XML 25 R12.htm IDEA: XBRL DOCUMENT v2.4.0.6
Shareholders' Equity
 12 Months Ended
Dec. 31, 2011
Stockholders' Equity Note [Abstract]  
Stockholders' Equity Note Disclosure [Text Block]

7. SHAREHOLDERS' EQUITY

 

In September 2005, the Company commenced a private placement offering of Units and Convertible Series AA Preferred Stock. The Units consisted of 2 shares of common stock and a warrant to purchase 1 share of common stock at $12 ($9.87 per share adjusted for stock dividends). In October 2006, the Company closed that offering and commenced a private placement offering of only its common stock. Through December 31, 2011, when the offering was closed, the Company was conducting a self-underwriting private placement offering and sale of 20,000,000 shares of its common stock at a price of $10 per share. This offering was being made only to accredited investors and up to thirty-five non-accredited investors pursuant to an exemption from registration provided by Section 4(2) and Rule 506 of Regulation D under the Securities Act of 1933, as amended. No public or private market currently exists for the securities sold under this offering. There currently is no plan to initiate a market for the stock. During the years ended December 31, 2011 and 2010, the Company received gross proceeds from the sale of common shares of $17,214,142 and $16,376,206, respectively.

 

Common Stock. The Company is authorized to issue up to 100,000,000 shares of Series A Common Stock (“Common Stock”) $0.01 par value and 1,000 shares of Series B Common Stock $0.01 par value. The Common Stock and the Series B Common Stock have identical rights, preferences, terms and conditions except that the Series B Common Shareholders are not entitled to receive any portion of Company assets in the event of Company liquidation. There have been no Series B Common Stock shares issued. Each share of Common Stock entitles the holder to one vote. The Common Stock is not subject to redemption and it does not have any preference, conversion, exchange or preemptive rights. The articles of incorporation contain a restriction on ownership of the Common Stock that prevents one person from owning more than 9.8% of the outstanding shares of common stock. At December 31, 2011 and 2010, there were 15,287,998 and 13,051,372 shares, respectively, of the Common Stock outstanding.

 

Undesignated Preferred Stock. The Company is authorized to issue up to 8,990,000 shares of preferred stock. The preferred stock may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares of any series of preferred stock, to determine the designation of any such series, and to determine or alter the rights granted to or imposed upon any wholly unissued series of preferred stock including the dividend rights, dividend rate, conversion rights, voting rights, redemption rights (including sinking fund provisions), redemption price, and liquidation preference. The Company has not issued any shares of this preferred stock.

 

Convertible Series AA Preferred Stock. The Board of Directors authorized the original issuance of 1,000,000 shares of the Preferred Stock as Series AA (“Series AA”). Each share of Series AA (i) is non-voting, except under certain circumstances as provided in the Articles of Incorporation; (ii) is entitled to annual cash dividends of 7% which are cumulative and payable quarterly; (iii) ranks senior, as to the payment of dividends and distributions of assets upon liquidation, to common stock or any other series of preferred stock that is not senior to or on parity with the Series AA; (iv) is entitled to receive $25.00 plus accrued dividends upon liquidation; (v) may be redeemed by the Company prior to the mandatory conversion date at a price of $25.00 plus accrued dividends, and (vi) may be converted into two shares of common stock at the option of the holder prior to the mandatory conversion date. The conversion price is subject to certain anti-dilution adjustments.

 

Convertible Series 6.3% Preferred Stock. In December 2011, the Company filed Supplementary Articles to its articles of incorporation by adding the authorization to issue up to 10,000 shares of Series 6.3% convertible preferred stock out of the previously authorized undesignated preferred stock discussed above. Each share of 6.3% preferred stock has a $1,000 liquidation preference.

 

In December 2011, the Company issued approximately 1,649 shares of its Series 6.3% Preferred Stock to the NetREIT National City Partnership, LP, an entity that is consolidated into the financial statements of the Company. The terms of the preferred stock provide for a liquidation preference of $1,000 per share and cumulative dividends from the date of original issue at a rate of 6.3% per annum (equal to an annual rate of $63.00 per share), subject to adjustment in certain circumstances. As of December 31, 2011, the liquidation preference would have been $1,649,000. Dividends on the preferred stock are payable quarterly in arrears subject to declaration by the Board of Directors and compliance with applicable law. All the shares issued to the partnership are subject to an option for the limited partner to exchange his interest in the partnership to equity in NetREIT.

 

The Series 6.3% preferred stock is convertible at any time at the holder's option into common stock of the Company at an initial conversion rate of 116.28 shares of NetREIT's common stock per share of preferred stock, which is equivalent to an initial conversion price of approximately $8.60 per share. Based on the initial conversion rate, approximately 191,756 shares of common stock would be issuable upon conversion of all of the outstanding shares of preferred stock.

 

The Company may also elect to mandatorily redeem some or all of the preferred stock at any time upon proper notice at the liquidation preference amount plus any unpaid accrued dividends.

 

Shareholder Warrants. Warrants were issued in connection with private placements of common stock Units during 2005 and 2006 pursuant to the terms of the respective subscription agreements. Each warrant entitled the registered holder to purchase one share of Series A common stock at the exercise price of $12 per share ($9.38 per share adjusted for stock dividends) during the period commencing upon issuance and continuing through the close of business on March 31, 2010. Unexercised warrants at the expiration date automatically converted into a one-tenth share of common stock, or 52,778 shares of NetREIT Series A common stock.

 

Broker Dealer Warrants. Warrants will be issued pursuant to the terms of the respective $10.50 broker agreement and the Participating Broker Dealer Agreement in connection with the private placement offering that closed on December 31, 2011. Each Warrant entitles the registered holder to purchase one share of common stock at the exercise price of $10.50 per share for a period of three years from the date of issuance. The exercise price, the number and kind of securities issuable on exercise of any Warrant, and the number of Warrants are subject to adjustment in the event the Company pays stock dividends or makes stock distributions with respect to its common stock. Adjustments will also be made upon any reclassification of the Company's common shares or in the event the Company makes certain pro rata distributions of options or warrants to its common shareholders. The warrant agreements also provide for adjustments in the event the Company consummates certain consolidation or merger transactions, and in the event the Company sells all, or substantially all, of its assets. Warrant holders do not have any voting or other rights of the Company's shareholders and are not entitled to receive dividends or other distributions. As of the close of the private placement, a total of 451,235 warrants to purchase NetREIT common stock were earned. These warrants have an exercise price ranging from $9.52 to $10.50 with a weighted average exercise price of $9.63. All warrants expire on December 31, 2014.

 

Limited Partnerships. In 2008, the Company and the other tenant in common contributed their respective equity ownership in the Escondido 7-Eleven to NetREIT 01 LP, a California limited partnership. Initially, the limited partner had an option to exchange its equity interest in the property into shares of NetREIT common stock at a conversion price equal to $9.30 per share up to 77,369 shares. In 2009, the partner exchanged one third of its interests in the partnership into 25,790 shares of Company common stock. Adjusted for stock dividends, the partner has the rights to exchange interests in the partnership for up to 56,866 shares of Company common stock. The Company has a put option to convert the partner's equity interests in NetREIT 01 LP into shares of Company common stock at $8.44 per share for up to 56,866 common shares upon the earlier of April 21, 2013 or the completion of an initial public offering of shares to be registered under the Securities Act of 1933.

 

In October 2009, NetREIT and five former tenants in common of Casa Grande Apartments and Palm Self-Storage contributed their respective ownership interests in these properties into NetREIT Casa Grande LP and NetREIT Palm LP. In exchange for the contribution of property, the owners became limited partners of these partnerships and NetREIT became the general partner. The partners have an option to exchange their equity interest in the partnership for up to 457,028 shares of Company common stock at a conversion price equal to $8.44 per share. The Company has a put option to convert the partner's equity interests in these limited partnerships to shares of Company common stock at $8.44 per share for up to 457,028 shares.

 

In February 2010, NetREIT and a former tenant in common of Garden Gateway Plaza contributed their respective ownership interests in these properties into NetREIT Garden Gateway LP. In exchange for the contribution of property, the owners became a limited partner of this partnership and NetREIT became the general partner. The partner has an option to exchange their equity interest in the partnership for up to 105,000 shares of Company common stock at a conversion price equal to $9.52 per share. The Company has a put option to convert the partner's equity interests in these limited partnerships to shares of Company common stock at $9.52 per share for up to 105,000 shares.

 

In December 2011, the Company and an unrelated party formed NetREIT National City Partnership, LP. In exchange for the contribution of property, the owner became a limited partner of this partnership. The Company is the sole general partner. The limited partner has the option to exchange its partnership units into approximately 1,649 shares of convertible series 6.3% preferred stock. The shares of the convertible series 6.3% preferred stock can be converted into 191,775 shares of NetREIT Series A common stock.

 

Employee Retirement and Share-Based Incentive Plans

 

Share-Based Incentive Plan. An incentive award plan has been established for the purpose of attracting and retaining officers, key employees and non-employee board members. The Compensation Committee of the Board of Directors adopted a Restricted Stock plan (“Restricted Stock”) in December 2006 and has granted nonvested shares of restricted common stock annually commencing on January 1, 2007. The nonvested shares have voting rights and are eligible for any dividends paid to common shares. The share awards vest in equal annual instalments over a three or five year period from date of issuance. The Company recognized compensation cost for these fixed awards over the service vesting period, which represents the requisite service period, using the straight-line attribution expense method.

 

The value of the nonvested shares was calculated based on the offering price of the shares in the most recent private placement offering of $10 adjusted for stock dividends since granted and assumed selling costs. The value of granted nonvested restricted stock issued during 2011 totalled approximately $448,400.The value of granted nonvested restricted stock issued during 2010 totalled $461,100. During the year ended December 31, 2011, 49,805 shares vested and $387,642 was recorded as compensation expense. During the year ended December 31, 2010, 23,607 shares vested and $322,067 was recorded as compensation expense. The remaining 63,777 nonvested restricted shares will vest in equal instalments over the next two to four years.

 

A table of non-vested restricted shares granted and vested since December 31, 2009 is as follows:

Balance, December 31, 2009 45,858
Granted 53,617
Vested (37,547)
Cancelled (286)
Balance, December 31, 201061,642
Granted 52,139
Vested (49,805)
Cancelled (5,504)
Stock dividend5,305
Balance, December 31, 2011 63,777

Stock Dividends. The Company's Board of Directors declared stock dividends on common shares to all Shareholders of record and at rates shown in the table below:

 

    Stock  Common Stock
Date of Declaration  Record Date  Dividend Rate  Value  Shares  Amount
September 9, 2011 December 2, 2011 5% $8.60 720,366 $6,195,148

____________

 

Cash Dividends. During 2011 and 2010, the Company paid cash dividends net of reinvested stock dividends of $3,582,252 and $2,836,516, respectively.  As the Company incurred net losses in both 2011 and 2010, these cash dividends represent a return of capital to the stockholders rather than a distribution of earnings. Cash dividends declared per common share for the years ended December 31, 2011 and 2010 were $0.57 and $0.57, respectively. The Company paid cash dividends on the Series AA Preferred Stock of $34,447 through May 2010 when the Series AA shares were redeemed.