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 1-22262
COMMERCIAL ASSETS, INC.
(Exact name of registrant as specified in its charter)
Maryland 84-1240911
(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) 614-9410
(Registrant's telephone number, including area code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
As of July 24, 1998, 10,364,029 shares of Commercial Assets, Inc. Common Stock
were outstanding.
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COMMERCIAL ASSETS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
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............ 7
PART II.OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders........ 11
Item 6. Exhibits and Reports on Form 8-K........................... 11
(i)
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<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30, December 31,
1998 1997
---- ----
(unaudited)
ASSETS
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 14,322 $ 74,153
SHORT TERM INVESTMENTS 57,978 --
INVESTMENTS IN AND NOTES RECEIVABLE FROM WESTREC 4,290 1,710
CMBS BONDS 1,855 1,981
OTHER ASSETS, NET 583 304
---------- ----------
$ 79,028 $ 78,148
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 532 $ 368
MANAGEMENT FEES PAYABLE -- 75
NOTE PAYABLE TO BANK -- --
---------- ----------
532 443
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STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share, 25,000 shares authorized; no
shares issued or outstanding -- --
Common stock, par value $.01 per share, 75,000 shares authorized; 10,364 and
10,316 shares issued and outstanding, respectively 104 104
Additional paid-in capital 76,874 76,724
Retained earnings 1,518 877
---------- ----------
78,496 77,705
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$ 79,028 $ 78,148
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. 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
--------- --------- --------- --------
REVENUES
<S> <C> <C> <C> <C>
Interest $ 1,042 $ 49 $ 2,095 $ 160
CMBS bonds 44 2,193 84 4,237
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1,086 2,242 2,179 4,397
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EXPENSES
General and administrative 88 121 174 244
Management fees 12 311 17 608
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100 432 191 852
--------- --------- --------- -------
NET INCOME 986 1,810 1,988 3,545
Other comprehensive income-unrealized holding gains on
CMBS bonds -- 943 -- 1,958
--------- --------- --------- -------
COMPREHENSIVE INCOME $ 986 $ 2,753 $ 1,988 $ 5,503
========= ========= ========= =======
BASIC EARNINGS PER SHARE $ 0.09 $ 0.17 $ 0.19 $ 0.34
DILUTED EARNINGS PER SHARE $ 0.09 $ 0.17 $ 0.19 $ 0.34
DIVIDENDS DECLARED PER SHARE $ 0.13 $ 0.17 $ 0.13 $ 0.34
Weighted-Average Common Shares Outstanding 10,359 10,326 10,350 10,321
Weighted-Average Common Shares and Common Share
Equivalents Outstanding 10,387 10,348 10,382 10,349
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONDENSED 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 $ 1,988 $ 3,545
Adjustments to reconcile net income to net cash flows
from operating activities:
Amortization of premium/discount on CMBS bonds and
short-term investments 11 (460)
Increase in accounts payable and accrued liabilities 89 (1)
Decrease (increase) in other assets 48 3
--------- --------
Net cash provided by operating activities 2,136 3,087
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in Westrec (2,580) --
Acquisitions of short term investments (58,166) --
Collections on CMBS bonds 126 --
Acquisitions of CMBS bonds -- (4,801)
--------- --------
Net cash used in investing activities (60,620) (4,801)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (1,347) (3,512)
Issuance of Common Stock -- 31
--------- --------
Net cash used in financing activities (1,347) (3,481)
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (59,831) (5,195)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 74,153 8,277
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,322 $ 3,082
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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COMMERCIAL ASSETS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. Organization
Commercial Assets, Inc. (the "Company") is a Maryland corporation which has
elected to be taxed as a real estate investment trust ("REIT"). The Company
commenced operations in 1993 when Asset Investors Corporation ("Asset
Investors") contributed $75,000,000 to the Company and distributed approximately
70% of the Company's Common Stock to Asset Investors' stockholders. The Common
Stock is listed on the American Stock Exchange under the symbol "CAX."
The Company's day-to-day operations are performed by a manager (the "Manager")
pursuant to a year-to-year management agreement currently in effect through
December 1998 ("the Management Agreement"). Prior to November 1997, the Company
was managed by Financial Asset Management LLC ("FAM"). An investor group led by
Terry Considine, Thomas L. Rhodes and Bruce D. Benson acquired FAM in September
1996. In November 1997, the assets of FAM, including the Management Agreement,
were acquired by Asset Investors, which is now the current Manager. Mr.
Considine is Chairman of the Board of Directors and Chief Executive Officer of
both the Company and Asset Investors. Mr. Rhodes is Vice Chairman and Mr. Benson
is a director of both companies. No change has been made to the Management
Agreement other than an extension.
The Management Agreement is subject to the approval of a majority of the
Company's independent directors and can be terminated by either party, without
cause, with 60 days' notice. Since the Company has no employees, certain
employees of the Manager have been designated as officers of the Company.
Historically, the Company owned subordinate classes of Commercial Mortgage
Backed Securities ("CMBS bonds"). The CMBS bonds were issued in commercial
mortgage loan securitizations involving multi-class issuances of debt securities
which were secured and funded as to the payment of principal and interest by a
specific group of mortgage loans on multi-family or other commercial real
estate. In 1997, the Company decided to restructure its asset base and cease to
invest in subordinate CMBS bonds. In November 1997, the Company restructured its
subordinate CMBS bond portfolio by selling, redeeming or resecuritizing its
various CMBS bonds. The restructuring resulted in the Company receiving
$77,693,000 cash and retaining an equity interest in an owner trust arising from
a resecuritization transaction (see Note F). The Company has temporarily
invested the proceeds from such restructuring in government securities and
short-term investments until the funds can be reinvested.
The Company has been evaluating investment opportunities for the proceeds from
the restructuring of the CMBS bonds, and during the first quarter of 1998, the
Company announced that it was considering the acquisition of interests in
marinas. In connection with this, the Company acquired a 12% interest in Westrec
Marina Management, Inc. ("Westrec") (see Note E).
B. Presentation of Financial Statements
The Condensed Consolidated Financial Statements of the Company have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. These Condensed 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 and results of operations of the Company as of June 30, 1998, for the
three and six months then ended, and for all prior periods presented. These
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statements are condensed and do not include all the information required by
generally accepted accounting principles ("GAAP") in a full set of financial
statements. These statements should be read in conjunction with the Company's
Financial Statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
C. Statements of 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 for purposes of reporting cash flows.
Non-cash investing and financing activities for the six months ended June 31,
1998 and 1997 were as follows (in thousands):
1998 1997
---- ----
Principal collections on CMBS bonds transferred
to restricted cash $ -- $ 227
Unrealized holding gains on CMBS bonds -- 1,958
Issuance of Common Stock 150 135
D. Short-term investments.
During the second quarter of 1998, the Company acquired short-term investments
consisting of mortgage-backed bonds guaranteed by Federal National Mortgage
Association and Federal Home Loan Mortgage Corporation. These investments are
classified as available-for-sale, and the fair market value at June 30, 1998
approximates the carrying value of $57,978,000.
E. Investments in and Notes Receivable from Westrec
On March 31, 1998, the Company acquired a 12% interest in Westrec for
approximately $2,500,000 and warrants to increase its ownership to 35% over the
next three years. In addition, the Company has options to purchase from
affiliates of Westrec two marinas and general partner interests in limited
partnerships that own an additional 10 marinas. Initially, the investment in
Westrec will be accounted for under the cost method. The Company also has notes
and interest receivable from affiliates of Westrec of $1,790,000 and $1,710,000
at June 30, 1998 and December 31, 1997, respectively.
In May 1998, the Company issued to an affiliate of Westrec warrants to purchase
322,000 shares of Common Stock at $6.60 per share.
F. CMBS Bonds
In November 1997, the Company restructured its portfolio of CMBS bonds. Nine
bonds were sold, one bond was redeemed and the remaining two CMBS bonds were
resecuritized by contributing the bonds and related restricted cash to an owner
trust in which the Company retained an equity interest. In a private placement,
the trust then sold debt securities representing senior interests in the trust's
assets. The principal balance of the equity interest retained by the Company is
$5,000,000. However, since the equity interest represents the first-loss class
of the portfolio and provides credit support for the senior debt securities, the
Company established an allowance for credit losses of $3,000,000 in order to
value the equity interest at its then estimated fair value of $2,000,000. During
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the six months ended June 30, 1998, the Company received $210,000 of which
$126,000 was recorded as a reduction in the net book value of the retained
equity interest.
Prior to the restructuring, certain of the Company's CMBS bonds were pledged as
collateral for the Company's short-term notes payable (see Note G).
G. Short-Term Notes Payable
The Company had a Loan and Security Agreement, collateralized by four CMBS
bonds, that was cancelled in November 1997 upon the sale and resecuritization of
the bonds.
The Company has an unsecured line of credit with a bank for $1,000,000 that
expires on July 31, 1998. Advances under this line bear interest at prime. One
of the Company's independent directors is a member of the Advisory Board of the
bank. No advances were outstanding on this line of credit at June 30, 1998 or
December 31, 1997.
H. Management Fees
The Company operates under a Management Agreement with the Manager, pursuant to
which the Manager advises the Company on its business and oversees its
day-to-day operations, subject to the supervision of the Company's Board of
Directors. Pursuant to the Management Agreement, the Manager receives a "Base
Fee," an "Incentive Fee," and an "Acquisition Fee." The Base Fee is payable
quarterly in an amount equal to 1% per annum of the Company's "average invested
assets." The Incentive Fee equals 20% of the amount by which the Company's REIT
(taxable) income exceeds the amount calculated by multiplying the Company's
"average net worth" by the "Ten-Year United States Treasury rate" plus 1%. The
Manager receives an Acquisition Fee equal to 1/2 of 1% of the cost of each asset
acquired. Prior to the restructuring of the CMBS bond portfolio, the Manager
also received "Administrative Fees" on each CMBS bond outstanding.
During the six months ended June 30, 1998 the Company incurred Base Fees of
$17,000 on the retained equity interest from the CMBS bond resecuritization and
investment in Westrec. During the six months ended June 30, 1997, the Company's
management fees were $631,000 consisting of Base Fees of $341,000, Incentive
Fees of $237,000, Administrative Fees of $30,000, and Acquisition Fees of
$23,000. The Acquisition Fees were capitalized as part of the cost of acquiring
CMBS bonds.
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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, the "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 and dividends. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which 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; risks inherent in
owning real estate or debt secured by real estate; competition; the availability
of real estate at prices which meet the Company's investment criteria; the
Company's ability to acquire any real estate; potential environmental
liabilities or costs associated with the ownership of real estate and the
Company's ability to maintain or reduce expense levels; and compliance with
provisions relating to the Company's continued qualification as a REIT. 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.
Commercial Assets, Inc., a Maryland corporation formed in August 1993, (together
with its consolidated subsidiaries, the "Company") is a real estate investment
trust ("REIT"). Initially, it was a wholly-owned subsidiary of Asset Investors
Corporation ("Asset Investors"). Asset Investors contributed $75 million to the
initial capital of the Company and in October 1993, it distributed approximately
70% of the Company's outstanding common stock ("Common Stock") as a taxable
dividend to Asset Investors' stockholders. Asset Investors currently owns
approximately 27% of the outstanding Common Stock and provides certain
management services to the Company pursuant to the terms of a management
agreement. See "Manager." The Common Stock is listed on the American Stock
Exchange, Inc. ("AMEX") under the symbol "CAX."
Prior to November 1997, the Company owned subordinate classes of Commercial
Mortgage Backed Securities ("CMBS bonds"). CMBS bonds generally are backed by
mortgage loans on commercial real estate. The principal and interest payments on
the underlying mortgage assets are allocated among the several classes or
"tranches" of a series of CMBS bonds. The Company's subordinate tranches of CMBS
bonds included "first-loss" tranches, which bore the risk of default on the
underlying collateral and provided credit support for the more senior tranches.
The Company restructured its subordinate CMBS bonds in November 1997 by selling,
redeeming and resecuritizing various CMBS bonds. The Company received $77.7
million in cash and a small residual interest in two CMBS bonds from such
restructuring. The Company has temporarily invested its funds in government
securities and short-term investments until such time as the funds can be
reinvested.
The Company is evaluating acquiring interests in various classes of real estate
including, but not limited to, marinas. The Company believes that even though
the cash returns to be earned from equity interests in real estate or marinas
may be less than the returns previously earned on the CMBS bonds, the change in
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assets will reduce the Company's exposure to credit risks and may result in
increased opportunities for capital appreciation. At this time, the Company has
not acquired any real estate or marinas. There can be no assurance that the
Company will ever acquire any real estate or marinas due to a number of factors
including, but not limited to, differences between the Company's valuation of
the property and the purchase price required by the property owner or the price
that other purchasers may be willing to pay, the Company's determination that
the return it expects from a property is inadequate for the risk associated with
owning and operating the property, or other investment opportunities that may
become available to the Company in the future. In addition, there can be no
assurance that the value of any real estate or marinas purchased by the Company
will appreciate. The failure to achieve expected returns or a decrease in the
value of such real estate or marinas could have a material adverse effect on the
Company.
In connection with its possible acquisition of interests in marinas, on March
31, 1998, the Company acquired a 12% interest, consisting of 9.8% voting common
stock and 2.2% non-voting common stock, in Westrec Marina Management, Inc.
("Westrec"). The purchase price for such stock consisted of approximately
$2,580,000 and warrants to purchase 322,000 shares of the Company's Common Stock
at a per share price of $6.60. Such warrants have been transferred to Westrec's
owner and expire in three years. In addition, the Company acquired warrants to
purchase an additional 23% of Westrec over the next three years, in the form of
non-voting common stock. Westrec also received warrants to purchase a number of
shares of the Company's Common Stock equal to (i) the total dollar amount paid
by the Company in exercising its warrants to purchase additional shares of
Westrec non-voting common stock divided by (ii) the average trading price of the
Company's Common Stock for the 30-day period prior to the date on which the
Company exercises its warrants to purchase the Westrec stock. These warrants
have been transferred to the owner of Westrec and expire three years after they
become exercisable. Westrec is the largest marina management company in the
United States. The Company also has options to acquire from affiliates of
Westrec two marinas and the general partner interests in limited partnerships
that own an additional 10 marinas. These 12 marinas have approximately 7,000
boat slips, believed to be the largest single group owned privately in the
United States.
Manager
The Company's day-to-day operations are performed by a manager (the "Manager")
pursuant to a year-to-year management agreement currently in effect through
December 1998 ("the Management Agreement"). Prior to November 1997, the Company
was managed by Financial Asset Management LLC ("FAM"). An investor group led by
Terry Considine, Thomas L. Rhodes and Bruce D. Benson acquired FAM in September
1996. In November 1997, the assets of FAM, including the Management Agreement,
were acquired by Asset Investors, which is now the current Manager. Mr.
Considine is Chairman of the Board of Directors and Chief Executive Officer of
both the Company and Asset Investors. Mr. Rhodes is Vice Chairman and Mr. Benson
is a director of both companies.
The Management Agreement is approved by the Company's independent directors and
may be terminated by either party with or without cause at any time upon 60
days' written notice. The Manager provides all personnel and related overhead
necessary to conduct the regular business of the Company. Pursuant to the
Management Agreement, the Manager receives a "Base Fee," an "Incentive Fee," and
an "Acquisition Fee." The Base Fee is payable quarterly in an amount equal to 1%
per annum of the Company's "average invested assets." At the present time, a
small Base Fee is being paid to the Manager as effectively all of the Company's
assets are cash equivalents or temporary investments. Once the Company invests
its cash balances in real estate assets, the Base Fee is expected to increase.
The Incentive Fee equals 20% of the amount by which the Company's REIT income
exceeds the amount calculated by multiplying the Company's "average net worth"
by the "Ten-Year United States Treasury rate" plus 1%. The Company does not
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expect to pay Incentive Fees until the Company's funds are reinvested. The
Manager receives an Acquisition Fee equal to 1/2 of 1% of the cost of each asset
acquired. The Company expects to pay Base Fees and Acquisition Fees during 1998.
It may pay Incentive Fees based on the Company's results.
The Company has agreed to indemnify the Manager and its affiliates with respect
to all expenses, losses, damages, liabilities, demands, charges or claims of any
nature in respect of acts or omissions of the Manager made in good faith and in
accordance with the standards set forth in the Management Agreement.
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 continue to operate in
such a manner. The Company's current and continuing 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.
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. 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 on its taxable income (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.
RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Interest Income
Interest income during the three and six months ended June 30, 1998 was
$1,042,000 and $2,095,000, respectively, compared to $49,000 and $160,000,
respectively, for the same periods in 1997. The increase is due to investing the
proceeds from the restructuring of the CMBS bonds into short-term investments.
The average interest rates earned on these funds were 5.4% and 5.2% during the
six months ended June 30, 1998 and 1997, respectively.
CMBS Bonds
Income from CMBS bonds was $44,000 and $84,000 during second quarter and first
half of 1998, respectively, compared to $2,193,000 and $4,237,000 in 1997.
Earnings during 1998 represent the income from the retained equity interest from
the resecuritization of two CMBS bonds. All other income from the CMBS bonds
ceased subsequent to the restructuring of the CMBS bonds in November 1997.
General and Administrative
General and administrative expenses of the Company were $88,000 and $174,000 for
the three and six months ended June 30, 1998, respectively, compared to $121,000
and $244,000, respectively, for the same periods in 1997. General and
administrative expenses decreased for such periods in 1998 compared to 1997
primarily due to lower accounting and other expenses related to the ownership of
CMBS bonds.
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Management Fees
During the three and six months ended June 30, 1998, the Company incurred Base
Fees of $12,000 and $17,000, respectively, on the retained equity interest from
the CMBS bond resecuritization and investment in Westrec. During the six months
ended June 30, 1997, the Company's management fees were $631,000 consisting of
Base Fees of $341,000, Incentive Fees of $237,000, Administrative Fees of
$30,000, and Acquisition Fees of $23,000. The Acquisition Fees were capitalized
as part of the cost of acquiring CMBS bonds. The large decrease in management
fees is because the Company does not incur such fees on cash equivalents and
temporary investments.
The Company does not believe that changes in inflation rates would have a
material impact on the net income of the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company has cash and cash equivalents of $14,322,000.
The Company's principal demands for liquidity include normal operating
activities and dividends paid to stockholders. In addition, during the six
months ended June 30, 1998, the Company invested $2,580,000 in Westrec. The
Company may invest a significant portion, if not all, of the remaining proceeds
from the restructuring of the CMBS bond portfolio in equity interests in either
real estate or marinas.
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 in order to allow
the dividend to be based on actual results instead of estimated results.
Accordingly, no dividend was declared in the first quarter of 1998. In April
1998, the Company declared a $0.13 per common share dividend for the first
quarter of 1998. During each of the first two quarters of 1997, a dividend of
$0.17 per common share was declared and paid.
The Company had a Loan and Security Agreement, collateralized by four CMBS
bonds, which was cancelled in November 1997 upon the sale and resecuritization
of the CMBS bonds. In addition, the Company has an unsecured line of credit with
a bank for $1,000,000 that expires on July 31, 1998. Advances under this line
bear interest at prime. No advances were outstanding on this line of credit at
June 30, 1998 or December 31, 1997.
The Company believes that even though the cash returns to be earned from equity
interests in real estate or marinas may be less than the returns previously
earned on the CMBS bonds, the change in assets will reduce the Company's
exposure to credit risks and may result in increased opportunities for capital
appreciation. However, there can be no assurance that the value of the real
estate or marinas will appreciate, and any drop in the value of the real estate
or marinas could have a material adverse effect on the Company.
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.
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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. Bruce D. Benson and Donald L. Kortz were elected as Class
II Directors to terms expiring in 2001. There were 9,554,447 and 9,554,557 votes
cast "for" the election of Messrs. Benson and Kortz, respectively, and 162,321
and 162,211, respectively, votes were withheld. In addition, the stockholders
approved the Commercial Assets, Inc. 1998 Stock Incentive Plan. Of the votes
cast, 5,513,448 were cast "for" approval of the plan and 1,029,931 were cast
"against" approval of the Plan with 88,010 abstentions.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
3.1 Amended and Restated Charter of Commercial Assets, Inc. (the
"Registrant"), (incorporated herein by reference to Exhibit 3.1
to Amendment No. 1 to the Registrant's Registration Statement on
Form 10 (as amended, the "Form 10") of the Registrant,
Commission File No. 1-22262, filed on August 31, 1993).
3.2 By-laws of the Registrant, (incorporated herein by reference to
Exhibit 3.2 to Amendment No. 1 to the Form 10 of the Registrant,
Commission File No. 1-22262, filed on August 31, 1993).
3.3 Amendment to the By-laws of the Registrant dated as of January
14, 1997 (incorporated herein by reference to Exhibit 3.3 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, Commission File No. 1-22262, filed on March
24, 1997).
10.4* 1998 Stock Incentive Plan of the Registrant.
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the Registrant
during the period covered by this Quarterly Report on Form 10-Q.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCIAL ASSETS, INC.
(Registrant)
Date: July 31, 1998 By /s/ David M. Becker
---------------------
David M. Becker
Chief Financial Officer
- 12 -
COMMERCIAL ASSETS, INC.
1998 STOCK INCENTIVE PLAN
Section 1. General Purpose of Plan; Definitions.
The name of this plan is the Commercial Assets, Inc. 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 Commercial Assets, Inc., 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.
<PAGE>
(9) "Eligible Recipient" means an officer, director, employee,
consultant or advisor 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 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
<PAGE>
Section 6 to receive an amount equal to the excess, if any, of (A) the Fair
Market Value, as of the 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
<PAGE>
Stock Appreciation Rights, Restricted Stock, Deferred Stock, 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 Company or any Parent Corporation
<PAGE>
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
<PAGE>
time the new Stock Option is granted. Consistent with the provisions of Section
162(m), to the extent 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 such 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 7,500 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
<PAGE>
conjunction with a given 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,
<PAGE>
Deferred Stock and 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
<PAGE>
the value of an award 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 Company or
<PAGE>
(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 Securities by the Company
<PAGE>
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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