SEC Filings.
Business
Asset Investors Corporation, a Maryland corporation formed in 1986, ("AIC" and
together with its consolidated subsidiaries the "Company") is a
self-administered and self-managed real estate investment trust ("REIT") engaged
in the ownership, acquisition, development and management of manufactured home
communities. AIC's shares of common stock ("Common Stock") are listed on the New
York Stock Exchange ("NYSE") under the symbol "AIC." The Company also owns
approximately 27% of the common stock of Commercial Assets, Inc. ("CAX"). CAX is
a publicly-traded REIT (American Stock Exchange, Inc.: CAX). In May 1997, the
Company contributed all of its net assets to Asset Investors Operating
Partnership, L.P. (the "Operating Partnership") in exchange for the sole general
partner interest in the Operating Partnership and substantially all of the
Operating Partnership's initial capital. As of June 30, 1998, AIC owned 78% of
the Operating Partnership.
A manufactured home community is a residential subdivision designed and improved
with sites for the placement of manufactured homes and related improvements and
amenities. Manufactured homes are detached, single-family homes which are
produced off-site by manufacturers and installed on sites within the community.
Manufactured homes are available in a variety of designs and floor plans,
offering many amenities and custom options.
Modern manufactured home communities are similar to typical residential
subdivisions containing centralized entrances, paved streets, curbs and gutters
and parkways. The communities frequently provide a clubhouse for social and
recreation activities and other amenities, which may include golf courses,
swimming pools, shuffleboard courts and laundry facilities. Utilities are
provided or arranged for by the owner of the community. Community lifestyles,
primarily promoted by resident managers, include a wide array of social
activities that serve to promote a sense of neighborhood. The communities
- 12 -
<PAGE>
provide an attractive and affordable housing alternative for retirees, empty
nesters and start-up or single-parent families.
The owner of each home in the Company's communities leases the site on which the
home is located. The typical lease entered into between the tenant and one of
the Company's manufactured home communities for the rental of a site is
month-to-month or year-to-year, renewable upon the consent of both parties or,
in some instances, as provided by statute. In some circumstances, the Company
also offers a 99-year lease to a tenant in order to enable the tenant to have
some benefits of an owner of real property (e.g. the Homestead exemption). These
leases are cancelable, depending on state law, for non-payment of rent,
violation of community rules and regulations or other specified defaults.
Generally, market rate adjustments are made on an annual basis. The Company owns
the underlying land, utility connections, streets, lighting, driveways, common
area amenities and other capital improvements and is responsible for enforcement
of community guidelines and maintenance. Each homeowner within the manufactured
home community is responsible for the maintenance of his home and leased site
including lawn care in some communities.
The Company believes that manufactured home communities, once fully occupied,
tend to achieve a stable rate of occupancy. The cost and effort involved in
relocating a home to another community generally encourages the owner of the
home to resell it within the community.
REIT Status
In November 1997, the Company incorrectly documented a transaction by having the
Operating Partnership acquire all of the voting common stock of Asset Investors
Equity, Inc. ("AIE"), a consolidated subsidiary of the Company, instead of
having another subsidiary acquire AIE's voting common stock. As a result of the
transaction, the Company was not in compliance with the technical requirements
necessary to maintain its status as a REIT. In June 1998, the Company received
confirmation from the Internal Revenue Service that its status as a REIT will
not be terminated as a result of the incorrect documentation of the transaction
in 1997.
Recent Developments
Manufactured Home Community Acquisitions
During the first seven months of 1998, AIC acquired interests in seven
manufactured home communities, for total consideration of $60.2 million
consisting of $19 million cash, units of limited partnership interests in the
Operating Partnership ("OP Units") with a total recorded value of $2.2 million
and $39 million of secured short-term financing. As of July 31, 1998, the
Company has interests in 24 manufactured home communities and two recreational
vehicle parks. The communities consist of 4,590 developed homesites, 800 sites
ready for homes, 1,960 sites available for future development and 380
recreational vehicle sites. Of such properties, 18 communities are located in
Florida, four are in Arizona and one each is in Pennsylvania and New Jersey. The
recreational vehicle parks are in California and Arizona.
Growth and Operating Strategies
The Company measures its economic profitability based on Funds From Operations
("FFO") and Adjusted Funds From Operations ("AFFO"). The Company's management
believes that FFO and AFFO provide investors with an understanding of the
Company's ability to incur and service debt and make capital expenditures. The
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<PAGE>
Board of Governors of the National Association of Real Estate Investment Trusts
("NAREIT") defines FFO as net income (loss), computed in accordance with
generally accepted accounting principles ("GAAP"), excluding gains and losses
from debt restructuring and sales of property, plus real estate related
depreciation and amortization (excluding amortization of financing costs), and
after adjustments for unconsolidated partnerships and joint ventures. The
Company calculates FFO in a manner consistent with the NAREIT definition, which
includes adjustments for minority interest in the Operating Partnership and
amortization of goodwill related to controlled management contracts, including
the investment advisory agreement between the Company and CAX. AFFO is equal to
FFO less an estimated annual reserve for capital replacements of $50 per
homesite. Neither FFO nor AFFO should be considered an alternative to net income
or net cash flows from operating activities, as calculated in accordance with
GAAP, as an indication of the Company's performance or as a measure of
liquidity. Neither FFO nor AFFO is necessarily indicative of cash available to
fund future cash needs.
The Company's primary objective is to maximize stockholder value by increasing
the amount and predictability of AFFO on a per share basis. The Company seeks to
achieve this objective primarily by improving net operating income from its
existing portfolio of manufactured home communities and by acquiring additional
communities at values that are accretive on a per share basis. The Company
intends to follow operating and financial strategies, including: (i) obtaining a
geographically diverse portfolio of communities; (ii) providing a minimum $50
per homesite per year for capital replacements to maintain its communities;
(iii) utilizing long-term, fixed-rate, fully-amortizing debt; and (iv)
maintaining a ratio of (a) AFFO plus interest expense to (b) interest expense of
at least 2 to 1. In addition, the Company seeks to: (i) selectively acquire
manufactured home communities that have potential long-term appreciation of
value through, among other things, rent increases, expense efficiencies and
in-park homesite absorption and development; (ii) improve the profitability of
its communities through aggressive management of occupancy, community
development and maintenance and expense control; (iii) develop and maintain
resident satisfaction and a reputation for quality communities through
maintenance of the physical condition of the communities and providing
activities that improve the community lifestyle; and (iv) recruit and retain
quality community management personnel.
Future Acquisitions
From time to time, the Company evaluates acquisition opportunities in the
manufactured home community industry and expects to acquire additional
properties as opportunities can be identified on terms considered beneficial by
management. The acquisition of interests in additional communities could also
result in the Company becoming increasingly leveraged as it incurs debt in
connection with these transactions.
When evaluating potential acquisitions, the Company considers such factors as:
(i) the geographic area and type of property; (ii) the location, construction
quality, condition and design of the property; (iii) the current and projected
cash flow of the property and the ability to increase cash flow; (iv) the
potential for capital appreciation of the property; (v) the terms of tenant
leases, including the potential for rent increases; (vi) the potential for
economic growth and the tax and regulatory environment of the community in which
the property is located; (vii) the potential for expansion of the physical
layout of the property and/or the number of sites; (viii) the occupancy and
demand by residents for properties of a similar type in the vicinity and the
residents' profile; (ix) the prospects for liquidity through sale, financing or
refinancing of the property; (x) competition from existing manufactured home
communities and the potential for the construction of new communities in the
area; and (xi) the replacement cost of the property.
- 14 -
<PAGE>
Expansion of Existing Communities
The Company also seeks to increase the number of homesites and earnings
generated from its existing portfolio of manufactured home communities and from
future acquisitions by expanding the number of sites available to be leased to
residents if justified by local market conditions and permitted by zoning and
other applicable laws. As of July 31, 1998, the Company has an interest in 11
communities with 802 sites ready for homes and 1,960 sites available for future
development.
Properties
The manufactured home communities in which the Company has interests are
primarily located in Florida and Arizona. The following table sets forth certain
information as of July 31, 1998, with respect to the Company's communities and
principal markets:
<TABLE>
<CAPTION>
Average
Monthly
Developed Rent RV Sites Ready Sites Available
Community Location Homesites Occupancy (1) per Site Sites for Homes for Development
- --------------------------------------------------------------------------------------------------------------------------------
Owned and Participating Mortgage Communities
<S> <C> <C> <C> <C> <C> <C>
Cardinal Court Largo, FL 138 98% $250 -- -- --
Forest View Homosassa, FL 185 98 213 -- 126 (2) --
Marina Dunes Marina, CA -- -- -- 65 -- --
Park Royale Pinellas Park, FL 259 94 315 -- 50 (2) --
Pinewood St. Petersburg, FL 220 98 273 -- -- --
Pleasant Living Riverview, FL 244 100 251 -- -- --
Stonebrook Homosassa, FL 120 97 227 -- 98 (2) --
Sun Valley Tarpon Springs, FL 261 100 328 -- -- --
Westwind I Dunedin, FL 195 99 343 -- -- --
Westwind II Dunedin, FL 189 99 362 -- -- --
Mullica Woods Egg Harbor City, NJ 90 100 422 -- -- --
Salem Farm Bensalem, PA 28 100 395 -- -- --
Serendipity Ft. Myers, FL 338 98 263 -- -- --
Brentwood West Mesa, AZ 350 100 274 -- -- --
Gulfstream Harbor Orlando, FL 379 100 306 -- 3 171
Gulfstream Harbor II Orlando, FL 286 100 299 -- 22 --
Caribbean Cove Orlando, FL 255 100 267 -- 31 --
Apache Acres Apache Junction, AZ (2) 28 100 200 98 -- --
Blue Star Apache Junction, AZ (2) 28 100 200 125 -- --
Lost Dutchman Apache Junction, AZ (2) 125 100 236 96 -- --
Sun Valley Apache Junction, AZ (2) 268 100 227 -- -- --
Brentwood Hudson, FL (2) 70 89 186 -- 76 74
Casa del Mar Punta Gorda, FL (2) 105 100 221 -- 138 212
Royal Palm Haines City, FL (2) 219 99 200 -- 67 175
Savanna Club Port St. Lucie, FL (2) 3 100 215 -- -- 1,328
Sun Lake Grand Island, FL (2) 212 100 285 -- 191 --
================================================================================
4,595 99% $269 384 802 1,960
================================================================================
<FN>
(1) Excludes recreational vehicle sites, which are leased on a seasonal basis.
(2) The Company holds notes receivable secured by the communities. The notes
earn interest and participate in profits from the communities.
</FN>
</TABLE>
- 15 -
<PAGE>
<TABLE>
<CAPTION>
Number of Sites
---------------------------------------------------------------
Available for
Number of Ready for Future Recreational
Communities Developed Homes Development Vehicles
----------- --------- ----- ----------- --------
<S> <C> <C> <C> <C> <C>
Florida 18 3,678 802 1,960 --
Arizona 5 799 -- -- 319
New Jersey 1 90 -- -- --
Pennsylvania 1 28 -- -- --
California 1 -- -- -- 65
--- ----- ---- ------ ----
Total 26 4,595 802 1,960 384
=== ===== ==== ====== ====
</TABLE>
Taxation of the Company
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), and the Company intends to operate in such a
manner. The Company's current qualification as a REIT depends on its ability to
meet the various requirements imposed by the Code, through actual operating
results, distribution levels and diversity of stock ownership. As indicated
above (see "REIT Status"), the Company was not in compliance with one of the
technical requirements for maintaining its status as a REIT as a result of a
transaction that was incorrectly documented in November 1997. In June 1998, the
Internal Revenue Service confirmed that the Company's status as a REIT has not
been terminated as a result of the incorrect documentation of the transaction in
1997.
If the Company qualifies for taxation as a REIT, it will generally not be
subject to federal corporate income tax on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
investment in a corporation. If the Company fails to qualify as a REIT in any
taxable year, its taxable income will be subject to federal income tax at
regular corporate rates (including any applicable alternative minimum tax). The
Company has a NOL carryover of approximately $95 million that could be used in
the event that the Company fails to qualify as a REIT. Even if the Company
qualifies as a REIT, it may be subject to certain state and local income and
other taxes and to federal income and excise taxes on its undistributed income.
If in any taxable year the Company fails to qualify as a REIT and incurs a tax
liability, the Company might need to borrow funds or liquidate certain
investments in order to pay the applicable tax and the Company would not be
compelled under the Code to make distributions. Unless entitled to relief under
certain statutory provisions, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. Although the Company currently intends to operate in a
manner designed to qualify as a REIT, it is possible that future economic,
market, legal, tax or other considerations may cause the Company to fail to
qualify as a REIT or may cause the Board of Directors to revoke the REIT
election.
The Company and its stockholders may be subject to state or local taxation in
various jurisdictions, including those in which it or they transact business or
reside. The state and local tax treatment of the Company and its stockholders
may not conform to the federal income tax treatment.
NOL and Capital Loss Carryovers
At June 30, 1998, the Company's NOL carryover was approximately $95,000,000 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
- 16 -
<PAGE>
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
In February 1998, the Company announced that it was changing the date on which
its quarterly dividends are declared from the last month of the quarter to the
first month of the subsequent quarter. This change was made to allow the
dividend to be based on actual results instead of estimated results.
Accordingly, no dividend was declared during the first quarter of 1998. In April
1998, AIC declared a $0.25 per share dividend on its Common Stock for the first
quarter of 1998 totaling $1,279,000, which was paid in May 1998. Similarly, the
Operating Partnership declared and paid a $0.25 per OP Unit distribution to
holders of OP Units. In July 1998, AIC and the Operating Partnership each
declared a $0.25 per share dividend and per OP Unit distribution, as applicable,
for the second quarter payable in August 1998. During the three and six months
ended June 30, 1997, AIC declared and paid $0.30 and $0.775, respectively, per
share dividends on its Common Stock, totaling $1,514,000 and $3,874,000,
respectively. During the three months and six months ended June 30, 1997, the
Operating Partnership declared a $0.30 per OP Unit distribution as the Operating
Partnership did not exist during the first quarter of 1997.
Acquisition of Manager
Prior to November 1997, the Company's daily activities were performed by
Financial Asset Management LLC (the "Manager" or "FAM") pursuant to an annual
management agreement (the "AIC Management Agreement"). The Manager provided all
personnel and related overhead necessary to conduct the Company's activities in
exchange for various fees provided for in the AIC Management Agreement. In
addition, the Manager provided similar services to CAX pursuant to a separate
agreement (the "CAX Management Agreement") (collectively, the "Management
Agreements"). In November 1997, the Company's stockholders approved the
acquisition of the Manager's assets and operations for a purchase price of
$11,692,000, which was paid by issuing 676,696 OP Units. In addition, FAM will
be entitled to an additional 240,000 OP Units if the Company achieves certain
performance goals, including investment and share price targets, by June 1999.
FAM was acquired in September 1996 by an investor group involving Terry
Considine, Thomas L. Rhodes and Bruce D. Benson. Mr. Considine is Chairman of
the Board of Directors and Chief Executive Officer of both the Company and CAX.
Mr. Rhodes is Vice Chairman and Mr. Benson is a director of both companies.
As a result of the Company's November 1997 acquisition, the AIC Management
Agreement was cancelled and the fees formerly payable by the Company to the
Manager ceased. The employees of the Manager employed to perform the services
under the AIC Management Agreement and the CAX Management Agreement are now
employed by the Company. Certain officers and directors of the Company also
serve as officers, directors or both of CAX.
As a result of the Company's purchase of the CAX Management Agreement, the
Company manages CAX's daily activities in exchange for various fees. The CAX
Management Agreement has been extended through December 31, 1998 and provides
for the following fees: (i) Acquisition Fees equal to 0.5% of the cost of each
asset acquired by CAX; (ii) Base Fees equal to 1% per annum of CAX's "average
invested assets," and (iii) Incentive Fees equal to 20% of the amount by which
CAX's REIT income exceeds the amount calculated by multiplying CAX's "average
net worth" by the "Ten Year United States Treasury rate" plus 1%. The Company
does not expect to receive significant fees from the CAX Management Agreement
until CAX begins to invest its funds in real estate assets. Although there can
- 17 -
<PAGE>
be no assurance of when CAX will make such investments or the amount thereof,
the Company believes that CAX will begin making such investments in 1998.
RESULTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 1998
Comparison of three and six months ended June 30, 1998 to three and six months
ended June 30, 1997
Due to the change in the Company's business from investing in non-agency MBS
bonds to owning and managing manufactured home communities, the results of
operations for the first half of 1998 are not comparable to the first half of
1997.
Rental Property and Service Operations
During the three and six months ended June 30, 1998, the Company earned
$2,108,000 and $3,852,000 of rental and other property revenues and $764,000 and
$1,547,000 of interest on participating mortgages and incurred $807,000 and
$1,600,000 of property operating expenses and $495,000 and $888,000 of
depreciation related to the acquired communities, respectively. In addition,
during the same periods, the Company earned $62,000 and $139,000 of property
management fees and other income (including $9,000 and $12,000 of fees earned
under the CAX Management Agreement) less $22,000 and $46,000 of expenses and
$689,000 and $1,516,000 of amortization related to the management contracts
acquired (including the CAX Management Agreement).
The Company's first acquisition of interests in manufactured home communities
and property management contracts was in May 1997. During the three and six
months ended June 30, 1997, the Company earned $568,000 of rental and other
property revenues and incurred $243,000 of property operating expenses and
$130,000 of depreciation. During the same periods, the Company earned $23,000 of
property management fees and other income, less $15,000 of expenses and $19,000
of amortization related to the management contracts acquired.
CAX
Income from the Company's 27% ownership interest in CAX for the three and six
months ended June 30, 1998 was $266,000 and $534,000, respectively, compared to
$484,000 and $948,000, respectively, for the same periods of 1997. CAX reported
to the Company that the decrease in income is primarily because of the
restructuring of CAX's portfolio of CMBS bonds. The proceeds from the
restructuring of CAX's CMBS bond portfolio were invested in highly-liquid,
short-term investments during the first half of 1998 which earned lower returns
than the CMBS bonds.
Non-agency MBS Bonds
Through March 1997, the Company owned a portfolio of unrated credit support debt
interests in non-conforming residential mortgage loan securitizations known as
"non-agency MBS bonds." In February 1997, the Company decided to restructure its
asset base in order to reduce risk associated with the Company's non-agency MBS
bond portfolio and attempt to maximize long-term, risk-adjusted returns to
stockholders. In March 1997, the Company contributed its portfolio of non-agency
MBS bonds into an owner trust in a structured transaction in which the Company
- 18 -
<PAGE>
received $67.7 million cash and retained a small equity interest in the trust.
Income from the Company's non-agency MBS bonds decreased to $50,000 during the
first six months of 1998 compared with $2,450,000 for the same period in 1997
primarily due to the resecuritization of the bonds in March 1997. The revenues
from the non-agency MBS bonds subsequent to March 1997 represent income from the
retained equity interest. No income was recognized from the retained equity
interest during the second quarter of 1998, and the Company anticipates
receiving minimal, if any, additional income in the future from such retained
interest.
Management Fees
The Company incurred $97,000 and $374,000 of management fees to the Manager
during the three and six months ended June 30, 1997, respectively. There were no
management fees in 1998 due to the Company's acquisition of its management
agreement in November 1997.
General and Administrative Expenses
General and administrative expenses were $336,000 and $658,000 for the three and
six months ended June 30, 1998, respectively, compared to $87,000 and $423,000,
respectively for the same periods in 1997. The variances between the periods are
due to salary, rent and other general and administrative expenses incurred by
the Company as a result of its acquisition of the Manager's assets and
operations and costs incurred by the Company in evaluating potential
acquisitions not completed by the Company.
Interest and Other Income
Interest and other income for the three and six months ended June 30, 1998 was
$219,000 and $552,000, respectively, compared to $795,000 and $847,000,
respectively, for the same periods in 1997. The variances between the periods
are due to the cash balances from the restructuring of the non-agency MBS bonds.
The proceeds from the restructuring were temporarily invested until used to
acquire manufactured home communities. In May 1997, the Company used $22,871,000
cash to acquire interests in its first eight communities, and it continued to
use its cash during the remainder of 1997 and first six months of 1998 to
acquire additional interests in communities. In June 1998, the Company completed
the redeployment of the proceeds from the restructuring of its bond portfolio
and, therefore, does not expect to receive significant interest income in the
future. The average interest rate on the Company's temporary investments during
both the three and six months ended June 30, 1998 was 5.3% compared to 5.5% and
4.8%, respectively, for the same periods in 1997.
Interest Expense
Interest expense for the three and six months ended June 30, 1998, was $268,000
and $476,000, respectively, compared to $55,000 and $81,000, respectively, for
the same periods of 1997. Included in the 1998 interest expense is interest on
the secured notes payable assumed with the acquisition of four manufactured home
communities. In addition, the Company incurred $62,000 of interest expense on
$7,000,000 of secured short-term borrowings that occurred in June 1998. Interest
expense of $55,000 during the three and six months ended June 30, 1997, was on
the secured notes payable assumed with the acquisition of two manufactured home
communities. In addition, $26,000 of interest expense during the six months
ended June 30, 1997 was on $3,000,000 of secured short-term borrowings that were
outstanding during a portion of the first quarter of 1997.
- 19 -
<PAGE>
Gain on Restructuring of Bonds
In connection with the resecuritization of the non-agency MBS bonds, 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, reduced by both
$1,472,000 of Incentive Fees related to the gain and an additional fee of
$600,000 incurred in exchange for the Manager agreeing to continue as a loss
mitigation advisor on the non-agency MBS bonds.
Comparison of quarter ended June 30, 1998 to quarter ended March 31, 1998
Rental Property and Service Operations
Income from rental property operations was $1,570,000 during the second quarter
of 1998 compared to $1,341,000 during the first quarter of 1998. The increase in
income from rental property operations was due to properties acquired in the
second quarter of 1998 and a full quarter of earnings on properties acquired
during the first quarter of 1998. The Company recognized a loss from service
operations of $649,000 during the second quarter of 1998 compared to a loss
during the first quarter of 1998 of $774,000. The decreased loss was primarily
due to the write off during the first quarter of 1998 of the remaining cost of
property management contracts on manufactured home communities which the Company
acquired during such period.
CAX
Income from the Company's 27% ownership interest in CAX for the first two
quarters of 1998 was comparable because CAX was invested in short-term
investments during both quarters.
Non-agency MBS Bonds
Income from the Company's non-agency MBS bonds decreased to $0 during the second
quarter of 1998 compared with $50,000 for the first quarter of 1998. The
revenues from the non-agency MBS bonds represent income from the Company's small
retained equity interest in the trust involved in the 1997 resecuritization of
the Company's bond portfolio. Because of credit losses on the underlying
collateral, the Company anticipates minimal, if any, earnings from the retained
equity interest in the future.
General and Administrative Expenses
General and administrative expenses for the first two quarters of 1998 were
comparable.
Interest and Other Income
Interest and other income decreased to $219,000 during the second quarter of
1998 compared with $333,000 during the first quarter of 1998 because of the
Company's use of $19 million cash to purchase manufactured home communities
during the first half of 1998. Minimal interest income is expected in the future
due to the Company's reduced cash balances.
- 20 -
<PAGE>
Interest Expense
Interest expense increased to $268,000 during the second quarter of 1998
compared to $208,000 during the first quarter due to interest incurred in June
1998 on $7,000,000 of secured short-term financing used to acquire a
manufactured home community. Interest expense is expected to increase in the
future as the Company uses debt to acquire additional communities.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company has cash and cash equivalents of $1,971,000.
The Company's principal demands for liquidity include normal operating
activities, payments of principal and interest on outstanding debt, acquisitions
of or additional investments in properties, dividends paid to stockholders and
distributions made to limited partners in the Operating Partnership.
Net cash provided by operating activities was $2,374,000 during the six months
ended June 30, 1998, compared to $1,059,000 during the same period in 1997. The
increase was primarily a result of higher earnings from rental property
operations partially offset by earnings from the non-agency MBS bonds in 1997.
Net cash used in investing activities was $27,384,000 during the first half of
1998 primarily related to the acquisition of manufactured home communities.
During the first half of 1997, net cash provided by investing activities of
$48,358,000 included $69,743,000 from the restructuring of the Company's bond
portfolio offset by $22,871,000 used to acquire communities.
Net cash provided by financing activities was $5,179,000 during the first six
months of 1998 compared to $6,891,000 of net cash used in financing activities
for the same period in 1997. The variance was primarily due to the borrowing and
repayment of secured short-term financings and the timing of the payment of
dividends on Common Stock in 1998 (see "Dividend Distributions").
Secured notes payable at June 30, 1998, consist of $4,665,000 of notes which
bear 8.25% interest and $5,791,000 of notes which bear 7.5% interest. All such
notes mature in October 2000. The notes are secured by four manufactured home
communities and were assumed by the Company in connection with the acquisition
of such communities. The secured notes payable require escrow payments for the
payment of property taxes. At June 30, 1998, $217,000 was held in such escrow
accounts.
The Company had a $1,000,000 unsecured line of credit with a bank that expired
July 31, 1998. Advances under this line bear interest at the prime rate. At June
30, 1998 and December 31, 1997, no advances were outstanding on this line of
credit.
The Company expects to meet its long-term liquidity requirements through
long-term, secured borrowings, the issuance of OP Units and equity securities
and cash generated by operations.
YEAR 2000 COMPLIANCE
Management believes that the cost of modification or replacement of its
accounting and reporting software and hardware that is not compliant with Year
2000 requirements will not be material to the Company's financial position or
results of operations.
- 21 -
<PAGE>
PART II
OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's 1998 Annual Meeting of Stockholders was held on June 30, 1998. At
the meeting, Messrs. Thomas L. Rhodes and Elliot H. Kline were elected as Class
III Directors to terms expiring in 2001. There were 4,468,931 and 4,473,149
votes cast "for" the election of Messrs. Rhodes and Kline, respectively, and
141,092 and 136,874, respectively, votes were withheld. In addition, the
stockholders approved the Asset Investors Corporation 1998 Stock Incentive Plan.
Of the votes cast, 2,017,038 were cast "for" approval of the plan and 897,958
were cast "against" approval of the Plan with 38,654 abstentions.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
3.1 Certificate of Incorporation of Asset Investors Corporation (the
"Registrant"), as amended (incorporated herein by reference to
Exhibit 3.1(b) to the Quarterly Report on Form 10-Q of the
Registrant for the quarter ended June 30, 1989, Commission File
No. 1-9360, filed on August 14, 1989).
3.2 By-laws of the Registrant, as amended and restated (incorporated
herein by reference to Exhibit 3.3 to the Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31,
1993, Commission File No. 1-9360 filed March 31, 1994).
3.2(a) June 21, 1994 Amendment to the By-laws of the Registrant
(incorporated herein by reference to Exhibit 3.3(b) to the
Annual Report on Form 10-K of the Registrant for the fiscal year
ended December 31, 1994, Commission File No. 1-9360 filed March
30, 1995).
3.2(b) March 15, 1995 Amendment to the By-laws of the Registrant
(incorporated herein by reference to Exhibit 3.3(c) to the
Annual Report on Form 10-K of the Registrant for the fiscal year
ended December 31, 1994, Commission File No. 1-9360 filed March
30, 1995).
3.2(c) January 14, 1997, Amendment to the By-laws of the Registrant
(incorporated herein by reference to Exhibit 3.2(c) to the
Annual Report on Form 10-K of the Registrant for the fiscal year
ended December 31, 1996, Commission File No. 1-9360, filed on
March 24, 1997).
10.3 1998 Stock Incentive Plan of the Registrant
27 Financial Data Schedule
- 22 -
<PAGE>
(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 and during July 1998:
Amendment No. 1 to Form 8-K dated February 27, 1998, reporting
the acquisition of manufactured home community assets which
included: (i) Statement of Excess of Revenues Over Specific
Operating Expenses of the Salem Farm Manufactured Home
Community for the year ended December 31, 1997; and (ii)
Statement of Excess of Revenues Over Specific Operating
Expenses of the Mullica Woods Adult Community for the year
ended December 31, 1997.
Form 8-K dated May 29, 1998, reporting the acquisition of
manufactured housing community assets and related Amendment
No. 1 to Form 8-K dated May 29, 1998, reporting the
acquisition of manufactured home community assets which
included: (i) Statement of Excess of Revenues Over Specific
Operating Expenses of the Brentwood West Manufactured Home
Community for the year ended December 31, 1997 (audited) and
the period from January 1, 1998 to March 31, 1998 (unaudited);
and (ii) Statement of Excess of Revenues Over Specific
Operating Expenses of the Serendipity Manufactured Home
Community for the year ended December 31, 1997 (audited) and
the period from January 1, 1998 to March 31, 1998 (unaudited).
Form 8-K dated July 16, 1998, reporting the acquisition of
manufactured housing community assets.
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 14, 1998 By /s/David M. Becker
-------------------------
David M. Becker
Chief Financial Officer
- 23 -
ASSET INVESTORS CORPORATION
1998 STOCK INCENTIVE PLAN
Section 1. General Purpose of Plan; Definitions.
The name of this plan is the Asset Investors Corporation 1998
Stock Incentive Plan (the "Plan"). The Plan was adopted by the Board on April
21, 1998, subject to the approval of the stockholders of the Company, which
approval was obtained on June 30, 1998. The purpose of the Plan is to enable the
Company to attract and retain highly qualified personnel who will contribute to
the Company's success by their ability, ingenuity and industry and to provide
incentives to the participating officers, directors, employees, consultants and
advisors that are linked directly to increases in stockholder value and will
therefore inure to the benefit of all stockholders of the Company.
For purposes of the Plan, the following terms shall be defined
as set forth below:
(1) "Administrator" means the Board, or if and to the extent
the Board does not administer the Plan, the Committee in accordance with Section
2.
(2) "Annual Non-Employee Director Stock Option" means an
annual grant of stock options to a non-employee director of the Company pursuant
to Section 5A.
(3) "Board" means the Board of Directors of the Company.
(4) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor thereto.
(5) "Committee" means the Compensation Committee of the Board
or any committee the Board may subsequently appoint to administer the Plan. To
the extent applicable, the Committee shall be composed entirely of individuals
who meet the qualifications referred to in Section 162(m) of the Code and Rule
16b-3 under the Securities Exchange Act of 1934, as amended. If at any time or
to any extent the Board shall not administer the Plan, then the functions of the
Board specified in the Plan shall be exercised by the Committee.
(6) "Company" means Asset Investors Corporation, a Maryland
corporation (or any successor corporation).
(7) "Deferred Stock" means an award made pursuant to Section 7
below of the right to receive Stock at the end of a specified deferral period.
(8) "Effective Date" shall mean the date set forth in Section
11.
(9) "Eligible Recipient" means an officer, director, employee,
consultant or advisor
<PAGE>
of the Company or any Subsidiary.
(10) "Fair Market Value" means, as of any given date, with
respect to any awards granted hereunder, (A) if the Stock is publicly traded,
the closing sale price of the Stock on such date as reported in the Western
Edition of the Wall Street Journal, (B) the fair market value of the Stock as
determined in accordance with a method prescribed in the agreement evidencing
any award hereunder, or (C) the fair market value of the Stock as otherwise
determined by the Administrator in the good faith exercise of its discretion.
(11) "Incentive Stock Option" means any Stock Option intended
to be designated as an "incentive stock option" within the meaning of Section
422 of the Code.
(12) "Limited Stock Appreciation Right" means a Stock
Appreciation Right that can be exercised only in the event of a "Change of
Control" (as defined in Section 13 or as otherwise defined in the award
agreement evidencing such Limited Stock Appreciation Right).
(13) "Non-Qualified Stock Option" means any Stock Option that
is not an Incentive Stock Option, including any Stock Option that provides (as
of the time such option is granted) that it will not be treated as an Incentive
Stock Option.
(14) "Parent Corporation" means any corporation (other the
Company) in an unbroken chain of corporations ending with the Company, if each
of the corporations in the chain (other than the Company) owns stock possessing
50% or more of the combined voting power of all classes of stock in one of the
other corporations in the chain.
(15) "Participant" means any Eligible Recipient selected by
the Administrator, pursuant to the Administrator's authority in Section 2 below,
to receive grants of Stock Options, Stock Appreciation Rights, Limited Stock
Appreciation Rights, Restricted Stock awards, Deferred Stock awards, Performance
Shares or any combination of the foregoing.
(16) "Partnership" means any operating partnership of the
Company or which may hereafter be formed by the Company.
(17) "Partnership Units" means units of limited partnership of
the Partnership.
(18) "Performance Share" means an award of shares of Stock
pursuant to Section 7 that is subject to restrictions based upon the attainment
of specified performance objectives.
(19) "Restricted Stock" means an award granted pursuant to
Section 7 of shares of Stock subject to certain restrictions.
(20) "Stock" means the Common Stock, par value $.01 per
share, of the Company.
(21) "Stock Appreciation Right" means the right pursuant to an
award granted under Section 6 to receive an amount equal to the excess, if any,
of (A) the Fair Market Value, as of the
<PAGE>
date such Stock Appreciation Right or portion thereof is surrendered, of the
shares of Stock covered by such right or such portion thereof, over (B) the
aggregate exercise price of such right or such portion thereof.
(22) "Stock Option" means any option to purchase shares of
Stock granted pursuant to Section 5 or any Annual Non-Employee Director Stock
Option granted pursuant to Section 5A.
(23) "Subsidiary" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company, if
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 the chain.
Section 2. Administration.
The Plan shall be administered in accordance with the
requirements of Section 162(m) of the Code (but only to the extent necessary to
maintain qualification of awards under the Plan under Section 162(m) of the
Code) and, to the extent applicable, Rule 16b-3 under the Securities Exchange
Act of 1934, as amended ("Rule 16b-3"), by the Board or by the Committee which
shall be appointed by the Board and which shall serve at the pleasure of the
Board.
Pursuant to the terms of the Plan, the Administrator shall
have the power and authority to grant to Eligible Recipients pursuant to the
terms of the Plan: (a) Stock Options, (b) Stock Appreciation Rights or Limited
Stock Appreciation Rights, (c) Restricted Stock, (d) Performance Shares, (e)
Deferred Stock or (f) any combination of the foregoing.
In particular, the Administrator shall have the authority:
(a) to select those Eligible Recipients who shall be
Participants;
(b) to determine whether and to what extent Stock
Options, Stock Appreciation Rights, Limited Stock Appreciation Rights,
Restricted Stock, Deferred Stock, Performance Shares or a combination of the
foregoing, are to be granted hereunder to Participants;
(c) to determine the number of shares of Stock to be
covered by each such award granted hereunder;
(d) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder
(including, but not limited to, (x) the restrictions applicable to Restricted
Stock or Deferred Stock awards and the conditions under which restrictions
applicable to such Restricted Stock or Deferred Stock shall lapse, and (y) the
performance goals and periods applicable to the award of Performance Shares);
and
(e) to determine the terms and conditions, not
inconsistent with the terms of the Plan, which shall govern all written
instruments evidencing the Stock Options, Stock Appreciation Rights, Limited
Stock Appreciation Rights, Restricted Stock, Deferred Stock,
<PAGE>
Performance Shares or any combination of the foregoing granted hereunder to
Participants.
The Administrator shall have the authority, in its discretion,
to adopt, alter and repeal such administrative rules, guidelines and practices
governing the Plan as it shall from time to time deem advisable; to interpret
the terms and provisions of the Plan and any award issued under the Plan (and
any agreements relating thereto); and to otherwise supervise the administration
of the Plan.
All decisions made by the Administrator pursuant to the
provisions of the Plan shall be final, conclusive and binding on all persons,
including the Company and the Participants.
Section 3. Stock Subject to Plan.
The number of shares of Stock reserved for issuance at any
time pursuant to outstanding awards under the Plan shall be limited to 15% of
the sum of (i) the number of then outstanding shares of Stock and (ii) the
number of then outstanding Partnership Units; provided, that in no event shall
the total number of shares of Common Stock issuable under the 1998 Stock Plan
exceed 3 million shares of Stock. The aggregate number of shares of Stock as to
which Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock
and Performance Shares may be granted to any individual during any calendar year
may not, subject to adjustment as provided in this Section 3, exceed 80% of the
shares of Stock reserved for the purposes of the Plan in accordance with the
provisions of this Section 3.
Consistent with the provisions of Section 162(m) of the Code,
as from time to time applicable, to the extent that (i) a Stock Option expires
or is otherwise terminated without being exercised, or (ii) any shares of Stock
subject to any Restricted Stock, Deferred Stock or Performance Share award
granted hereunder are forfeited, such shares shall again be available for
issuance in connection with future awards under the Plan. If any shares of Stock
have been pledged as collateral for indebtedness incurred by a Participant in
connection with the exercise of a Stock Option and such shares are returned to
the Company in satisfaction of such indebtedness, such shares shall again be
available for issuance in connection with future awards under the Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend or other change in corporate structure
affecting the Stock, a substitution or adjustment shall be made in (i) the
aggregate number of shares reserved for issuance under the Plan, (ii) the kind,
number and option price of shares subject to outstanding Stock Options granted
under the Plan, and (iii) the kind, number and purchase price of shares issuable
pursuant to awards of Restricted Stock, Deferred Stock and Performance Shares,
in each case as may be determined by the Administrator, in its sole discretion.
Such other substitutions or adjustments shall be made as may be determined by
the Administrator, in its sole discretion. An adjusted option price shall also
be used to determine the amount payable by the Company upon the exercise of any
Stock Appreciation Right or Limited Stock Appreciation Right related to any
Stock Option. In connection with any event described in this paragraph, the
Administrator may provide, in its discretion, for the cancellation of any
outstanding awards and payment in cash or other property therefor.
<PAGE>
Section 4. Eligibility.
Officers, directors and employees of the Company or any
Subsidiary, and consultants and advisors to the Company or any Subsidiary, who
are responsible for or are in a position to contribute to the management, growth
and/or profitability of the business of the Company shall be eligible to be
granted Stock Options, Stock Appreciation Rights, Limited Stock Appreciation
Rights, Restricted Stock awards, Deferred Stock awards or Performance Shares
hereunder. The Participants under the Plan shall be selected from time to time
by the Administrator, in its sole discretion, from among the Eligible Recipients
recommended by the senior management of the Company, and the Administrator shall
determine, in its sole discretion, the number of shares of Stock covered by each
award.
Section 5. Discretionary Grants of Stock Options.
Stock Options may be granted alone or in addition to other
awards granted under the Plan. Any Stock Option granted under the Plan shall be
in such form as the Administrator may from time to time approve, and the
provisions of Stock Option awards need not be the same with respect to each
optionee. Recipients of Stock Options shall enter into an award agreement with
the Company, in such form as the Administrator shall determine, which agreement
shall set forth, among other things, the exercise price of the option, the term
of the option and provisions regarding exercisability of the option granted
thereunder.
The Stock Options granted under the Plan may be of two types:
(i) Incentive Stock Options and (ii) Non-Qualified Stock Options.
The Administrator shall have the authority to grant any
officer or employee of the Company (including directors who are also officers of
the Company) Incentive Stock Options, NonQualified Stock Options, or both types
of Stock Options (in each case with or without Stock Appreciation Rights or
Limited Stock Appreciation Rights). Directors who are not officers of the
Company, consultants and advisors may only be granted Non-Qualified Stock
Options (with or without Stock Appreciation Rights or Limited Stock Appreciation
Rights). To the extent that any Stock Option does not qualify as an Incentive
Stock Option, it shall constitute a separate NonQualified Stock Option. More
than one option may be granted to the same optionee and be outstanding
concurrently hereunder.
Stock Options granted under the Plan shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Administrator
shall deem desirable:
(1) Option Price. The option price per share of Stock
purchasable under a Stock Option shall be determined by the Administrator in its
sole discretion at the time of grant but shall not, in the case of Incentive
Stock Options, be less than 100% of the Fair Market Value of the Stock on such
date and shall not, in any event, be less than the par value (if any) of the
Stock. If an employee owns or is deemed to own (by reason of the attribution
rules applicable under Section 424(d) of the Code) more than 10% of the combined
voting power of all classes of stock of the
<PAGE>
Company or any Parent Corporation and an Incentive Stock Option is granted to
such employee, the option price of such Incentive Stock Option (to the extent
required by the Code at the time of grant) shall be no less than 110% of the
Fair Market Value of the Stock on the date such Incentive Stock Option is
granted.
(2) Option Term. The term of each Stock Option shall be fixed
by the Administrator, but no Stock Option shall be exercisable more than ten
years after the date such Stock Option is granted; provided, however, that if an
employee owns or is deemed to own (by reason of the attribution rules of Section
424(d) of the Code) more than 10% of the combined voting power of all classes of
stock of the Company or any Parent Corporation and an Incentive Stock Option is
granted to such employee, the term of such Incentive Stock Option (to the extent
required by the Code at the time of grant) shall be no more than five years from
the date of grant.
(3) Exercisability. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be determined by
the Administrator at or after grant. The Administrator may provide, in its
discretion, that any Stock Option shall be exercisable only in installments, and
the Administrator may waive such installment exercise provisions at any time in
whole or in part based on such factors as the Administrator may determine, in
its sole discretion.
(4) Method of Exercise. Subject to Section 5(3) above, Stock
Options may be exercised in whole or in part at any time during the option
period, by giving written notice of exercise to the Company specifying the
number of shares to be purchased, accompanied by payment in full of the purchase
price in cash or its equivalent, as determined by the Administrator. As
determined by the Administrator, in its sole discretion, payment in whole or in
part may also be made (i) by means of any cashless exercise procedure approved
by the Administrator, (ii) in the form of unrestricted Stock already owned by
the optionee or (iii) in the case of the exercise of a NonQualified Stock
Option, in the form of Restricted Stock or Performance Shares subject to an
award hereunder (based, in each case, on the Fair Market Value of the Stock on
the date the option is exercised); provided, however, that in the case of an
Incentive Stock Option, the right to make payment in the form of already owned
shares may be authorized only at the time of grant. If payment of the option
exercise price of a Non-Qualified Stock Option is made in whole or in part in
the form of Restricted Stock or Performance Shares, the shares received upon the
exercise of such Stock Option shall be restricted in accordance with the
original terms of the Restricted Stock or Performance Share award in question,
except that the Administrator may direct that such restrictions shall apply only
to that number of shares equal to the number of shares surrendered upon the
exercise of such option. An optionee shall generally have the rights to
dividends and any other rights of a stockholder with respect to the Stock
subject to the Stock Option only after the optionee has given written notice of
exercise, has paid in full for such shares, and, if requested, has given the
representation described in paragraph (1) of Section 10.
The Administrator may require the voluntary surrender of all
or a portion of any Stock Option granted under the Plan as a condition precedent
to the grant of a new Stock Option. Subject to the provisions of the Plan, such
new Stock Option shall be exercisable at the price, during such period and on
such other terms and conditions as are specified by the Administrator at the
time the new Stock Option is granted. Consistent with the provisions of Section
162(m), to the extent
<PAGE>
applicable, upon their surrender, Stock Options shall be canceled and the shares
previously subject to such canceled Stock Options shall again be available for
grants of Stock Options and other awards hereunder.
(5) Loans. The Company may make loans available to Stock
Option holders in connection with the exercise of outstanding options granted
under the Plan, as the Administrator, in its discretion, may determine. Such
loans shall (i) be evidenced by promissory notes entered into by the Stock
Option holders in favor of the Company, (ii) be subject to the terms and
conditions set forth in this Section 5(5) and such other terms and conditions,
not inconsistent with the Plan, as the Administrator shall determine, (iii) bear
interest, if any, at such rate as the Administrator shall determine, and (iv) be
subject to Board approval (or to approval by the Administrator to the extent the
Board may delegate such authority). In no event may the principal amount of any
such loan exceed the sum of (x) the exercise price less the par value (if any)
of the shares of Stock covered by the option, or portion thereof, exercised by
the holder, and (y) any federal, state, and local income tax attributable to
such exercise. The initial term of the loan, the schedule of payments of
principal and interest under the loan, the extent to which the loan is to be
with or without recourse against the holder with respect to principal or
interest and the conditions upon which the loan will become payable in the event
of the holder's termination of employment shall be determined by the
Administrator. Unless the Administrator determines otherwise, when a loan is
made, shares of Stock having a Fair Market Value at least equal to the principal
amount of the loan shall be pledged by the holder to the Company as security for
payment of the unpaid balance of the loan, and such pledge shall be evidenced by
a pledge agreement, the terms of which shall be determined by the Administrator,
in its discretion; provided, however, that each loan shall comply with all
applicable laws, regulations and rules of the Board of Governors of the Federal
Reserve System and any other governmental agency having jurisdiction.
(6) Transferability of Options. Stock Options shall be
transferable by the optionee, and all Stock Options shall be exercisable, during
the optionee's lifetime, only by the optionee or any transferee; provided, that
the Administrator may, in its sole discretion, provide for the
non-transferability of Stock Options under such terms and conditions as the
Administrator shall determine and set forth in the agreement evidencing such
award. Notwithstanding the foregoing, except to the extent permitted by Section
422 of the Code, no Stock Option intended to qualify as an Incentive Stock
Option shall be transferable by the optionee.
(7) Termination of Employment or Service. If an optionee's
employment or service as a director, consultant or advisor terminates by reason
of death, disability or for any other reason, the Stock Option may thereafter be
exercised to the extent provided in the applicable award agreement, or as
otherwise determined by the Administrator.
(8) Annual Limit on Incentive Stock Options. To the extent
that the aggregate Fair Market Value (determined as of the date the Incentive
Stock Option is granted) of shares of Stock with respect to which Incentive
Stock Options granted to an Optionee under this Plan and all other option plans
of the Company or its Parent Corporation become exercisable for the first time
by the Optionee during any calendar year exceeds $100,000, such Stock Options
shall be treated as NonQualified Stock Options.
<PAGE>
Section 5A. Annual Non-Employee Director Stock Option Grants
Immediately following each annual meeting of the Company's
stockholders, each then non-employee director of the Company shall automatically
be granted a Non-Qualified Stock Option to purchase 2,800 shares of Stock (an
"Annual Non-Employee Director Stock Option"). The terms and conditions of the
Annual Non-Employee Director Stock Options granted pursuant to this Section 5A
shall be as follows:
(1) Option Term. The term of the option shall be ten (10)
years from the date of grant.
(2) Exercise Price. The exercise price per share of Stock
subject to such option shall be 100% of the Fair Market Value of the Stock on
the date of grant.
(3) Vesting and Exercisability. The option shall be 100%
vested and exercisable as of the date of grant.
(4) Transferability. The option shall be transferable as
provided in Section 5(6).
(5) Payment of Exercise Price. The exercise price of the
option shall be paid in cash or its equivalent as determined by the
Administrator.
(6) Termination of Service. Following termination of service
as a director for any reason, the option shall be exercisable as determined by
the Administrator at or after grant.
Section 5B. Stock Grants to Non-Employee Directors in Lieu of Meeting Fees
Each non-employee director of the Company may elect to receive
all or any portion of any Meeting Fees in shares of Stock. "Meeting Fees" shall
mean all annual retainers and other fees payable for attendance at each regular
or special meeting of the Board or any committees attended by a non-employee
director. The number of shares of Stock issuable pursuant to any such election
shall be determined based on (i) the amount of Meeting Fees subject to such
election and (ii) the Fair Market Value of the Stock as of the date of grant. If
no such election is timely received by the Company, such director shall receive
any Meeting Fees in cash.
Section 6. Stock Appreciation Rights and Limited Stock Appreciation Rights.
(1) Grant and Exercise. Stock Appreciation Rights and Limited
Stock Appreciation Rights may be granted either alone ("Free Standing Rights")
or in conjunction with all or part of any Stock Option granted under the Plan
("Related Rights"). In the case of a Non-Qualified Stock Option, Related Rights
may be granted either at or after the time of the grant of such Stock Option. In
the case of an Incentive Stock Option, Related Rights may be granted only at the
time of the grant of the Incentive Stock Option.
A Related Right or applicable portion thereof granted in
conjunction with a given
<PAGE>
Stock Option shall terminate and no longer be exercisable upon the termination
or exercise of the related Stock Option, except that, unless otherwise provided
by the Administrator at the time of grant, a Related Right granted with respect
to less than the full number of shares covered by a related Stock Option shall
only be reduced if and to the extent that the number of shares covered by the
exercise or termination of the related Stock Option exceeds the number of shares
not covered by the Related Right.
A Related Right may be exercised by an optionee, in accordance
with paragraph (2) of this Section 6, by surrendering the applicable portion of
the related Stock Option. Upon such exercise and surrender, the optionee shall
be entitled to receive an amount determined in the manner prescribed in
paragraph (2) of this Section 6. Stock Options which have been so surrendered,
in whole or in part, shall no longer be exercisable to the extent the Related
Rights have been so exercised.
(2) Terms and Conditions. Stock Appreciation Rights shall be
subject to such terms and conditions, not inconsistent with the provisions of
the Plan, as shall be determined from time to time by the Administrator,
including the following:
(a) Stock Appreciation Rights that are Related Rights
("Related Stock Appreciation Rights") shall be exercisable only at such time or
times and to the extent that the Stock Options to which they relate shall be
exercisable in accordance with the provisions of Section 5 and this Section 6 of
the Plan.
(b) Upon the exercise of a Related Stock Appreciation
Right, an optionee shall be entitled to receive up to, but not more than, an
amount in cash or that number of shares of Stock (or in some combination of cash
and shares of Stock) equal in value to the excess of the Fair Market Value of
one share of Stock as of the date of exercise over the option price per share
specified in the related Stock Option multiplied by the number of shares of
Stock in respect of which the Related Stock Appreciation Right is being
exercised, with the Administrator having the right to determine the form of
payment.
(c) Related Stock Appreciation Rights shall be
transferable only when and to the extent that the underlying Stock Option would
be transferable under paragraph (6) of Section 5 of the Plan.
(d) Upon the exercise of a Related Stock Appreciation
Right, the Stock Option or part thereof to which such Related Stock Appreciation
Right is related shall be deemed to have been exercised for the purpose of the
limitation set forth in Section 3 of the Plan on the number of shares of Stock
to be issued under the Plan, but only to the extent of the number of shares
issued under the Related Stock Appreciation Right.
(e) A Related Stock Appreciation Right granted in
connection with an Incentive Stock Option may be exercised only if and when the
Fair Market Value of the Stock subject to the Incentive Stock Option exceeds the
exercise price of such Stock Option.
<PAGE>
(f) Stock Appreciation Rights that are Free Standing
Rights ("Free Standing Stock Appreciation Rights") shall be exercisable at such
time or times and subject to such terms and conditions as shall be determined by
the Administrator at or after grant.
(g) The term of each Free Standing Stock Appreciation
Right shall be fixed by the Administrator, but no Free Standing Stock
Appreciation Right shall be exercisable more than ten years after the date such
right is granted.
(h) Upon the exercise of a Free Standing Stock
Appreciation Right, a recipient shall be entitled to receive up to, but not more
than, an amount in cash or that number of shares of Stock (or any combination of
cash or shares of Stock) equal in value to the excess of the Fair Market Value
of one share of Stock as of the date of exercise over the price per share
specified in the Free Standing Stock Appreciation Right (which price shall be no
less than 100% of the Fair Market Value of the Stock on the date of grant)
multiplied by the number of shares of Stock in respect of which the right is
being exercised, with the Administrator having the right to determine the form
of payment.
(i) Free Standing Stock Appreciation Rights shall be
transferable only when and to the extent that a Stock Option would be
transferable under paragraph (6) of Section 5 of the Plan.
(j) In the event of the termination of employment or
service of a Participant who has been granted one or more Free Standing Stock
Appreciation Rights, such rights shall be exercisable at such time or times and
subject to such terms and conditions as shall be determined by the Administrator
at or after grant.
(k) Limited Stock Appreciation Rights may only be
exercised within the 30-day period following a "Change of Control" (as defined
in Section 13 or as otherwise defined by the Administrator in the award
agreement evidencing such Limited Stock Appreciation Right) and, with respect to
Limited Stock Appreciation Rights that are Related Rights ("Related Limited
Stock Appreciation Rights"), only to the extent that the Stock Options to which
they relate shall be exercisable in accordance with the provisions of Section 5
and this Section 6 of the Plan.
(l) Upon the exercise of a Limited Stock Appreciation
Right, the recipient shall be entitled to receive an amount in cash equal in
value to the excess of the "Change of Control Price" (as defined in the
agreement evidencing such Limited Stock Appreciation Right) of one share of
Stock as of the date of exercise over (A) the option price per share specified
in the related Stock Option, or (B) in the case of a Limited Stock Appreciation
Right which is a Free Standing Stock Appreciation Right, the price per share
specified in the Free Standing Stock Appreciation Right, such excess to be
multiplied by the number of shares in respect of which the Limited Stock
Appreciation Right shall have been exercised.
<PAGE>
Section 7. Restricted Stock, Deferred Stock and Performance Shares.
(1) General. Restricted Stock, Deferred Stock or Performance
Share awards may be issued either alone or in addition to other awards granted
under the Plan. The Administrator shall determine the Eligible Recipients to
whom, and the time or times at which, grants of Restricted Stock, Deferred Stock
or Performance Share awards shall be made; the number of shares to be awarded;
the price, if any, to be paid by the recipient of Restricted Stock, Deferred
Stock or Performance Share awards; the Restricted Period (as defined in
paragraph (3) of this Section 7) applicable to Restricted Stock or Deferred
Stock awards; the performance objectives applicable to Restricted Stock,
Performance Share or Deferred Stock awards; the date or dates on which
restrictions applicable to such Restricted Stock or Deferred Stock awards shall
lapse during such Restricted Period; and all other conditions of the Restricted
Stock, Deferred Stock and Performance Share awards. Subject to the requirements
of Section 162(m) of the Code, as applicable, the Administrator may also
condition the grant of Restricted Stock, Deferred Stock awards or Performance
Shares upon the exercise of Stock Options, or upon such other criteria as the
Administrator may determine, in its sole discretion. The provisions of
Restricted Stock, Deferred Stock or Performance Share awards need not be the
same with respect to each recipient. In the discretion of the Administrator,
loans may be made to Participants in connection with the purchase of Restricted
Stock under substantially the same terms and conditions as provided in Section
5(5) with respect to the exercise of stock options.
(2) Awards and Certificates. The prospective recipient of a
Restricted Stock, Deferred Stock or Performance Share award shall not have any
rights with respect to such award, unless and until such recipient has executed
an agreement evidencing the award (a "Restricted Stock Award Agreement,"
"Deferred Stock Award Agreement" or "Performance Share Award Agreement," as
appropriate) and delivered a fully executed copy thereof to the Company, within
a period of sixty days (or such other period as the Administrator may specify)
after the award date. Except as otherwise provided below in this Section 7(2),
(i) each Participant who is awarded Restricted Stock or Performance Shares shall
be issued a stock certificate in respect of such shares of Restricted Stock or
Performance Shares; and (ii) such certificate shall be registered in the name of
the Participant, and shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such award.
The Company may require that the stock certificates evidencing
Restricted Stock or Performance Share awards hereunder be held in the custody of
the Company until the restrictions thereon shall have lapsed, and that, as a
condition of any Restricted Stock award or Performance Share award, the
Participant shall have delivered a stock power, endorsed in blank, relating to
the Stock covered by such award.
With respect to Deferred Stock awards, at the expiration of
the Restricted Period, stock certificates in respect of such shares of Deferred
Stock shall be delivered to the participant, or his legal representative, in a
number equal to the number of shares of Stock covered by the Deferred Stock
award.
(3) Restrictions and Conditions. The Restricted Stock, Deferred
Stock and
<PAGE>
Performance Share awards granted pursuant to this Section 7 shall be subject to
the following restrictions and conditions:
(a) Subject to the provisions of the Plan, and the
Restricted Stock Award Agreement, Deferred Stock Award Agreement or Performance
Share Award Agreement, as appropriate, governing such award, during such period
as may be set by the Administrator commencing on the grant date (the "Restricted
Period"), the Participant shall not be permitted to sell, transfer, pledge or
assign shares of Restricted Stock, Performance Shares or Deferred Stock awarded
under the Plan; provided, however, that the Administrator may, in its sole
discretion, provide for the lapse of such restrictions (other than those
pursuant to any stockholders agreement) in installments and may accelerate or
waive such restrictions in whole or in part based on such factors and such
circumstances as the Administrator may determine, in its sole discretion,
including, but not limited to, the attainment of certain performance related
goals or the Participant's termination of employment or service, death or
disability.
(b) Except as provided in paragraph (3)(a) of this
Section 7, the Participant shall generally have, with respect to the shares of
Restricted Stock or Performance Shares, all of the rights of a stockholder with
respect to such stock during the Restricted Period. The Participant shall
generally not have the rights of a stockholder with respect to stock subject to
Deferred Stock awards during the Restricted Period; provided, however, that
dividends declared during the Restricted Period with respect to the number of
shares covered by a Deferred Stock award shall be paid to the Participant.
Certificates for shares of unrestricted Stock shall be delivered to the
Participant promptly after, and only after, the Restricted Period shall expire
without forfeiture in respect of such shares of Restricted Stock, Performance
Shares or Deferred Stock, except as the Administrator, in its sole discretion,
shall otherwise determine.
(c) The rights of holders of Restricted Stock,
Deferred Stock and Performance Share awards upon termination of employment or
service for any reason during the Restricted Period shall be set forth in the
Restricted Stock Award Agreement, Deferred Stock Award Agreement or Performance
Share Award Agreement, as appropriate, governing such awards.
(d) With respect to awards intended to constitute
"qualified performance based compensation for purposes of Section 162(m) of the
Code, the applicable performance goals shall be based on funds from operations,
adjusted funds from operations, net income and stock price performance.
Section 8. Amendment and Termination.
The Board may amend, alter or discontinue the Plan, but no
amendment, alteration, or discontinuation shall be made that would impair the
rights of a Participant under any award theretofore granted without such
Participant's consent, or that, without the approval of the stockholders (as
described below), would:
(1) except as provided in Section 3, increase the total number
of shares of Stock reserved for the purpose of the Plan;
<PAGE>
(2) change the class of directors, officers, employees,
consultants and advisors eligible to participate in the Plan; or
(3) extend the maximum option period under paragraph (2) of
Section 5 of the Plan.
Notwithstanding the foregoing, stockholder approval under this
Section 8 shall only be required at such time and under such circumstances as
stockholder approval would be required under Section 162(m) of the Code or other
applicable law, rule or regulation with respect to any material amendment to any
employee benefit plan of the Company.
The Administrator may amend the terms of any award theretofore
granted, prospectively or retroactively, but, subject to Section 3 above, no
such amendment shall impair the rights of any holder without his or her consent.
Section 9. Unfunded Status of Plan.
The Plan is intended to constitute an "unfunded" plan for
incentive compensation. With respect to any payments not yet made to a
Participant by the Company, nothing contained herein shall give any such
Participant any rights that are greater than those of a general creditor of the
Company.
Section 10. General Provisions.
(1) The Administrator may require each person purchasing
shares pursuant to a Stock Option or otherwise acquiring shares under the Plan
to represent to and agree with the Company in writing that such person is
acquiring the shares without a view to distribution thereof. The certificates
for such shares may include any legend which the Administrator deems appropriate
to reflect any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan
shall be subject to such stock-transfer orders and other restrictions as the
Administrator may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Stock is then listed, and any applicable federal or state securities
law, and the Administrator may cause a legend or legends to be placed on any
such certificates to make appropriate reference to such restrictions.
(2) Nothing contained in the Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to stockholder
approval, if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases. The adoption of the
Plan shall not confer upon any officer, director, employee, consultant or
advisor of the Company any right to continued employment or service with the
Company, as the case may be, nor shall it interfere in any way with the right of
the Company to terminate the employment or service of any of its officers,
directors, employees, consultants or advisors at any time.
(3) Each Participant shall, no later than the date as of which
the value of an award
<PAGE>
first becomes includible in the gross income of the Participant for federal
income tax purposes, pay to the Company, or make arrangements satisfactory to
the Administrator regarding payment of, any federal, state, or local taxes of
any kind required by law to be withheld with respect to the award. The
obligations of the Company under the Plan shall be conditional on the making of
such payments or arrangements, and the Company shall, to the extent permitted by
law, have the right to deduct any such taxes from any payment of any kind
otherwise due to the Participant.
(4) No member of the Board or the Administrator, nor any
officer or employee of the Company acting on behalf of the Board or the
Administrator, shall be personally liable for any action, determination, or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Board or the Administrator and each and any officer or employee
of the Company acting on their behalf shall, to the extent permitted by law, be
fully indemnified and protected by the Company in respect of any such action,
determination or interpretation.
Section 11. Effective Date of Plan.
The Plan became effective (the "Effective Date") on June 30,
1998, the date the Company's stockholders formally approved the Plan.
Section 12. Term of Plan.
No Stock Option, Stock Appreciation Right, Limited Stock
Appreciation Right, Restricted Stock, Deferred Stock or Performance Share award
shall be granted pursuant to the Plan on or after the tenth anniversary of the
Effective Date, but awards theretofore granted may extend beyond that date.
Section 13. Change of Control.
Except as otherwise determined by the Administrator in its
sole discretion, the exercisability and vesting of all awards granted under the
Plan shall be accelerated upon the occurrence of a Change of Control.
For purposes of the Plan, except as otherwise determined by
the Administrator in its sole discretion, "Change of Control" shall mean the
occurrence of any of the following events:
(1) An acquisition (other than directly from the Company) of
any voting securities of the Company ("Voting Securities") by any
"person" (as used for purposes of Section 13(d) or Section 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"))
immediately after which such person has "beneficial ownership" (within
the meaning of Rule 13d-3 promulgated under the Exchange Act)
("Beneficial Ownership") of 20% or more of the combined voting power of
the Company's then outstanding Voting Securities; provided, however, in
determining whether a Change in Control has occurred, the acquisition
of Voting Securities in a Non-Control Acquisition (as hereinafter
defined) shall not constitute a Change in Control. "Non-Control
Acquisition" shall mean an acquisition by (A) an employee benefit plan
(or a trust forming a part thereof) maintained by (i) the
<PAGE>
Company or (ii) any corporation, partnership or other person of which a
majority of its voting power or its equity securities or other equity
interests is owned directly or indirectly by the Company or of which
the Company serves as a general partner or manager (a "Subsidiary"),
(B) the Company or any Subsidiary, or (C) any person in connection with
a Non-Control Transaction (as hereinafter defined); or
(2) The individuals who constitute the Board as of the
Effective Date (the "Incumbent Board") cease for any reason to
constitute at least two-thirds (2/3) of the Board; provided, however,
that if the election, or nomination for election by the Company's
stockholders, of any new director was approved by a vote of at least
two-thirds (2/3) of the Incumbent Board, such new director shall be
considered as a member of the Incumbent Board; provided, further, that
no individual shall be considered a member of the Incumbent Board if
such individual initially assumed office as a result of either an
actual or threatened "election contest" (as described in Rule 14a-11
promulgated under the Exchange Act) (an "Election Contest") or other
actual or threatened solicitation of proxies or consents by or on
behalf of a person other than the Board (a "Proxy Contest") including
by reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest; or
(3) Approval by stockholders of the Company of: (A) a merger,
consolidation, share exchange or reorganization involving the Company,
unless (i) the stockholders of the Company, immediately before such
merger, consolidation, share exchange or reorganization, own, directly
or indirectly immediately following such merger, consolidation, share
exchange or reorganization, at least 80% of the combined voting power
of the outstanding voting securities of the corporation that is the
successor in such merger, consolidation, share exchange or
reorganization (the "Surviving Company") in substantially the same
proportion as their ownership of Voting Securities immediately before
such merger, consolidation, share exchange or reorganization, (ii) the
individuals who were members of the Incumbent Board immediately prior
to the execution of the agreement providing for such merger,
consolidation, share exchange or reorganization constitute at least
two-thirds (2/3) of the members of the board of directors of the
Surviving Company, and (iii) no person (other than the Company or any
Subsidiary, any employee benefit plan (or any trust forming a part
thereof) maintained by the Company, the Surviving Company or any
Subsidiary, or any person who, immediately prior to such merger,
consolidation, share exchange or reorganization had Beneficial
Ownership of 15% or more of the then outstanding Voting Securities) has
Beneficial Ownership of 15% or more of the combined voting power of the
Surviving Company's then outstanding voting securities immediately
following such merger, consolidation, share exchange or reorganization
(a transaction described in clauses (i) through (iii) is referred to
herein as "Non-Control Transaction"); (B) a complete liquidation or
dissolution of the Company; or (C) an agreement for the sale or other
disposition of all or substantially all of the assets of the Company to
any person (other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not
be deemed to occur solely because any person (a "Subject Person") acquires
Beneficial Ownership of more than the permitted amount of the outstanding Voting
Securities as a result of the acquisition of Voting
<PAGE>
Securities by the Company that, by reducing the number of Voting Securities
outstanding, increases the proportional number of shares Beneficially Owned by
such Subject Person, provided that if a Change in Control would occur (but for
the operation of this sentence) as a result of the acquisition of Voting
Securities by the Company, and after such share acquisition by the Company, such
Subject Person becomes the Beneficial Owner of any additional Voting Securities
that increases the percentage of the then outstanding Voting Securities
Beneficially Owned by such Subject Person, then a Change in Control shall occur.
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