SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant (X)
Filed by a Party other than the Registrant ( )
Check the appropriate box:
( ) Preliminary Proxy Statement ( ) Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
(X) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
FAC REALTY TRUST, INC.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
(X) No fee required
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
( ) Fee paid previously with preliminary materials.
( ) Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule, or Registration Statement No.:
3) Filing Party:
4) Date Filed:
FAC REALTY TRUST, INC.
11000 Regency Parkway, Suite 300
Cary, North Carolina 27511
July 6, 1998
Dear Stockholder:
On behalf of the Board of Directors, I cordially invite you to attend the
Annual Meeting of Stockholders of FAC Realty Trust, Inc. The meeting will be
held on August 5, 1998 at 1:00 p.m. local time at the Carolina Inn, 211
Pittsboro Street, Chapel Hill, North Carolina 27516. The formal notice and
proxy statement for this meeting are attached to this letter.
As described in the accompanying Proxy Statement, the Company has entered
into a Stock Purchase Agreement with Prometheus Southeast Retail, LLC (the
"Investor"), an affiliate of Lazard Fre`res Real Estate Investors, LLC,
providing for the Investor to invest a total of $200 million in the Company
(the "Transaction"). The Board of Directors believes that the Transaction
represents an opportunity to improve long-term stockholder value by providing
access to significant equity capital at an attractive cost and strategic
resources not otherwise readily available to it, thereby improving the
Company's ability to capitalize on opportunities in the retail shopping center
sector.
The Company's financial advisor, Donaldson, Lufkin & Jenrette Securities
Corporation, has delivered an opinion to the Board of Directors to the effect
that the consideration to be paid to the Company in the Transaction is fair to
the Company from a financial point of view. A copy of that opinion is attached
to the accompanying Proxy Statement.
As previously announced, the Company has agreed to acquire 11 community
shopping centers totaling approximately two million square feet from entities
affiliated with Simon Konover, who has a national reputation in the real estate
and retail shopping center industries. In connection with this acquisition, the
Company has agreed to elect Mr. Konover to serve as Chairman of the Board of
Directors upon consummation of the Konover transaction and seeks your approval
to change the Company's name to "Konover Property Trust, Inc."
At the Annual Meeting, you will be asked to approve the following:
1. the election of six directors;
2. the Transaction;
3. the change of the Company's name to "Konover Property Trust, Inc.";
4. an amendment to the Company's charter to increase the number of shares
authorized for issuance;
5. an amendment to the Company's 1993 Employee Stock Incentive Plan to
increase the number of shares of Common Stock reserved for issuance
thereunder; and
6. an amendment to the Company's 1995 Outside Directors' Stock Compensation
Plan to increase the number of shares of Common Stock reserved for
issuance thereunder.
Details of the proposals are set forth in the accompanying Proxy
Statement, which I urge you to read carefully.
The matters to be considered and voted upon at the Annual Meeting are of
great importance to your investment and the future growth potential of the
Company. The Board of Directors has determined that the proposals being
submitted for approval by the stockholders at the Annual Meeting are in the
best interests of the Company and its stockholders and recommends that you vote
FOR approval of the proposals.
On behalf of the Board of Directors, I thank you for your cooperation.
Sincerely,
/s/ C. Cammack Morton
C. Cammack Morton
President and Chief Executive Officer
FAC REALTY TRUST, INC.
11000 Regency Parkway, Suite 300
Cary, North Carolina 27511
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held August 5, 1998
NOTICE IS HEREBY GIVEN that the 1998 Annual Meeting of Stockholders of FAC
Realty Trust, Inc., a Maryland corporation (the "Company"), will be held at the
Carolina Inn, 211 Pittsboro Street, Chapel Hill, North Carolina 27516, on
August 5, 1998, at 1:00 p.m., for the following purposes:
1. To elect six directors to serve until the 1999 annual meeting of
stockholders or until their successors are duly elected and qualified
(Proposal One);
2. To approve the transaction (the "Transaction") contemplated by a Stock
Purchase Agreement between the Company and Prometheus Southeast Retail,
LLC (the "Investor"), an affiliate of Lazard Fre1res Real Estate
Investors, LLC, which involves the purchase by the Investor of a
controlling interest in the Company (21,052,632 shares of Common Stock)
for $200 million or $9.50 per share (Proposal Two);
3. To amend the Company's charter to change its name to "Konover Property
Trust, Inc." (Proposal Three);
4. To amend the Company's charter to increase the number of authorized shares
of capital stock from 75,000,000 to 130,000,000 (Proposal Four);
5. To amend the Company's 1993 Employee Stock Incentive Plan to increase the
number of shares of Common Stock reserved for issuance thereunder from
1,100,000 to 2,800,000 (Proposal Five);
6. To amend the Company's 1995 Outside Directors' Stock Compensation Plan to
increase the number of shares of Common Stock reserved for issuance
thereunder from 25,000 to 150,000 (Proposal Six); and
7. To transact such other business as may properly come before the meeting
and any adjournment thereof.
Only stockholders of record at the close of business on June 12, 1998 will
be entitled to notice of and to vote at the meeting or any adjournment thereof.
By Order of the Board of Directors
/s/ Robin W. Malphrus
Robin W. Malphrus, Esq.
Secretary
Dated: July 6, 1998
YOUR VOTE IS IMPORTANT NO MATTER HOW LARGE OR SMALL YOUR HOLDINGS MAY BE.
THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE OF FURTHER PROXY
SOLICITATION. PLEASE MAIL YOUR PROXY TODAY.
FAC REALTY TRUST, INC.
---------------
PROXY STATEMENT
---------------
ANNUAL MEETING OF STOCKHOLDERS
To Be Held on August 5, 1998
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of FAC Realty Trust, Inc., a Maryland corporation (the
"Company"), of proxies from the holders of the Common Stock for use at the 1998
Annual Meeting of Stockholders to be held at the Carolina Inn, 211 Pittsboro
Street, Chapel Hill, North Carolina 27516, on
August 5, 1998 at 1:00 p.m., and at any adjournments or postponements thereof
(the "Annual Meeting").
At the Annual Meeting, the stockholders will consider and vote upon the
following matters:
1. Election of six directors to serve until the 1999 annual meeting of
stockholders or until their successors are duly elected and qualified
(Proposal One);
2. Approval of the transaction (the "Transaction") contemplated by a Stock
Purchase Agreement between the Company and Prometheus Southeast Retail,
LLC (the "Investor"), an affiliate of Lazard Fre`res Real Estate
Investors, LLC, which involves the purchase by the Investor of a
controlling interest in the Company (21,052,632 shares of Common Stock)
for $200 million or $9.50 per share (Proposal Two);
3. Amendment of the Company's charter to change its name to "Konover Property
Trust, Inc." (Proposal Three);
4. Amendment of the Company's charter to increase the number of authorized
shares from 75,000,000 to 130,000,000 (Proposal Four);
5. Amendment of the 1993 Employee Stock Incentive Plan to increase the number
of shares of Common Stock reserved for issuance thereunder from 1,100,000
to 2,800,000 (Proposal Five);
6. Amendment of the Company's 1995 Outside Directors' Stock Compensation Plan
to increase the number of shares of Common Stock reserved for issuance
thereunder from 25,000 to 150,000 (Proposal Six); and
7. Such other business as may properly come before the meeting and any
adjournment thereof.
This Proxy Statement and the accompanying form of proxy are first being
sent to stockholders on or about July 6, 1998.
This solicitation is made on behalf of the Board of Directors of the
Company. Costs of the solicitation will be borne by the Company. Directors,
officers and employees of the Company may also solicit proxies by telephone,
telegraph, fax or personal interview. The Company has retained the services of
Beacon Hill Partners, Inc. for a fee estimated at $2,500 plus out-of-pocket
expenses, to assist in the solicitation of proxies. The Company will reimburse
banks, brokerage firms and other custodians, nominees and fiduciaries for
reasonable expenses incurred by them in sending proxy material to
stockholders.
Holders of record of Common Stock of the Company as of the close of
business on June 12, 1998 are entitled to receive notice of, and to vote at,
the Annual Meeting. The outstanding Common Stock constitutes the only class of
securities of the Company entitled to vote at the Annual Meeting, and each
share of Common Stock entitles the holder thereof to one vote. At the close of
business on June 12, 1998, there were 14,283,566 shares of Common Stock issued
and outstanding.
Unless contrary instructions are indicated on the proxy, all shares
represented by valid proxies received pursuant to this solicitation (and not
revoked before they are voted) will be voted at the Annual Meeting FOR the
proposals. With respect to any other business that may properly come before the
Annual Meeting and be submitted to a vote of stockholders, proxies received by
the Board of Directors will be voted in accordance with the best judgment of
the designated proxy holders. A stockholder may revoke his or her proxy at any
time before exercise by delivering to the Secretary of the Company a written
notice of such revocation, by filing with the Secretary of the Company a duly
executed proxy bearing a later date, or by voting in person at the Annual
Meeting.
Proposal One, the election of the directors of the Company, requires the
vote of a plurality of all of the votes cast at the Annual Meeting provided a
quorum is present. For purposes of the election of directors, abstentions will
not be counted as votes cast and will have no effect on the result of the vote.
3
Proposal Two, the approval of the Transaction, requires the affirmative
vote of a majority of the votes cast on the proposal, provided that the total
vote cast on the proposal represents over 50% in interest of all shares of
Common Stock entitled to vote on the proposal. The Investor is not entitled to
vote on Proposal Two. For purposes of the votes on Proposal Two, an abstention
or a broker non-vote (i.e., shares held by a broker or nominee which are
represented at the Annual Meeting but with respect to which such broker or
nominee is not empowered to vote on a proposal) will have the effect of a vote
against the proposal, unless holders of more than 50% in interest of all
securities entitled to vote on the proposal cast votes, in which event neither
an abstention nor a broker non-vote will have any effect on the result of the
vote.
Proposal Three, approval of the change of the Company's name, and Proposal
Four, approval of an increase in the number of shares authorized for issuance,
require the affirmative vote of a majority of all of the votes entitled to be
cast on the matter. For purposes of the vote on Proposals Three and Four,
abstentions and broker non-votes will have the same effect as votes against the
proposal.
Proposal Five, approval of an increase in the number of shares authorized
for issuance under the Company's 1993 Employee Stock Incentive Plan, and
Proposal Six, approval of an increase in the number of shares authorized for
issuance under the Company's 1995 Outside Directors' Stock Compensation Plan,
require the affirmative vote of a majority of the votes cast on the proposal,
provided that the total vote cast on the proposal represents over 50% in
interest of all shares of Common Stock entitled to vote on the proposal. For
purposes of the votes on Proposals Five and Six, an abstention or a broker
non-vote will have the effect of a vote against the proposals, unless holders
of more than 50% in interest of all shares of Common Stock entitled to vote on
the proposals cast votes, in which event neither an abstention nor a broker
non-vote will have any effect on the result of the vote.
4
TABLE OF CONTENTS
PROPOSAL ONE: ELECTION OF DIRECTORS .................................................... 8
Information Regarding Meetings and Committees of the Board of Directors ............... 9
Audit Committee ..................................................................... 9
Executive Compensation Committee .................................................... 9
Nominating Committee ................................................................ 9
Compensation of Directors ............................................................. 9
EXECUTIVE OFFICERS OF THE COMPANY ...................................................... 10
EXECUTIVE COMPENSATION ................................................................. 11
Employment Agreements ................................................................. 15
Annual Compensation and Basic Terms ................................................. 15
Long-Term Compensation............................................................... 15
Change in Control Arrangements ........................................................ 16
Executive Compensation Committee Report ............................................... 16
Executive Officer Compensation Policies ............................................. 16
Base Salaries ....................................................................... 16
Bonuses ............................................................................. 16
Stock Options ....................................................................... 17
Restricted Stock .................................................................... 17
Chief Executive Officer's Compensation .............................................. 17
Section 162(m) of the Internal Revenue Code ......................................... 17
Report on Repricing of Options ...................................................... 18
Compensation Committee Interlocks and Insider Participation ........................... 18
BENEFICIAL OWNERSHIP ................................................................... 19
INFORMATION REGARDING INDEPENDENT PUBLIC ACCOUNTANTS ................................... 20
PERFORMANCE GRAPH ...................................................................... 21
PROPOSAL TWO: APPROVAL OF THE TRANSACTION (WHICH INVOLVES THE SALE OF A
CONTROLLING INTEREST IN THE COMPANY) .................................................. 22
Transaction Summary ................................................................... 22
Information about the Company ......................................................... 26
Information about the Investor ........................................................ 26
Background of the Transaction ......................................................... 26
The Investment ........................................................................ 28
Stockholders Agreement ................................................................ 28
Management of the Company; Representation on the Board and Certain Board Committees . 29
Participation Rights ................................................................ 30
Restrictions on Certain Corporate Actions ........................................... 30
Information Rights .................................................................. 30
Contingent Value Rights ............................................................... 30
Limited Put Option .................................................................... 32
Accounting Treatment .................................................................. 32
Registration Rights Agreement ......................................................... 32
No Solicitation of Competing Transactions ............................................. 32
Expenses .............................................................................. 33
Break-Up Fee and Topping Fee .......................................................... 33
Conditions to Closing ................................................................. 33
Indemnification Provisions ............................................................ 33
5
Amendment or Termination of the Transaction Documents ................................... 33
Advantages of the Transaction ........................................................... 33
Large, Timely Infusion of Capital at Reasonable Cost .................................. 34
Association with the Investor ......................................................... 34
Improved Future Access to Capital ..................................................... 34
Potential Enhancement of Stockholder Value ............................................ 34
Disadvantages of the Transaction ........................................................ 35
Change of Control of the Company ...................................................... 35
Anti-takeover Effect of the Transaction ............................................... 35
Potential Dilution .................................................................... 35
Restrictions on Certain Corporate Actions ............................................. 36
Contingent Obligation ................................................................. 36
Competition with Alexander Haagen Properties, Inc ..................................... 36
Potential Extinguishing of Claims ..................................................... 36
Other Consequences of Failure to Approve the Transaction ................................ 36
Possible Exercise of the Limited Put Option ........................................... 36
Payment of Break-up Fee and Possible Topping Fee ...................................... 37
Certain Federal Income Tax Considerations ............................................... 37
No Recognition of Taxable Gain ........................................................ 37
Taxation of the Company as a REIT ..................................................... 37
Possible Impact of the Transaction on Subsequent Sales of Stock by Non-U.S. 38
Stockholders
Opinion of Financial Advisor ............................................................ 38
Current Capitalization ................................................................ 39
Stock Trading History ................................................................. 40
Selected Comparable Company Trading Analysis .......................................... 40
Comparative Transactions Analysis ..................................................... 41
Premiums Paid Analysis ................................................................ 41
Net Asset Valuation Analysis .......................................................... 41
Accretion/(Dilution) Analysis ......................................................... 42
Discounted Dividend Analysis .......................................................... 42
Projected Stockholder Return Analysis ................................................. 42
Contingent Value Right Analysis ....................................................... 42
Cautionary Note Regarding Forward-Looking Statements .................................... 43
Recommendation of the Board and Description of its Decision-Making Process .............. 43
Appraisal Rights ........................................................................ 44
Required Vote and Related Matters ....................................................... 44
PROPOSAL THREE: AMENDMENT OF CHARTER TO CHANGE THE NAME OF THE COMPANY ................... 44
PROPOSAL FOUR: CHARTER AMENDMENT TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
CAPITAL STOCK ........................................................................... 45
PROPOSAL FIVE: AMENDMENT TO THE COMPANY'S 1993 EMPLOYEE STOCK INCENTIVE PLAN ............. 46
Reasons for Amendment ................................................................... 46
Summary Plan Description ................................................................ 46
General ............................................................................... 46
Administration ........................................................................ 46
Eligible Employees .................................................................... 46
Grant of Options ...................................................................... 46
Exercise .............................................................................. 46
Option Price .......................................................................... 47
Transfer and Termination of Options ................................................... 47
Adjustment of Shares .................................................................. 47
Termination and Amendment of the Stock Incentive Plan ................................. 47
Federal Tax Consequences .............................................................. 47
6
Options Granted to Date ...................................................... 48
Required Vote ................................................................ 48
PROPOSAL SIX: AMENDMENT OF THE 1995 OUTSIDE DIRECTORS' STOCK COMPENSATION PLAN 48
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE ....................... 49
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ............................. 49
ADDITIONAL INFORMATION ........................................................ 50
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING ................................. 50
APPENDIX A STOCK PURCHASE AGREEMENT
APPENDIX B STOCKHOLDERS AGREEMENT
APPENDIX C REGISTRATION RIGHTS AGREEMENT
APPENDIX D CONTINGENT VALUE RIGHT AGREEMENT
APPENDIX E DLJ OPINION
APPENDIX F OPINION OF ALSTON & BIRD LLP
7
PROPOSAL ONE:
ELECTION OF DIRECTORS
The Company's bylaws authorize the Board of Directors to set the number of
directors at no less than three nor more than fifteen. The number of directors
is currently set at seven. Theodore E. Haigler, Jr., presently a director of
the Company, has advised the Company that he will retire from the Board as of
the date of the Annual Meeting. Six incumbent directors have been nominated for
re-election for one-year terms expiring at the 1999 annual meeting of
stockholders or until their successors are duly elected and qualified. As
discussed under "Proposal Two," assuming approval of the Transaction, the size
of the Board will be increased to nine. The three vacancies will then be filled
by the Board of Directors. The Board is contractually obligated to fill the
vacancies with three Investor Nominees. Information regarding the Investor
Nominees is included in the discussion of "Proposal Two" under the caption
"Stockholders Agreement."
In addition, Mr. Robert O. Amick has agreed to resign from the Board no
later than the final closing of the Konover Transaction (as defined herein).
See "Proposal Three: Amendment of Charter to Change the Name of the Company"
for a discussion of the Konover Transaction. Pursuant to the terms of the
Konover Transaction, the Board of Directors will fill the vacancy created by
Mr. Amick's resignation by electing Simon Konover as Chairman of the Board. For
information about Mr. Konover, see "Proposal Three."
Unless marked otherwise, proxies received will be voted for the election
of each of the nominees named below. If any nominee becomes unable or unwilling
to serve before the Annual Meeting, the shares represented by proxy will be
voted for a substitute nominee designated by the Board of Directors.
Alternatively, the size of the Board may be reduced accordingly. The Board of
Directors has no reason to believe that any of the nominees will be unwilling
or unable to serve if elected as a director. The nominees for election at the
Annual Meeting are set forth below.
Name Age Principal Occupation Director Since
- ------------------------- ----- ------------------------------------------------------------- ---------------
C. Cammack Morton 46 President and Chief Executive Officer of the Company 1996
Patrick M. Miniutti 50 Executive Vice President and Chief Financial Officer of the 1996
Company
Robert O. Amick 65 President of The Amick Group 1993
William D. Eberle 74 Chairman of Manchester Associates, Ltd. 1997
J. Richard Futrell, Jr. 67 Former Chairman and Chief Executive Officer of Centura 1993
Banks, Inc.
John W. Gildea 54 Managing Director of Gildea Management Company and 1996
Advisor for The Network Funds
C. Cammack Morton joined the Company in December 1995 as Chief Operating
Officer and was elected President and a Director in January 1996. Effective
January 1, 1997, Mr. Morton became the Company's Chief Executive Officer. Prior
to his affiliation with the Company, Mr. Morton served as Managing Director of
Rothschild Realty, Inc. ("Rothschild") and President and Chief Executive
Officer of the Charter Oak Group, Ltd. (the "Charter Oak Group"), a subsidiary
of Rothschild engaged in the development and management of factory outlet
centers. He joined Rothschild in 1987 as Vice President, was promoted to Senior
Vice President in 1989 and to Managing Director in 1991. To resolve certain
personal financial matters arising out of a limited partner obligation to the
general partner of a real estate partnership, Mr. Morton filed a petition for
relief under Chapter 11 of the United States Bankruptcy Code in March 1994.
After settling with the general partner, the bankruptcy case was dismissed in
June 1994.
Patrick M. Miniutti joined the Company as Executive Vice President, Chief
Financial Officer and Director in August 1996. Prior to his affiliation with
the Company, Mr. Miniutti served for three years as Executive Vice President,
Chief Financial Officer and Trustee of Crown American Realty Trust, a public
REIT that owns regional shopping malls. Prior thereto, Mr. Miniutti held senior
financial positions for a combined 12 years with New Market Companies, Inc.,
Western Development Corporation (predecessor to The Mills Corporation) and
Cadillac Fairview Corporation Limited, which was preceded by ten years in
public accounting, principally with national firms. Mr. Miniutti is a member of
the American Institute of Certified Public Accountants and a former member of
its Real Estate Accounting Committee, which was responsible for promulgating
most of the real estate accounting rules in practice today.
Robert O. Amick is the President of The Amick Group, a financial
consulting firm that he founded in 1992. Mr. Amick served as Vice President and
Controller of J.C. Penney Co., Inc. from 1982 to 1992 and was a director of
J.C. Penney Business Services, Inc. from 1985 to 1992. Mr. Amick also is a
director of Protection Mutual Insurance Company and Park P.M. Company.
8
William D. Eberle was a founder of Boise Cascade and is Chairman of
Manchester Associates, Ltd., a venture capital and international consulting
firm and Of Counsel to the law firm of Kaye, Scholer, Fierman, Hays & Handler.
Mr. Eberle is also Chairman of the Board of America Service Group Inc., a
health care services company, Showscan Entertainment, Inc., a movie-based
software and technology company, and Barry's Jewelry, Inc., a retail jewelry
chain, and is a director of Ampco-Pittsburgh Corp., a steel fabrication
equipment company, Fiberboard Corporation, a timber manufacturer, Mitchell
Energy and Development, a gas and oil company, and Mid-States PLC, an auto
parts distributor headquartered in Nashville, Tennessee.
J. Richard Futrell, Jr. is the retired Chairman and Chief Executive
Officer of Centura Banks, Inc., a position he held from 1989 to 1993. He
currently serves as a member of Centura's board of directors and its executive
committee.
John W. Gildea has been Managing Director of Gildea Management Company, an
investment advisory firm, and affiliates since 1990. From 1986 to 1990, he was
Senior Vice President of Donaldson, Lufkin & Jenrette Securities Corporation.
Mr. Gildea also has been President of Gildea Investment Co., an investment
advisory firm, since 1983. He is a director of America Service Group, Inc.,
UNC, Inc., and Barry's Jewelry, Inc.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" ALL OF THE
ABOVE-LISTED NOMINEES FOR ELECTION AS DIRECTORS.
Information Regarding Meetings and Committees of the Board of Directors
The Board of Directors has an Audit Committee, an Executive Compensation
Committee and a Nominating Committee. During the year ended December 31, 1997,
the Board of Directors held ten meetings, the Audit Committee held two
meetings, and the Executive Compensation Committee held three meetings. The
Nominating Committee was formed in 1998. Each director attended at least 75% of
the Board of Directors meetings and assigned committee meetings held during
1997.
Audit Committee. The Audit Committee, which consists of Messrs. Eberle
(Chairman), Amick, Futrell, Gildea and Haigler, makes recommendations
concerning the engagement of independent public accountants, reviews the plans
and results of the audit engagement, approves professional services provided
and fees charged by the independent public accountants, reviews the
independence of the independent public accountants and determines the adequacy
of the Company's internal accounting controls.
Executive Compensation Committee. The Executive Compensation Committee,
which consists of Messrs. Gildea (Chairman), Amick, Eberle, Futrell and
Haigler, determines the compensation of the executive officers and administers
the Company's 1993 Employee Stock Incentive Plan and its 1996 Restricted Stock
Plan.
Nominating Committee. The Nominating Committee, which consist of Messrs.
Futrell (Chairman), Amick, Eberle, Gildea and Haigler, determines the slate of
nominees for election to the Board of Directors by vote of the stockholders.
Compensation of Directors
The Company pays an annual fee of $12,000 to directors who are not
employees of the Company, plus a fee of $1,000 for each Board of Directors or
assigned committee meeting attended. The annual fee is payable in equal
installments semi-annually. Under the Company's 1995 Outside Directors' Stock
Compensation Plan, as amended by the Board, up to $20,000 of a director's
annual compensation is paid in shares of Common Stock or options to purchase
shares of Common Stock and the remainder paid in cash, at the direction of the
director. Each non-employee director also is reimbursed for expenses incurred
in attending meetings of the Board of Directors and assigned committees.
Employees of the Company who are directors receive no additional compensation
for their service as directors.
9
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
current executive officers of the Company.
Name Age Position
- --------------------------- ----- -----------------------------------------------------
C. Cammack Morton 46 President and Chief Executive Officer
Patrick M. Miniutti 50 Executive Vice President and Chief Financial Officer
William H. Neville 53 Executive Vice President and Chief Operating Officer
Christopher G. Gavrelis 44 Executive Vice President - Management
Connell L. Radcliff 43 Senior Vice President - Development
Linda M. Swearingen 33 Senior Vice President - Finance/Investor Relations
Sona A. Thorburn 32 Vice President and Chief Accounting Officer
See the biographical information for Messrs. Morton and Miniutti under
"Proposal One: Election of Directors."
William H. Neville, has served as Executive Vice President and Chief
Operating Officer since September 1997. Before joining the Company, Mr. Neville
was Regional President of Horizon Group Realty, a real estate investment trust
specializing in outlet centers, from January 1996 to July 1997. Prior to
joining Horizon, Mr. Neville held various positions with Charter Oak Partners,
a privately held outlet center developer, from January 1993 to December 1995,
at which time he was the President of the company.
Christopher G. Gavrelis joined the Company in December 1995. Mr. Gavrelis
was named Senior Vice President in January 1996 and promoted to Executive Vice
President in January 1998. Prior to his affiliation with the Company,
Mr. Gavrelis was Vice President - Property Management of the Charter Oak Group
for approximately four years. From 1989 to 1991, Mr. Gavrelis served as
regional property manager for McArthur/Glen Realty Corp. (now HGI Realty,
Inc.), a company engaged in the development and operation of factory outlet
centers. Mr. Gavrelis is responsible for the Company's management and
administration activities.
Connell L. Radcliff has served as Senior Vice President of Development
since its organization in April 1993. Mr. Radcliff joined North-South
Management Corporation (a predecessor company) as Vice President - Leasing in
1989. From 1987 to 1989, Mr. Radcliff was a real estate broker for The Shopping
Center Group, a real estate brokerage firm specializing in national tenant
representation. Mr. Radcliff is responsible for the Company's development
activities.
Linda M. Swearingen was promoted from Vice President to Senior Vice
President of Finance/Investor Relations in January 1998. Prior to being named
Vice President in May 1996, Ms. Swearingen was Director of Leasing for the
Company, a position she had held since July 1993. From 1990 to 1993, Ms.
Swearingen served as Assistant Vice President -- Commercial Real Estate for
Bank One Dayton.
Sona A. Thorburn has served as Vice President and Chief Accounting Officer
since joining the Company in 1997. Prior to joining the Company, Ms. Thorburn
was a manager with the accounting firm of Ernst & Young LLP, where she was
employed for eight years. At Ernst & Young, Ms. Thorburn supervised audits for
a variety of clients, including the Company.
10
EXECUTIVE COMPENSATION
The following table sets forth the compensation of the Chief Executive
Officer and the four most highly compensated executive officers other than the
Chief Executive Officer who were serving as executive officers at December 31,
1997 (collectively, the "Named Executive Officers").
Summary Compensation Table
Annual Long-Term
Compensation Compensation Awards
---------------------------------- -------------------------------------
Restricted Securities
Stock Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Awards($) Options(#)(10) Compensation ($)
- ------------------------------- ------ --------------- ----------- ------------------ ------------------ -----------------
C. Cammack Morton 1997 336,072 (4) 670,538(5) (11) 33,467(12)
President and Chief 1996 287,692 (4) 1,019,250(5) 300,000(11) 3,570(13)
Executive Officer 1995 11,458(1) -- -- -- --
Patrick M. Miniutti 1997 230,871 (4) 346,726(6) (11) 19,000(12)
Executive Vice President and 1996 70,769(2) (4) 819,313(6) 200,000(11) 50,000(13)
Chief Financial Officer 1995 -- -- -- -- --
William H. Neville 1997 65,059(3) (4) 205,800(7) 50,000 --
Executive Vice President and 1996 -- -- -- -- --
Chief Operating Officer 1995 -- -- -- -- --
Christopher G. Gavrelis 1997 160,962 (4) 94,163 (11) 11,915(12)
Executive Vice President - 1996 129,742 (4) 214,750(8) 35,000(11) 1,163(13)
Management 1995 5,208(1) -- -- -- --
Connell L. Radcliff 1997 185,555 (4) 101,138(9) -- 13,712(12)
Senior Vice President- 1996 181,923 (4) 39,750(9) -- 3,750(13)
Development 1995 158,654 41,250 -- 18,000 3,332(14)
- ---------
(1) Messrs. Morton and Gavrelis joined the Company in December 1995 and,
therefore, their salary for 1995 represents only a portion of the year.
(2) Mr. Miniutti joined the Company in August 1996 and, therefore, his salary
for 1996 represents only a portion of the year.
(3) Mr. Neville joined the Company in September 1997 and, therefore, his salary
for 1997 represents only a portion of the year.
(4) Bonuses for all of the officers of the Company for 1997 and 1996 were paid
in the form of shares of restricted Common Stock ("Restricted Stock") or
options to purchase Restricted Stock based on the market price of Common
Stock on the last day of the applicable calendar year. The shares of
Restricted Stock paid as bonuses vest all at once ("cliff vesting") after
three years. In consideration of the three-year vesting period, Restricted
Stock bonus amounts are set at 150% of an equivalent cash bonus determined
under the Company's MBO Plan. See " -- Executive Compensation Committee
Report."
(5) Mr. Morton receives a portion of his base annual salary, his periodic
increases in base annual salary, his annual bonus and his long-term
incentive compensation in the form of Restricted Stock or options to
purchase Restricted Stock, as follows:
(a) 30,000 shares, with a value of $198,750 ($6.625 per share), were
granted on March 1, 1997, subject to a one-year cliff vest, as part of
Mr. Morton's base annual salary;
(b) 6,000 shares, with a value of $39,750 ($6.625 per share), were granted
on March 1, 1997, subject to a three-year cliff vest, as an increase
in Mr. Morton's base annual salary;
(c) An option to purchase 48,500 shares, with a value of $338,288 ($7.75
per share) net of a 10% exercise price, was granted as of December 31,
1997, subject to a three-year cliff vest, as Mr. Morton's 1997 bonus;
(d) 18,000 shares, with a value of $119,250 ($6.625 per share), were
granted as of December 31, 1996, subject to a three-year cliff vest,
as Mr. Morton's 1996 bonus;
11
(e) 90,000 shares, with a value of $900,000 ($10.00 per share), were
granted in 1996 to Mr. Morton as long-term incentive compensation.
These shares were replaced with a grant of 150,000 shares, with a
value of $993,750 ($6.625 per share), on March 1, 1997. These
restricted shares vest in ten equal installments commencing March 1,
1997.
(f) On November 11, 1997, Mr. Morton was awarded an additional 21,000
shares of Restricted Stock, and each unvested share of Restricted
Stock then owned by Mr. Morton was exchanged for an option to
repurchase a share of Restricted Stock at an exercise price of 10% of
the fair market value of a share of Common Stock on the date awarded
(the "Repurchase Options"). The additional 21,000 shares of Restricted
Stock were awarded so that, after taking into account the exercise
price of the Repurchase Options, the value of such options would equal
the value of Mr. Morton's unvested Restricted Shares prior to the
exchange. See " -- Executive Compensation Committee Report --
Restricted Stock."
During 1997 the Company repurchased, pursuant to provisions in its 1996
Restricted Stock Plan (the "Restricted Plan"), 7,500 shares of Restricted
Stock to cover the income tax liability on Restricted Stock that vested in
1997. At December 31, 1997, the aggregate number of Mr. Morton's shares of
Restricted Stock and shares issuable upon exercise of his Repurchase
Options was 266,000 with a value of $1,860,788 ($7.75 per share) net of the
cost to exercise. Dividends or dividend equivalents are payable on such
Restricted Stock and shares underlying such Repurchase Options with the
exception of the unvested portion of the 150,000 Repurchase Options granted
as long-term compensation.
(6) Mr. Miniutti receives a portion of his base annual salary, his periodic
increases in base annual salary, his annual bonus and his long-term
incentive compensation in the form of Restricted Stock or options to
repurchase restricted stock, as follows:
(a) 15,000 shares, with a value of $99,375 ($6.625 per share), were
granted on March 1, 1997, subject to a one-year cliff vest, as part of
Mr. Miniutti's base annual salary;
(b) 4,500 shares, with a value of $29,813 ($6.625 per share), were granted
on March 1, 1997, subject to a three-year cliff vest, as an increase
in Mr. Miniutti's base annual salary;
(c) An option to purchase 28,500 shares, with a value of $198,788 ($7.75
per share) net of a 10% exercise price, was granted as of December 31,
1997, subject to a three-year cliff vest, as Mr. Miniutti's 1997
bonus;
(d) 6,500 shares, with a value of $43,063 ($6.625 per share), were granted
as of December 31, 1996, subject to a three-year cliff vest, as Mr.
Miniutti's 1996 bonus;
(e) 90,000 shares, with a value of $776,250 ($8.625 per share), were
granted in 1996 to Mr. Miniutti as long-term incentive compensation.
These shares were replaced with a grant of 120,000 shares, with a
value of $795,000 ($6.625 per share), on March 1, 1997. These
restricted shares vest in ten equal installments commencing March 1,
1997.
(f) On November 11, 1997, Mr. Miniutti was awarded an additional 15,000
shares of Restricted Stock, and each unvested share of Restricted
Stock then owned by Mr. Miniutti was exchanged for a Repurchase
Option. The additional 15,000 shares of Restricted Stock were awarded
so that, after taking into account the exercise price of the
Repurchase Options, the value of such options would equal the value of
Mr. Morton's unvested Restricted Shares prior to the exchange. See "
-- Executive Compensation Committee Report -- Restricted Stock."
During 1997 the Company repurchased, pursuant to its Restricted Plan, 6,000
shares of Restricted Stock to cover the income tax liability on Restricted
Stock that vested in 1997. At December 31, 1997, the aggregate number of
Mr. Miniutti's shares of Restricted Stock and shares issuable upon exercise
of his Repurchase Options was 183,500 with a value of $1,283,788 ($7.75 per
share) net of the cost to exercise. Dividends or dividend equivalents are
payable on such Restricted Stock and shares underlying such Repurchase
Options with the exception of the unvested portion of the 120,000
Repurchase Options granted as long-term compensation.
(7) Mr. Neville receives his annual bonus and his long-term incentive
compensation in the form of restricted stock or an option to purchase
restricted stock, as follows:
(a) An option to purchase 8,000 shares, with a value of $55,800 ($7.75 per
share) net of a 10% exercise price, was granted as of December 31,
1997, subject to a three-year cliff vest, as Mr. Neville's
proportionate 1997 bonus;
12
(b) 20,000 shares, with a value of $150,000 ($7.50 per share), were
granted on September 8, 1997 to Mr. Neville as long-term incentive
compensation. These restricted shares vest in three equal installments
commencing March 1, 1998.
(c) On November 11, 1997, Mr. Neville was awarded an additional 2,250
shares of Restricted Stock, and each unvested share of Restricted
Stock then owned by Mr. Neville was exchanged for a Repurchase Option.
The additional 2,250 shares of Restricted Stock were awarded so that,
after taking into account the exercise price of the Repurchase
Options, the value of such options would equal the value of Mr.
Neville's unvested Restricted Shares prior to the exchange. See " --
Executive Compensation Committee Report -- Restricted Stock."
At December 31, 1997, the aggregate number of shares of Restricted Stock
issuable upon exercise of Mr. Neville's Repurchase Options was 30,250 with
a value of $211,550 ($7.75 per share) net of the cost to exercise. Dividend
equivalents are payable on all of the shares underlying Mr. Neville's
Repurchase Options.
(8) Mr. Gavrelis receives his annual bonus and his long-term incentive
compensation in the form of Restricted Stock or options to purchase
Restricted Stock, as follows:
(a) An option to purchase 13,500 shares, with a value of $94,163 ($7.75
per share) net of a 10% exercise price, was granted as of December
31, 1997, subject to a three-year cliff vest, as Mr. Gavrelis's 1997
bonus;
(b) 6,000 shares, with a value of $39,750 ($6.625 per share), were
granted as of December 31, 1996, subject to a three-year cliff vest,
as Mr. Gavrelis's 1996 bonus;
(c) 16,667 shares, with a value of $175,000 ($10.50 per share), were
granted on February 28, 1996 to Mr. Gavrelis as long-term incentive
compensation. These restricted shares vest in three equal installments
commencing January 1, 1997.
(d) On November 11, 1997, Mr. Gavrelis was awarded an additional 1,350
shares of Restricted Stock, and each unvested share of Restricted
Stock then owned by Mr. Gavrelis was exchanged for Repurchase
Options. The additional 1,350 shares of Restricted Stock were awarded
so that, after taking into account the exercise price of the
Repurchase Options, the value of such options would equal the value
of Mr. Gavrelis' unvested Restricted Shares prior to the exchange.
See " -- Executive Compensation Committee Report -- Restricted
Stock."
During 1997 the Company repurchased, pursuant to provisions in its
Restricted Plan, 2,778 shares of Restricted Stock to cover the income tax
liability on Restricted Stock that vested in 1997. At December 31, 1997,
the aggregate number of Mr. Gavrelis' shares of Restricted Stock and shares
issuable upon exercise of Repurchase Options was 34,739 with a value of
$249,086 ($7.75 per share) net of the cost to exercise. Dividends or
dividend equivalents are payable on all of such Restricted Stock and the
shares underlying Mr. Gavrelis' Repurchase Options.
(9) Mr. Radcliff received his annual bonus in the form of Restricted Stock or
an option to purchase Restricted Stock, as follows:
(a) An option to purchase 14,500 shares, with a value of $101,138 ($7.75
per share), was granted as of December 31, 1997 net of a 10% exercise
price, subject to a three-year cliff vest, as Mr. Radcliff's 1997
bonus;
(b) 6,000 shares, with a value of $39,750 ($6.625 per share), were
granted as of December 31, 1996, subject to a three-year cliff vest,
as Mr. Radcliff's 1996 bonus.
(c) On November 11, 1997, Mr. Radcliff was awarded an additional 700
shares of Restricted Stock, and each unvested share of Restricted
Stock then owned by Mr. Radcliff was exchanged for Repurchase
Options. The additional 700 shares of Restricted Stock were awarded
so that, after taking into account the exercise price of the
Repurchase Options, the value of such options would equal the value
of Mr. Radcliff's unvested Restricted Shares prior to the exchange.
See " -- Executive Compensation Committee Report -- Restricted
Stock."
At December 31, 1997, the aggregate number of shares of Restricted Stock
issuable upon exercise of Mr. Radcliff's Repurchase Options was 21,200 with
a value of $148,038 ($7.75 per share) net of the cost to exercise. Dividend
equivalents are payable on all of the shares underlying Mr. Radcliff's
Repurchase Options.
13
(10) Excludes options to purchase shares of Restricted Stock, which options
have an exercise price equal to 10% of a share's fair market value on the
date of grant. Such options are reported under the "Restricted Stock
Awards" column of the Summary Compensation Table.
(11) Stock options granted in 1996 were canceled in 1997 and new options for
the same number of shares were issued in 1997. See " -- Executive
Compensation Committee Report -- Report on Repricing of Options" for
additional information.
(12) In 1997 Messrs. Morton, Miniutti, Gavrelis and Radcliff received
distributions from the cancellation of a Split Dollar Insurance Plan in
the amounts of $29,746, $15,000, $10,000 and $10,000, respectively, as
well as matching contributions to the Company's 401(k) Retirement and
Savings Plan of $3,721, $4,000, $1,915 and $3,712, respectively.
(13) In 1996 Messrs. Morton, Gavrelis and Radcliff received matching
contributions to the Company's 401(k) Retirement and Savings Plan of
$3,570, $1,163 and $3,750, respectively. In addition, in 1996, Mr.
Miniutti received an allowance for relocation expenses of $50,000.
(14) In 1995 Mr. Radcliff received matching contributions to the Company's
401(k) Retirement and Savings Plan of $3,332.
The following table provides information regarding the stock options
granted during 1997 to the Named Executive Officers:
Option Grants in Last Fiscal Year(1)
Individual Grants
- ---------------------------------------------------------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Number of Percent of Total Annual Rates of Stock
Securities Underlying Options Granted Price Appreciation for
Options to Employees Exercise Option Term ($)(2)
Granted in Fiscal Year Price Expiration -------------------------------
Name (#) (%) ($) Date 5% ($) 10% ($)
- ------------------------- ----------------------- ----------------- ----------- ----------- ---------- ----------
C. Cammack Morton 300,000(3) 46.5 $ 5.625 4/1/07 1,061,260 2,689,440
Patrick M. Miniutti 200,000(4) 31.0 $ 5.625 4/1/07 707,506 1,792,960
William H. Neville 50,000(4) 7.8 $ 7.50 9/7/07 235,835 597,653
Christopher G. Gavrelis 35,000(4) 5.4 $ 5.625 4/1/07 123,814 313,768
- ---------
(1) Excludes Repurchase Options, which options have an exercise price equal to
10% of a share's fair market value on the date of grant. Such options are
reported under the "Restricted Stock Awards" column of the Summary
Compensation Table.
(2) In accordance with SEC rules, these columns show gains that might exist for
the respective options, assuming the market price of the Company's Common
Stock appreciates from the date of grant over a period of ten years at
annualized rates of five and ten percent, respectively. The actual value, if
any, on stock option exercises will depend on the future performance of the
Company's Common Stock, as well as the option holders' continued employment
through the four-year vesting period. There can be no assurance that the
value, if any, ultimately realized by the executive will be at or near the
values shown above.
(3) 100,000 option shares vested upon grant with the remainder at 25% per year.
These stock options represent the replacement of option shares issued in
1996 and canceled in 1997. See " -- Executive Compensation Committee
Report -- Report on Repricing of Options" for additional information.
(4) 20% vested upon grant with the remainder at 25% per year. These stock
options represent the replacement of option shares issued in 1996 and
canceled in 1997. See " -- Executive Compensation Committee Report --
Report on Repricing of Options" for additional information.
14
The following table sets forth certain information concerning the number
of shares of Common Stock underlying options held by each of the Named
Executive Officers and the value of such options at December 31, 1997:
Fiscal Year-End Option Values (1)
Number of Value of Unexercised
Securities Underlying In-the-money
Unexercised Options Options at
at Fiscal Fiscal Year-End
Year-End (#) ($)
Exercisable/ Exercisable/
Name Unexercisable(2) Unexercisable(3)
- ------------------------- ----------------------- ---------------------
C. Cammack Morton 100,000 / 200,000 212,500 / 425,000
Patrick M. Miniutti 40,000 / 160,000 85,000 / 340,000
William H. Neville 10,000 / 40,000 2,500 / 10,000
Christopher G. Gavrelis 7,000 / 28,000 14,875 / 59,500
Connell L. Radcliff 43,400 / 19,850 -- / --
- ---------
(1) Excludes Repurchase Options, which options have an exercise price equal to
10% of a share's fair market value on the date of grant. Such options are
reported under the "Restricted Stock Awards" column of the Summary
Compensation Table.
(2) Future exercisability is subject to vesting and the optionee remaining
employed by the Company.
(3) Value is calculated by subtracting the exercise price from the fair market
value of the securities underlying the option at fiscal year-end and
multiplying the results by the number of in-the-money options held. Fair
market value was based on closing market price of the Common Stock at
December 31, 1997 ($7.75).
Employment Agreements
Annual Compensation and Basic Terms. The Company is a party to employment
agreements with Messrs. Morton, Miniutti, Gavrelis and Neville. The agreements
with Messrs. Morton, Miniutti and Neville currently continue through February
29, 2001. The term is automatically extended for an additional year on March 1,
1999 and each year thereafter, subject to the right of either party to
terminate as of the end of the then-existing three-year term by giving written
notice at least 30 days before the March 1 extension date. The agreement with
Mr. Gavrelis continues through March 1, 1999. If the employment of any
executive is terminated due to the change of control of the Company, an
additional two years will be added to the unexpired term of the respective
agreements. Pursuant to their respective agreements, each executive is required
to devote his entire business time to the Company and is prohibited from
competing with the Company for a period of one year following termination of
employment. The employment agreements provide for base annual cash salaries as
follows: Mr. Morton -- $330,000; Mr. Miniutti -- $225,000; Mr. Neville --
$225,000; and Mr. Gavrelis -- $170,000. In addition, Messrs. Morton and
Miniutti receive Restricted Stock as part of their base annual compensation,
based on an equivalent cash value of approximately $200,000 and $100,000,
respectively. The number of restricted shares issued annually is adjusted on
March 1st of each year based on the previous year-end market price of the
stock. Such Restricted Stock is subject to a one-year cliff vest. The base
annual salaries are subject to periodic increases based upon the performance of
the Company and the executive. Messrs. Morton and Miniutti each agreed to take
the raises in their base salaries for 1997 in the form of Restricted Stock,
which is subject to a three-year cliff vest, in the amounts of 6,000 shares and
4,500 shares, respectively. In addition, they have agreed to take all future
raises in the form of Restricted Stock subject to similar vesting provisions.
If the employment of any executive is terminated without cause (as defined in
the respective agreements), such executive will be entitled to (i) the greater
of the base salary payable to the executive for the remainder of the then
existing employment term or one year's base salary, (ii) in the case of Messrs.
Morton, Miniutti and Neville, the product of the number of years representing
the unexpired term of the agreement and an amount equal to the average bonus
paid to such executive over the three years immediately prior to termination,
and in the case of Mr. Gavrelis, a pro rata portion of any incentive
compensation or bonus payable for the years of termination and (iii) certain
other accrued benefits.
Long-Term Compensation. As of March 1, 1997, in recognition of the
increases in their responsibilities and after consultation with an independent
executive compensation consultant, the Independent Directors replaced the
previous long-term incentive plan awards of 90,000 shares of Restricted Stock
for Messrs. Morton and Miniutti with grants of 150,000 shares and 120,000
shares, respectively. These grants were issued pursuant to the Company's 1996
Restricted Stock Plan. These restricted shares vest in ten equal annual
installments commencing on March 1, 1997, provided each executive continues to
be employed by the Company. If the Company (i) does not extend the executive's
employment agreement beyond its initial three-year term; or (ii) terminates the
executive without cause (as defined in their respective employment agreements)
15
all unvested shares of restricted stock will become fully vested. The
executives will be entitled to receive dividends on only the vested shares. Mr.
Neville was awarded 20,000 shares of Restricted Stock, which vests in three
equal annual installments commencing March 1, 1998, provided he continues to be
employed by the Company. Mr. Gavrelis was awarded 16,667 shares of Restricted
Stock, which vest in three equal annual installments commencing December 14,
1996, provided that he continues to be employed by the Company.
In addition, the employment agreements for Messrs. Morton, Miniutti,
Neville and Gavrelis provide for the grant of options to purchase 300,000,
200,000, 50,000 and 35,000 shares of Common Stock, respectively. For
information regarding such options, see the table captioned "Option Grants in
Last Fiscal Year" above and " -- Executive Compensation Committee Report --
Report on Repricing of Options" below.
Change in Control Arrangements
Under the employment agreements, termination without cause includes any
termination resulting from a change in control of the Company. The term change
in control generally is defined under the employment agreements to include the
first to occur of the following: (i) any person or group owns or controls 50%
or more of the outstanding Common Stock, (ii) any person or group who owned
less than 5% of the outstanding Common Stock on the date of the agreement owns
20% or more of the outstanding Common Stock or (iii) the stockholders of the
Company approve a business combination that will result in a change in
ownership of 20% or more of the outstanding Common Stock. Upon the occurrence
of a change in control of the Company, all non-vested Restricted Stock will
become immediately vested.
In addition, upon the occurrence of a change in control of the Company (as
defined in the Stock Incentive Plan), all non-vested stock options granted
thereunder become immediately vested and exercisable in full. Change in control
generally is defined under the Stock Incentive Plan to occur at such time as
any person or group beneficially owns at least 25% of the outstanding Common
Stock.
Each of the five executive officers who have employment agreements with
the Company have entered into waivers providing that the Lazard Investment and
the Konover Transaction will not trigger any obligation under their employment
agreements except to the extent that such transactions automatically extend the
term of their employment agreements.
Executive Compensation Committee Report
Executive Officer Compensation Policies. The goals of the Executive
Compensation Committee (the "Committee") with respect to the compensation of
the Company's executive officers are to (i) provide a competitive total
compensation package that enables the Company to attract and retain qualified
executives, (ii) align the compensation of such executives with the Company's
overall business strategies and (iii) provide each executive officer with a
significant equity stake in the Company, which serves to align compensation
with the interests of stockholders. To this end, the Committee determines
executive compensation consistent with a philosophy of compensating executive
officers based on their responsibilities and the Company's performance in
attaining financial and non-financial objectives.
The primary components of the Company's executive compensation program
are: (i) base salaries, (ii) performance-based annual bonuses, (iii) stock
options and (iv) restricted stock. The more senior the position, the greater
the compensation that varies with performance and the greater the portion that
is in the form of options or restricted stock.
Base Salaries. Base salaries for the Company's Named Executive Officers,
as well as changes in such salaries, are based upon recommendations of the
Chief Executive Officer, taking into account such factors as competitive
industry salaries; a subjective assessment of the nature of the position; the
contribution and experience of the officer; and the length of the officer's
service. Under the Chief Executive Officer's direction, the Chief Operating
Officer reviews all salary recommendations with the Committee, which then
approves or disapproves such recommendations. The Chief Executive Officer
reviews any salary recommendations for the Chief Operating Officer with the
Committee. The Committee has engaged a national executive compensation
consultant for the purpose of obtaining comparative information and advice on
each of the components of executive compensation. The Committee believes that
the majority of the Company's executive officers are at or near the average for
base salaries and total compensation as compared to that of the Company's
peers. The Committee would like to increase base salaries to the 75th
percentile level in the future. See "Employment Agreements -- Annual
Compensation and Basic Terms."
Bonuses. Annual bonuses are determined under a Management By Objectives
(MBO) plan based on Company and individual performance. The weighting between
Company performance and individual performance is determined on the basis of
position and responsibilities. Performance targets are determined for both
Company performance and individual
16
performance. Achieving the targets would ordinarily result in bonuses ranging
from 5% to 60% of base salary, with maximum bonuses ranging from 10% to 70% of
base salary for performance achievements greater than the targets. All officers
of the Company receive 100% of their bonus in the form of restricted stock with
a three-year cliff vest. In consideration therefor, each officer receives
shares equal to 150% of the value of the appropriate cash bonus; the number of
shares is determined using the total bonus amount divided by the stock price at
the day of issuance.
Stock Options. The Company established an Employee Stock Incentive Plan
(the "Stock Incentive Plan") in 1993 for the purpose of attracting and
retaining the Company's executive officers and other employees. A maximum of
1,100,000 shares of Common Stock are currently reserved for issuance under the
Stock Incentive Plan (see "Proposal Five" below relating to the proposed
increase to 2,800,000 shares). The Stock Incentive Plan allows for the grant of
incentive and nonqualified options (within the meaning of the Internal Revenue
Code) that are exercisable at a price equal to the closing price of the Common
Stock on the New York Stock Exchange on the trading day immediately preceding
the date of grant. All of the Company's executive officers are eligible to
receive options to purchase shares of Common Stock granted under the Stock
Incentive Plan. The Committee believes that stock option grants are a valuable
motivating tool and provide a long-term incentive to management. The Committee
also believes that issuing stock options to executives benefits the Company's
stockholders by encouraging executives to own the Company's stock, thus
aligning executive compensation with stockholder interests. Options for 645,000
shares were granted during 1997. (See " -- Option Grants in Last Fiscal Year"
above.)
Restricted Stock. The Company established a restricted stock plan (the
"Restricted Plan") in 1996, reserving 350,000 shares of Common Stock for
issuance thereunder, to give the Committee more flexibility in designing
equity-based compensation arrangements to attract, motivate and retain
executives and other key employees. Such equity-based compensation is designed
to align more closely the financial interests of management with that of the
stockholders. In 1997 and 1998, the Company reserved in the aggregate an
additional 1,150,000 shares of Common Stock for issuance under the Restricted
Plan. The Restricted Plan, which is administered by the Committee, provides for
the grant of restricted stock awards to any new or existing employee of the
Company, including executive officers. Awards under the Restricted Plan
typically will be subject to various vesting schedules ranging from one to ten
years from the date of grant. The Restricted Plan permits the Committee to
customize the vesting schedule by deferring the commencement date, lengthening
the vesting period and/or conditioning vesting upon the achievement of
specified performance goals. During 1997, the Company granted 248,752 shares of
Restricted Stock, net of replacement shares, to officers and other key
employees.
In 1997, the Company amended the Restricted Plan so that officers would
not have to sell their shares of Restricted Stock to meet their tax obligations
incurred upon the vesting of such shares. The amendment provides that
Restricted Stock may be awarded to certain officers in the form of an option to
purchase Restricted Stock at 10% of the market price of the Common Stock on the
date of grant of the option. Under the Restricted Plan all of the officers'
previously unvested shares of Restricted Stock as of November 11, 1997 were
replaced with options to purchase such shares. The options vest on the same
schedules as the shares of Restricted Stock that they replaced. Under the
Restricted Plan, holders of options to purchase Restricted Stock will also be
entitled to cash payments equal to the value of the dividends that would have
been paid on the shares underlying such options. The executives may exercise
the options at any time after vesting and within 15 years of the date of grant.
All future grants to officers under the Restricted Plan will be in the form of
an option to purchase Restricted Stock.
Chief Executive Officer's Compensation. C. Cammack Morton's compensation
for 1997 as the Company's President and Chief Executive Officer consisted of an
annual base salary, pursuant to his above-described employment agreement, of
$568,500 ($238,500 of which was paid in the form of options to purchase
Restricted Stock, subject to one-year and three-year cliff vesting), which is
subject to periodic increases to be determined by the Committee in its
discretion based upon the Committee's or the Board's subjective determination
of the performance of the Company and Mr. Morton. Mr. Morton's base salary was
increased effective March 1, 1997 in connection with his being named Chief
Executive Officer of the Company on January 1, 1997. In addition, consistent
with the intent of the bonus plan discussed above, the Committee granted a
bonus to Mr. Morton for 1997 in the form of an option to purchase 48,500 shares
of Restricted Stock subject to a three-year cliff vest, which had a market
value at date of grant of $338,288, net of a 10% exercise price. Eighty percent
of the bonus was based on the Company's exceeding the target increase in FFO
for 1997; the remaining 20% was not based on any specific criteria but was
awarded in the subjective discretion of the Committee.
Section 162(m) of the Internal Revenue Code. The Company does not expect
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
to affect the deductibility for federal income tax purposes of the compensation
of the Company's executive officers in 1997. In the future, the Company intends
to review periodically the applicability of Section 162(m) to the Company's
compensation programs, including its potential impact on stock options and
Restricted
17
Stock awarded to executive officers, and, if considered appropriate, to develop
a policy with respect to the Company's compliance with Section 162(m).
Report on Repricing of Options. The Executive Compensation Committee
determined that the granting of new stock options to certain senior executives
would promote its goals of aligning executive and stockholder interests and
retaining qualified executives. However, due in part to the issuance of stock
options to former officers, the Company did not have sufficient unreserved
options under the Stock Incentive Plan to grant new stock options. Therefore,
the Company requested that certain officers allow their previously granted
stock options, of which in the aggregate 37% had vested, to be canceled in
exchange for new options. The executive officers accepted the Company's
re-issuance offer although their proportion of vested versus unvested stock
options decreased by 28% on average.
Number of Length of Original
Securities Market Price of Exercise Price Option Term
Underlying Stock at Time of at Time of Remaining at Date
Options Repriced Repricing or Repricing or New Exercise of Repricing or
Name Date or Amended (#) Amendment ($) Amendment ($) Price ($) Amendment
- ------------------------- ------ ------------------ ------------------ ---------------- -------------- -------------------
C. Cammack Morton 4/97 300,000 5.625 10.25 5.625 8.8 years
Patrick M. Miniutti 4/97 200,000 5.625 8.625 5.625 9.4 years
Christopher G. Gavrelis 4/97 35,000 5.625 10.25 5.625 8.8 years
Michaela M. Twomey 4/97 35,000 5.625 8.875 5.625 9.4 years
Susan M. Crusoe 4/97 25,000 5.625 10.25 5.625 8.8 years
The Executive Compensation Committee is pleased to submit this report to the
stockholders.
John W. Gildea, Chairman
William D. Eberle
J. Richard Futrell, Jr.
Robert O. Amick
Theodore E. Haigler, Jr.
The foregoing report should not be deemed incorporated by reference by any
general statement incorporating by reference this proxy statement into any
filing under the Securities Act of 1933, as amended, or under the Securities
Exchange Act of 1934, as amended, except to the extent that the Company
specifically incorporates this information by reference and shall not otherwise
be deemed filed under such acts.
Compensation Committee Interlocks and Insider Participation
During 1997, the following individuals (none of whom was or had been an
officer or employee of the Company) served on the Executive Compensation
Committee: Messrs. Gildea, Eberle, Futrell, Amick and Haigler. No member of the
Executive Compensation Committee was or is an officer or employee of the
Company.
18
BENEFICIAL OWNERSHIP
The following table sets forth certain information regarding the
beneficial ownership of Common Stock of the Company as of June 26, 1998 by: (a)
each Named Executive Officer; (b) each director; (c) current executive officers
and directors as a group; and (d) each person or group known by the Company to
beneficially own more than five percent of the Common Stock. Except as
otherwise described in the notes below, the following beneficial owners have
sole voting power and sole investment power with respect to all shares of
Common Stock set forth opposite their name.
Amount and Nature of Percent
Beneficial Ownership of Class (1)
---------------------- -------------
C. Cammack Morton .................................................... 214,715 1.5%
Patrick M. Miniutti .................................................. 118,400 *
William H. Neville ................................................... 17,417 *
Christopher G. Gavrelis .............................................. 19,671 *
Connell L. Radcliff .................................................. 128,541 *
Robert O. Amick ...................................................... 5,544 *
William D. Eberle .................................................... 6,095 *
J. Richard Futrell, Jr. .............................................. 5,044 *
John W. Gildea ....................................................... 904,877(2) 6.3%
Theodore E. Haigler, Jr. ............................................. 5,354 *
All current executive officers and directors as a group (12) ......... 1,439,329 10.1%
Jeffrey B. Citrin .................................................... 807,222(3) 5.7%
Promethus Southeast Retail LLC(4) .................................... 2,350,000 16.5%
- ---------
(1) An asterisk (*) indicates less than one percent. The total number of shares
outstanding used in calculating this percentage assumes that (i) no
options to purchase shares of Common Stock are exercised, (ii) no warrants
to purchase shares of common stock are exercised, and (iii) no shares of
Preferred Stock are converted to shares of Common Stock; provided that the
following shares of Common Stock are deemed outstanding: (x) those
issuable within 60 days upon exercise of options or warrants held by the
persons(s) shown in this table and (y) those issuable upon conversion of
Preferred Stock held by the person(s) shown in this table.
(2) Includes (i) 4,000 shares held by Mr. Gildea's spouse as custodian for
their children as to which Mr. Gildea has sole voting power only and as to
which he disclaims beneficial ownership, (ii) 111,111 shares of Common
Stock presently issuable upon conversion of Preferred Stock as to which
Mr. Gildea has sole voting and dispositive power, (iii) 766,666 shares of
Common Stock presently issuable upon conversion of Preferred Stock and
warrants owned by Network Fund III, Ltd. ("Network"), and (iv) 18,100
shares of Common Stock owned by Network, with respect to which Mr. Gildea
has shared dispositive power only. Mr. Gildea is a director of Network and
a Managing Director of Gildea Management Company, which has an investment
advisory agreement with Network.
(3) Includes 547,222 shares issuable upon conversion of outstanding preferred
stock and 260,000 shares issuable upon conversion of outstanding warrants.
Jeffery B. Citrin possesses only investment control with respect to
272,222 of such shares. Mr. Citrin's address is 950 Third Avenue, 17th
Floor, New York, New York 10022. Information based on Schedule 13D dated
July 22, 1996.
(4) As discussed at "Proposal Two," the Investor purchased 2,350,000 shares on
March 23, 1998 pursuant to the Stock Purchase Agreement. If the
Stockholders approve Proposal Two, Investor will be obligated to purchase
an additional 18,702,632 shares of Common Stock. Assuming no other changes
in the number of outstanding shares of Common Stock, the Investor would
then own 63.8% of the outstanding shares of Common Stock. Investor's
address is 30 Rockefeller Plaza, 63rd Floor, New York, New York 10020.
19
INFORMATION REGARDING INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors, upon the recommendation of the Audit Committee,
has appointed the accounting firm of Arthur Andersen LLP ("Arthur Andersen") to
serve as independent auditors of the Company for the fiscal year ending
December 31, 1998. Arthur Andersen has served as independent auditors of the
Company since September 1997 and is considered by management of the Company to
be well qualified. The Company has been advised by that firm that neither it
nor any member thereof has any financial interest, direct or indirect, in the
Company or any of its subsidiaries in any capacity. Representatives of Arthur
Andersen will be present at the Annual Meeting, will have the opportunity to
make a statement if they so desire, and will be available to respond to
appropriate questions.
Effective September 9, 1997, the Company retained Arthur Andersen LLP as
its new certifying accountants, replacing its prior certifying accountants,
Ernst & Young LLP ("Ernst & Young").
Ernst & Young's reports on the Company's financial statements during the
two most recent fiscal years contained no adverse opinion or disclaimer of
opinion, nor were qualified or modified as to uncertainty, audit scope or
accounting principles.
During the two most recent fiscal years and all subsequent interim periods
preceding September 9, 1997, there were no disagreements between the Company
and Ernst & Young on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Ernst & Young, would have
caused Ernst & Young to make reference to the subject matter of disagreement in
connection with Ernst & Young's reports.
20
PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in
the Company's cumulative total return on the Common Stock with the cumulative
total return of a hypothetical investment in each of the Standard & Poor's
Composite 500 Index and the index of equity real estate investment trusts
prepared by the National Association of Real Estate Investment Trusts
("NAREIT") based on the respective market prices of each such investment on the
dates shown below, assuming an initial investment of $100 in the Common Stock
on June 3, 1993 (the date of the Company's initial public offering) and the
reinvestment of dividends. Equity real estate investment trusts are defined as
those which derive more than 75% of their income from equity investments in
real estate assets. The NAREIT equity index includes all tax qualified real
estate investment trusts listed on the New York Stock Exchange, the American
Stock Exchange or the NASDAQ National Market System.
[LINE CHART APPEARS HERE WITH THE FOLLOWING INFORMATION:]
Jun-93 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97
FAC Realty Trust 100 104 97 68 37 43
- ---------------------- --- --- -- -- -- --
S&P 500 Index 100 105 106 146 180 240
- ---------------------- --- --- --- --- --- ---
NAREIT Equity Index 100 101 104 120 163 196
The stock price performance graph shall not be deemed incorporated by
reference by any general statement incorporating by reference this proxy
statement into any filing under the Securities Act of 1933, or amended, or
under the Securities Exchange Act of 1934, as amended, except to the extent
that the Company specifically incorporates this information by reference, and
shall not otherwise be deemed filed under such acts.
21
PROPOSAL TWO:
APPROVAL OF THE TRANSACTION
(WHICH INVOLVES THE SALE OF A CONTROLLING INTEREST IN THE COMPANY)
The following discussion summarizes all material aspects of the
Transaction, as set forth in the Amended and Restated Stock Purchase Agreement
between the Company and the Investor dated March 23, 1998 (the "Stock Purchase
Agreement") and the various exhibits thereto, including the Stockholders
Agreement, the Contingent Value Right Agreement and the Registration Rights
Agreement (collectively, the "Transaction Documents"). This summary is not
intended to be a complete description of the Transaction Documents and is
qualified in its entirety by reference to the Transaction Documents, copies of
which are attached hereto as appendices and incorporated herein by reference.
Capitalized terms used in this section but not defined herein shall have the
meanings assigned in the Transaction Documents.
Transaction Summary
As part of the Transaction, the Company will issue from time to time
approximately 21 million shares of Common Stock to Prometheus Southeast Retail,
LLC (the "Investor"), an affiliate of Lazard Freres & Co., for a purchase price
of $200 million ($9.50 per share). The Transaction involves a change of control
of the Company, and shareholders are urged to consider this carefully, along
with the other detriments and the benefits of the Transaction discussed below.
This summary presents an overview of the material aspects of the Transaction,
which are discussed at greater length in the remainder of this section.
Securities to be Sold .................. 21,052,632 shares of Common Stock (the "Shares").
Aggregate Purchase Price ............... $200 million, or $9.50 per Share, assuming no payments under
the Contingent Value Right Agreement described below.
The Investor ........................... Prometheus Southeast Retail, LLC (the "Investor"). The Inves-
tor is indirectly controlled by Lazard Freres Real Estate Inves-
tors, LLC ("LFREI"), a real estate investment affiliate of
Lazard Freres & Co. See " -- Information about the Investor"
below.
Closings
Initial Purchase ...................... 2,350,000 Shares for $22,325,000, which closed on March 23,
1998. But see " -- Limited Put Option" below.
Second Closing ........................ 8,176,316 Shares for $77,675,000, to close no later than Sep-
tember 30, 1998.
Subsequent Closings ................... 10,526,316 Shares for $100 million, at least one-third of which
must close no later than six months, 12 months and 18 months
after the Second Closing.
Investor Representation on the Board ... Three Investor Nominees would be elected to a nine-member
Board of Directors following stockholder approval of the Trans-
action. Additionally, the Investor would have the right to have
a proportionate share of its nominees on each of the Board's
audit committee, compensation committee and executive com-
mittee, as well as any other key committees. See " -- Stockholders
Agreement -- Management of the Company; Representation on
the Board and Certain Board Committees" below.
Participation Rights ................... For so long as the market value of the Shares owned and the
Shares yet to be acquired by the Investor is $50 million or
more, the Investor would have the right to participate in future
issuances of capital stock so that the Investor may maintain its
proportional ownership interest in the Company. Issuance of
any capital stock pursuant to options, warrants or other securi-
ties outstanding on February 24, 1998 are excluded from the
Investor's participation right. See " -- Stockholders
Agreement -- Participation Rights" below.
22
Restrictions on Certain Corporate Actions ..... Approval of the Transaction would also impose certain prohi-
bitions on the Company's operations unless prior approval of
over 67% of the directors is obtained ("Super-majority Board
Approval"). These prohibitions include restrictions on (i) sig-
nificant acquisitions and sales, (ii) the incurrence of additional
indebtedness beyond a stated level, (iii) significant issuances of
capital stock and other securities, (iv) amendments to the char-
ter or bylaws of the Company in a manner that would be mate-
rially adverse to the Investor, and (v) transactions that would
result in any person, other than the Investor, holding more than
15% of the voting power of the Company. With three Investor
Nominees on the Board, the Investor would be able to prevent
any action requiring Super-majority Board Approval. See
" -- Stockholders Agreement -- Restrictions on Certain Corpo-
rate Actions" below.
Contingent Value Rights ("CVRs") .............. If the Investor has not doubled its investment (through stock
appreciation, dividends, or both) by January 1, 2004, the Com-
pany will pay the Investor, in cash or stock, an amount neces-
sary to achieve such a return, subject to a maximum payment
of 4,500,000 shares or the cash value thereof. See " -- Contin-
gent Value Rights" below.
Limited Put Option ............................ If the stockholders do not approve the Transaction or the Sec-
ond Closing does not otherwise occur by September 30, 1998,
the Investor has the right (but not the obligation) to require the
Company to repurchase the Shares sold in the Initial Purchase
for the purchase price thereof, plus accrued dividends. See
" -- Limited Put Option" below.
Expenses ...................................... The Company estimates that its out-of-pocket expenses in con-
nection with the Transaction, including amounts paid or owed
to the Investor as reimbursement of its expenses, will be approxi-
mately $3.3 million. See "--Expenses" below.
Break-up Fee and Topping Fee .................. Provided that the Investor has complied with the terms of the
Transaction Documents, the Company will pay the Investor a
break-up fee of $2,250,000 (the "Breakup Fee") if the Stock
Purchase Agreement is terminated at any time prior to the Sec-
ond Closing. The Breakup Fee, therefore, will be payable to the
Investor if the stockholders do not approve the Transaction. In
addition, if a Competing Transaction is entered into by the Com-
pany within one year of the termination of the Stock Purchase
Agreement, the Company may have to pay the Investor a
$3 million topping fee. See "--Break-Up Fee and Topping
Fee" below.
Conditions to Closing ......................... Each of the Company's and the Investor's obligations to effect
the Second Closing and the Subsequent Closings are subject to
various conditions, including the approval of Proposal Two by
the Company's stockholders. In addition, the Investor is not
obligated to fund beyond the Second Closing until a significant
portion of the Konover Transaction (as described under "Pro-
posal Three") is complete. See " -- Conditions to Closing"
below.
23
Advantages of the Transaction
Large, Timely Infusion of Capital
at a Reasonable Cost ......................... The Transaction will enable the Company to accomplish its financ-
ing objectives for 1998 and 1999 in a single transaction. The
purchase price is at a 24% premium over the average closing
price of the Common Stock for the 30 trading days preceding
the announcement of the Transaction. Even if the Company issues
the maximum number of shares to the Investor under the CVRs,
the purchase price would represent a two percent premium, with-
out taking into consideration the benefit to the stockholders of
the delayed issuance of the shares issued in 2004. In addition,
the expenses of the Transaction are expected to be less than in
a traditional underwritten offering of capital stock, and the Com-
pany will not be exposed to the risk of falling stock prices com-
monly observed in advance of such offerings.
Association with the Investor .................. The experience and contacts in the industry of the Investor and
the Investor Nominees should increase the Company's acquisi-
tion opportunities and assist in the overall implementation of its
business plan.
Improved Access to Capital ..................... The increase in the Company's equity market capitalization and
its total capitalization should enable the Company to access the
capital markets at a lower cost. In addition, as a result of its
participation rights, the Investor may be a significant buyer in
future equity offerings. Other buyers, especially large institu-
tional investors, may find the Company more attractive as a
result of its association with the Investor. The Investor's capi-
tal market capabilities and experience should also improve the
Company's access to capital.
Potential Enhancement of Stockholder Value ..... The Transaction is believed to be the best way to maximize
long-term stockholder value. The capital raised from the Trans-
action is expected to be used to retire existing indebtedness and
to fund future acquisitions with a view to increasing funds from
operations and cash available for distribution over the long-
term.
Disadvantages of the Transaction
Change of Control ............................. As a result of the Transaction, the Investor would be entitled to
own up to 64% of the Common Stock. The size of the Inves-
tor's interest in the Company, its right to nominate three Inves-
tor Nominees to the Board and the Super-majority Board Approval
requirements will enable the Investor to control the Company.
As a result, other stockholders will have less influence over the
affairs of the Company. Moreover, to the extent the Investor's
interests differ from those of the other stockholders, the Inves-
tor's control could cause the Company to take actions that are
not in the best interest of the minority stockholders.
Anti-takeover Effects ......................... Aspects of the Transaction may make the Company a less attrac-
tive take-over candidate to unsolicited buyers of the Company.
As a result, the stockholders are less likely to enjoy the poten-
tial benefits of an unsolicited purchase of the Company, such as
the receipt of a premium for their shares of Common Stock.
24
Restrictions on Certain Corporate Actions ..... The Super-majority Board Approval requirements grant the Inves-
tor the power to prevent certain significant corporate actions
even if favored by a majority of the Board or in the best inter-
est of the stockholders. See " -- Stockholders Agreement --
Restrictions on Certain Corporate Actions" below.
Contingent Obligation ......................... The CVRs could require the Company to issue up to 4.5 mil-
lion additional shares (or the cash value thereof) in the year
2004 to the extent necessary for the Investor to realize the agree-
upon return. See " -- Contingent Value Rights" below.
Conflicts of Interest ......................... An affiliate of the Investor owns a controlling interest in Alexander
Haagen Properties, Inc. ("Haagen"). The Company may com-
pete with Haagen for tenants and possible property acquisitions.
If such a conflict arises, due to its controlling interest in both
companies, the Investor may take actions that are not in the best
interest of the stockholders of the Company. Moreover, the Trans-
action Documents do not prevent the Investor or its affiliates
from taking other significant ownership positions in potential
competitors of the Company.
Consequences of Failing to Approve
the Transaction .............................. In addition to preventing the Company from completing the
Transaction, failure to approve the Transaction would (i) entitle
the Investor to exercise its Limited Put Option, which would
require the Company to return approximately $22 million to the
Investor in exchange for 2,325,000 Shares; and (ii) require the
Company to pay a $2.25 million break-up fee. See "-- Other
Consequences of Failure to Approve the Transaction" below.
Opinion of Financial Advisor ................... DLJ, the Company's financial advisor, has provided an opinion
that the consideration to be received by the Company in exchange
for issuing the Shares and the CVRs was, as of the date of its
opinion, fair from a financial point of view to the Company.
Such opinion was based upon, and subject to, the assumptions,
limitations and qualifications set forth therein. See " -- Opin-
ion of Financial Advisor" below.
Use of Proceeds ................................ The net proceeds from the Initial Purchase were used primarily
to repay loans totaling approximately $8.2 million and to fund
certain acquisition and development activities. Proceeds from
the Second Closing are expected to pay down the Company's
credit facility with Nomura, which has an interest rate of LIBOR
plus 2 1/4%. As of March 31, 1998, the Company had $62 mil-
lion outstanding under the credit facility. The remaining pro-
ceeds from the Transaction are expected to be used to fund the
acquisition and development of additional community shopping
center properties.
Appraisal Rights ............................... Stockholders have no appraisal rights with respect to the
Transaction.
Required Vote .................................. Approval of the Transaction requires the affirmative vote of a
majority of the votes cast on the proposal, provided that the
total vote cast on the proposal represents over 50% in interest
of all shares of Common Stock entitled to be voted on the pro-
posal. The Investor is not entitled to vote on the proposal.
25
Information about the Company
The Company is a self-administered and self-managed real estate investment
trust ("REIT") engaged in the ownership, management, leasing, acquisition,
development and operation of retail shopping centers. The Company's revenues
are primarily derived under real estate leases with national, regional and
local retailing companies. As of June 30, 1998, the Company owned, operated or
had under contract to purchase 62 retail shopping centers in 22 states,
totaling more than 8.5 million square feet. See "Proposal Three: Amendment of
Charter to Change the Name of the Company" for a discussion of 11 shopping
centers under contract to purchase from entities affiliated with Konover &
Associates South.
Substantially all of the Company's assets (or the economic benefits
thereof) are held by, and the Company conducts substantially all of its
operations through, FAC Properties, L.P., a Delaware limited partnership (the
"Operating Partnership"). The Company controls the Operating Partnership as its
sole general partner. As of June 30, 1998, the Company directly or indirectly
owned 96% of the interests (the "Units") in the Operating Partnership.
Other than Units held by the Company, each Unit may be redeemed by the
holder thereof for the cash value of one share of Common Stock or, at the
Company's option, one share (subject to certain adjustments) of Common Stock.
Following the initial issuance of Units to third parties, with each such
exchange, the number of Units owned by the Company and, therefore, the
Company's percentage interest in the Operating Partnership, will increase.
The Company is incorporated in Maryland. Its executive offices are located
at 11000 Regency Parkway, Suite 300, Cary, North Carolina 27511, and its
telephone number is (919) 462-8787.
Information about the Investor
The Investor's sole member is LF Strategic Realty Investor II, L.P., whose
general partner is Lazard Freres Real Estate Investors, LLC ("LFREI"). LFREI is
a real estate investment affiliate of Lazard Freres & Co. and manages several
realty investment funds including the Investor.
Established in 1848, Lazard Freres & Co., LLC is a private investment
bank, with extensive experience in principal investments, real estate, asset
management, mergers and acquisitions and corporate finance. Operating through
affiliated entities in six countries throughout the world, Lazard Freres & Co.,
LLC advises numerous corporations, financial institutions and governments on
strategic and financial transactions. Lazard Freres & Co., LLC also provides
investment management services to institutional and individual investors
worldwide, managing more than $53 billion of capital.
Since its inception, LFREI and its affiliates have acquired sizable
investment stakes in a select group of leading real estate operating companies,
including Alexander Haagen Properties, Inc.; American Apartment Communities;
RF&P Corporation (renamed Commonwealth Atlantic Properties); Dermody
Properties; Bell Atlantic Properties (renamed Atlantic American Properties
Trust), ARV Assisted Living, Inc.; the Fortress Group; Kapson Senior Quarters;
and The Rubenstein Company.
The Real Estate Investment Banking Group at Lazard Freres & Co., LLC is in
the business of advising real estate companies on the process of
recapitalizing, restructuring and expanding their companies and portfolios.
Selected clients include Corporate Property Investors, Mobil Corp., Olympia &
York (World Financial Properties), Prudential Insurance Company, Rockefeller
Group, Rodamco, N.V. and Wright Runstad Company.
Background of the Transaction
The Company believes that commercial real estate in the United States will
increasingly be held by publicly traded REITs that are fully integrated
operating companies. It is the Company's view that, as the real estate
securitization process continues, the success of a REIT will be largely
dependent on its ability to access capital markets consistently on favorable
terms and that this access will depend upon the REIT's asset size, management
experience, performance history and operational sophistication.
Since the appointment of Mr. Morton as President of the Company in January
1996, management has sought to improve the Company's operating performance and
financial structure and to reverse the Company's negative stock price trend.
These efforts, in part, focused on strengthening the Company's management and
resulted in the addition of several new senior executive officers, including
Mr. Miniutti as Chief Financial Officer in August 1996, and, more recently, Mr.
Neville, as Chief Operating Officer in September 1997.
Beginning in February 1996, management began to look at various financing
options and strategic alliances. Given the drop in the Common Stock price,
management determined that public equity financing alternatives were not
attractive. In
26
1996 the Company secured $20 million of private equity from Gildea Management
Company and Blackacre Bridge Capital, L.L.C. and hired Prudential Securities,
Inc. ("Prudential") to assist the Company in exploring strategic alliance
opportunities. Over a period of 12 months, with Prudential's assistance, the
Company analyzed various options and had discussions with several existing
REITs, primarily owners of retail outlet properties, regarding possible
strategic alliances. None of these discussions led to viable opportunities due
to a variety of factors, including concerns over the Company's product mix, the
Company's belief that diversification into other forms of retail real estate
was in its best interest and an unwillingness of these potential partners to
place a value on the Company commensurate with what management believed to be
the Company's inherent value.
Soon after Mr. Miniutti joined the Company in August 1996, management
explored strategic options with contacts of Mr. Miniutti. Through these
meetings it became clear that the best strategy for the Company to improve its
operational and financial position was to move forward aggressively with its
diversification strategy. This strategy involved targeting the acquisition and
development of community shopping centers. Management also engaged Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") in May 1997 to help the
Company continue to explore strategic opportunities. From February 1997 until
November 1997, the Company had various discussions with REITs and other
companies, primarily diversified portfolio REITs and REITs specializing in
community centers, regarding possible alliances. These discussions led to the
exchange of information pursuant to confidentiality agreements with two such
REITs. Again, because of valuation and product mix issues, no viable
opportunities were found.
As part of its diversification strategy, beginning in August 1997, the
Company undertook to reorganize itself into an umbrella partnership structure
(an "UPREIT") that would increase its flexibility in acquiring and developing
community shopping center portfolios. See " -- Information about the Company"
above. As a result of this strategy, the Company entered into agreements to
acquire two community center portfolios through its new UPREIT structure,
including its agreement to acquire nine community shopping centers from
affiliates of Messrs. Rodwell and Kane (the "Rodwell/Kane Acquisition"). The
Company began discussions regarding the Konover Transaction in late 1997, which
ultimately resulted in an executed definitive agreement in February 1998.
Contemporaneous with the decision to adopt an UPREIT structure, the Board
directed management to focus on obtaining a private strategic equity investment
in order to better capitalize the Company. In particular, the Board desired an
active investor with experience in the industry and knowledge of attractive
acquisition opportunities. The Company had discussions with numerous potential
investors, including real estate investment funds, regarding an equity
investment in the Company. No potential investor pursued discussions regarding
an investment in Common Stock. Two potential investors, however, expressed an
interest in a preferred stock investment of $25 to $50 million. Such investors
sought preferred stock that was convertible after three years into Common Stock
with a moving conversion ratio that would essentially guarantee a return
between 15% and 18%. Discussions with such investors never advanced to an offer
by any party in large part because, shortly after such discussions began, the
Company began negotiations with officers of LFREI in early December 1997
regarding a transaction on terms that the Board believed to be superior to
those sought by the potential preferred stock investors. The transaction under
discussion with LFREI was preferred, primarily because of its significantly
greater size and its limitation on possible future payments by the Company if
the proposed investment did not produce the desired return for the Investor.
See " -- Contingent Value Rights," " -- Advantages of the Transaction" and "
- -- Disadvantages of the Transaction" below.
After extensive discussions, on December 22, the Board of Directors
authorized entering into a letter of intent regarding a potential $200 million
Common Stock investment by LFREI subject to due diligence and negotiation of
mutually acceptable terms. The letter of intent, which was executed on December
24, 1997, provided that the Company could not solicit offers from or provide
information to any person relating to the sale of capital stock by the Company
or a merger or similar significant transaction until January 31, 1998.
Representatives of LFREI and the Company met several times throughout the
months of January and February 1998 to discuss the transaction. In January of
1998, the Company requested that DLJ provide a fairness opinion in connection
with the financial aspects of the transaction. On February 6, 1998, the Board
of Directors met by telephone to discuss the transaction. Representatives from
DLJ and outside counsel to the Company participated in the meeting. The Board
discussed the structure and instructed management to continue the negotiations.
Another Board meeting was held on February 9, 1998, and was attended by all
Board members in person. At that meeting, management summarized the
negotiations, and presentations were made by the Company's outside counsel,
Alston & Bird LLP, special Maryland counsel, Ballard Spahr Andrews & Ingersoll,
LLP, and by DLJ. The Board instructed management to continue to negotiate the
final terms of the agreement and to seek modifications regarding certain
protections for the Company's existing stockholders in the event of future
merger or sale transactions that might be instituted by LFREI and to negotiate
a lower break-up fee if the stockholders rejected the
27
LFREI transaction without any competing bids being made. Management continued
to meet with LFREI and its representatives over the next several days and
reached agreement with LFREI, including the requested changes to the break-up
fee and the stockholder protection provisions.
On February 19, 1998, the Board met again, at which time DLJ presented its
conclusions (and distributed written materials) relating to the fairness of the
transaction to the Company from a financial point of view. The Board also heard
from management as to its conclusions regarding the transaction and the results
of its continued negotiations with LFREI. Management believed that the
transaction provided the Company and its stockholders with the best opportunity
for growth for several reasons, including (i) an attractive stock price, which
was approximately a 25% premium to the 30-trading day average closing stock
price of $7.60 as of the date of the Board meeting; (ii) the positive effect on
the Company's capital structure of a significant equity investment, and (iii)
the benefit of having LFREI as a strategic partner given LFREI's expertise in
real estate finance and capital markets. The Board believed that the proposed
transaction was in the best interest of the Company regardless of whether it
improved the likelihood of reaching agreement on the Konover Transaction. See
"Proposal Three" for a discussion of the Konover Transaction. Upon additional
discussions, the Board approved entering into the transaction, subject to
completion of written documentation. On February 24, 1998, the parties reached
agreement on and executed the final documents.
On March 23, 1998, the Company and the Investor entered into the Amended
and Restated Stock Purchase Agreement and sold 2,350,000 shares of Common Stock
to the Investor at $9.50 per share (the "Initial Purchase"), for an aggregate
purchase price of $22,325,000. The amendment primarily addressed certain
indemnification obligations with respect to the Company's status as a
"domestically controlled" REIT (described below) and clarified other provisions
of the original agreement.
The Investment
Pursuant to the Stock Purchase Agreement, the Company has agreed to sell
an aggregate of 21,052,632 shares of Common Stock to the Investor at a price of
$9.50 per share, for an aggregate purchase price of $200 million. The purchase
price per share was determined as a result of arm's-length negotiations between
the Company and the Investor. On March 23, 1998, the Company sold 2,350,000
shares to the Investor at $9.50 per share (the "Initial Purchase"), for an
aggregate purchase price of $22,325,000. As of the Record Date, the Investor
owned approximately 16.5% of the outstanding Common Stock.
If the stockholders do not approve the Transaction or the Second Closing
(as defined below) does not occur by September 30, 1998, the Investor has the
right to require the Company to repurchase the shares sold in the Initial
Purchase for the purchase price thereof, plus accrued dividends. See " --
Limited Put Option" below. As a result of such Limited Put Option, the Company
has accounted for the Initial Purchase as "temporary equity." See " --
Accounting Treatment" below.
Subject to stockholder approval, the Stock Purchase Agreement provides
that the Company sell 18,702,632 additional shares of Common Stock from time to
time to the Investor at a price of $9.50 per share, in exchange for
approximately $177 million (the "Remaining Equity Commitment"). Of the
Remaining Equity Commitment, the Company would sell 8,176,316 shares by
September 30, 1998 (the "Second Closing"), with the remaining 10,526,316 shares
to be sold in subsequent closings (the "Subsequent Closings"), the last of
which would occur within 18 months of the Second Closing. If the Investor
acquired all of the shares represented by the Remaining Equity Commitment (and
assuming no other change in the number of outstanding shares), the Investor
would own approximately 64% of the outstanding Common Stock (59% on a fully
diluted basis).
The net proceeds from the Initial Purchase were used to repay (i)(a) $5.7
million loan due on March 23, 1998 at a rate of prime plus 2 1/4% and (ii) $2.5
million outstanding under a line of credit with interest at prime plus 1/2%.
The remaining proceeds were used primarily to fund certain acquisition and
development activities. Proceeds from the Second Closing are expected to pay
down the Company credit facility with Nomura Asset Capital Corporation, which
has an interest rate of LIBOR plus 2 1/4%. As of March 31, 1998, the Company
had $62 million outstanding under the credit facility. The remaining proceeds
from the Transaction are expected to be used to fund the acquisition and
development of additional community shopping center properties primarily in the
southeastern United States. There can be no assurance, however, that the
Company will be able to use the funds for such purposes.
Stockholders Agreement
Concurrently with the execution of the Stock Purchase Agreement, the
Investor and the Company entered into the Stockholders Agreement, which grants
certain rights to and imposes certain restrictions on the Investor with respect
to the
28
shares purchased by it pursuant to the Stock Purchase Agreement. Many of these
rights terminate when the value of the Common Stock held by the Investor plus
the dollar amount yet to be purchased under the Stock Purchase Agreement is
less than $10 million (the "Final Threshold Date"). These rights and
restrictions include the following:
Management of the Company; Representation on the Board and Certain Board
Committees. Under the Stockholders Agreement, the three Investor Nominees would
be elected to a nine-member Board as soon as practicable following stockholder
approval of the Transaction. Two of the Investor Nominees would be chosen at
the sole discretion of Investor; the third would be subject to the "reasonable
approval" of the Company. Although the Stockholders Agreement does not specify
the meaning of "reasonable approval," the Company believes it could reasonably
withhold its approval if the Investor Nominee was affiliated with a competitor
of the Company or if the nominee did not comply with the requirements for such
nominees contained in the Stockholders Agreement, which include reasonable
experience in business, financial and real estate matters and no conviction of
a felony. The Investor has indicated that two of the Investor Nominees would be
Arthur P. Solomon and Murry N. Gunty.
Mr. Solomon, 59, is a managing director of Lazard Freres & Co. and a
senior principal of LFREI. Mr. Solomon joined Lazard Freres & Co. in 1988 to
oversee all of its real estate investment and advisory activities. His prior
experience in the real estate industry includes positions as managing director
and head of real estate at Drexel Burnham Lambert; chief executive officer of
Krupp Companies, a national real estate and financial services company; and
executive vice president and chief financial officer of The Federal National
Mortgage Association. Prior to that, Mr. Solomon was a professor of economics
and urban studies at MIT and concurrently headed the Harvard-MIT Joint Center
for Urban Policy. Mr. Solomon holds a BA from Brown University, an MA from
Trinity College, and a Ph.D. in economics from Harvard University. He is a
trustee of the Urban Land Institute, and a member of the International Council
of Shopping Centers and Pension Real Estate Association.
Mr. Gunty, 31, is a principal of LFREI and a senior member of its
investment team. He joined Lazard Freres & Co. in 1995 from J.E. Robert
Company, where he directed the firm's investments in REITs, commercial
mortgage-backed securities and other corporate real estate opportunities. Prior
to that, Mr. Gunty worked at Trammell Crow Ventures, the $3 billion (assets)
real estate investment affiliate of Trammell Crow Company, and at Blackstone
Capital Partners, a $1 billion leveraged buyout fund. He received his A.B. from
Harvard College, and his MBA from the Harvard Business School.
At each annual or special meeting of stockholders of the Company with
respect to which any class of directors is to be elected, the Investor would
have the right (but not the obligation) to nominate directors. The number of
Investor Nominees the Investor is entitled to nominate will decrease with
certain reductions in the combined value of (i) the Shares purchased and (ii)
the amount still owed under the Stock Purchase Agreement (collectively, the
"Commitment Value"), as set forth below:
Commitment Value Number of Investor Nominees
- ----------------------------------------------------------- ------------------------------------------------------
$50 million or more (the date this threshold is no longer Three or proportional one-third share of the Board if
met, the "Preliminary Threshold Date") Board size over nine
$25 million to $50 million (the date this threshold is no Two or proportional two-ninths share of the Board if
longer met, the "Second Threshold Date") Board size over nine
$10 million to $25 million (the date this threshold is no One or proportional one-ninth share of the Board if
longer met, the "Final Threshold Date") Board size over nine
Less than $10 million None
If the Investor's right to nominate directors to the Board is reduced, the
Investor would cause the applicable number of its nominees to resign
immediately (regardless of the remaining term) from the Board. In addition, in
the event that the Board did not include the requisite number of directors
nominated by the Investor, the Company would be subject to certain limitations
on its operations unless it receives the prior written consent of the Investor.
In addition, the Company has amended its bylaws to (i) establish the
executive committee, which has been delegated authority to the maximum extent
permitted by law, and (ii) provide that for so long as the Investor has the
right to nominate directors to the Board, the Investor has the right to have a
proportionate share of its nominees on each of the Board's audit committee,
compensation committee and executive committee, as well as any other key
committees (the "Key Committees"), to be comprised as follows: (A) until the
Preliminary Threshold Date, at least one-third of such members shall be
29
Investor Nominees, (B) until the Second Threshold Date, at least two-ninths of
such members shall be Investor Nominees, and (C) until the Final Threshold
Date, at least one-ninth of such members shall be Investor Nominees. However,
in the event that any such Investor Nominee to a Key Committee would compromise
such committee's ability to qualify as independent or disinterested under
applicable law, the Investor Nominee would not be appointed to the Key
Committee. To the extent practicable, any Key Committee on which an Investor
Nominee did not sit would consider only those items that prevent the Investor
Nominee from serving on such Key Committee. Assuming stockholder approval of
the Transaction, at least one Investor Nominee would serve as a member of the
board of directors of each subsidiary of the Company until the Final Threshold
Date.
Participation Rights. As part of the Transaction, the Company has granted
certain participation rights (the "Participation Rights") to the Investor. The
Stock Purchase Agreement provides that until the Preliminary Threshold Date, in
the event that the Company issues or sells shares of capital stock (including
any security convertible into or redeemable for securities of capital stock of
the Company or any of its subsidiaries), the Investor would be entitled to a
participation right to purchase or subscribe for that proportion of the total
number of securities to be issued equal to the Investor's proportionate
holdings of Common Stock outstanding (assuming the purchase of 21,052,632
shares pursuant to the Stock Purchase Agreement). The Investor has no right,
however, to participate in the issuance by the Company of any of its capital
stock issued to any of the Company's subsidiaries or pursuant to options,
warrants or other securities outstanding on the date of the Stock Purchase
Agreement. The Participating Rights would also enable the Investor to purchase
one share of Common Stock for each Unit issued (other than to the Company);
such shares, however, would be required to be voted in the same manner and
proportion as the votes cast by other stockholders of the Company. All
purchases pursuant to the Participation Rights would be at the same price and
on the same terms and conditions as are applicable to other purchasers of the
additional shares of capital stock of the Company (except that the price to the
Investor to make such purchase would be net of an amount equal to 50% of any
underwriting, placement agent or similar fee associated with such purchase paid
in connection with such purchase).
Restrictions on Certain Corporate Actions. Until the date (the "Approval
Rights Termination Date") on which the Investor owns (or is obligated to
purchase) less than 15% of the value of all Common Stock and Units (excluding
Units held by the Company), the Company would be subject to certain
prohibitions on its operations unless the prior approval of over 67% of the
directors is first obtained, including restrictions relating to: (i) the
acquisition of any business or assets having an aggregate purchase price in
excess of 25% of the Company's total asset value or total market capitalization
(the "Total Enterprise Value") or the acquisition of an aggregate of businesses
and assets having an aggregate purchase price in excess of the 50% of the Total
Enterprise Value during a fiscal year; (ii) the sale or disposition of any
assets or stock during any fiscal year having an aggregate value in excess of
25% of the Total Enterprise Value; (iii) the incurrence of additional
indebtedness such that the ratio of the Company's total indebtedness to the
Total Enterprise Value exceeds 65%; (iv) issuances of capital stock or options,
rights or warrants or other commitments to purchase or other securities
convertible into shares of Common Stock, including Units, in excess of 50% of
all shares of capital stock outstanding, on a fully diluted basis; (v) the
amendment of any provision of the Articles of Incorporation or the bylaws of
the Company in a manner that would be materially adverse to the Investor (the
Stockholders Agreement does not specify who determines such material
adversity); (vi) the commencement of any voluntary case in bankruptcy, the
consent to the entry of an order for relief against it in an involuntary case,
the consent to the appointment of a custodian of it or for all or substantially
all of its property, or a general assignment for the benefit of its creditors;
(vii) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which would be that any person, other
than the Investor, became the beneficial owner, directly or indirectly, of
stock having more than 15% of the voting power of the Company; (viii) taking
certain actions with, or for the benefit of, any of the Company's affiliates;
and (ix) termination of the federal income tax status of the Company as a REIT.
Information Rights. Until the Final Threshold Date, the Company has the
obligation to provide to the Investor (i) the financial statements and operating
and management information provided to the Company's senior management, and (ii)
copies of all other information distributed by the Company to the Board, any
equity investor of the Company or any of the Company's partners in joint
ventures.
Contingent Value Rights
If the stockholders approve the Transaction, the Investor would have the
right, pursuant to the Contingent Value Right Agreement, to receive on January
1, 2004 payment of an aggregate amount equal to the lesser of (a) 4,500,000
multiplied by the Fair Market Value (as defined below) of a share of Common
Stock on such date and (b)(i) the greater of (A) $19.00
30
multiplied by the number of shares of Common Stock purchased pursuant to the
Stock Purchase Agreement less all dividends paid with respect to such Shares
(the "$19.00 Amount") or (B) the dollar amount that allows the Investor to
realize a 15% internal rate of return on the price paid for the shares
purchased pursuant to the Stock Purchase Agreement on a compounded, annualized
basis (inclusive of all dividends paid with respect to such shares) (the "15%
IRR Amount") less (ii) the fair market value of the number of shares of Common
Stock purchased pursuant to the Stock Purchase Agreement. Such payment may be
paid, at the election of the Company, in cash or shares of Common Stock (based
on the average of their last reported sales price for the 60 consecutive
calendar days (the "Fair Market Value") before January 1, 2004).
Essentially, the $19.00 Amount and the 15% IRR Amount both represent the
amount necessary for the Investor to have doubled its $200 million investment by
January 1, 2004. If the Investor has doubled its investment by that date (taking
into account stock appreciation and dividends), there will be no payment under
the CVRs. If the Investor has not realized this return, the Company is obligated
to pay the lesser of the then-current value of a share of Common Stock
multiplied by 4.5 million or the amount necessary to realize the desired return.
The CVRs do not guarantee that the Investor will receive the desired return;
rather they merely guarantee the issuance of up to 4,500,000 shares of Common
Stock (or, at the Company's option, the payment of the cash value thereof) to
the extent that the Investor has not realized the desired return by January 1,
2004. The issuance of another 4.5 million shares would have the effect of
resetting the sale price of the stock to $7.83 per share.
The CVRs expire upon completion of an offer to purchase as described in
the paragraph below or upon the Investor's refusal to accept such offer. The
CVRs also terminate if, during the three months prior to January 1, 2004, the
Fair Market Value of the Purchased Shares equals or exceeds (A) $21.00
multiplied by the number of Purchased Shares less (B) the aggregate amount of
cash dividends paid on the Purchased Shares following the Initial Purchase.
At any time prior to December 31, 2003, the Company could make an irrevocable
offer to purchase from the Investor all shares of Common Stock acquired pursuant
to the Transaction. The per share offer price would be the greater of (A) $19.00
less all dividends paid with respect to such share and (B) the dollar amount
that allows the Investor to realize a 15% internal rate of return on the price
paid for such share on a compounded, annualized basis (inclusive of all
dividends paid with respect to such share).
The following table shows the amount of the Company's obligation under the
CVRs at various stock price levels and aggregate dividend amounts (through
January 1, 2004) with respect to the shares purchased by the Investor:
Cumulative
Dividends Paid
per Share
through
January 1, Contingent Value Right Payment Amount
2004 ($ in millions)
- --------------- ---------------------------------------------------------------------------------------------------------------
$ 10.00 0 0 0 0 0 0 0 0 0 0 0
$ 9.00 21.0 0 0 0 0 0 0 0 0 0 0
$ 8.00 40.5 21.0 0 0 0 0 0 0 0 0 0
$ 7.00 40.5 42.0 21.0 0 0 0 0 0 0 0 0
$ 6.00 40.5 45.0 42.0 21.0 0 0 0 0 0 0 0
$ 5.00 40.5 45.0 49.5 42.0 21.0 0 0 0 0 0 0
$ 4.00 40.5 45.0 49.5 54.0 42.0 21.0 0 0 0 0 0
$ 3.00 40.5 45.0 49.5 54.0 58.5 42.0 21.0 0 0 0 0
$ 2.00 40.5 45.0 49.5 54.0 58.5 63.0 42.0 21.0 0 0 0
$ 1.00 40.5 45.0 49.5 54.0 58.5 63.0 63.0 42.0 21.0 0 0
$ 0.00 40.5 45.0 49.5 54.0 58.5 63.0 67.5 63.0 42.0 21.0 0
----- ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
$ 9.00 $ 10.00 $ 11.00 $ 12.00 $ 13.00 $ 14.00 $ 15.00 $ 16.00 $ 17.00 $ 18.00 $ 19.00
Fair Market Value per Share as of January 1, 2004
The Company's greatest possible liability under the CVRs (4,500,000 shares
valued at $71.2 million) would arise only if the Company paid no dividends
while its stock price rose to $15.82 per share by January 1, 2004. For a
discussion of DLJ's analysis of the CVRs, see " -- Opinion of Financial Advisor
- -- Contingent Value Right Analysis."
31
Limited Put Option
If the shareholders fail to approve the Transaction, the Investor would
have an option under the Stock Purchase Agreement to require that the Company
repurchase the shares of Common Stock acquired in the Initial Purchase at a
price equal to the purchase price thereof, together with any accrued dividends
(the "Limited Put Option"). In addition, the Limited Put Option is exercisable
if the Second Closing does not occur by September 30, 1998 (other than as a
result of the Investor's material breach of the Stock Purchase Agreement). The
Limited Put Option must be exercised no later than October 31, 1998. The
Company does not have the right to require the Investor to exercise the Limited
Put Option. Therefore, in the event that stockholder approval of the
Transaction is not obtained and the Investor does not exercise the Limited Put
Option, the shares of Common Stock issued to the Investor in the Initial
Purchase will remain outstanding.
Accounting Treatment
The $22,325,000 received in connection with the Initial Purchase has been
accounted for by the Company as "temporary equity" to reflect the fact that, in
the event the Limited Put Option is exercised, such funds would have to be
returned to the Investor. If the Limited Put Option is not exercised, the
Initial Purchase will be accounted for as "permanent equity" in stockholders'
equity. Upon receipt thereof, the Company will account for the Remaining Equity
Commitment ($177 million) as "permanent equity" in stockholders' equity.
As a result of the CVRs, the Company could have to pay the Investor (in
shares or cash) up to the Fair Market Value of 4,500,000 shares of Common Stock
on January 1, 2004. No accounting for the CVRs will be made until the amount
due, if any, is determinable and payable. When the CVR obligation is determined
and payable, the amounts related to the CVRs will be recorded as
paid-in-capital. The significant terms of the CVRs will be disclosed in the
footnotes of the Company's financial statements.
Registration Rights Agreement
Concurrently with the Stock Purchase Agreement, the Company and the
Investor entered into the Registration Rights Agreement, pursuant to which the
Company is obligated to file up to four demand registration statements (no more
than two of which may be requested in any two-year period) under the Securities
Act for the resale by the Investor of all or a portion of the Company
securities acquired in the Transaction.
The right to a demand registration is further limited in that (i) it may
be invoked in each instance only with respect to a number of shares having a
fair market value equal or greater than $10 million, and (ii) the Company has
the right from time to time to require the Investor not to sell under the
demand registration statement or to postpone or suspend the effectiveness
thereof in certain circumstances. The Investor also will have the right, with
respect to most registrations of Common Stock by the Company for its own
account, to require the Company to include its Company securities in such
registration. The Registration Rights Agreement provides that the Company will
pay the expenses, other than underwriting discounts and fees, relating to the
demand registrations requested by the Investor.
No Solicitation of Competing Transactions
Unless and until the Stock Purchase Agreement is terminated in accordance
with its terms, the Company may not initiate, solicit or encourage any
inquiries involving (i) the acquisition of 15% or more of the Company's equity
securities (excluding Units) by any person or group or (ii) the merger,
consolidation, liquidation or other action out of the ordinary course of
business of the Company (a "Competing Transaction"). The Company must notify
the Investor of all of the relevant details relating to all inquiries that the
Company may receive relating to any such matters; provided, that the
Transaction Documents do not prohibit the Board from complying with Rule 14e-2
promulgated under the Exchange Act with regard to a tender or exchange offer or
prohibit the Board from taking such other actions as may be required to comply
with its fiduciary obligations. If the Board determines with the advice of
counsel that failure to do so could be held to violate its fiduciary duties, it
may provide information in response to an unsolicited proposal. If the Company
receives a bona fide proposal for a Competing Transaction that the Board
determines in good faith (based upon the advice of a nationally recognized
financial advisor) may provide greater value to the Company and its
stockholders than the Transaction, the Company may enter into negotiations with
respect to such proposal. The Company must notify the Investor of any such
superior proposal not less than two business days prior to entering into a
definitive agreement with respect to a Competing Transaction; provided,
however, that in no event may the Company enter into a definitive agreement
with respect to a Competing Transaction less than five business days after the
Company's initial notification to the Investor of an inquiry or proposal
relating to a Competing Transaction. Within the two-business-day or
five-business-day period referred to above, the Investor may propose an
improved transaction.
32
Expenses
Whether or not the Transaction is consummated, the Company will reimburse
the Investor for its expenses in connection with the Transaction, including
out-of-pocket expenses of monitoring the Company and of performing its duties
under the Transaction Documents. The Company has already paid $1.25 million of
the Investor's expenses and expects that future payments will be under
$100,000. Based on estimates provided by the Company's service providers and
prior dealings with them, the Company anticipates that its out-of-pocket
expenses in connection with the Transaction will be approximately
$3.3 million, although the Company has not negotiated caps on the charges of
its service providers in connection with the Transaction. This $3.3 million
estimate assumes that the Company makes no additional payments to DLJ, which
has indicated that it believes it is entitled to an additional $3.9 million
advisory fee. See " -- Opinion of Financial Advisor" below.
Break-Up Fee and Topping Fee
Provided that the Investor is not in material default under the Stock
Purchase Agreement, has not breached any of its representations and warranties
in any material respect, and has satisfied in all material respects its
covenants relating to the Initial Purchase, the Company will pay the Investor a
break-up fee of $2,250,000 (the "Breakup Fee") in the event that the Stock
Purchase Agreement is terminated at any time prior to the Second Closing. The
Breakup Fee, therefore, will be payable to the Investor if the stockholders do
not approve the Transaction. In addition, in the event that the Company learns
of a Competing Transaction prior to the date of the Annual Meeting and enters
into the Competing Transaction within one year of the date that the Stock
Purchase Agreement is terminated, the Company will pay the Investor $3,000,000
(the "Topping Fee"). Notwithstanding the foregoing, if a Topping Fee is payable
to the Investor and the Investor profits on the sale of the shares purchased in
the Initial Purchase in connection with the Competing Transaction, then the
Investor must pay the Company the amount by which such profit, the Break-up Fee
and the Topping Fee exceed $7,750,000.
Conditions to Closing
Each of the Company's and the Investor's obligations to effect the Second
Closing and the Subsequent Closings are subject to various mutual and
unilateral conditions, including, without limitation, the following: (i)
stockholder approval of the Transaction; (ii) the continued qualification of
the Company as a REIT for federal income tax purposes; (iii) the receipt of an
opinion of counsel to the effect that the Company is a "domestically
controlled" REIT as discussed below at " -- Certain Federal Income Tax
Considerations"; (iv) the continuing correctness of the representations and
warranties in the Stock Purchase Agreement, (v) the receipt of any consents
necessary for the Transaction, and (vi) various other customary conditions. In
addition, the Investor is not obligated to fund more than $100 million of the
Transaction unless a significant portion of the Konover Transaction is
consummated.
Indemnification Provisions
The Stock Purchase Agreement provides that each party shall indemnify the
other for breaches of its representations and warranties or the failure to
perform its covenants under the Agreement. Such indemnification obligations are
generally not triggered until the indemnified party has incurred losses and
expenses of $500,000. If the Investor does not receive an opinion of counsel to
the effect that the Company is a "domestically controlled" REIT and the Second
Closing occurs, the Company has agreed to increase the indemnification amount
relating to losses arising from any failure to qualify as a "domestically
controlled" REIT by a percentage equal to the Investor's ownership percentage.
Amendment or Termination of the Transaction Documents
Although the Board reserves the right to amend the provisions of the Stock
Purchase Agreement without approval of the stockholders, either before or after
approval by the stockholders of the Transaction, the Company intends to solicit
further approval of the stockholders in the event that any such amendment would
change the Transaction in a manner that would be materially adverse to the
stockholders. The Board also reserves the right to terminate the Stock Purchase
Agreement without obtaining further approval of the stockholders. The Board
does not anticipate either the material amendment of the terms of, or the
termination of, the Stock Purchase Agreement.
Advantages of the Transaction
The Company believes that the Transaction, if consummated, represents an
opportunity to improve long-term stockholder value by providing the Company
with access to significant equity capital at an attractive cost and strategic
resources not otherwise readily available to it, thereby improving the
Company's ability to capitalize on community shopping center
33
acquisition and development opportunities. In particular, the Company believes
that the Transaction may have a number of beneficial effects on the Company and
its stockholders, including the following:
Large, Timely Infusion of Capital at Reasonable Cost. The Transaction is
expected to enable the Company to accomplish its financing objectives for 1998
and 1999 in a single transaction on more favorable terms than might have been
available in the public markets. The purchase price to be received in the
Transaction represents a 24% premium over the 30-trading day average closing
price ($7.68) prior to announcement of the Transaction. Because the purchase
price for the Common Stock to be acquired by the Investor is fixed, the
Transaction protects the Company against the risks of a decline in the stock
market as a whole and the market for REIT stocks in particular. In addition,
the Company will not pay any underwriting discount or commission in connection
with the sales to the Investor and expects that its out-of-pocket expenses in
connection with such sales (estimated at $3.3 million) will be substantially
less than the costs it would have incurred in selling a similar number of
shares in one or more firm commitment underwritings. Moreover, the Company is
not exposed to the risk of a decline in the market price of its shares that is
commonly observed in advance of such offerings. Additionally, the Transaction
will enable management to focus on managing the Company's existing properties
and acquiring and developing additional properties rather than being required
to divert management time and attention to the process of raising capital.
The 24% premium calculation does not take into account the possible
payment (in shares or cash) that may be due under the Contingent Value Right
Agreement. Assuming the issuance of the maximum number of shares issuable under
the CVRs, the purchase price per share would still exceed the 30-trading day
average closing price prior to the announcement of the Transaction by two
percent; moreover, such two-percent-calculation does not take into account the
benefit to the other stockholders of enjoying the Investor's full capital
contribution for a four to five-year period before suffering any additional
dilution of their interest in the Company.
Although the premium to be paid for the shares to be sold in the
Transaction is less than the median premium paid in the merger and acquisition
transactions reviewed by the Company's financial advisor, DLJ noted that
typical REIT merger and acquisition transactions do not involve significant
control premiums, probably due to the stable net asset value of the underlying
real estate properties. Of the comparable investments in publicly traded REITs
identified by DLJ, the mean premium was 5%. See " -- Opinion of Financial
Advisor -- Premiums Paid Analysis" and " -- Comparable Transactions
Analysis."
Association with the Investor. As described under " -- Information about
the Investor," LFREI, which controls the Investor, and its affiliate, Lazard
Freres & Co., LLC, have extensive experience and contacts in the real estate
industry. Moreover, as described under " -- Stockholders Agreement," the named
Investor Nominees are experienced, well-connected and accomplished real estate
investment managers. The Company believes that it will benefit significantly
from its association with the Investor, as well as the Investor Nominees, and
their market knowledge, operating experience and capital market capabilities.
Improved Future Access to Capital. The Company believes that, as a result
of the Transaction, it will have greater access to the capital markets and a
lower cost of capital because the Transaction will (i) increase its equity
market capitalization and total capitalization; (ii) establish an association
with a highly regarded institutional investor, the Investor, which should
enhance the Company's access and attractiveness to significant institutional
investors; and (iii) through the participation rights granted to the Investor
under the Stockholders Agreement, provide a potential buyer (the Investor) for
substantial portions of future offerings by the Company of its equity
securities or debt securities convertible into equity. Moreover, because of its
substantial investment in the Company, the Investor will have significant
incentives to make available to the Company its resources, experience and
advice on accessing capital markets and to assist the Company in achieving a
lower cost of capital. The Company believes that improved access to the capital
markets should enhance its ability to grow and increase stockholder value.
Potential Enhancement of Stockholder Value. The Transaction will not
result in any direct return to stockholders of cash or other consideration.
However, the Company believes that the Transaction offers stockholders an
opportunity to realize long-term value. The Company intends to use a portion of
the capital raised in the Transaction to reduce its outstanding debt level. In
addition, the Company's strategic plan calls for the application of the
significant capital to be raised in the Transaction to expand the Company for
the purpose of increasing the Company's asset base and cash flow in a
controlled but significant fashion over a relatively short period of time.
Management's goal is to increase funds from operations and cash available for
distribution to stockholders through the strategic deployment of the capital
and other resources to be made available to the Company through its affiliation
with the Investor.
34
It should be noted, however, that there is no assurance that the Company
will realize all or any of the potential benefits described above, which are
forward-looking statements that are subject to numerous risks and uncertainty.
The realization of the potential benefits described above will depend upon a
number of factors, many of which are outside the control of management,
including the following: the availability of attractive acquisition and
development opportunities; the Company's continuing ability to identify,
perform due diligence with respect to, acquire and manage effectively a large
number of retail shopping center properties; the state of the capital markets
generally and prevailing interest rates; uncertainty concerning the Company's
ability to refinance its indebtedness at favorable interest rates as it becomes
due; and risks relating to the ownership of real estate generally, including
the risks of bankruptcy, insolvency or the downturn in business of or failure
to renew leases by the Company's tenants, potential liability for unknown
environmental matters, and the risk of uninsured losses.
For a discussion of how the factors listed above influenced the Board's
determination that the Transaction is in the best interest of the Company and
its stockholders, see " -- Recommendation of the Board and Description of its
Decision-Making Process."
Disadvantages of the Transaction
The Company believes that the Transaction, if consummated, could have
certain adverse effects on the Company and its stockholders, including the
following:
Change of Control of the Company. The Investor would be entitled to own up
to 64% of the Company's Common Stock (59% on a fully diluted basis), and would
be the largest single stockholder of the Company. The Investor would have the
right to nominate up to three directors of the Company's Board. The Investor
would have a substantial influence over the affairs of the Company as a result
of the Transaction. The Investor would be in a position to control the election
of the Board or the outcome of any corporate transaction or other matter
submitted to the stockholders for approval (assuming no other changes in the
number of outstanding shares of Common Stock). This concentration of ownership
in one stockholder could be disadvantageous to other stockholders. As a result
of the Transaction, the other stockholders of the Company will have less
influence over the affairs of the Company. In addition, to the extent the
interests of the other stockholders differ from that of the Investor, the
Investor's control of the Company may result in the Company taking actions that
are not in the best interest of the minority stockholders.
The Company has limited the ability of the Investor to cause the Company
to consolidate or merge with another entity for a period of five years unless
all stockholders receive the same consideration received by the Investor in the
merger. Moreover, if the Investor transfers more than 50% of the
then-outstanding shares of Common Stock to a single person or entity, the
purchaser would be subject to the same limitation until the end of such
five-year period.
Anti-takeover Effect of the Transaction. The Investor's acquisition of up
to 64% of the outstanding Common Stock (59% on a fully diluted basis) and the
director nomination, voting and other rights granted to the Investor under the
Stockholders Agreement and the Contingent Value Right Agreement, in addition to
the provisions requiring 67% Board approval of certain actions, may make it
more difficult for other stockholders to challenge the Company's director
nominees, elect their own nominees as directors, or remove incumbent directors,
and may render the Company a less attractive target for an unsolicited
acquisition by an outsider. In addition, under the Company's charter, a merger
or consolidation requires the affirmative approval of over 50% of the shares
entitled to vote. Accordingly, the Investor would have sufficient voting power
to block any such transaction both as a significant stockholder of the Company
and through the Board membership of the Investor Nominees. To the extent the
Transaction causes the Company to be a less attractive take-over candidate to
unsolicited buyers of the Company, the stockholders would be less likely to
enjoy the potential benefits of an unsolicited purchase of the Company, such as
the receipt of a premium for their shares of Common Stock.
Prior to execution of the Transaction Documents, the Company's Board of
Directors waived the application of the Maryland Business Combination Statute
with respect to all aspects of the Transaction and amended its bylaws to exempt
the Transaction from the Control Share Acquisition Statute. As a result, such
statutes impose no restrictions on the voting of the Investor's shares or on
its ability to enter into a business combination with the Company. See " --
Certain Federal Income Tax Considerations" for a discussion of the waiver by
the Board of the limit on ownership of Common Stock in the Company's charter
with respect to the Transaction.
Potential Dilution. Although the Company generally has the ability to
control the timing of the Subsequent Closings and any additional investments by
the Investor, if the proceeds from sales of securities to the Investor are not
invested in a timely or accretive manner, there would be dilution of earnings
per share and funds from operations per share to the existing stockholders of
the Company. The Company does not intend to change its acquisition criteria,
and it may temporarily
35
have excess cash on its balance sheet if sufficient acquisitions are not
completed between the Second Closing and March 30, 2000 (unless the Company and
the Investor agree to extend such dates).
Restrictions on Certain Corporate Actions. From such time as the
stockholders approve the Transaction until the Approval Rights Termination
Date, Super-majority Board Approval will be a prerequisite for (i) the
acquisition of any business or assets having an aggregate purchase price in
excess of 25% of the Total Enterprise Value or the acquisition of an aggregate
of businesses and assets having an aggregate purchase price in excess of the
50% of the Total Enterprise Value during a fiscal year; (ii) the sale or
disposition of any assets or stock during any fiscal year having an aggregate
value in excess of 25% of the Total Enterprise Value; (iii) the incurrence of
additional indebtedness such that the ratio of the Company's total indebtedness
to the Total Enterprise Value exceeds 65%, (iv) issuances of Company Stock or
options, rights or warrants or other commitments to purchase or other
securities convertible into shares of Common Stock, including, without
limitation, Units in excess of 50% of all shares of Company Stock outstanding,
on a fully diluted basis, and (v) termination of the federal income tax status
of the Company as a REIT. This requirement, along with the Investor's rights
with respect to Board representation, will enable the Investor to prevent the
actions listed even if otherwise in the best interest of the stockholders.
Contingent Obligation. Under the Contingent Value Right Agreement, the
Company could be obligated to pay the Investor (in shares of common stock or
cash) up to the then-current value of 4,500,000 shares as of January 1, 2004.
As explained under " -- Contingent Value Rights" above, no payment will be
made if the Investor has essentially doubled its $200 million investment
(measured by stock appreciation and aggregate dividend payments) by the year
2004. If the Investor has not realized such a return, the Company will pay in
shares or cash an amount necessary for the Investor to achieve the agreed-upon
return, but in no event will the payment exceed the value of the
4.5-million-share cap. Assuming the issuance of the maximum number of shares
under the CVRs, the purchase price for the shares would still exceed the
30-trading day average closing price of a share of Common Stock prior to the
announcement of the Transaction. The value of those 4,500,000 shares, however,
will vary with the stock price. As discussed above, the maximum value of the
CVR payment is $71.2 million, but this obligation could only arise if the
Company paid no dividends while its stock price rose to $15.82 per share by
January 1, 2004. See " -- Contingent Value Rights."
Competition with Alexander Haagen Properties, Inc. The Company will
continue to compete with other REITs, real estate partnerships and other
investors in real estate. One potential competitor, Alexander Haagen
Properties, Inc. ("Haagan"), owns unenclosed shopping centers in the western
United States. An affiliate of the Investor currently owns a controlling
interest in Haagen and, due to the similarities between Haagen's business and
the Company's business, the companies may be in competition for tenants and
potential property acquisitions in certain markets. As a result, the Investor
may have a conflict of interest due to its controlling interest in the two
competing companies. If such a conflict arises, the Investor may be motivated
to take actions that are not in the best interest of the stockholders of the
Company. Moreover, there is no limitation in the Transaction Documents on the
Investor's or its affiliates' ability to make investments in other competitors
of the Company.
Potential Extinguishing of Claims. Approval of the Transaction by the
stockholders will constitute approval of all of the various terms of the
Transaction set forth in the Stock Purchase Agreement, the Stockholders
Agreement, the Contingent Value Right Agreement and the Registration Rights
Agreement and the transactions contemplated thereby and will result in the
election of three new directors to the Board.
Such approval also may serve to extinguish potential claims, if any,
regarding any conduct of members of the Board in connection with the
Transaction, including potential claims, if any, alleging violations of the
Board's duties to stockholders. Under Maryland law, the fully informed
stockholder approval of a transaction may, in certain circumstances, serve to
extinguish certain related fiduciary duty claims against directors.
For a discussion of how the factors listed above influenced the Board's
determination that the Transaction is in the best interest of the Company and
its stockholders, see " -- Recommendation of the Board and Description of its
Decision-Making Process."
Other Consequences of Failure to Approve the Transaction
Possible Exercise of the Limited Put Option. Failure to approve the
Transaction would also trigger the Investor's Limited Put Option, as described
above at " -- Limited Put Option." The Investor's exercise of the Limited Put
Option would
36
require the Company to repurchase the shares of Common Stock acquired in the
Initial Purchase at a price equal to the purchase price thereof ($22,325,000).
The exercise of the Limited Put Option is at the Investor's election,
therefore, the Investor may remain a significant holder of the Company's shares
of Common Stock even if the stockholders do not approve the Transaction.
Payment of Break-up Fee and Possible Topping Fee. Another adverse
consequence of the failure of the stockholders to approve the Transaction is
the required $2,250,000 Break-up Fee that would be required upon the
termination of the Stock Purchase Agreement. In addition, if the Company learns
of a Competing Transaction prior to the date of the Annual Meeting and enters
into such Competing Transaction within one year of the termination of the Stock
Purchase Agreement, the Investor would be entitled to a $3 million topping fee.
Certain Federal Income Tax Considerations
The following discussion summarizes the material federal income tax
considerations resulting from the Transaction that may be relevant to the
Company and the Company's current stockholders. This discussion does not
address the federal income tax considerations resulting from the Transaction
that may be relevant to the Investor or its investors, and does not address the
state, local, or foreign tax considerations resulting from the Transaction that
may be relevant to the Company, the Investor, or their respective investors.
This discussion is based on the current provisions of the Code, the applicable
Treasury regulations promulgated thereunder, administrative rulings, court
decisions, certain factual assumptions related to the ownership and operation
of the Company, and certain representations made by the Company and the
Investor. No assurance can be given that the legal authorities on which this
discussion is based will not change, perhaps retroactively, that the factual
assumptions and representations underlying this discussion will continue to be
accurate, or that there will not be a change in the future in the circumstances
of the Company or the Investor that would affect this discussion.
No Recognition of Taxable Gain. The Company believes that neither the
Company nor any of the Company's current stockholders will recognize taxable
gain as a result of the Transaction.
Taxation of the Company as a REIT. The Company made an election to be
taxed as a REIT under sections 856 through 860 of the Code, effective for its
short taxable year ended December 31, 1993. The Company believes that,
commencing with such taxable year, it has been organized and has operated in
such a manner as to qualify for taxation as a REIT under the Code, and the
Company intends to continue to operate in such a manner. Qualification and
taxation as a REIT depends upon the Company's ability to meet on a continuing
basis (through actual annual operating results, distribution levels and
diversity of share ownership) the various qualification tests imposed under the
Code. Accordingly, no assurance can be given that the Company has operated in a
manner so as to qualify, or will operate in a manner so as to continue to
qualify, as a REIT.
To qualify as a REIT under the Code, not more than 50% in value of the
outstanding capital stock of the Company may be owned, directly or indirectly
through the application of certain attribution rules, by five or fewer
individuals during the last half of each taxable year. The Investor would not
be treated as an individual for purposes of this REIT qualification test. In
order to protect the Company's tax status as a REIT, the Company's charter
limits the ownership of its capital stock to no more than 9.8% by any person or
entity (the "Ownership Limit") unless the Board of Directors exempts such
person or entity from the Ownership Limit. Based upon the opinion of Alston &
Bird LLP and the representations made by the Investor, the Board of Directors
has exempted the Investor from the Ownership Limit with respect to the Initial
Purchase. A copy of this opinion is included as Appendix F to this Proxy
Statement. The Board expects to grant similar exemptions prior to the Second
Closing or any Subsequent Closing upon the receipt of an updated opinion. The
Company will seek an update of this opinion (based on updated representations
from the Company and the Investor) prior to the Second Closing or any
Subsequent Closing.
If the representations made by the Investor are not accurate, the Company
believes it will still qualify as a REIT because its charter provides (and the
Investor has agreed) that, to the extent necessary, the Investor's shares would
be deemed "Excess Stock." Shares of Excess Stock are shares that are deemed to
have been transferred to the Company as trustee of a trust for the benefit of
the future recipient of the shares. If the Investor's shares become shares of
Excess Stock, the Company would have the right, for a period of 90 days, to
purchase the Excess Stock from the Investor for the lessor of (i) the price
paid for such shares by the Investor and (ii) the then-current market price. If
the Company did not exercise its purchase right, the Investor would generally
be permitted to designate the beneficiaries of the trust provided it did not
receive consideration for making such designation in excess of the price it
paid for such shares. Upon such a designation, the shares of Excess Stock
37
would be exchanged for shares of Common Stock to be held directly by the
designated beneficiary. While the Excess Stock is held in trust, it is not
entitled to vote and, except upon liquidation, it is not entitled to
participate in dividends or other distributions.
The Excess Stock provisions of the charter are intended to preserve the
Company's tax status as a REIT in the event the ownership of Common Stock would
otherwise jeopardize such status. However, such charter provisions are untested
and no assurance can be given that they will protect the Company's tax status
as a REIT. If the Company were to fail to qualify as a REIT in any taxable
year, the Company would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. Moreover, unless entitled to relief under certain statutory provisions,
the Company also would be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification is lost. This
treatment would reduce the net earnings of the Company available for investment
or distribution to stockholders of the Company because of the additional tax
liability to the Company for the years involved. In addition, distributions to
stockholders of the Company would no longer be required to be made.
Possible Impact of the Transaction on Subsequent Sales of Stock by Non-U.S.
Stockholders. Generally, a sale of stock in the Company by a "Non-U.S. Holder"
will not be subject to United States taxation under the Foreign Investment in
Real Property Tax Act of 1980 ("FIRPTA") unless such stock constitutes a United
States real property interest ("USRPI"). As used herein, the term "Non-U.S.
Holder" means a holder of shares of Common Stock who is not (for United States
federal income tax purposes) (i) a citizen or resident of the United States,
(ii) a corporation, partnership, or other entity created or organized in the
United States or under the laws of the United States or of any state thereof or
the District of Columbia, (iii) an estate the income of which is subject to
United States federal income taxation regardless of its source, or (iv) a trust,
if a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. Stock in the
Company will not constitute a USRPI if the Company is a "domestically controlled
REIT," defined generally as a REIT in which, at all times during a specified
testing period, less than 50% in value of its stock was held directly or
indirectly by Non-U.S. Holders. In the event that, either at the time of the
Transaction or at any time thereafter, direct or indirect stockholders of the
Company (including owners of interests in the Investor) who are Non-U.S. Holders
own collectively 50% or more, in value, of the outstanding capital stock of the
Company, the Company would cease to be a domestically controlled REIT.
If the Company does not qualify as a domestically controlled REIT, a
Non-U.S. Holder's sale of stock in the Company generally still will not be
subject to United States tax under FIRPTA, provided that (i) the stock is
"regularly traded" (as defined by applicable Treasury regulations) on an
established securities market, and (ii) the selling Non-U.S. Holder held 5% or
less of the Company's outstanding stock at all times during a specified testing
period. The Company presently believes the Common Stock would be considered to
be "regularly traded" for this purpose.
If gain on the sale of stock in the Company were subject to taxation under
FIRPTA, a Non-U.S. Holder would be subject to the same treatment as a United
States stockholder with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals, and the purchaser of the stock could be required to withhold
10% of the purchase price and remit such amount to the Internal Revenue
Service).
Opinion of Financial Advisor
In January of 1998, the Company advised DLJ that it had negotiated and
entered into a letter of intent regarding the Transaction and requested that
DLJ render an opinion as to the fairness, from a financial point of view to the
Company, of the consideration to be paid and received by the Company, in
aggregate, pursuant to the terms of the Stock Purchase Agreement, Stockholders
Agreement and Contingent Value Right Agreement (collectively, the
"Agreements"). Except for services necessary to enable DLJ to render its
opinion, DLJ was not requested to perform any other services pertaining to the
Transaction, and did not make any recommendation to the Company's Board of
Directors as to the amount or type of consideration to be paid or received as
provided for in the Agreements, which consideration was determined through
arms-length negotiations between the Company and the Investor.
The Company retained DLJ to act as its advisor based upon DLJ's experience
in the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes
especially with respect to REITs and other real estate companies and because of
DLJ's familiarity with the Company and its operations.
On February 19, 1998, DLJ delivered its oral opinion to the Company's
Board of Directors that the consideration to be received by the Company in
exchange for issuing the Company Common Stock and Contingent Value Rights
pursuant to the Stock Purchase Agreement was in aggregate, fair to the Company
from a financial point of view. On March 31, 1998
38
DLJ delivered its written opinion to the Company's Board of Directors (the "DLJ
Opinion"), to the effect that, as of the date of such opinion, based upon and
subject to the assumptions, limitations and qualifications set forth in such
opinion, the consideration to be received by the Company in exchange for
issuing the Company Common Stock and Contingent Value Rights pursuant to the
Stock Purchase Agreement was, in aggregate, fair to the Company from a
financial point of view.
A COPY OF THE DLJ OPINION IS ATTACHED HERETO AS APPENDIX E. THE COMPANY'S
STOCKHOLDERS ARE URGED TO READ THE DLJ OPINION IN ITS ENTIRETY FOR ASSUMPTIONS
MADE, PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY
DLJ.
The DLJ Opinion is directed to the Company's Board of Directors and
addresses only the fairness, from a financial point of view to the Company, of
the consideration to be received by the Company in exchange for issuing the
Company Common Stock and Contingent Value Rights pursuant to the Stock Purchase
Agreement. The DLJ Opinion was rendered to the Company's Board of Directors for
its consideration in determining whether to approve the Transaction. The DLJ
Opinion does not address the relative merits of the Transaction and the other
business strategies considered by the Company's Board of Directors nor does it
address the decision by the Company's Board of Directors to proceed with the
Transaction. DLJ was not requested to, and did not, solicit the interest of any
other party in engaging in a transaction alternative to the Transaction. The
DLJ Opinion does not constitute a recommendation to any stockholder of Company
as to how any such stockholder should vote on the Transaction.
In arriving at its opinion, DLJ reviewed the drafts dated February 24,
1998 of the Agreements and the exhibits thereto. In issuing the DLJ Opinion,
DLJ assumed, with the consent of the Company's management, that the drafts of
the Agreements would conform in all material respects to such documents when in
final form. (Such drafts did not materially differ from the Amended and
Restated Stock Purchase Agreement entered into on March 23, 1998.) DLJ reviewed
financial and other information that was publicly available or furnished by the
Company including information provided during discussions with the Company's
management. Included in the information provided during discussions with the
Company's management were certain financial projections of the Company prepared
by the management of the Company. In addition, DLJ compared certain financial
and securities data of the Company with various other companies whose
securities are traded in public markets, reviewed the historical stock prices
and trading volumes of the Company's Common Stock, reviewed prices and premiums
paid in certain other transactions and conducted such other financial studies,
analyses and investigations as appropriate for purposes of the DLJ Opinion. No
restrictions or limitations were imposed by the Company upon DLJ with respect
to the investigation made or procedures followed by DLJ in rendering the DLJ
Opinion, except for restrictions imposed under the December 24, 1997 letter of
intent with LFREI and except that, as noted above, DLJ was not requested to,
and did not, solicit the interest of any other party in engaging in a
transaction alternative to the Transaction.
In rendering its opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to it from public sources, that was provided to it by the Company or the
Company's representatives, or that was otherwise reviewed by it. In particular,
DLJ relied upon the estimates of the management of the Company of the financial
impact of the Transaction on the Company. With respect to the financial
projections supplied to it, DLJ assumed that they were reasonably prepared on
the basis reflecting the best currently available estimates and judgments of
the management of the Company as to the future operating and financial
performance of the Company. In particular, DLJ assumed that the pro forma
adjustments and projections made for certain pending property acquisitions
accurately reflect the future financial performance of such acquisitions. In
addition, DLJ assumed, at the direction of the Company's management, that the
Transaction was not contingent upon the closing of any property acquisitions.
DLJ did not express an opinion as to the fairness of any consideration paid for
any pending or recently completed property acquisitions. DLJ did not make, and
does not assume any responsibility for making, any independent appraisal or
evaluation of any assets or liabilities or for making any independent
verification of any of the information provided or reviewed.
The DLJ Opinion is necessarily based on economic, market, financial and
other conditions as they existed on, and on the information made available to
DLJ as of, the date of the opinion. It should be understood that, although
subsequent developments may affect the DLJ Opinion, DLJ does not have any
obligation to update, revise or reaffirm the opinion. DLJ does not express any
opinion in the DLJ Opinion as to the price at which the Company's Common Stock
will actually trade at any time.
The following is a summary of the presentation made by DLJ to the
Company's Board of Directors at its February 19, 1998 board meeting in
connection with the preparation of the DLJ Opinion.
Current Capitalization. DLJ reviewed certain trading information for the
Company and, on the basis thereof, calculated its market capitalization,
dividend yield, debt-to-total market capitalization ratio and trading multiples
based on a closing
39
price for the Company's Common Stock on February 11, 1998 of $7.88. For this
purpose, DLJ defined "total market capitalization" as market value of the
Company's common equity, pro forma for certain pending acquisitions, on a fully
diluted basis (including Operating Partnership Units and convertible
securities), plus total debt less cash. DLJ based its financial analysis of the
Company on estimates of 1997 and 1998 FFO per share of $1.15 and $1.25,
respectively, based on publicly available estimates of future financial results
published by First Call, a data service that monitors and publishes a
compilation of earnings estimates produced by selected research analysts
regarding companies of interest to institutional investors. With respect to the
Company, DLJ calculated a total market capitalization of $475.6 million, an
annual dividend yield of 0.0%, a debt-to-total market capitalization ratio of
69.9% and share price to FFO per share multiples of 6.8x and 6.3x for 1997 and
1998 respectively.
Stock Trading History. DLJ reviewed the history of trading prices and the
historical total returns (comprised of cumulative dividends and changes in
stock price) of the Company's Common Stock for the 12-month period ending
February 12, 1998 in relation to the Standard & Poor's 500 Index, an index of
Comparative Factory Outlet Companies and an index of Comparative Community
Center Companies (as defined below). The comparisons to the indices of
Comparative Factory Outlet Companies and Comparative Community Center Companies
was utilized to compare the total returns of the Company's Common Stock to the
total common stock returns of similar public REITs, while the Standard & Poor's
500 Index was used to compare the total returns of the Company's Common Stock
to the total returns of the overall stock market. DLJ noted that the Company
outperformed both comparative company indices and the overall stock market
during the 12-month period ending February 12, 1998. DLJ also analyzed the
historical distribution of trading prices of the Company's Common Stock for the
period from February 11, 1997 to February 11, 1998. DLJ noted that the shares
traded at prices ranging from $5.25 per share to $8.44 per share over such
period. DLJ found that none of the 11.3 million shares traded during this
period (representing the equivalent of 95% of the 11.9 million outstanding
shares of Company Common Stock) traded at prices greater than the Transaction
Price of $9.50 per share.
Selected Comparable Company Trading Analysis. Using publicly available
information and estimates of future financial results published by First Call,
DLJ compared selected historical and projected financial, operating and stock
market performance data of the Company to the corresponding data of certain
publicly traded companies that DLJ deemed to be reasonably comparable (the
"Comparative Community Center Companies" and the "Comparative Factory Outlet
Companies"). The Comparative Community Center Companies represented public
REITs focused primarily on the management and ownership of community shopping
center properties. The Comparative Community Center Companies consisted of
Excel Realty Trust Inc., Federal Realty Investment Trust, IRT Property Co.,
Kimco Realty Corporation, Kranzco Realty Trust, Mark Centers Trust, New Plan
Realty Trust and Regency Realty Corporation. The Comparative Factory Outlet
Companies represented public REITs focused on the management and ownership of
factory outlet shopping centers. The Comparative Factory Outlet Companies
consisted of Chelsea GCA Realty, Inc., Horizon Group, Inc., Prime Retail, Inc.
and Tanger Factory Outlet Centers. The Comparative Community Center Companies
and the Comparative Factory Outlet Companies were selected principally based on
the consistency of property types owned with those owned by the Company. The
two periods selected were the years ended December 31, 1997 and 1998. In
calculating the FFO multiples of the Comparative Community Center Companies and
the Comparative Factory Outlet Companies, DLJ used median First Call FFO
estimates or DLJ Research FFO estimates and closing stock prices as of February
11, 1998. DLJ observed that (i) the FFO multiples for the Comparative Community
Center Companies for the year ended December 31, 1997 ranged from 7.7x to
14.8x, with a mean of 11.9x, the FFO multiples for the Comparative Factory
Outlet Companies for the same period ranged from 8.0x to 12.3x, with a mean of
10.3x and (ii) the FFO multiples for the Comparative Community Center Companies
for the year ended December 31, 1998 ranged from 7.3x to 13.5x, with a mean of
10.9x, the FFO multiples for the Comparative Factory Outlet Companies for the
same period ranged from 7.4x to 10.9x, with a mean of 9.2x. Per share values
for the Company were computed by multiplying the Company's projected FFO per
share by the low, high and mean FFO multiples for the Comparative Community
Center Companies and the Comparative Factory Outlet Companies for the years
ended December 31, 1997 and 1998. The values produced by this method ranged
from $8.86 to $17.02 per share for the year ended December 31, 1997 and $9.13
to $16.86 for the year ended December 31, 1998. DLJ noted that the Transaction
Price of $9.50 per share is at the low end of the valuation ranges produced by
this method. DLJ noted that the range of implied values reflect, among other
factors, the lower leverage and higher anticipated FFO per share growth of the
comparative companies and that the implied share prices indicated by this
methodology using estimates of the Company's FFO per share on a leverage
neutral basis would be significantly lower. None of the companies utilized in
the above analysis for comparative purposes is, of course, identical to the
Company. Accordingly, a complete analysis of the results of the foregoing
calculations cannot be limited to a quantitative review of such results and
involves complex considerations and judgments concerning differences in the
financial and operating characteristics of the comparative companies and other
factors that could affect the public trading value of the comparative companies
as well as that of the Company. In addition, the multiples of common stock
40
price to projected 1997 FFO per share and projected 1998 FFO per share for the
comparative companies are based on projections prepared by research analysts
using only publicly available information. Accordingly, such estimates may or
may not prove to be accurate.
Comparative Transactions Analysis. DLJ reviewed the financial terms, to
the extent publicly available, of six comparable investments in publicly traded
REITs (the "Selected Transactions"). DLJ calculated the premiums over market
price one day prior to the announcement date and 30 days prior to the
announcement date for the Selected Transactions and applied those premiums to
the closing price of the Company Common Stock of $7.88 on February 11, 1998.
The Selected Transactions included the following transactions: (i) Security
Capital U.S. Realty's investment in Carr Realty Corporation, (ii) Security
Capital U.S. Realty's investment in Storage USA, Inc., (iii) Lazard Freres Real
Estate Investors' investment in Alexander Haagen Properties, (iv) Security
Capital U.S. Realty's investment in Regency Realty Corporation,
(v) Tiger/Westbrook Real Estate Fund, L.P.'s investment in Essex Property Trust
and (vi) Security Capital U.S. Realty's investment in Prime Retail, Inc. DLJ
noted that the Selected Transactions were effected at prices compared to the
market price one trading day prior to the public announcement of the
transactions ranging from a discount of 7.8% to a premium of 10.3% (with a mean
premium of 0.8%) and prices compared to the market price 30 trading days prior
to the public announcement of the transactions ranging from a discount of 0.6%
to a premium of 11.7% (with a mean premium of 5.4%). DLJ observed that the
indicated range of premiums from the Comparative Transactions was less than the
20.6% premium indicated by the Transaction Price of $9.50 per share over the
unaffected closing price of the Company's Common Stock of $7.88 on February 11,
1998. DLJ also calculated the implied per share value for the Company by
applying the mean premium one day and 30 days prior to the announcement of the
Selected Transactions to the closing price of the Company's Common Stock of
$7.88 on February 11, 1998. DLJ observed that the range of per share values
produced by this method was $7.94 to $8.31 per share and that the Transaction
Price of $9.50 per share was above the range of per share values produced by
this method.
Premiums Paid Analysis. DLJ compared the 20.6% premium implied by the
Transaction Price of $9.50 per share over the unaffected closing price of the
Company's Common Stock of $7.88 on February 11, 1998, with the percentage
premium of the offer price over the trading prices one day and seven days prior
to the announcement date of approximately 450 merger and acquisition
transactions involving public company targets with total market capitalizations
less than $750 million. The transactions analyzed consisted of recent
stock-for-stock and cash-for-stock merger or acquisition transactions in which
the target company was a domestic non-financial, publicly traded company and in
which more than 50% of the target company's stock was acquired. The
transactions involve companies not necessarily directly comparable to the
Company. The median premiums for the stock-for-stock transactions over the
trading prices, one day and seven days prior to the announcement dates were
34.6% and 40.5%, respectively, and the median premiums for all the transactions
over the trading prices, one day and seven days prior to the announcement dates
were 30.1% and 35.2%, respectively. DLJ applied the median premiums from all of
the merger and acquisition transactions as well as the median premiums from all
of the stock-for-stock merger and acquisition transactions and applied them to
the unaffected closing price of the Company's Common Stock on February 11, 1998
of $7.88 to arrive at a range of implied per share values. Based on this
analysis, DLJ arrived at an implied value range of $10.06 to $10.74 per share.
Based on this analysis, the implied premium of 20.4% and the Transaction Price
of $9.50 per share were below the range of premiums and range of implied stock
prices indicated by the merger transactions analyzed. DLJ noted that the lower
comparative premium paid in the Transaction may be a result of the stable net
asset value of the underlying real estate properties and the lack of
significant control premiums paid in typical REIT merger and acquisition
transactions. In addition, DLJ noted that the Company's Common Stock has lower
price volatility than the overall market.
Net Asset Valuation Analysis. DLJ performed a net asset valuation analysis
of the Company's operating community center and factory outlet center
properties by subtracting outstanding debt from the gross estimated value of
the properties including, at the direction of the Company's management, certain
pending acquisitions. The gross estimated value for the Company's community
center and factory outlet operating assets was estimated by capitalizing 1998
net operating income for such properties, including an adjustment for market
rate management fees, using a range of capitalization rates. The range of
capitalization rates applied was based on industry surveys published by certain
independent research firms. DLJ applied capitalization rates ranging from 9.5%
to 11.5% for the community center properties and 10.0% to 12.0% for the factory
outlet center properties. In applying the range of capitalization rates, DLJ
took into consideration current market conditions, property characteristics and
the projected financial performance of the assets. The net asset valuation was
further adjusted for construction in progress. DLJ adjusted the debt and common
share equivalents used in the net asset valuation analysis for debt to be
assumed and Units to be issued for certain pending property acquisitions. The
net asset valuation analysis produced a range of estimated equity value of
approximately $128.3 million to $221.4 million, or $7.06 to
41
$12.19 per share of Common Stock. DLJ observed that the Transaction Price of
$9.50 per share was within the range of value estimates produced by this
method.
Accretion / (Dilution) Analysis. DLJ performed an analysis of the effect
of the Transaction on the Company's FFO per share for 1998 and 1999, based on
projections and other information supplied by the Company's management. The
base case projections (i.e., projections assuming no Transaction) prepared by
the Company's management were based on: (i) 1998 budgeted net operating income
for the Company's owned properties and certain acquisitions, increasing four
percent annually, (ii) interest expense and principal payments of existing debt
terms, (iii) completion of identified acquisitions, proposed developments and
joint ventures at budgeted costs and annual returns on cost of 10.5% to 15.0%,
(iv) dividend policy of paying minimum allowable dividend under REIT
requirements, (v) $100 million of new common equity at future implied stock
prices over the next 18 months with net proceeds used to pay down debt to a
targeted stabilized debt-to-market capitalization ratio of 45% to 50%, and (vi)
excess cash flow (defined as revenues less operating expenses, capital
expenditures, debt service and stock dividends) used to pay down debt. The
Company based its projected annual returns on information obtained during its
negotiations, analysis of similar acquisition and joint venture opportunities,
and an analysis of the terms of comparable market transactions. The base case
projections indicated annual FFO per share of $1.25 in 1998 and $1.26 in 1999
and forward 12-month FFO multiples of 7.7x in 1998 and 8.0x in 1999. DLJ
adjusted the projected base case results of the Company to give effect to the
Transaction, including among other things, a more aggressive acquisition and
development program and a targeted stabilized debt-to-market capitalization
ratio of 30% to 35%, to arrive at projected FFO per share for the Company pro
forma for the Transaction. The projections pro forma for the Transaction
indicated annual FFO per share of $1.15 in 1998 and $1.30 in 1999. DLJ then
compared the resulting FFO per share pro forma for the Transaction to the
Company's base case FFO per share. This analysis indicated that the pro forma
impact of the Transaction would be FFO per share dilutive in 1998 and FFO per
share accretive in 1999. DLJ observed that the Transaction would significantly
reduce the Company's debt to market capitalization ratio in comparison to the
stand alone base case scenario (44.1% vs. 60.8% in 1998 and 35.3% vs. 48.9% in
1999). Based on the Company's assumption that the lower leverage post-
Transaction would result in an expansion of the Company's FFO multiple to 9.2x
in 1998 and 9.6x in 1999, DLJ noted that the implied year-end share prices pro
forma for the Transaction were, based on this analysis, projected to be higher
than the base case estimated share prices in both 1998 and 1999. DLJ observed
that the Transaction would be beneficial to the Company with respect to FFO per
share accretion in 1999 and share price accretion and leverage in 1998 and
1999.
Discounted Dividend Analysis. The discounted dividend valuation assumes,
as a basic premise, that the value of a share of common stock of a company can
be determined with reference to the present value of the projected dividends to
common stockholders over an investment period plus the present value of the
future stock price at the end of such investment period. DLJ used the base case
projections and other information supplied by the Company to estimate the
future quarterly common dividends for the Company (based on the assumption that
the Company will continue to pay the minimum allowable common dividends for
REITs). The present value of common dividends for the five-year period
beginning January 1, 1998 through December 31, 2002, inclusive, was calculated
using discount rates ranging from 12.5% to 22.5%, based on equity return
requirements of private equity investors in similar real estate transactions.
DLJ estimated the terminal common stock value as of December 31, 2002 by
applying FFO multiples of 7.5x to 9.5x to estimated 2002 FFO per share. DLJ
discounted the range of terminal values back to January 1, 1998 at discount
rates ranging from 12.5% to 22.5%, the same discount rates used in calculating
the present value of common dividends. DLJ then added together the range of
present values of the dividends and the range of present values of terminal
common stock value to arrive at a discounted cash flow valuation for the
Company's equity. DLJ observed that the Transaction Price of $9.50 per share
was within the implied per share value range of $6.07 to $12.08 produced by
this method.
Projected Stockholder Return Analysis. DLJ performed an analysis of the
effect of the Transaction on the Company's projected annualized common
stockholder returns for the five-year period beginning January 1, 1998 through
December 31, 2002, based on the base case projections and the projections pro
forma for the Transaction prepared by the Company's management. For the base
case scenario, assuming internal growth rates ranging from 3.0% to 5.0% and
stabilized FFO multiples ranging from 7.5x to 9.5x, DLJ observed projected
five-year annualized common stockholder returns ranging from 14% to 25%. Pro
forma for the Transaction, assuming internal growth rates ranging from 3.0% to
5.0% and stabilized FFO multiples ranging from 8.0x to 12.0x, DLJ noted
projected five-year annualized common stockholder returns ranging from 22% to
38%. DLJ noted that holders of the Company's Common Stock are projected to
receive higher five-year annualized common stockholder returns assuming the
Transaction is completed than in the base case scenario.
Contingent Value Right Analysis. DLJ performed an analysis of the
contingent value right which, under the terms of the Agreements, will be "in
the money" if the annualized return to the Investor from the Transaction
through January 1, 2004, excluding the contingent value right, is less than
15%. DLJ analyzed the projected annualized return to the Investor based
42
on the financial projections pro forma for the Transaction prepared by the
Company's management. DLJ performed a sensitivity analysis of the projected
annualized returns based on annual net operating income growth rates ranging
from 1.0% to 5.0% and stabilized FFO multiples ranging from 7.0x to 12.0x. DLJ
noted that based on the sensitivity analysis of Company management projections
pro forma for the Transaction, the contingent value right will not be "in the
money" unless the Company has very low internal growth or minimal multiple
expansion.
The summary set forth above does not purport to be a complete description
of the analyses performed by DLJ, but describes, in summary form, the material
elements of the presentation by DLJ to the Company's Board on February 19, 1997
in connection with its preparation of the DLJ Opinion. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of these methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Each of the analyses conducted by DLJ was
carried out in order to provide a different perspective on the Transaction and
add to the total mix of information available. DLJ did not form a conclusion as
to whether any individual analysis, considered in isolation, supported or
failed to support an opinion as to fairness from a financial point of view.
Rather, in reaching its conclusion, DLJ considered the results of the analyses
in light of each other and ultimately reached its opinion based on the results
of all analyses taken as a whole. DLJ did not place particular reliance or
weight on any individual analysis, but instead concluded that its analyses,
taken as a whole, supported its determination. Accordingly, notwithstanding the
separate factors summarized above, DLJ believes that its analyses must be
considered as a whole and that selecting portions of its analysis and the
factors considered by it, without considering all analyses and factors, could
create an incomplete or misleading view of the evaluation process underlying
its opinion. In performing its analyses, DLJ made numerous assumptions with
respect to industry performance, business, economic, market and financial
conditions and other matters, including the absence of any material changes in
the real estate markets in which the Company conducts business, U.S. economic
conditions generally and the financial markets and mergers and acquisitions
markets in particular. The analyses performed by DLJ are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than suggested by such analyses.
The Company has paid DLJ $700,000 for its services in rendering its
opinion and has agreed to reimburse DLJ for reasonable out-of-pocket expenses
pursuant to the engagement letter dated May 23, 1997. The Company has also
agreed to indemnify DLJ, its affiliates and their respective directors,
officers, employees, agents and controlling persons against certain
liabilities, including liabilities under federal securities laws. Although the
Company believes that DLJ is not entitled to any additional fees or
consideration in connection with the Transaction, DLJ has notified the Company
that it believes it is entitled to additional fees totaling $3.9 million,
including "success based" advisory fees, under the terms of its engagement
letter with the Company dated May 23, 1997. As of the date hereof, there has
been no resolution of the disagreement.
DLJ may actively trade the securities of the Company for its own account
and for the accounts of its customers and, accordingly, DLJ may at any time
hold long or short positions in such securities. Other than the current
engagement, DLJ has not been paid for providing investment banking or advisory
services to the Company over the past five years.
Cautionary Note Regarding Forward-Looking Statements
This proxy statement contains forward-looking statements. This is
especially true with respect to the description of the base case projections
and the projections pro forma for the Transaction under the caption "-- Opinion
of Financial Advisor." Throughout this proxy statement, words such as "expect,"
"should," "will," "anticipate," "project," and "assume" and words of similar
meaning indicate a forward-looking statement. These forward-looking statements
are based on numerous assumptions that may prove to be inaccurate. Factors that
could cause these forward-looking statements to be inaccurate include, but are
not limited to, greater than expected development of retail shopping centers,
an unanticipated downturn in the national or southeastern economy, an
unforeseen weakening of the financial condition of the Company's tenants, and
the failure to close pending acquisitions, such as the Konover Transaction. As
a result, no assurances can be made regarding the realization of any of the
forward-looking statements set forth in this proxy statement.
Recommendation of the Board and Description of its Decision-Making Process
The Board of Directors of the Company has approved the Transaction and has
determined that the Transaction is in the best interests of the Company and its
stockholders. The Board recommends that stockholders vote "FOR" approval of the
Transaction.
The Board believes that the Transaction is in the best interests of the
Company and its stockholders because it represents an opportunity to improve
long-term stockholder value by providing the Company with access to significant
equity
43
capital at an attractive cost and strategic resources not otherwise readily
available to it, thereby enhancing the Company's ability to capitalize on
community shopping center opportunities. The Board concluded that the
Transaction was more likely to maximize long-term stockholder value than any
other known alternative. See "-- Advantages of the Transaction" above.
As discussed above under "-- Background of the Transaction," the Board of
Directors met several times to discuss the merits of the Transactions and
explore the other options available to the Company. In making their decision to
enter into the Transaction, the Board compared the benefits of the Transaction
with the detriments. DLJ's opinion as to the fairness of the Transaction and
each of the factors described above at "-- Advantages of the Transaction"
influenced the Board to conclude that the Transaction was in the best interest
of the Company and its stockholders. Each of the factors described above at
" -- Disadvantages of the Transaction" caused the Board to question whether
the Transaction was, in fact, in the best interest of the Company and its
stockholders.
After due discussion of such potential benefits and adverse effects, the
Board concluded that the potential beneficial effects outweighed the potential
adverse effects. In view of the wide variety of factors considered in
connection with its evaluation of the beneficial and adverse effects, the Board
did not find it practical to quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination.
Appraisal Rights
Under Maryland law, the stockholders of the Company have no appraisal
rights with respect to the Transaction.
Required Vote and Related Matters
Proposal Two, the approval of the Transaction, requires the affirmative
vote of a majority of the votes cast on the proposal, provided that the total
vote cast on the proposal represents over 50% in interest of all shares of
Common Stock entitled to vote on the proposal. The Investor is not entitled to
vote on Proposal Two. For purposes of the vote on Proposal Two, an abstention
or a broker non-vote (i.e., shares held by a broker or nominee which are
represented at the Annual Meeting but with respect to which such broker or
nominee is not empowered to vote on a proposal) will have the effect of a vote
against the proposal, unless holders of more than 50% in interest of all
securities entitled to vote on the proposal cast votes, in which event neither
an abstention nor a broker non-vote will have any effect on the result of the
vote.
Approval of the Transaction by the requisite vote of the stockholders of
the Company is a condition to consummation of the Transaction (except for the
Initial Purchase by the Investor of 2,350,000 shares on March 23, 1998).
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" PROPOSAL
TWO.
PROPOSAL THREE:
AMENDMENT OF CHARTER TO CHANGE THE NAME OF THE COMPANY
The Company has entered into definitive agreements with affiliates of Konover
& Associates South, a privately held real estate development firm based in Boca
Raton, Florida, to acquire 11 community shopping centers totaling approximately
2.0 million square feet, as well as certain affiliated management and leasing
contracts (the "Konover Transaction"). The shopping centers to be acquired (the
"Konover Centers") are located in the Company's target markets of Florida, North
Carolina, Alabama, Virginia and Georgia and are anchored by such tenants as
Winn-Dixie, Kroger, Eckerd Drug Store, Home Depot and Food Lion. The purchase
price for the Konover Transaction consists of approximately $24 million in
equity, plus the assumption of approximately $76 million in debt. At least $7
million of the equity will be paid in cash; the remaining equity will be paid,
at the seller's election, in the form of Units, cash or both.
As discussed above under "Proposal One: Election of Directors," the
Company has agreed to elect Mr. Konover as Chairman of the Board of Directors
no later than the final closing of the Konover Transaction. The Konover
Transaction is expected to close in stages during July and August 1998.
Simon Konover, 76, is the founder of Konover & Associates, a $500 million-plus
real estate enterprise located in West Hartford, Connecticut. The organization
includes shopping centers, office buildings, hotels and residential communities.
The shopping center portfolio includes over 100 centers and 11 million square
feet. In the mid-1960s, Mr. Konover began developing retail centers in south
Florida and in late 1989 founded Konover & Associates South, located in Boca
Raton, Florida.
44
Neither the acquisition of the Konover Centers nor the election of Mr. Konover
to the Chairman of the Board requires the approval of the stockholders. Assuming
satisfaction of the conditions to closing, the Company will acquire the Konover
Centers and elect Mr. Konover as Chairman, to serve until the election of
directors at the 1999 annual meeting of the stockholders.
The Board of Directors believes that the Konover Transaction and, even more
importantly, the addition of Simon Konover as Chairman of the Board will greatly
enhance the Company's ability to reach its long-term objectives. Mr. Konover has
a national reputation in the real estate and retail shopping center industries.
The Board of Directors believes that the Company can maximize the benefits of
the Konover Transaction by changing its name to "Konover Property Trust, Inc."
and its NYSE-assigned stock symbol to "KPT."
The Board of Directors is seeking stockholder approval to amend the Company's
charter to change its name to "Konover Property Trust, Inc." In the event
stockholder approval of the proposed charter amendment is not obtained, the
Company is contractually obligated under the agreements with Konover to do
business under a name substantially similar to "Konover/FAC."
If the name change is approved, the Company will file a certificate of
amendment to its charter as soon as practicable after the completion of the
Konover Transaction. As amended, Article FIRST of the Charter would read as
follows: "The name of the Corporation is Konover Property Trust, Inc."
Proposal Three, approval of change of the Company's name, requires the
affirmative vote of a majority of all of the votes entitled to be cast on the
matter. For purposes of the Vote on Proposal Three, abstentions and broker
non-votes will have the same effect as votes against the proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" PROPOSAL THREE.
PROPOSAL FOUR:
CHARTER AMENDMENT TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF CAPITAL STOCK
The Company's charter currently authorizes 75,000,000 shares of capital
stock, consisting of 45,000,000 shares of Common Stock, 5,000,000 shares of
preferred stock, par value $25.00 per share (the "Preferred Stock"), and
25,000,000 shares of excess stock, par value $.01 per share (the "Excess
Stock"). The Board of Directors recommends amending the charter to increase the
number of authorized shares of capital stock to 130,000,000, consisting of
100,000,000 shares of Common Stock, 5,000,000 shares of Preferred Stock and
25,000,000 shares of Excess Stock. The charter would continue to provide that
the Board of Directors could reclassify any unissued shares of capital stock.
Although the Company only has 14,283,566 shares of Common Stock
outstanding, approximately 28,000,000 additional shares of Common Stock are
issuable in connection with (i) the Lazard Investment, (ii) the redemption of
outstanding Units and Units to be issued in the Konover Transaction, (iii) the
possible conversion of the outstanding Preferred Stock into shares of Common
Stock, (iv) the exercise of existing stock options and (v) the exercise of
outstanding warrants.
The Board of Directors believes that the proposed increase is desirable so
that the Company will have more flexibility to issue shares of Common Stock
without the expense and delay of a special stockholders' meeting in connection
with acquisitions involving Common Stock or Units, equity financings, incentive
compensation of directors and employees, and for other corporate purposes for
which the issuance of Common Stock may be advisable.
The increase in authorized capital stock would not have any immediate
effect on the rights of existing stockholders. However, the Board of Directors
would have the authority to issue authorized Common Stock without requiring
future stockholder approval of such issuances, except as may be required by
applicable law or stock exchange regulations. (For example, stockholder
approval is required in connection with the Lazard Investment because of the
rules of the New York Stock Exchange.) To the extent that additional authorized
shares are issued in the future, they would decrease the existing stockholders'
percentage equity ownership and, depending upon the price at which they were
issued, could be dilutive to the existing stockholders. The holders of Common
Stock have no preemptive rights.
Proposal Four, approval of an increase in the number of shares authorized
for issuance, requires the affirmative vote of a majority of all of the votes
entitled to be cast on the matter. For purposes of the vote on Proposal Four,
abstentions and broker non-votes will have the same effect as votes against the
proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" PROPOSAL FOUR.
45
PROPOSAL FIVE:
AMENDMENT TO THE COMPANY'S 1993 EMPLOYEE STOCK INCENTIVE PLAN
Reasons for Amendment
The Board of Directors proposes that the stockholders approve an amendment
(the "Stock Plan Amendment") to the Company's 1993 Amended and Restated
Employee Stock Incentive Plan (the "Stock Incentive Plan") to increase the
number of shares of Common Stock reserved for issuance thereunder (the "Plan
Shares") from 1,100,000 to 2,800,000. The Plan was previously amended by the
stockholders at the 1996 annual meeting to increase the number of Plan Shares
from 525,000 to 1,100,000. As of July 1, 1998, options to purchase 906,050 Plan
Shares had been granted under the Stock Incentive Plan, inclusive of options to
purchase 190,800 Plan Shares issued to certain former officers of the Company.
Although disputed by such former officers, the Company believes the exercise
period for such options has expired. For a discussion of the repricing of
options issued under the plan, see "Executive Compensation -- Executive
Compensation Committee Report on Executive Compensation -- Report on Repricing
of Options." The policy of the Board is to not issue options that would cause
the total number of outstanding options to exceed 7% of the then-outstanding
shares of Common Stock. The Board of Directors believes that it is in the best
interests of the Company and its stockholders to approve the Stock Plan
Amendment to enable the Company to continue to grant options in the future to
secure and retain the services of key employees. Moreover, the Board of
Directors believes the additional financial incentive inherent in new or
additional ownership of shares of the Common Stock by its key employees is
beneficial to the Company.
Summary Plan Description
General. Stock options intended to qualify as "incentive stock options"
within the meaning of Section 422 of the Code, and the regulations promulgated
thereunder, as well as "nonqualified stock options," may be granted under the
Stock Incentive Plan. Unless specified to the contrary, the terms "option" and
"stock option," when used in this summary description, refer to both incentive
stock options and nonqualified stock options. The Stock Plan Amendment would
increase the aggregate number of Plan Shares to 2,800,000. The Stock Incentive
Plan expires on March 30, 2003. Any stock option outstanding at the expiration
date will remain outstanding until it has either expired or been exercised.
Administration. The Stock Incentive Plan is administered by the Executive
Compensation Committee (the "Committee"). The Committee has full authority to
determine and designate employees eligible to receive option grants and to
determine the nature and terms of such grants. The interpretation and
construction by the Committee of any provision of the Stock Incentive Plan or
of any stock option granted under it and the administration of the Stock
Incentive Plan by the Committee is final.
Eligible Employees. The Committee selects the key employees of the Company
who will be granted options under the Stock Incentive Plan. The approximate
number of employees of the Company currently eligible to participate in the
Stock Incentive Plan is 13.
Grant of Options. Subject to certain limitations explained below, the
Committee may grant stock options from time to time during the period that the
Stock Incentive Plan is in effect to such key employees of the Company as in
the opinion of the Committee will best further the interests of the Company and
achieve the purposes of the Stock Incentive Plan. No option under the Stock
Incentive Plan will be granted to any individual who, at the time of grant, is
not an employee of the Company (or has agreed to become an employee). The
Committee may not grant incentive stock options to an employee if the aggregate
fair market value (determined at the time the incentive stock option is
granted) of shares of Common Stock with respect to which incentive stock
options are exercisable for the first time by such employee during any calendar
year (under all option plans of the Company) will exceed $100,000.
Exercise. Stock options, to the extent vested, may be exercised in whole
or in part upon payment of the exercise price of the shares to be acquired.
Payment shall be made in cash or, at the discretion of the Committee, in shares
of Common Stock previously acquired by the optionee, or in a combination of
cash and such shares. The fair market value of shares of Common Stock tendered
on exercise of the stock option shall be determined on the date of exercise.
Stock options may also be exercised in whole or in part by giving an
irrevocable written notice of exercise to the Company. The date on which such
notice is received by the Company shall be the date of exercise of the stock
option, provided that within five business days of delivery of such notice the
funds to pay for the exercise of such option are delivered to the Company by a
broker acting on behalf of the optionee either in connection with the sale of
the shares underlying such stock option or in connection with the making of a
margin loan to the optionee to enable payment of the exercise price of such
stock option.
46
Option Price. The option price per share of Common Stock to be paid upon
the exercise of an option will not be less than the fair market value per share
at the time the option is granted. Such fair market value will be the closing
sale price per share of Common Stock (or in the event there are no sales, then
the average of the opening bid and asked prices per share of Common Stock) on
the New York Stock Exchange on the last trading day preceding the date on which
the option is granted.
Transfer and Termination of Options. An option may not be transferred by
the optionee other than by will or the laws of descent and distribution. An
option may be exercised during the optionee's lifetime only by the optionee or
his duly authorized legal representative if the optionee is unable to exercise
his option as a result of the optionee's disability, but only if and to the
extent permitted by Section 422 of the Code, and, after his death, only by the
administrator or executor of the optionee's estate. If an optionee leaves the
Company's employment voluntarily or is released by the Company for "cause" (as
that term is defined in the Stock Incentive Plan), options granted to that
optionee terminate on the effective date of termination of the optionee's
employment. An uninterrupted transfer of an optionee's employment to or between
the Company and/or any parent or subsidiary corporation of the Company is not
deemed to be a termination of employment.
If an optionee becomes permanently and totally disabled (within the
meaning of Section 22(e)(3) of the Code) while employed by the Company, any
option granted to such optionee will be exercisable only for the one year
succeeding cessation of employment due to such disability. If an optionee dies
while employed by the Company, an option granted to such optionee will be
exercisable by his administrator or executor for one year after the optionee's
death. If the optionee is terminated by the Company without "cause," any
incentive stock options held by an optionee must be exercised within three
months of the date of such termination and any other options granted to the
optionee must be exercised within one year following such termination.
Notwithstanding the foregoing, no option may be exercised after the
expiration of the option period. Upon the occurrence of a change in control of
the Company (as defined in the Stock Incentive Plan), all stock options granted
under the Stock Incentive Plan become immediately vested and exercisable in
full. The Company has obtained waivers from the current participants in the
Stock Incentive Plan to the effect that the Transaction will not result in the
acceleration of the vesting of the participants' stock options under the plan.
Adjustment of Shares. The Committee will automatically adjust the number
and kind of shares, both in the aggregate and as to each optionee, available
for and subject to options and the option price payable upon exercise thereof
to prevent dilution or enlargement of option rights in the event of a change in
the number or kind of outstanding shares of the Company by reason of
capitalization, merger, consolidation, reorganization, stock split, stock
dividend, combination of shares or any other change in the corporate structure
or shares of stock of the Company.
Termination and Amendment of the Stock Incentive Plan. Options may be
granted under the Stock Incentive Plan at any time until and including March
30, 2003, on which date the Stock Incentive Plan will expire except as to
options then outstanding. Options outstanding at the time will remain in effect
until they have been exercised or have expired.
The Board of Directors may alter, amend or revoke the Stock Incentive Plan
in whole or in part at any time; provided, however, that in no event, without
the approval of the stockholders, may any action of the Board of Directors
result in: (i) materially amending, modifying or altering the eligibility
requirements provided in the Stock Incentive Plan; (ii) materially increasing,
except as provided in the Stock Incentive Plan, the maximum number of shares of
Common Stock that may be made subject to grants under the Stock Incentive Plan;
(iii) materially increasing the benefits accruing to participants under the
Stock Incentive Plan; or (iv) reducing the minimum option price requirements.
Federal Tax Consequences. The following is a summary only of the general
tax principles applicable to the Stock Incentive Plan under federal law as in
effect on the date of this Proxy Statement.
There are no tax consequences to the optionee upon the grant of an
incentive stock option pursuant to the Stock Incentive Plan. There are no tax
consequences to the optionee upon exercise of an incentive stock option, except
that the amount by which the fair market value of the shares at the time of
exercise exceeds the option exercise price is a tax preference item possibly
giving rise to alternative minimum tax. If the shares of Common Stock acquired
are not disposed of within two years from the date the option was granted or
within one year after the shares are transferred to the optionee, any gain
realized upon the subsequent disposition of the shares will be characterized as
capital gain and any loss will be characterized as long-term capital loss. If
all requirements other than the above-described holding period requirements are
met, a "disqualifying disposition" occurs and gain in an amount equal to the
fair market value of the shares on the date of exercise minus the option
exercise price (except for certain "wash" sales, gifts or sales to related
persons), is taxed as ordinary income and the Company will be entitled to a
corresponding deduction in an amount equal to the optionee's ordinary income
47
at that time. The gain in excess of this amount, if any, will be characterized
as capital gain if the optionee held the shares for more than one year. There
are no tax consequences to the Company upon the grant of an incentive stock
option nor upon the exercise of an incentive stock option unless a
"disqualifying disposition" occurs.
There are no tax consequences to the optionee upon the grant of a
nonqualified option pursuant to the Stock Incentive Plan. Upon the exercise of
a nonqualified stock option, taxable ordinary income will be recognized by the
holder in an amount equal to the excess of the fair market value of the shares
purchased as the time of such exercise over the aggregate option price. The
Company will be entitled to a corresponding federal income tax deduction. Upon
any subsequent sale of the shares, the optionee will generally recognize a
taxable capital gain or loss based upon the difference between the per share
fair market value at the time of exercise and the per share selling price at
the time of the subsequent sale of the shares.
Options Granted to Date
The following table shows the aggregate number of Plan Shares subject to
options granted under the Stock Incentive Plan through the Record Date as to (a)
each named executive officer; (b) all current executive officers as a group and
(c) all other employees as a group. As of June 29, 1998, the closing price of
the Common Stock on the New York Stock Exchange was $8 per share.
Options Received
Name and Position to Date (#)
- ----------------------------------------------------------------------------- -----------------
C. Cammack Morton, President and Chief Executive Officer .................... 300,000
Patrick M. Miniutti, Executive Vice President and Chief Financial Officer ... 200,000
William H. Neville, Executive Vice President and Chief Operating Officer .... 50,000
Christopher G. Gavrelis, Executive Vice President - Management .............. 35,000
Connell L. Radcliff, Senior Vice President - Development .................... 63,250
All current executive officers as a group (7) ............................... 693,250
All employees as a group (200) .............................................. 758,250
Required Vote
Proposal Five requires the affirmative vote of a majority of the votes
cast on the proposal, provided that the total vote cast on the proposal
represents over 50% in interest of all shares of common stock entitled to vote
on the proposal. For purposes of the vote on Proposal Five, an abstention or a
broker non-vote will have the effect of a vote against the proposals, unless
holders of more than 50% interest of all shares of common stock entitled to
vote on the proposal cast votes, in which event neither an abstention nor a
broker non-vote will have any effect on the result of the vote.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" PROPOSAL FIVE.
PROPOSAL SIX:
AMENDMENT OF THE
1995 OUTSIDE DIRECTORS' STOCK COMPENSATION PLAN
The Board of Directors recommends that the stockholders approve an
amendment to the Company's 1995 Outside Directors' Stock Compensation Plan (the
"Directors' Plan") to increase the shares of Common Stock authorized to be
issued under the Directors' Plan from 25,000 to 150,000. The Directors' Plan
was adopted in 1995 by the Company to provide an incentive of increased Common
Stock ownership to the members of the Board of Directors of the Company who are
not officers or employees of the Company or any of its subsidiaries ("Outside
Directors"). The Directors' Plan is administered by the executive compensation
committee. Information regarding the Directors' Plan is set forth below.
Outside Directors receive an annual retainer fee of $12,000 that is paid
in equal semi-annual installments (the "Retainer Fee") plus a fee of $1,000
(plus out-of-pocket expenses) for attendance in person at each meeting of the
Board of Directors or a committee (the "Meeting Fee"). Outside Directors may
elect to receive all or a portion of their Retainer Fee and Meeting Fees in
shares of Common Stock or options to purchase Common Stock issued under the
Directors' Plan in lieu of a cash payment. If an Outside Director elects to
receive a portion of his Retainer Fee or Meeting Fee in shares of Common Stock,
the number of shares of Common Stock awarded to Outside Directors in lieu of a
cash payment will be based on the price of the Common Stock on the New York
Stock Exchange on the business day immediately preceding the relevant payment
date. If an Outside Director elects to receive a portion of his Retainer Fee or
Meeting Fee in options to purchase shares
48
of Common Stock, the number of options awarded will vary with the exercise
price such that the difference between the fair market value of the shares
underlying the options and the aggregate exercise price of the options equals
such portion of the cash director fees foregone. The executive compensation
committee may also grant discretionary awards of options to purchase Common
Stock to Outside Directors. In no event, however, may the total number of
shares and options granted to an Outside Director in any year exceed 5,000,
including shares and options issued as Retainer Fees and Meeting Fees.
The exercise price for each option issued under the Directors' Plan will
be not less than the fair market value of a share of Common Stock on the date
of grant, except that options received in lieu of cash Retainer Fees or Meeting
Fees will have an exercise price of not less than such fair market value minus
the amount of such fees that the director elected to forego.
As of March 1, 1998, 11,376 shares of Common Stock had been issued or
reserved for issuance upon exercise of outstanding options under the Directors'
Plan. The proposed amendment to the Directors' Plan would increase the number
of shares of Common Stock authorized to be issued under the Directors' Plan
from 25,000 to 150,000. The Board of Directors believes this increase is
necessary because each current Outside Director has elected to receive up to
$20,000 of their Retainer Fee and Meeting Fees in shares of Common Stock in
lieu of a cash payment. Moreover, the Board of Directors believes that the
additional financial incentive inherent in new or additional ownership of
shares of Common Stock by its directors is beneficial to the Company.
Proposal Six requires the affirmative vote of a majority of the votes cast
on the proposal, provided that the total vote cast on the proposal represents
over 50% in interest of all shares of Common Stock entitled to vote on the
proposal. For proposes of the vote on Proposal Six, an abstention or a broker
non-vote will have the effect of a vote against the proposals, unless holders
of more than 50% in interest of all shares of Common Stock entitled to vote on
the proposal cast votes, in which event neither an abstention nor a broker
non-vote will have any effect on the result of the vote.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" PROPOSAL
SIX.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Each director and officer of the Company is required to file with the
Securities and Exchange Commission, by a specified date, reports regarding his
or her transactions involving the Company's Common Stock. To the Company's
knowledge, based solely on the information furnished to the Company and written
representations that no other reports were required, during the fiscal year
ended December 31, 1997, all such filing requirements were complied with,
except that the exchange of unvested shares of Restricted Stock for Repurchase
Options described at "Executive Compensation--Executive Compensation Committee
Report--Restricted Stock" was reported late by Messrs. Morton, Miniutti,
Neville, Gavrelis and Radcliff and Ms. Thorburn.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the Commission pursuant to the Exchange
Act are incorporated herein by reference: (1) the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, as amended on Form
10-K/A filed on June 4, 1998 and June 30, 1998; (2) the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1998, as amended
on Form 10-Q/A filed on July 1, 1998; (3) the Company's Current Report on Form
8-K dated March 23, 1998, as amended on Form 8-K/A filed on June 3, 1998; (4)
the Company's Current Report on Form 8-K dated February 24, 1998, as amended on
July 1, 1998; and (5) all other documents filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Proxy Statement and prior to the Special Meeting.
Any statement contained in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Proxy Statement to the extent
that a statement contained herein or in any subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified shall not be deemed to
constitute a part of this Proxy Statement except as so modified, and any
statement so superseded shall not be deemed to constitute part of this Proxy
Statement.
49
The Company undertakes to provide without charge to each person to whom a
copy of this Proxy Statement has been delivered, upon request, a copy of the
Company's annual report on Form 10-K, including the financial statements and
the financial statement schedules, and any or all other documents that are
incorporated herein by reference, other than exhibits to such documents.
Requests for such copies should be directed to the Company, at its principal
executive offices, Attention: Linda Swearingen, 11000 Regency Parkway, Suite
300, Cary, North Carolina 27511; telephone number (919) 462-8787.
ADDITIONAL INFORMATION
The Board of Directors knows of no other business to be brought before the
Annual Meeting. If, however, any other business should properly come before the
Annual Meeting, including matters incident to the Annual Meeting, the persons
named in the accompanying proxy will vote proxies as they deem appropriate with
respect to such matters.
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Any stockholder proposals intended to be presented at the Company's 1999
annual meeting of stockholders must be received by the Company at 11000 Regency
Parkway, Suite 300, Cary, North Carolina 27511, on or before March 8, 1999 for
inclusion in the Company's proxy statement and form of proxy relating to the
1999 annual meeting of stockholders.
By Order of the Board of Directors
/s/ Robin W. Malphrus
ROBIN W. MALPHRUS, ESQ.
Secretary
Dated: July 6, 1998
50
APPENDIX A
AMENDED AND RESTATED
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
FAC REALTY TRUST, INC.
and
PROMETHEUS SOUTHEAST RETAIL LLC
Dated as of March 23, 1998
THIS AMENDED AND RESTATED STOCK PURCHASE AGREEMENT (this "Agreement"),
dated as of March 23, 1998, is made by and between FAC Realty Trust, Inc., a
Maryland corporation (the "Company") and Prometheus Southeast Retail LLC
("Buyer"), an affiliate of Lazard Freres Real Estate Investors, LLC, a Delaware
limited liability company ("LFREI").
RECITALS:
WHEREAS, the Company and Buyer entered into that certain stock purchase
agreement, dated as of February 24, 1998 (the "First Agreement");
WHEREAS, the Company and Buyer desire to amend and restate in its entirety
the First Agreement as set forth herein;
WHEREAS, the First Agreement, as amended and restated as set forth herein
shall be referred to as the "Agreement";
WHEREAS, Buyer wishes to purchase from the Company, and the Company wishes
to sell to Buyer, (i) an aggregate of 21,052,632 shares of the Company's common
stock, par value $0.01 per share (the "Company Common Stock"), at a purchase
price of $9.50 per share and (ii) contingent value rights (the "Contingent
Value Rights") of the Company as further described in the Contingent Value
Right Agreement (as defined herein); and
WHEREAS, the Company and Buyer believe that the combination in a strategic
alliance of the leadership, expertise and experience in retail development and
operations of the Company and the proven investment and capital markets
expertise and access to capital of Buyer and its affiliates will significantly
enhance the Company's ability to pursue its growth and operating strategies;
NOW, THEREFORE, in consideration of the promises and the representations,
warranties, covenants and agreements contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto
hereby agree as follows:
ARTICLE 1
Definitions
As used in this Agreement, the following terms shall have the following
respective meanings:
Section 1.1 "Action" shall mean any action, suit, arbitration, inquiry,
proceeding or investigation by or before any Government Authority.
Section 1.2 "ADA" shall have the meaning set forth in Section 3.11(e).
Section 1.3 "Affiliate" shall have the meaning ascribed thereto in Rule
12b-2 promulgated under the Exchange Act, and as in effect on the date hereof.
Section 1.4 "Agreement" shall mean this Stock Purchase Agreement as
amended and restated, together with all schedules and exhibits referenced
herein.
Section 1.5 "Army Corps of Engineers" shall have the meaning set forth in
Section 3.11(d).
Section 1.6 "Benefit Arrangements" shall have the meaning set forth in
Section 3.13(h).
Section 1.7 "Blue Sky Laws" shall have the meaning set forth in Section
3.4(e).
Section 1.8 "Board" shall mean the Board of Directors of the Company.
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Section 1.9 "Break-up Fee" shall have the meaning set forth in Section
9.3(b).
Section 1.10 "Business Day" shall mean any day other than a Saturday, a
Sunday or a day on which the New York Stock Exchange is closed.
Section 1.11 "Buyer" shall have the meaning set forth in the first
paragraph hereof.
Section 1.12 "Capital Expenditure Budget and Schedule" shall have the
meaning set forth in Section 3.11(i).
Section 1.13 "CERCLA" shall have the meaning set forth in Section 3.12(e).
Section 1.14 "Claim" shall have the meaning set forth in Section
3.12(g)(i).
Section 1.15"Closing" shall mean the consummation of any Stock Purchase.
Section 1.16 "Closing Date" shall mean, with respect to the consummation
of any Stock Purchase, the date on which the conditions set forth herein with
respect thereto shall be satisfied or duly waived, or if the Company and Buyer
mutually agree on a different date, the date upon which they have mutually
agreed.
Section 1.17 "Code" shall mean the Internal Revenue Code of 1986, as
amended, and any successor thereto, including all of the rules and regulations
promulgated thereunder.
Section 1.18 "Commitment" shall have the meaning set forth in Section 3.7.
Section 1.19 "Company" shall have the meaning set forth in the first
paragraph hereof.
Section 1.20 "Company Charter" shall mean the Amended and Restated
Articles of Incorporation of FAC Realty Trust, Inc. and any amendment or
supplement thereto, as in effect on the date hereof.
Section 1.21 "Company Common Stock" shall have the meaning set forth in
the second paragraph hereof.
Section 1.22 "Company Environmental Reports" shall have the meaning set
forth in Section 3.12(f).
Section 1.23 "Company Excess Stock" shall have the meaning set forth in
Section 3.3(a).
Section 1.24 "Company Leases" shall have the meaning set forth in Section
3.11(f).
Section 1.25 "Company Plans" shall have the meaning set forth in Section
3.13(b).
Section 1.26 "Company Preferred Stock" shall have the meaning set forth in
Section 3.3(a).
Section 1.27 "Company Properties" shall have the meaning set forth in
Section 3.11(a).
Section 1.28 "Company Registration Statement" shall have the meaning set
forth in Section 3.5(a).
Section 1.29 "Company Reports" shall have the meaning set forth in Section
3.5(a).
Section 1.30 "Company Stock" shall mean, collectively, the Company Common
Stock and any other shares of capital stock of the Company.
Section 1.31 "Company Stock Equivalents" shall have the meaning set forth
in Section 5.3(e).
Section 1.32 "Competing Transaction" shall mean (i) any acquisition in any
manner, directly or indirectly (including through any option, right to acquire
or other beneficial ownership), of more than 15% of the equity securities, on a
Fully Diluted basis, of the Company by a single person or a group of related
persons, or assets representing a material portion of the assets of the
Company, other than any of the transactions contemplated by this Agreement or
(ii) any merger, consolidation, sale of assets, share exchange,
recapitalization, other business combination, liquidation, or other action out
of the ordinary course of business of the Company (it being understood that
acquisitions of real property in exchange for OP Units is in the ordinary
course of business), other than any of the transactions contemplated by this
Agreement.
Section 1.33 "Contingent Value Rights" shall have the meaning set forth in
the first paragraph of the recitals hereto.
Section 1.34 "Contingent Value Right Agreement" shall have the meaning set
forth in Section 2.6(a).
Section 1.35 "Controlled Group Liability" shall have the meaning set forth
in Section 3.13(h).
Section 1.36 "Debt Instruments" shall mean all notes, loan agreements,
mortgages, deeds of trust or similar instruments which evidence or secure any
indebtedness owing by the Company or any of its Subsidiaries.
A-2
Section 1.37 "Development Budget and Schedule" shall have the meaning set
forth in Section 3.11(j).
Section 1.38 "Development Properties" shall have the meaning set forth in
Section 3.11(j).
Section 1.39 "Employee Benefit Plans" shall have the meaning set forth in
Section 3.13(h).
Section 1.40 "Employees" shall have the meaning set forth in Section
3.13(h).
Section 1.41 "Employment Agreements" shall have the meaning set forth in
Section 3.13(a).
Section 1.42 "Environmental Claim" shall have the meaning set forth in
Section 3.12(g)(ii).
Section 1.43 "Environmental Laws" shall have the meaning set forth in
Section 3.12(g)(iii).
Section 1.44 "Environmental Permits" shall have the meaning set forth in
Section 3.12(a).
Section 1.45 "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended, and any successor thereto.
Section 1.46 "ERISA Affiliates" shall mean any entity which is under
"common control" with the Company, within the meaning of Section 4001(b)(1) of
ERISA.
Section 1.47 "Exchange Act" shall have the meaning set forth in Section
3.4(e).
Section 1.48 "Fair Market Value" shall have the meaning given to it in the
Stockholders Agreement.
Section 1.49 "Final Schedules" shall have the meaning set forth in Section
5.7.
Section 1.50 "Fully Diluted" shall mean, with respect to the Company
Stock, the total number of outstanding shares of Company Stock (for such
purposes, treating as outstanding Company Stock all options or warrants to
purchase and securities convertible into (or exchangeable or redeemable for)
Company Stock including, without limitation, OP Units), outstanding as of the
relevant measurement date, assuming exercise, conversion, exchange or
redemption of such other securities.
Section 1.51 "GAAP" shall have the meaning set forth in Section 3.5(b).
Section 1.52 "Governing Documents" shall mean this Agreement, the
Registration Rights Agreement, the Stockholders Agreement and the Contingent
Value Right Agreement.
Section 1.53 "Government Authority" shall mean any government or state (or
any subdivision thereof) of or in the United States, or any agency, authority,
bureau, commission, department or similar body or instrumentality thereof, or
any governmental court or tribunal.
Section 1.54 "Ground Leases" shall have the meaning set forth in Section
3.11(k).
Section 1.55 "Indemnified Party" shall mean Buyer or the Company, as the
context may require.
Section 1.56 "Initial Closing" shall mean the first Closing, which shall
occur on the Target Date.
Section 1.57 "Initial Number of Shares" shall mean the number of shares of
Company Common Stock equal to 19.9% of the aggregate number of outstanding
shares of Company Common Stock on the date of the Initial Closing (prior to the
issuance of the Initial Number of Shares of Company Common Stock).
Section 1.58 "Initial Public Offering" shall mean the initial public
offering of the common stock of FAC Realty, Inc.
Section 1.59 "Insurance Policies" shall have the meaning set forth in
Section 3.16.
Section 1.60 "Investor" shall have the meaning giving to it in the
Stockholders Agreement.
Section 1.61 "Investor Nominee" shall have the meaning given to such term
in the Stockholders Agreement.
Section 1.62 "IRS" shall mean the Internal Revenue Service.
Section 1.63 "Kane" shall mean Kane Realty Corporation.
Section 1.64 "Kane and Konover Properties" shall mean the properties to be
purchased after the date hereof by the Company pursuant to the Kane Purchase
Agreement and the Konover Purchase Agreement.
Section 1.65 "Kane and Konover Schedules" shall have the meaning set forth
in Section 5.8.
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Section 1.66 "Kane Purchase Agreement" shall mean, collectively, those
certain Exchange Option Agreements, Master Agreements and other related
documents by and among FAC Realty Trust, Inc., FAC Properties, L.P., Carolina
FAC L.P., Roy O. Rodwell, Carolyn E. Martin, John M. Kane, Clifford Clark, Mark
E. Pitney, Atlantic Realty LLC, Effell Pembroke, LLC, Park Place FAC LLC and
Atlantic RealVest LLC relating to the acquisition by FAC Properties, L.P. of
the partnership or other ownership interests in the entities which own title to
and/or the shopping center real properties and improvements located at (i)
Celebration, Raleigh, NC, (ii) Shoreside, Kitty Hawk, NC, (iii) Stanton,
Greenville, NC, (iv) Parkwest, Durham, NC, (v) Brookneal, Brookneal, VA, and
(vi) Keysville, Keysville, VA.
Section 1.67 "Konover" shall mean Konover Associates South, Inc.
Section 1.68 "Konover Purchase Agreement" shall mean that certain Master
Agreement and other related documents by and among FAC Realty Trust, Inc., FAC
Properties, L.P. and the owners of the properties and interests listed therein
relating to the acquisition by FAC Properties, L.P. of the title to the
shopping center real properties and improvements located at (i) Mobile Festival
Centre, Mobile, AL, (ii) The Plaza Shopping Center, Davie, FL, (iii) Square One
Plaza, Stuart, FL, (iv) Durham Festival Centre, Durham, NC, (v) Hollywood
Festival Centre, Hollywood, FL, (vi) Lenoir Festival Centre, Lenoir, NC, (vii)
Oakland Park Festival Centre, Oakland Park, FL, (viii) Tampa Festival Centre,
Tampa, FL, (ix) Food Lion Plaza, Petersburg, VA and (x) South Cobb Festival
Centre, Smyrna, GA, and of certain management and leasing agreements of Konover
Management South.
Section 1.69 "Kick Out Properties" shall have the meaning set forth in
Section 5.8.
Section 1.70 "Liabilities" shall mean, as to any person, all debts,
adverse claims, liabilities and obligations, direct, indirect, absolute or
contingent of such person, whether known or unknown, accrued, vested or
otherwise, whether in contract, tort, strict liability or otherwise and whether
or not actually reflected, or required by GAAP to be reflected, in such
person's or entity's balance sheets or other books and records, including
without limitation (i) obligations arising from non-compliance with any law,
rule or regulation (including Environmental Laws) of any Government Authority
or imposed (including, without limitation, under any Environmental Laws or in
connection with Environmental Claims) by any court or any arbitrator of any
kind, (ii) all indebtedness or liability of such person for borrowed money, or
for the purchase price of property or services (including trade obligations),
(iii) all obligations of such person as lessee under leases, capital or other,
(iv) liabilities of such person in respect of plans covered by Title IV of
ERISA, or otherwise arising in respect of plans for Employees or former
Employees or their respective families or beneficiaries, (v) reimbursement
obligations of such person in respect of letters of credit, (vi) all
obligations of such person arising under acceptance facilities, (vii) all
liabilities of other persons or entities, directly or indirectly, guaranteed,
endorsed (other than for collection or deposit in the ordinary course of
business) or discounted with recourse by such person or with respect to which
the person in question is otherwise directly or indirectly liable, (viii) all
obligations secured by any Lien on property of such person, whether or not the
obligations have been assumed, and (ix) all other items which have been, or in
accordance with GAAP would be, included in determining total liabilities on the
liability side of the balance sheet.
Section 1.71 "LFREI" shall have the meaning set forth in the first
paragraph hereof.
Section 1.72 "Liens" shall mean all liens, mortgages, deeds of trust,
deeds to secure debt, security interests, pledges, claims, charges, easements
and other encumbrances of any nature whatsoever.
Section 1.73 "Loss and Expenses" shall have the meaning set forth in
Section 8.2(a).
Section 1.74 "Material Adverse Effect" shall mean a material adverse
effect on the financial condition, results of operations, business or prospects
of the Company and its Subsidiaries (to the extent of the Company's interests
therein) taken as a whole.
Section 1.75 "Material Company Leases" shall have the meaning set forth in
Section 3.11(f).
Section 1.76 "Materials of Environmental Concern" shall have the meaning
set forth in Section 3.12(g)(iv).
Section 1.77 "19.9% Sale Transaction" shall mean the sale by Investor of
the Initial Number of Shares to a person in connection with a Competing
Transaction entered into on any date on or prior to the one year anniversary of
the date this Agreement is terminated.
Section 1.78 "19.9% Sale Transaction Profit" shall mean, on any date, the
dollar amount equal to (i) the Initial Number of Shares MULTIPLIED BY the price
per share actually paid in cash by another person for the shares of Company
Common Stock pursuant to a 19.9% Sale Transaction, LESS (ii) $9.50 MULTIPLIED
BY the Initial Number of Shares.
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Section 1.79 "1998 and 1999 Preliminary Capital Expenditure Budgets and
Schedules" shall have the meaning set forth in Section 3.11(i).
Section 1.80 "OP Units" shall mean the limited partnership interests in
FAC Properties, L.P.
Section 1.81 "Other Filings" shall have the meaning set forth in Section
5.1(b).
Section 1.82 "Pension Plans" shall have the meaning set forth in Section
3.13(h).
Section 1.83 "Per Share Purchase Price" shall mean the price of $9.50 per
share for the Company Common Stock.
Section 1.84 "Permitted Liens" shall mean (i) Liens (other than Liens
imposed under ERISA or any Environmental Law or in connection with any
Environmental Claim) for taxes or other assessments or charges of Government
Authorities that are not yet delinquent or that are being contested in good
faith by appropriate proceedings, in each case, with respect to which adequate
reserves are being maintained by the Company or its Subsidiaries to the extent
required by GAAP, (ii) statutory Liens of landlords, carriers, warehousemen,
mechanics, materialmen and other Liens (other than Liens imposed under ERISA or
any Environmental Law or in connection with any Environmental Claim) imposed by
law and created in the ordinary course of business for amounts not yet overdue
or which are being contested in good faith by appropriate proceedings, in each
case, with respect to which adequate reserves or other appropriate provisions
are being maintained by the Company or its Subsidiaries to the extent required
by GAAP and which, to the extent same do not relate to work or materials
provided for in the Capital Expenditure Budget and Schedule, the 1998 and 1999
Preliminary Capital Expenditure Budgets and Schedules or the Development Budget
and Schedule, do not exceed $300,000 in the aggregate (excluding from such
calculation, any amounts disclosed in writing by the Company to Buyer which (a)
are fully covered by insurance held by the Company under which the Company
reasonably expects full recovery of such amounts, or (b) for which an adequate
escrow has been established and is, at the relevant time, maintained), (iii)
the Company Leases and any leases entered into after December 31, 1997 in the
ordinary course of business on commercially reasonable terms, (iv) easements,
rights-of-way, covenants, restrictions and other similar matters which are
customary and typical for properties similar to the Company Properties and
which do not (x) interfere materially with the ordinary conduct of any Company
Property or the business of the Company and its Subsidiaries as a whole or (y)
detract materially from the value or usefulness of the Company Properties to
which they apply, (v) the Liens which were granted by the Company or any of its
Subsidiaries to lenders pursuant to credit agreements in existence on the date
hereof which are described in either Schedule 3.9(c) or the Company Reports,
(vi) the other Liens, if any, described in Schedule 1.84, and (vii) such
imperfections of title and encumbrances, if any, as would not, individually or
in the aggregate, reasonably be expected to result in a Material Adverse
Effect.
Section 1.85 "person" shall mean any individual, corporation, partnership,
limited liability company, joint venture, trust, unincorporated organization,
other form of business or legal entity or Government Authority.
Section 1.86 "Pro Forma Balance Sheet" shall have the meaning set forth in
Section 3.5(c).
Section 1.87 "Projects" shall have the meaning set forth in Section
3.11(j).
Section 1.88 "Property Restrictions" shall have the meaning set forth in
Section 3.11(a).
Section 1.89 "Proxy Statement" shall have the meaning set forth in Section
5.1(b).
Section 1.90 "Purchase Price" shall mean the Per Share Purchase Price
multiplied by the number of shares of Company Common Stock to be purchased and
sold at a particular Closing.
Section 1.91 "Purchased Shares" shall have the meaning set forth in
Section 2.1.
Section 1.92 "Registration Rights Agreement" shall have the meaning set
forth in Section 2.6(a).
Section 1.93 "Regulatory Filings" shall have the meaning set forth in
Section 3.4(e).
Section 1.94 "Repurchase Payment" shall have the meaning set forth in
Section 2.9(a).
Section 1.95 "REIT" shall have the meaning set forth in Section 3.8(b).
Section 1.96 "Release" shall have the meaning set forth in Section
3.12(g)(v).
Section 1.97 "Remaining Equity Ownership" shall mean, for any person and
on any date, the sum of (i) product of (A) the number of shares of Company
Stock held by such person and (B) the Fair Market Value of the Company Stock on
such date and (ii) the product of (A) the number of OP Units held by such
person and (B) the Fair Market Value of the OP Units on such date.
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Section 1.98 "Rent Roll" shall have the meaning set forth in Section
3.11(f).
Section 1.99 "SEC" shall have the meaning set forth in Section 3.5(a).
Section 1.100 "Second Closing" shall mean the Closing as soon as
practicable following Stockholder Approval.
Section 1.101 "Securities" means the Purchased Shares and the Contingent
Value Rights.
Section 1.102 "Securities Act" shall have the meaning set forth in Section
3.4(e).
Section 1.103 "Securities Laws" shall have the meaning set forth in
Section 3.5(a).
Section 1.104 "Stock Purchase" shall have the meaning set forth in Section
2.1.
Section 1.105 "Stockholder Approval" shall have the meaning set forth in
Section 7.2(b).
Section 1.106 "Stockholders Agreement" shall have the meaning set forth in
Section 2.6(a).
Section 1.107 "Subsequent Closing" shall mean each Closing of a Subsequent
Purchase.
Section 1.108 "Subsequent Purchase Price" shall mean the Per Share
Purchase Price multiplied by the number of Purchased Shares purchased by Buyer
in a Subsequent Purchase.
Section 1.109 "Subsequent Purchases" shall have the meaning set forth in
Section 2.5(a).
Section 1.110 "Subsidiaries" shall mean with respect to any person, any
corporation, partnership, limited liability company, joint venture, business
trust or other entity, of which such person, directly or indirectly, owns or
controls 50% or more of the securities or other interests entitled to vote in
the election of directors or others performing similar functions with respect
to such corporation or other organization, or to otherwise control such
corporation, partnership, limited liability company, joint venture, business
trust or other entity.
Section 1.111 "Target Date" shall mean any date within forty five days of
February 24, 1998, provided, the "Target Date" may, at the sole discretion of
the Company, mean any date within seventy five days of February 24, 1998.
Section 1.112 "Tax" means any federal, state, local, or foreign income,
gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including taxes under
Section 59(a) of the Code), customs duties, capital stock, franchise, profits,
withholding, social security (or similar), unemployment, disability, real
property, personal property, sales, use, transfer, registration, value added,
alternative or add-on minimum, estimated, or other tax of any kind whatsoever,
including any interest, penalty, or addition thereto, whether disputed or not.
The term "Tax" also includes any amounts payable pursuant to any tax sharing
agreement to which any relevant entity is liable as a successor or pursuant to
contract.
Section 1.113 "Tax Return" means any return, declaration, report, claim
for refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
Section 1.114 "Title Policies" shall have the meaning set forth in Section
3.11(a).
Section 1.115 "Topping Fee" shall have the meaning set forth in Section
9.3(b).
Section 1.116 "Total Equity Commitment" shall mean the amount of
$200,000,000.00.
Section 1.117 "Total Enterprise Value" shall mean, on any date, the
greater of (A) total asset value of the Company (as measured in accordance with
GAAP) and (B) total market capitalization of the Company (based on the Fair
Market Value of the outstanding Common Stock and OP Units and the outstanding
indebtedness of the Company and its Subsidiaries).
Section 1.118 "Transaction Documents" shall have the meaning set forth in
Section 7.1(e).
Section 1.119 "Updated Schedules" shall have the meaning set forth in
Section 5.7.
Section 1.120 "Welfare Plans" shall have the meaning set forth in Section
3.13(h).
ARTICLE 2
Purchase and Sale of Shares; Closing
Section 2.1 Purchase and Sale. Subject to the terms and conditions hereof,
from time to time after the date hereof, at the Closings, the Company will
sell, convey, assign, transfer, and deliver, and Buyer will purchase and
acquire from the
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Company, up to an aggregate of 21,052,632 shares of Company Common Stock (the
"Purchased Shares"). Each Closing at which Buyer purchases any Purchased Shares
is herein referred to as a "Stock Purchase."
Section 2.2 Consideration. Subject to the terms and conditions hereof, at
each Closing, Buyer shall deliver to the Company the Purchase Price with
respect to the number of shares of Company Common Stock to be purchased and
sold at such Closing by wire transfer of immediately available funds in U.S.
dollars to the account or accounts specified by the Company.
Section 2.3 Initial Closing. Subject to the terms and conditions hereof,
at the Initial Closing, at which time the applicable conditions set forth in
Sections 7.1, 7.3 and 7.4 shall have been satisfied or duly waived, Buyer will
purchase and acquire from the Company, and the Company will sell, convey,
assign, transfer and deliver to Buyer, the Initial Number of Shares of Company
Common Stock, and Buyer will pay to the Company the Purchase Price for such
shares of Company Common Stock. Concurrently with the Initial Closing, the
Buyer shall be issued the Contingent Value Rights which shall vest in the
amounts, and on the terms, set forth in the Contingent Value Right Agreement.
Section 2.4 Second Closing. Subject to the terms and conditions hereof, on
or before September 30, 1998, at which time the applicable conditions set forth
in Sections 7.2, 7.3 and 7.4 shall have been satisfied or duly waived, Buyer
will purchase and acquire from the Company, and the Company will sell, convey,
assign, transfer and deliver to Buyer, a number of shares of Company Common
Stock equal to the difference between 10,526,316 shares of Company Common Stock
and the Initial Number of Shares, and Buyer will pay to the Company the
Purchase Price for such shares of Company Common Stock.
Section 2.5 Subsequent Purchases and Sales.
(a) Subject to the terms and conditions hereof, following the Second
Closing, the Company shall have the right to require, subject to satisfaction
or waiver of the applicable conditions set forth in Sections 7.3 and 7.4, Buyer
to purchase from the Company from time to time at one or more Subsequent
Closings, an aggregate of 10,526,316 Purchased Shares (each referred to as a
"Subsequent Purchase" and, together, the "Subsequent Purchases"). Subject to
the terms and conditions hereof, the Closing of any Subsequent Purchase shall
occur as soon as possible following the date on which the applicable conditions
set forth in Section 7.3 and 7.4 shall have been satisfied or duly waived.
(b) At least 20 Business Days prior to a Subsequent Purchase, the Company
shall notify (which notice shall be in writing and irrevocable) Buyer of the
anticipated date of the Subsequent Closing and the number of Purchased Shares
the Company is requiring Buyer to purchase, which shall not be fewer than
1,052,631 Purchased Shares (except the final Subsequent Purchase).
(c) If fewer than 3,508,772 of the Purchased Shares shall have been issued
and sold at all Subsequent Closings prior to six months after the Second
Closing, then Buyer shall, subject to the satisfaction or waiver of the
applicable conditions set forth in Sections 7.3 and 7.4, make a Subsequent
Purchase of the number of Purchased Shares equal to 3,508,772 less the number
of Purchased Shares purchased after the Second Closing but prior to such date,
from the Company (and the Company shall sell to Buyer such number of shares) on
or before the date six months after the date of the Second Closing, or as soon
thereafter as all conditions to the parties' obligations to effect the
Subsequent Purchase hereunder shall have been satisfied or waived.
(d) If fewer than 7,017,544 of the Purchased Shares shall have been issued
and sold at all Subsequent Closings prior to twelve months after the Second
Closing, then Buyer shall, subject to the satisfaction or waiver of the
applicable conditions set forth in Sections 7.3 and 7.4, make a Subsequent
Purchase of the number of Purchased Shares equal to 7,017,544 less the number
of Purchased Shares purchased after the Second Closing but prior to such date,
from the Company (and the Company shall sell to Buyer such number of shares) on
or before the date twelve months after the date of Second Closing, or as soon
thereafter as all conditions to the parties' obligations to effect the
Subsequent Purchase hereunder shall have been satisfied or waived.
(e) If fewer than all Purchased Shares shall have been issued and sold at
any and all Closings on or before eighteen months after the Second Closing,
then Buyer shall, subject to the satisfaction or waiver of the applicable
conditions set forth in Sections 7.3 and 7.4, make a Subsequent Purchase of all
such remaining shares from the Company (and the Company shall sell to Buyer
such number of shares) on or before eighteen months after the Second Closing,
or as soon thereafter as all conditions to Buyer's obligation to effect the
Subsequent Purchase hereunder shall have been satisfied or waived.
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(f) If the condition set forth in Section 7.3(e) is not satisfied (which
determination shall be made by Buyer, based upon the written advice of Buyer's
counsel, and the cause of such determination is not cured by the Company prior
to the relevant Closing) or waived at any time when a Closing would otherwise
occur, the relevant Closing will be effected as to the number of Purchased
Shares, if any, as will not result in such condition failing to be satisfied,
and Buyer shall acquire any remaining Purchased Shares as soon thereafter as
such condition to Buyer's obligation to effect the Subsequent Purchase shall
have been, as determined in Buyer's sole discretion, satisfied or waived.
Section 2.6 Additional Agreements and Closing Deliveries.
(a) On February 24, 1998, the Company and Buyer entered into a
registration rights agreement substantially in the form attached as Exhibit A
(the "Registration Rights Agreement"), a stockholders agreement substantially
in the form attached as Exhibit B (the "Stockholders Agreement") and a
contingent value right agreement substantially in the form attached as Exhibit
C (the "Contingent Value Right Agreement").
(b) In addition to the other things required to be done hereby, at each
Closing, the Company shall deliver, or cause to be delivered, to Buyer the
following: (i) certificates representing the number of shares of Company Common
Stock to be issued and delivered at such Closing, free and clear of all Liens,
with all necessary share transfer and other documentary stamps attached, (ii) a
certificate, dated the relevant Closing Date and validly executed on behalf of
the Company, as contemplated by Section 7.1(a), as to the Initial Closing only,
by Section 7.2(a), as to the Second Closing only, and by Section 7.3(a) as to
other Subsequent Closings, (iii) evidence or copies of any consents, approvals,
orders, qualifications or waivers required pursuant to Section 7.1(c), as to
the Initial Closing only, and pursuant to Section 7.2(c), as to the Second
Closing, (iv) all certificates and other instruments and documents required by
this Agreement to be delivered by the Company to Buyer at or prior to each
Closing, and (v) such other instruments reasonably requested by Buyer, as may
be necessary or appropriate to confirm or carry out the provisions of this
Agreement.
(c) In addition to the delivery of the Purchase Price and the other things
required to be done hereby, at each Closing, Buyer shall deliver, or cause to
be delivered, to the Company the following: (i) a certificate, dated the
relevant Closing Date and validly executed by Buyer, as contemplated by Section
7.4(a), (ii) if not previously delivered to the Company, all other
certificates, documents, instruments and writings required pursuant hereto to
be delivered by or on behalf of Buyer at or before each Closing, and (iii) such
other instruments reasonably requested by the Company, as may be necessary or
appropriate to confirm or carry out the provisions of this Agreement.
Section 2.7 Time and Place of Closings. Each Closing shall take place at
9:00 a.m. New York City time on the relevant Closing Date at Latham & Watkins,
885 Third Avenue, Suite 1000, New York, New York or at such other place and
time as the Company and Buyer shall mutually agree.
Section 2.8 Right to Assign. Buyer may assign its rights and delegate its
obligations created hereby to purchase Company Common Stock in accordance with
the provisions of Section 10.5.
Section 2.9 Limited Put Option.
(a) In the event that the Second Closing does not occur by September 30,
1998 or this Agreement is terminated at any time prior to the Second Closing
(other than as a result of Buyer's material breach of any of its obligations
hereunder), Buyer will have the right to require the Company to repurchase all
or any part of the Initial Number of Shares pursuant to the terms described
below at a price in cash equal to the Purchase Price thereof plus accrued but
unpaid dividends, if any, thereon to the date of purchase (the "Repurchase
Payment"). On any date within two months after the earlier to occur of (i) the
date that the Company fails to receive Stockholder Approval, (ii) August 31,
1998 and (iii) the date this Agreement is terminated prior to the Second
Closing, Buyer may, at its sole option, exercise such right to cause the
Company to repurchase all or any part of the Initial Number of Shares by
surrendering to the Company the certificates for the shares it is causing the
Company to repurchase.
(b) If Buyer chooses to cause the Company to repurchase some or all of the
Initial Number of Shares, the Company will pay Buyer the Repurchase Payment
within six months after the date on which Buyer exercises its rights pursuant
to Section 2.9(a) of this Agreement.
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ARTICLE 3
Representations and Warranties of the Company
The Company hereby represents and warrants to Buyer as follows:
Section 3.1 Organization and Qualification; Subsidiaries.
(a) The Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Maryland. The Company has all
requisite corporate power and authority to own, operate, lease and encumber its
properties and carry on its business as now conducted, and to enter into this
Agreement, the Registration Rights Agreement, the Contingent Value Right
Agreement and the Stockholders Agreement and to perform its obligations
hereunder and thereunder.
(b) Each of the Subsidiaries of the Company is a corporation, partnership
or limited liability company duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization, and has the corporate, partnership or limited liability company
power and authority to own its properties and to carry on its business as it is
now being conducted.
(c) Each of the Company and its Subsidiaries is duly qualified to do
business and in good standing in each jurisdiction in which the ownership of
its property or the conduct of its business requires such qualification, except
for any failures to be so qualified or to be in good standing as would not,
individually or in the aggregate, reasonably be expected to result in a
Material Adverse Effect.
(d) Schedule 3.1(d) sets forth the name of each Subsidiary of the Company
(whether owned, directly or indirectly, through one or more intermediaries).
All of the outstanding shares of capital stock of, or other equity interest in,
each of the Subsidiaries owned by the Company are duly authorized, validly
issued, fully paid and nonassessable, and are owned, directly or indirectly, by
the Company free and clear of all Liens, except as set forth in Schedule
3.1(d). The following information for each Subsidiary is set forth in Schedule
3.1(d), if applicable: (i) its name and jurisdiction of incorporation or
organization, (ii) the type of and percentage interest held by the Company in
the Subsidiary and the names of and percentage interest held by the other
interest holders, if any, in the Subsidiary, and (iii) any loans from the
Company to, or priority payments due to the Company from, the Subsidiary, and
the rate of return thereon. Except as contemplated hereby and as set forth on
Schedule 3.1(d), there are no existing options, warrants, calls, subscriptions,
convertible securities or other rights, agreements or commitments which
obligate the Company or any of the Subsidiaries to issue, transfer or sell any
shares of capital stock or equity interests in any of the Subsidiaries.
Section 3.2 Authority Relative to Agreements; Approvals.
(a) The execution, delivery and performance of this Agreement, the
Registration Rights Agreement, the Contingent Value Right Agreement and the
Stockholders Agreement have been duly and validly authorized by all necessary
corporate action on the part of the Company, subject only to the approval of
the issuance of Company Common Stock pursuant to this Agreement and the Company
Charter by the Company's stockholders. This Agreement, the Registration Rights
Agreement, the Contingent Value Right Agreement and the Stockholders Agreement
have been duly executed and delivered by the Company for itself and constitute
the valid and legally binding obligations of the Company, enforceable against
the Company in accordance with their terms, subject to applicable bankruptcy,
insolvency, moratorium or other similar laws relating to creditors' rights or
general principles of equity.
(b) The Board has, as of the date hereof, approved this Agreement, the
Registration Rights Agreement, the Stockholders Agreement, the Contingent Value
Right Agreement and the transactions contemplated hereby and thereby, and the
Board has determined to recommend that the stockholders of the Company vote in
favor of and approve the issuance of Company Common Stock pursuant to this
Agreement, subject to the fiduciary duty provisions of Section 5.4.
(c) The shares of Company Common Stock to be acquired pursuant to this
Agreement have been duly authorized and reserved for issuance, and upon
issuance will be duly and validly issued, fully paid and nonassessable and not
subject to any preemptive or similar rights.
(d) The issue and sale of the shares of Company Common Stock hereunder
will not give any stockholder of the Company the right to demand payment for
its shares under Maryland law or give rise to any preemptive or similar rights.
Section 3.3 Capital Stock.
(a) The authorized capital stock of the Company as of the date hereof
consists of 45,000,000 shares of Company Common Stock, 25,000,000 shares of
excess stock, par value $0.01 per share (the "Company Excess Stock"), and
5,000,000
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shares of preferred stock, par value $25.00 per share (the "Company Preferred
Stock"). As of the date hereof, there are 12,298,891 shares of Company Common
Stock issued and outstanding; to the Company's knowledge, no shares of Company
Excess Stock issued and outstanding; and the shares of Company Preferred Stock
issued and outstanding as described in the most recent Company Report. All such
issued and outstanding shares of Company Common Stock are duly authorized,
validly issued, fully paid, nonassessable and free of preemptive or similar
rights. Except as set forth on Schedule 3.3(a), the Company has no outstanding
bonds, debentures, notes or other obligations the holders of which have the
right to vote (or which are convertible into or exercisable for securities the
holders of which have the right to vote) with the stockholders of the Company
on any matter. As of the date hereof, except as set forth in Schedule 3.3(a) to
this Agreement, there are no existing options, warrants, calls, subscriptions,
convertible securities, or other rights, agreements or commitments which
obligate the Company to issue, transfer or sell any shares of capital stock or
other equity interests of the Company.
(b) Except for interests in the Subsidiaries of the Company and except as
set forth in Schedule 3.3(b), neither the Company nor any of its Subsidiaries
owns directly or indirectly any interest or investment (whether equity or debt)
in any corporation, partnership, limited liability company, joint venture,
business, trust or entity (other than investments in short-term investment
securities).
Section 3.4 No Conflicts; No Defaults; Required Filings and Consents.
Neither the execution and delivery by the Company hereof nor the consummation
by the Company of the transactions contemplated hereby in accordance with the
terms hereof, will:
(a) conflict with or result in a breach of any provisions of the Company
Charter or by-laws of the Company;
(b) result in a breach or violation of, a default under, or the triggering
of any payment or other obligations pursuant to, or, except as set forth in
Schedule 3.9(g), accelerate vesting under, any compensation plan or any grant
or award made under any of the foregoing;
(c) violate or conflict with in any material respect any material statute,
regulation, judgment, order, writ, decree or injunction applicable to the
Company or its Subsidiaries;
(d) subject to the Company obtaining the third party consents set forth in
Schedule 3.4(d)-A (with respect to the Initial Closing), Schedule 3.4(d)-B
(with respect to the Second Closing) and Schedule 3.4(d)-C (with respect to
each Subsequent Closing), violate or conflict with or result in a breach of any
provision of, or constitute a default (or any event which, with notice or lapse
of time or both, would constitute a default) under, or result in the
termination or in a right of termination or cancellation of, or accelerate the
performance required by, or result in the creation of any material Lien upon
any of the properties of the Company or its Subsidiaries under, or result in
being declared void, voidable or without further binding effect, any of the
terms, conditions or provisions of any material note, bond, mortgage, indenture
or deed of trust or any material license, franchise, permit, lease, contract,
agreement or other instrument, commitment or obligation to which the Company or
its Subsidiaries is a party, or by which the Company or its Subsidiaries or any
of their properties is bound or affected; or
(e) require any material consent, approval or authorization of, or
declaration, filing or registration with, any Government Authority, other than
any filings required under the Securities Act of 1933, as amended (the
"Securities Act"), the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or state securities laws ("Blue Sky Laws") (collectively, the
"Regulatory Filings"), and any material filings required to be made with the
Secretary of State of Maryland or any national securities exchange on which the
Company Common Stock is listed.
Section 3.5 SEC and Other Documents; Financial Statements; Undisclosed
Liabilities.
(a) The Company has delivered or made available to Buyer the registration
statement of the Company filed with the Securities and Exchange Commission
("SEC") in connection with the Initial Public Offering, and all exhibits,
amendments and supplements thereto (collectively, the "Company Registration
Statement"), and each registration statement, report, proxy statement or
information statement and all exhibits thereto prepared by it or relating to
its properties since the effective date of the Company Registration Statement
up through the date hereof, each of which are set forth in Schedule 3.5(a) and
are in the form (including exhibits and any amendments thereto) filed with the
SEC (collectively, the "Company Reports"). Except as set forth in Schedule
3.5(a), the Company Reports were filed with the SEC in a timely manner and
constitute all forms, reports and documents required to be filed by the Company
under the Securities Act, the Exchange Act and the rules and regulations
promulgated thereunder (the "Securities Laws"). As of their respective dates,
the Company Reports (i) complied as to form in all material respects with the
applicable requirements of the Securities Laws and (ii) did not contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the
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statements made therein, in the light of the circumstances under which they
were made, not misleading. There is no unresolved violation asserted by any
Government Authority with respect to any of the Company Reports.
(b) Each of the balance sheets included in or incorporated by reference
into the Company Reports (including the related notes and schedules) fairly
presented the financial position of the entity or entities to which it relates
as of its date and each of the statements of operations, stockholders' equity
(deficit) and cash flows included in or incorporated by reference into the
Company Reports (including any related notes and schedules) fairly presented
the results of operations, stockholders' equity (deficit) or cash flows, as the
case may be, of the entity or entities to which it relates for the periods set
forth therein, in each case in accordance with United States generally accepted
accounting principles ("GAAP") consistently applied during the periods
involved, except as may be noted therein and except, in the case of the
unaudited statements, normal recurring year-end adjustments which would not,
individually or in the aggregate, reasonably be expected to result in a
Material Adverse Effect.
(c) The Company has delivered to Buyer a balance sheet, dated as of
January 1, 1998, adjusted to give effect to the transactions contemplated by
this Agreement, the Kane Purchase Agreement and the Konover Purchase Agreement
as if such transactions had occurred on January 1, 1998 (the "Pro Forma Balance
Sheet"). The Pro Forma Balance Sheet is based on the consolidated balance
sheets of the Company and its Subsidiaries as of December 31, 1997 which the
Company believes have been prepared in accordance with GAAP; provided, that the
columns labeled "Kane" and "Konover" on the Pro Forma Balance Sheet are based
on the terms of the Kane Purchase Agreement and the Konover Purchase Agreement,
respectively, and, where applicable, financial statements prepared by
management of Kane and Konover, respectively. The Pro Forma Balance Sheet
fairly presents the pro forma financial position of the Company as of its date
in accordance with GAAP consistently applied.
(d) Except as and to the extent set forth in the Company Reports and the
Company's financial statements filed with the SEC or in any Schedule hereto,
none of the Company or any of its Subsidiaries has any Liabilities (nor do
there exist any circumstances) that would, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect.
Section 3.6 Litigation; Compliance With Law.
(a) Except as set forth on Schedule 3.6, there are no Actions pending or,
to the Company's knowledge, threatened against the Company or any of its
Subsidiaries that would, individually or in the aggregate, reasonably be
expected to result in a Material Adverse Effect, or which question the validity
hereof or any action taken or to be taken in connection herewith. Except as
disclosed in Schedule 3.6(a), there are no continuing orders, injunctions or
decrees of any Government Authority to which the Company or any of its
Subsidiaries is a party or by which any of its properties or assets are bound.
(b) None of the Company or its Subsidiaries is in violation of any
statute, rule, regulation, order, writ, decree or injunction of any Government
Authority or any body having jurisdiction over them or any of their respective
properties which, if enforced, would, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect.
Section 3.7 Absence of Certain Changes or Events. Except as disclosed in
the Company Reports filed with the SEC prior to the date hereof or in Schedule
3.7, since November 15, 1997 the Company and each of its Subsidiaries has
conducted its business only in the ordinary course and has acquired real estate
and entered into financing arrangements in connection therewith only in the
ordinary course of such business, and there has not been (a) any change,
circumstance or event that would reasonably be expected to result in a Material
Adverse Effect, (b) any declaration, setting aside or payment of any dividend
or other distribution with respect to the Company Common Stock, except in
accordance with Section 5.3, (c) any material commitment, contractual
obligation, borrowing, capital expenditure or transaction (each, a
"Commitment") entered into by the Company or any of its Subsidiaries or (d) any
material change in the Company's accounting principles, practices or methods.
Section 3.8 Tax Matters; REIT and Partnership Status.
(a) The Company and each of its Subsidiaries has timely filed with the
appropriate taxing authority all Tax Returns required to be filed by it or has
timely requested extensions and any such request has been granted and has not
expired. Each such Tax Return is complete and accurate in all respects. All
Taxes shown as owed by the Company or any of its Subsidiaries on any Tax Return
have been paid or accrued, except for Taxes being contested in good faith and
for which adequate reserves have been taken. The Company and each of its
Subsidiaries has properly accrued all Taxes for such periods subsequent to the
periods covered by such Tax Returns as required by GAAP. None of the Company or
any of its Subsidiaries has executed or filed with the IRS or any other taxing
authority any agreement now in effect extending the period for
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assessment or collection of any Tax. Except as set forth in Schedule 3.8(a),
none of the Company or any of its Subsidiaries is being audited or examined by
any taxing authority with respect to any Tax or is a party to any pending
action or proceedings by any taxing authority for assessment or collection of
any Tax, and no claim for assessment or collection of any Tax has been asserted
against it. True and complete copies of all federal, state and local income or
franchise Tax Returns filed by the Company and each of its Subsidiaries for
1995 and 1996 and all written communications relating thereto have been
delivered to Buyer or made available to representatives of Buyer prior to the
date hereof. No claim has been made in writing or, to the Company's knowledge,
otherwise by an authority in a jurisdiction where the Company or any of its
Subsidiaries does not file Tax Returns that it is or may be subject to taxation
by that jurisdiction. Except as set forth in Schedule 3.8(a), there is no
dispute or claim concerning any Tax liability of the Company or any of its
Subsidiaries, (i) claimed or raised by any taxing authority in writing or (ii)
as to which the Company or any of its Subsidiaries has knowledge. As of the
date hereof, the Company is a domestically controlled REIT within the meaning
of Section 897(h)(4)(B) of the Code. To the Company's knowledge, except as set
forth in Schedule 3.8(a), no person or entity which would be treated as an
"individual" for purposes of Section 542(a)(2) of the Code (as modified by
Section 856(h) of the Code) owns or would be considered to own (taking into
account the constructive ownership rules of Section 544 of the Code, as
modified by Section 856(h) of the Code) in excess of 9.8% of the value of the
outstanding equity interests in the Company. Except as contemplated by this
Agreement or as set forth in Schedule 3.8(a), the Board has not exempted any
person from the Ownership Limit or otherwise waived any of the provisions of
Article IV of the Company Charter (as all capitalized terms used in this
sentence are defined in the Company Charter). The Ownership Limit (as such term
is defined in the Company Charter) has not been modified. Except as set forth
on Schedule 3.8(a), each ownership interest that the Company and each of its
Subsidiaries has in an entity formed as a partnership (or which files federal
income tax returns as a partnership) qualifies, and since the date of its
formation qualified, to be treated as a partnership for federal income tax
purposes or as a "qualified REIT subsidiary" within the meaning of Section
856(i)(2) of the Code.
(b) The Company (i) intends in its federal income tax return for the tax
year that will end on December 31, 1997 to be taxed as a real estate investment
trust within the meaning of Section 856 of the Code ("REIT") and has complied
(or will comply) with all applicable provisions of the Code relating to a REIT,
for 1997, (ii) has operated, and intends to continue to operate, in such a
manner as to qualify as a REIT for 1997, (iii) has not taken or omitted to take
any action which would reasonably be expected to result in a challenge to its
status as a REIT, and, to the Company's knowledge, no such challenge is pending
or threatened, and (iv) to the Company's knowledge, and assuming the accuracy
of Buyer's representations in Sections 4.8 and 4.10 (disregarding the
qualification relating to Buyer's knowledge and assuming no exceptions are set
forth in Schedule 19 4.10-B), will not be rendered unable to qualify as a REIT
for federal income tax purposes as a consequence of the transactions
contemplated hereby.
(c) Except as set forth on Schedule 3.8(c), any amount or other
entitlement that could be received (whether in cash or property or the vesting
of property) as a result of any of the transactions contemplated hereby by any
person who is a "disqualified individual" (as such term is defined in proposed
Treasury Regulation Section 1.280G-1) with respect to the Company or any of its
Affiliates would not be characterized as an "excess parachute payment" (as such
term is defined in Section 280G(b)(1) of the Code).
(d) Except as set forth on Schedule 3.8(d), the disallowance of a
deduction under Section 162(m) of the Code for employee remuneration will not
apply to any amount paid or payable by the Company or any of its Subsidiaries
under any contract, stock plan, program, arrangement or understanding currently
in effect.
(e) The Company was eligible to and did validly elect to be taxed as a
REIT for federal income tax purposes for calendar year 1993 and all subsequent
taxable periods and was in compliance with the Code and all applicable rules
and regulations of the Code necessary to permit it to be taxed as a REIT for
all such periods. Each Subsidiary of the Company organized as a partnership
(and any other Subsidiary that files Tax Returns as a partnership for federal
income tax purposes) was and continues to be classified as a partnership for
federal income tax purposes or as a "qualified REIT subsidiary" within the
meaning of Section 856(i)(2) of the Code.
Section 3.9 Compliance with Agreements; Material Agreements.
(a) Neither the Company nor any of its Subsidiaries is in default under or
in violation of any provision of the Company Charter, the by-laws of the
Company (or equivalent documents) or any partnership agreement, operating
agreement, joint venture agreement or any other organization or formation
documents to which the Company or any of its Subsidiaries is a party.
(b) The Company and each of its Subsidiaries have filed all material
reports, registrations and statements, together with any amendments required to
be made with respect thereto, that they were required to file with any
Government Authority
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and all other material reports and statements required to be filed by them,
including any report or statement required to be filed pursuant to the laws,
rules or regulations of the United States, and have paid all fees or
assessments due and payable in connection therewith, except for such failures
to file or pay which would not, individually or in the aggregate, reasonably be
expected to result in a Material Adverse Effect. Except as set forth on
Schedule 3.9(b), there is no unresolved violation asserted by any regulatory
agency with respect to any report or statement relating to an examination of
the Company or any of its Subsidiaries which, if resolved in a manner
unfavorable to the Company or such Subsidiary, would, individually or in the
aggregate, reasonably be expected to result in a Material Adverse Effect.
(c) The Company Reports or Schedule 3.9(c) set forth (i) a description of
all material indebtedness of the Company and each of its Subsidiaries, whether
unsecured, or secured or collateralized by mortgages, deeds of trust or other
security interests in the Company Properties or any other assets of the Company
and each of its Subsidiaries, or otherwise and (ii) each Commitment entered
into by the Company or any of its Subsidiaries (including any guarantees of any
third party's debt or any obligations in respect of letters of credit issued
for the Company's or any of its Subsidiary's account) which may result in total
payments or liabilities in excess of $300,000, excluding Commitments made in
the ordinary course of business with a maturity of less than one year or that
are terminable on 30 days or less notice. True and complete copies of the
documents relating to the foregoing have been delivered or made available to
Buyer prior to the date hereof. Neither the Company nor any of its Subsidiaries
is in default, and, to the Company's knowledge, no event has occurred which,
with the giving of notice or the lapse of time or both, would constitute a
material default, under any of the documents described in clause (i) or (ii) of
this paragraph or in respect of any payment obligations thereunder. All joint
venture and partnership agreements to which the Company or any of its
Subsidiaries is a party as of the date hereof are set forth in Schedule 3.1(d),
all of which are in full force and effect as against the Company or such
Subsidiary and, to the Company's knowledge, as against the other parties
thereto, and none of the Company or any of its Subsidiaries is in default, and,
to the Company's knowledge, no event has occurred which, with the giving of
notice or the lapse of time or both, would constitute a default, with respect
to any obligations thereunder. To the Company's knowledge, the other parties to
such agreements are not in breach of any of their respective obligations
thereunder. To the Company's knowledge, no event has occurred nor is the
Company aware of the existence of any facts with respect to the Company's
Subsidiaries (including with respect to the partnership agreements for the
Company's Subsidiaries that are partnerships and operating agreements for the
Company's Subsidiaries that are limited liability companies) that would,
individually or in the aggregate, reasonably be expected to result in a
Material Adverse Effect.
(d) Except as disclosed in the Company Reports, Schedule 3.9(d) sets forth
a complete and accurate list of all material agreements entered into by the
Company or any of its Subsidiaries as of the date hereof relating to the
development or construction of, additions or expansions to, or management or
leasing services for retail shopping centers or other real properties which are
currently in effect and under which the Company or any of its Subsidiaries
currently has, or expects to incur, obligations in excess of $300,000. True and
complete copies of such agreements will be made available to Buyer.
(e) Except as disclosed in the Company Reports and except for (i)
agreements made in the ordinary course of business with a maturity of one year
or less or that are terminable on 30 days or less notice, (ii) agreements the
breach or non-fulfillment of which would not, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect and (iii)
agreements under which the Company's total benefit or obligations do not exceed
$300,000, Schedule 3.9(e) sets forth a complete and accurate list of all
material agreements entered into by the Company as of the date hereof,
including, without limitation, material Debt Instruments. Each agreement set
forth in Schedule 3.9(e) is in full force and effect as against the Company
and, to the Company's knowledge, as against the other parties thereto, no
payments, if any, thereunder are delinquent, the Company is not in default, in
any material respect, thereunder, and no notice of default thereunder has been
sent or received by the Company or any of its Subsidiaries. To the Company's
knowledge, no event has occurred which, with notice or lapse of time or both,
would constitute a default, in any material respect, by the Company under any
agreement set forth in Schedule 3.9(e). To the Company's knowledge, the other
parties to such agreements are not in breach of their respective obligations
thereunder, except as would not, individually or in the aggregate, reasonably
be expected to result in a Material Adverse Effect. True and complete copies of
each such agreement have been made available to Buyer prior to the date hereof.
(f) Schedule 3.9(f) sets forth a complete and accurate list of all
agreements and policies of the Company in effect on the date hereof relating to
transactions with affiliates and potential conflicts of interest. Each
agreement or arrangement set forth in Schedule 3.9(f) is in full force and
effect, and the Company, each of its Subsidiaries, and, to the Company's
knowledge, the other parties thereto are in compliance with such agreements and
policies, or such compliance has been waived by the Board as set forth in
Schedule 3.9(f). True and complete copies of each such agreement or arrangement
were made available to Buyer.
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(g) Except as set forth on Schedule 3.9(g), there are no change of control
or similar provisions in any employment, severance, stock option, stock
incentive, Company Plans or similar agreement or arrangement which would be
triggered by the transactions contemplated by this Agreement. Schedule 3.9(g)
identifies the obligations to employees (including any payment or other
obligation, forgiveness of debt, other release from obligations, or
acceleration of vesting) which are created, accelerated or triggered by the
execution, delivery or performance of this Agreement or the consummation of the
transactions contemplated hereby.
Section 3.10 Financial Records; Company Charter and By-laws; Corporate
Records.
(a) The books of account and other financial records of the Company and
each of its Subsidiaries are in all material respects true and complete, have
been maintained in accordance with good business practices, and are accurately
reflected in all material respects in the financial statements included in the
Company Reports.
(b) The Company has previously delivered or made available to Buyer true
and complete copies of the Company Charter and the by-laws of the Company, as
amended to date, and the charter, by-laws, organizational documents,
partnership agreements and joint venture agreements of its Subsidiaries, and
all amendments thereto. All such documents are listed in Schedule 3.10(b).
(c) The minute books and other records of corporate or partnership
proceedings of the Company and each of its Subsidiaries have been made
available to Buyer and its representatives and contain in all material respects
accurate records of all meetings and accurately reflect in all material
respects all other corporate actions of the stockholders and directors and any
committees of the Board and the board of directors of its Subsidiaries which
are corporations and all material actions of the partners of its Subsidiaries
which are partnerships, except for documentation of discussions relating to or
in connection with the transactions contemplated hereby or matters related
hereto.
Section 3.11 Properties.
(a) Schedule 3.11(a) sets forth a complete and accurate list and the
address of all real property owned or leased by the Company or any of its
Subsidiaries or otherwise used by the Company or its Subsidiaries in the
conduct of their business or operations (collectively, and together with the
land at each address referenced in Schedule 3.11(a) and all buildings,
structures and other improvements and fixtures located on or under such land
and all easements, rights and other appurtenances to such land, the "Company
Properties"). The Company and each of its Subsidiaries own insurable fee simple
title (or, if so indicated in Schedule 3.11(a), leasehold title) to each of the
Company Properties, free and clear of any Liens, title defects, contractual
restrictions or covenants, laws, ordinances or regulations affecting use or
occupancy (including zoning regulations and building codes) or reservations of
interests in title (collectively, "Property Restrictions"), except for (i)
Permitted Liens and (ii) Property Restrictions imposed or promulgated by law or
by any Government Authority which are customary and typical for similar
properties. None of the matters described in clauses (i) and (ii) of the
immediately preceding sentence materially interferes with, materially impairs,
or is violated by, the existence of any building or other structure or
improvement which constitutes a part of, or the present use, occupancy or
operation of, the Company Properties taken as a whole, and such matters do not,
individually or in the aggregate, have a Material Adverse Effect. American Land
Title Association policies of title insurance (or marked title insurance
commitments having the same force and effect as title insurance policies or
binding irrevocable escrow instructions to issue such title insurance policies
or endorsements to existing title insurance policies) have been issued by
national title insurance companies insuring the fee simple or leasehold, as
applicable, title of the Company or its Subsidiaries, as applicable, to each of
the Company Properties in, to the Company's knowledge, sufficient amounts to
avoid co-insurance statutes, subject only to the matters set forth therein (the
"Title Policies"), and, to the Company's knowledge, the Title Policies are
valid and in full force and effect and no claim has been made under any such
policy. The Company will make available to Buyer true and complete copies of
all such policies and of the most recent surveys of the Company Properties, and
true and complete copies of all material exceptions referenced in such policies
and the most recent title reports for and surveys (to the extent not previously
delivered or made available to Buyer) of each of the Company Properties
available to the Company or any of its Subsidiaries for inspection by Buyer or
its representatives within five Business Days of Buyer's request therefor.
(b) Except as set forth in Schedule 3.11(b), and except for matters which
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect or to materially and adversely affect the use or
occupancy of the applicable Company Property, to the Company's knowledge, there
are no (i) certificates, permits or licenses that are currently required
(including building permits and certificates of occupancy for tenant spaces)
from any Government Authority having jurisdiction over any Company Property or
agreements, easements or other rights which are necessary to permit the lawful
use, occupancy or operation of the existing buildings, structures or other
improvements which constitute a part of any of the Company Properties or to
permit the lawful use and operation of utility service to any Company Property
or
A-14
of any existing driveways, roads or other means of egress and ingress to and
from any of the Company Properties that have not been obtained or that are not
in full force and effect, or any pending modification or cancellation of any of
same, or (ii) violations by any Company Property of any federal, state or
municipal law, ordinance, order, regulation or requirement, including any
applicable zoning law or building code, as a result of the use or occupancy of
such Company Property or otherwise. Except as set forth in Schedule 3.11(b),
the Company has no knowledge of any uninsured physical damage to any Company
Property in excess of $300,000 in the aggregate. To the Company's knowledge,
except for repairs identified in the Capital Expenditure Budget and Schedule or
in any engineering or structural report reviewed by Buyer or its consultants,
each Company Property, (i) is in good operating condition and repair and is
structurally sound and free of defects, with no material alterations or repairs
being required thereto under applicable law or insurance company requirements,
and (ii) consists of sufficient land, parking areas, driveways and other
improvements and lawful means of access and utility service and capacity to
permit the use thereof in the manner and for the purposes to which it is
presently devoted, except, in each such case, to the extent that failure to
meet such standards would not materially and adversely affect the use or
occupancy of the applicable Company Property. The Company will make available
to Buyer true and complete copies of all engineering reports, inspection
reports, maintenance plans and other documents relating to the condition of any
Company Property prepared for or by the Company since the Initial Public
Offering.
(c) Except as set forth in Schedule 3.11(c), there is no (i) condemnation,
eminent domain or rezoning proceeding pending or, to the Company's knowledge,
threatened with respect to any of the Company Properties, (ii) road widening or
change of grade of any road adjacent to any Company Property currently underway
or that, to the Company's knowledge, has been proposed, (iii) proposed change
in the assessed valuation of any Company Property other than customarily
scheduled revaluations, (iv) special assessment that has been made or, to the
Company's knowledge, threatened against any Company Property, or (v) Company
Property subject to any so-called "impact fee" or to any agreement with any
Government Authority to pay for sewer extensions, oversizing utilities,
lighting or like expenses or charges for work or services by such Government
Authority, except, in the case of each of the foregoing, to the extent that
same would not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect or to materially and adversely affect the use or
occupancy of the applicable Company Property.
(d) Each of the Company Properties is an independent unit which does not
rely on any facilities located on any property not included in such Company
Property to fulfill any municipal or governmental requirement or for the
furnishing to such Company Property of any essential building systems or
utilities, other than facilities the benefit of which inures to the Company
Properties pursuant to one or more valid easements or parking agreements. Each
of the Company Properties is served by public water and sanitary or septic
systems and all other utilities, and each of the Company Properties has lawful
access to public roads, in all cases sufficient for the current use and
occupancy of each Company Property. To the Company's knowledge or as set forth
in the surveys, all parcels of land included in each Company Property that
purport to be contiguous are contiguous and are not separated by strips or
gores. Except as set forth in Schedule 3.11(d) or any surveys or Environmental
Reports relating to any Company Property prepared for or by the Company since
the Initial Public Offering, no portion of any Company Property includes any
wetlands or vegetation or species protected by any applicable laws or, in event
that such surveys or Environmental Reports disclose the existence of such
wetlands or protected vegetation or species, such items would not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect
on the use or occupancy of the applicable Company Property. Except as set forth
on Schedule 3.11(d) or the Title Policies or surveys, none of the Company
Properties lies in any 100-year flood plain area, as established by the U.S.
Army Corps of Engineers (the "Army Corps of Engineers"). With respect to the
improvements on each Company Property which lie in a flood plain area, if any,
the Company or its Subsidiaries carry and presently maintain in full force and
effect flood insurance in connection with such Company Properties as required
by applicable law and as accurately described in Schedule 3.11(d). The
improvements on each Company Property comply in all material respects with all
applicable building codes and other relevant laws and regulations. No
improvements constituting a part of any Company Property encroach on real
property not constituting a part of such Company Property or such encroachments
would not, individually or in the aggregate, have a Material Adverse Effect or
materially and adversely affect the use or occupancy of the applicable Company
Property.
(e) Schedule 3.11(e) contains a complete and accurate list of each survey,
study or report prepared by or for the Company or any of its Subsidiaries since
the Initial Public Offering, in connection with any Company Property's
compliance or non-compliance with the requirements of the Americans with
Disabilities Act (the "ADA"), other than routine correspondence or memoranda.
Except for matters addressed in the Capital Expenditure Budget and Schedule, no
Company Property fails to comply with the requirements of the ADA except for
such non-compliance as the Company believes will not, individually or in the
aggregate, have a Material Adverse Effect.
A-15
(f) The Company has provided to Buyer an accurate rent roll for each
Company Property as of February 19, 1998 (the "Rent Roll"), which accurately
describes each lease of space in each Company Property (collectively, the
"Company Leases"). The Company has delivered to Buyer profiles of the Company
Leases (the "Lease Profiles"), which have been prepared in the ordinary course
of business. The Company will make available to Buyer a true and complete copy
of each Company Lease, including all amendments and modifications thereto. With
respect to each Company Lease for premises larger than 10,000 square feet of
rentable space (collectively, the "Material Company Leases"), except as set
forth in Schedule 3.11(f), (i) each of the Material Company Leases is valid and
subsisting and in full force and effect as against the Company or the
Subsidiary, as applicable, and, to the Company's knowledge, as against the
tenant, and the information on the Rent Roll with respect to the Material
Company Leases is accurate, (ii) except as otherwise set forth on the Rent
Roll, the tenant under each of the Material Company Leases is in actual
possession of the premises leased thereunder, (iii) except as otherwise set
forth on the Rent Roll, no tenant under any Material Company Lease is more than
30 days in arrears in the payment of rent, (iv) neither the Company nor any of
its Subsidiaries has received any written notice from any tenant under any
Material Company Lease of its intention to vacate, (v) neither the Company nor
any of its Subsidiaries has collected payment of rent under any Material
Company Lease (other than security deposits) accruing for a period which is
more than one month in advance, (vi) no notice of default has been sent or
received by the landlord under any Material Company Lease which remains uncured
as of the date hereof, no default has occurred under any Material Company Lease
by the landlord thereunder and, to the Company's knowledge, no default has
occurred under any Material Company Lease by the tenant thereunder and, to the
Company's knowledge, no event has occurred and is continuing which, with notice
or lapse of time or both, would constitute a default under any Material Company
Lease, (vii) except as disclosed on the Lease Profiles or Schedule 3.11(f), no
tenant under any of the Material Company Leases has any purchase options or
kick-out rights or is entitled to any concessions, allowances, abatements,
setoffs, rebates or refunds, (viii) none of the Material Company Leases and
none of the rents or other amounts payable thereunder has been mortgaged,
assigned, pledged or encumbered by any party thereto or otherwise, except in
connection with financing secured by the applicable Company Property which is
described in Schedule 3.9(c) or the Company Reports, (ix) (A) as of the date
hereof, except as set forth in Schedule 3.11(f), no brokerage or leasing
commission or other compensation is due or payable to any person with respect
to or on account of any of the Material Company Leases or any extensions or
renewals thereof incurred after the date hereof, and (B) any brokerage or
leasing commission or other compensation due or payable to any person with
respect to or on account of any of the Material Company Leases or any
extensions or renewals thereof have been incurred in the ordinary course of
business of the Company consistent with past practice and market terms, (x) no
space occupied under any Material Company Lease in any Company Property is
occupied by a tenant not paying base and/or percentage rent, (xi) no tenant
under any of the Material Company Leases has asserted any claim in writing or,
to the Company's knowledge, orally, which is likely to affect the collection of
rent from such tenant, (xii) other than as would be customary or consistent
with commercially reasonable retail leasing business practices, no tenant under
any of the Material Company Leases has any right to remove material
improvements or fixtures that have at any time been affixed to the premises
leased thereunder, (xiii) each tenant under the Material Company Leases is
required thereunder to maintain or to cause to be maintained, at its cost and
expense, public liability and property damage insurance with liability limits
in amounts at least equal to that maintained by commercially prudent owners of
properties similar to the Company Property to which such Material Company Lease
relates, or in the alternative, consistent with commercially reasonable prudent
retail leasing business practices, tenants may self-insure or the Company may
provide such coverage to tenants and (xiv) the landlord under each Material
Company Lease has fulfilled all of its obligations thereunder in respect of
tenant improvements and capital expenditures consistent with commercially
reasonable prudent retail leasing business practices. Other than the tenants
identified in the Rent Roll and parties to easement agreements which constitute
Permitted Liens, no third party has any right to occupy or use any portion of
any Company Property. Budgets for all material tenant improvements and similar
material work required to be made by the lessor under each of the Material
Company Leases is incorporated in Schedule 3.11(i).
(g) Schedule 3.11(g) sets forth a complete and accurate list of all
material commitments, letters of intent or similar written understandings made
or entered into by the Company or any of its Subsidiaries as of the date hereof
(x) to lease any space larger than 10,000 rentable square feet at any of the
Company Properties, (y) to sell, mortgage, pledge or hypothecate any Company
Property or Properties, which, individually or in the aggregate, are material,
or to otherwise enter into a material transaction in respect of the ownership
or financing of any Company Property, or (z) to purchase or to acquire an
option, right of first refusal or similar right in respect of any real
property, which, individually or in the aggregate, are material, which, in any
such case, has not yet been reduced to a written lease or contract, and sets
forth with respect to each such commitment, letter of intent or other
understanding the principal terms thereof. The Company will make available to
Buyer a true and complete copy of each such commitment, letter of intent or
other understanding. Schedule 3.11(g) also sets forth a complete and accurate
list of all agreements to purchase real property to which the Company or any of
its Subsidiaries is a party.
A-16
(h) Except as set forth in Schedule 3.11(h), none of the Company
Properties is subject to any outstanding purchase options nor has the Company
or any of its Subsidiaries entered into any outstanding contracts with others
for the (i) lease or sublease of space in excess of 10,000 square feet of
rentable space in any Company Property; or (ii) sale, mortgage, pledge,
hypothecation or other transfer of all or any part of any Company Property, and
no person has any right or option to acquire, or right of first refusal with
respect to, the Company's or any of its Subsidiaries' interest in any Company
Property or any part thereof. Except as set forth in Schedule 3.11(h) or
3.11(g), none of the Company or any of its Subsidiaries has any outstanding
options or rights of first refusal or has entered into any outstanding
contracts with others for the purchase of any real property.
(i) Schedule 3.11(i) sets forth the Company's or any of its Subsidiary's
capital expenditure budget and schedule for each Company Property, which
describes the capital expenditures which the Company or such Subsidiary has
budgeted for such Company Property for the period running through December 31,
1997 (the "Capital Expenditure Budget and Schedule"), and the Company's or any
of its Subsidiary's preliminary capital expenditure budget and schedule for
each Company Property, which describes the capital expenditures which the
Company or such Subsidiary has budgeted for such Company Property for the
period commencing January 1, 1998 and running through December 31, 1999 (the
"1998 and 1999 Preliminary Capital Expenditure Budgets and Schedules"). Each of
the Capital Expenditure Budget and the 1998 and 1999 Preliminary Capital
Expenditure Budgets and Schedules also describes other capital expenditures as
are necessary, to the Company's knowledge, in order to bring the applicable
Company Property into material compliance with applicable laws, ordinances,
codes, health and safety regulations and insurance requirements (including in
respect of fire sprinklers, compliance with the ADA (except to the extent that
(x) a tenant under any Company Lease is contractually responsible and liable
for such ADA compliance under its Company Lease or (y) with respect to shopping
center properties, any work required to cause such compliance is not material
and the related expenditures are, in the aggregate with all other such
expenditures, less than $300,000), and asbestos containing material) or which
the Company otherwise plans or expects to make in order to cure or remedy any
construction, electrical, mechanical or other defects, to renovate,
rehabilitate or modernize such Company Property, or otherwise, excluding,
however, any tenant improvements required to be made under any Company Lease.
To the Company's knowledge, the costs and time schedules for 1998 and 1999 set
forth in the 1998 and 1999 Preliminary Capital Expenditure Budgets and
Schedules are reasonable estimates and projections based upon information
available to the Company at the time that the 1998 and 1999 Preliminary Capital
Expenditure Budgets and Schedules were prepared, and, nothing has come to the
attention of the Company since such time which would indicate that the 1998 and
1999 Preliminary Capital Expenditure Budgets and Schedules are inaccurate or
misleading in any material respect. Except as set forth in Schedule 3.11(i),
there are no outstanding or, to the Company's knowledge, threatened
requirements by any insurance company which has issued an insurance policy
covering any Company Property, or by any board of fire underwriters or other
body exercising similar functions, requiring any repairs or alterations to be
made to any Company Property that would, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect.
(j) Schedule 3.11(j) contains a list of each Company Property which
consists of or includes undeveloped land or which is in the process of being
developed or redeveloped (collectively, the "Development Properties") and a
brief description of the development or redevelopment intended by the Company
or any of its Subsidiaries to be carried out or completed thereon
(collectively, the "Projects"), including any budget and development schedule
therefor prepared by or for the Company or any of its Subsidiaries
(collectively, the "Development Budget and Schedule"). Except as disclosed in
Schedule 3.11(j), each Development Property is zoned for the lawful development
or redevelopment thereon of the applicable Project, and the Company or its
Subsidiaries have obtained all permits, licenses, consents and authorizations
required for the lawful development or redevelopment thereon of such Project,
except only for such failure to meet the foregoing standards as would not,
individually or in the aggregate, be reasonably expected to have a Material
Adverse Effect. Except as set forth in Schedule 3.11(j), all of the existing
improvements or structures located on any of the Development Properties comply
in all material respects with all applicable building codes, laws, rules or
regulations. Except as set forth in Schedule 3.11(j), to the Company's
knowledge, there are no material impediments to or constraints on the
development or redevelopment of any Project in all material respects within the
time frame and for the cost set forth in the Development Budget and Schedule
applicable thereto. Except as disclosed in Schedule 3.11(j), each Development
Property consists of sufficient land, parking areas, driveways and other
improvements, and lawful means of access and utility and service and capacity
to permit the development and operation of the Project as intended to be
carried out or completed thereon. Except as set forth on Schedule 3.11(j), the
Development Properties are free and clear of any Property Restrictions,
encroachments or other matters (including, any condemnation, eminent domain or
rezoning proceedings (proposed or threatened), special assessments, taxes or
so-called "impact fees") which would individually, or in the aggregate, be
reasonably expected to have a Material Adverse Effect on the development of the
related Development Property. In the case of each Project the development of
which has commenced, to the Company's knowledge, the costs and expenses
incurred in connection with such Project and the progress
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thereof are, except as set forth in Schedule 3.11(j), consistent and in
compliance in all material respects with the Development Budget and Schedule
applicable thereto. The Company will make available to Buyer all feasibility
studies, soil tests, due diligence reports and other studies, tests or reports
performed by or for the Company at any time since the Initial Public Offering,
which relate to the Development Properties or the Projects.
(k) The ground leases underlying the leased Company Properties referenced
in Schedule 3.11(a) (collectively, the "Ground Leases") are accurately
described in Schedule 3.11(k). Each of the Ground Leases is valid, binding and
in full force and effect as against the Subsidiary and, to the Company's
knowledge, as against the other party thereto. Except as indicated in Schedule
3.11(k) and except for any Company Leases and Permitted Liens affecting the
same, none of the Ground Leases is subject to any mortgage, pledge, Lien,
sublease, assignment, license or other agreement granting to any third party
any interest therein, collateral or otherwise, or any right to the use or
occupancy of any premises leased thereunder. True and complete copies of the
Ground Leases (including all amendments, modifications and supplements thereto)
have been delivered to Buyer prior to the date hereof. To the Company's
knowledge, except as set forth in Schedule 3.11(k), there is no pending or
threatened proceeding which is reasonably likely to interfere with the quiet
enjoyment of the tenant under any of the Ground Leases. Except as set forth in
Schedule 3.11(k), as of the last day of the month preceding the date hereof and
as of the last day of the month preceding the date of the Initial Closing, no
payments under any Ground Lease are delinquent and no notice of default under
any Ground Lease has been sent or received by the Company or any of its
Subsidiaries. There does not exist under any of the Ground Leases any default,
and, to the Company's knowledge, no event has occurred which, with notice or
lapse of time or both, would constitute such a default.
(l) The Company and each of its Subsidiaries have good and sufficient
title to all the personal and non-real properties and assets reflected in their
books and records as being owned by them (including those reflected in the
balance sheets of the Company and its Subsidiaries as of December 31, 1997,
except as since sold or otherwise disposed of in the ordinary course of
business), free and clear of all Liens, except for Permitted Liens which are
not, individually or in the aggregate, reasonably expected to have a Material
Adverse Effect.
(m) The Company has provided to Buyer historical operating expense
information (the "Historical Expense Information") for each of the last three
years, which has been prepared in the ordinary course of business. The
Historical Expense Information is accurate in all material respects.
(n) Except as set forth on Schedule 3.11(n), neither the Company nor any
of its Subsidiaries is a party to any material third-party property management
or leasing agreements pursuant to which the Company or any of its Subsidiaries
receives a fee or other compensation from a third party for managing or leasing
real property.
Section 3.12 Environmental Matters.
(a) To the Company's knowledge, each of the Company and its Subsidiaries
has obtained, and now maintains as currently valid and effective, all permits,
certificates of financial responsibility and other governmental authorizations
required to be obtained by the Company or any of its Subsidiaries under the
Environmental Laws (the "Environmental Permits") in connection with the
operation of its businesses and properties. Except as disclosed in the Company
Environmental Reports or the Company Reports, each of the Company and its
Subsidiaries and each Company Property is and has been in compliance with all
terms and conditions of the Environmental Permits and all Environmental Laws,
except only to an extent which would not, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect. The Company has
no knowledge of any circumstances or conditions that may prevent or interfere
with such compliance in the future.
(b) Each of the Company and its Subsidiaries has provided or made
available to Buyer all formal written communications (whether from a Government
Authority, citizens' group, employee or other person), which the Company has
received regarding (x) alleged or suspected noncompliance of any of the Company
Properties with any Environmental Laws or Environmental Permits or (y) alleged
or suspected Liability of the Company or its Subsidiaries under any
Environmental Law, which noncompliance or Liability would, individually or in
the aggregate, reasonably be expected to result in a Material Adverse Effect.
(c) To the Company's knowledge, there are no liens or encumbrances on any
of the Company Properties which arose pursuant to or in connection with any
Environmental Law or Environmental Claim and, to the Company's knowledge, no
government actions have been taken or threatened to be taken or are in process
which are reasonably likely to subject any Company Property to such liens or
other encumbrances.
(d) Except as disclosed in Schedule 3.12(d) or in the Company Reports
(none of which matters would, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect), or set forth in the Company
Environmental Reports, no Environmental Claims have been asserted or, to the
Company's knowledge, threatened that, individually or in
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the aggregate, may result in liabilities exceeding $300,000 with respect to the
operations or the businesses of the Company or its Subsidiaries, or with
respect to the Company Properties. To the Company's knowledge, except as set
forth on the Company Environmental Reports or in the Company Reports, no
circumstances, past or present actions, conditions, events or incidents exist
with respect to the Company or any of its Subsidiaries or the Company
Properties that would reasonably be expected to result in the assertion of any
Environmental Claims that, individually or in the aggregate, may result in
liabilities exceeding $300,000, in any such case, against (i) the Company or
any of its Subsidiaries, or (ii) to the Company's knowledge, any person whose
liability for any Environmental Claims the Company or any of its Subsidiaries
has or may have retained or assumed either contractually or by operation of
law.
(e) Except as disclosed in Schedule 3.12(e) (none of which matters would,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect), or set forth in the Company Environmental Reports or the
Company Reports, (i) none of the Company or its Subsidiaries has been notified
or anticipates being notified of potential responsibility in connection with
any site that has been placed on, or proposed to be placed on, the National
Priorities List or its state or foreign equivalents pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), 42 U.S.C. ss. 9601 et seq., or analogous state laws, (ii) no
Materials of Environmental Concern are present on, in or under any Company
Property in a manner or condition that is reasonably likely to give rise to
Environmental Claims which, individually or in the aggregate, would reasonably
be expected to result in a Material Adverse Effect, (iii) none of the Company
or its Subsidiaries has Released or arranged for the Release of any Materials
of Environmental Concern at any location to an extent or in a manner which
would reasonably be expected to result in a Material Adverse Effect, (iv) no
underground storage tanks, surface impoundments, disposal areas, pits, ponds,
lagoons, open trenches or disused industrial equipment is present at any
Company Property in a manner or condition that is reasonably likely to give
rise to one or more Environmental Claims which, individually or in the
aggregate, would reasonably be expected to result in a Material Adverse Effect,
(v) no transformers, capacitors or other equipment containing fluid with more
than 50 parts per million polychlorinated biphenyls are present at any Company
Property in a manner or condition that is reasonably likely to give rise to one
or more Environmental Claims which, individually or in the aggregate, would
reasonably be expected to result in a Material Adverse Effect, except for any
such transformers, capacitors or other equipment owned by any utility company,
and (vi) to the Company's knowledge, no friable asbestos and no friable
asbestos-containing material is present at any Company Property and, to the
Company's knowledge, no Employee, agent, contractor or subcontractor of the
Company or its Subsidiaries or any other person is now or has in the past been
exposed to friable asbestos at any Company Property, except, in the case of
each of the matters set forth in this subpart (vi), for such matters as would
not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.
(f) Schedule 3.12(f) contains a list of each environmental report, audit,
summary, or similar document prepared for or by the Company or any of its
Subsidiaries or otherwise in the possession of any of them with respect to the
environmental condition of any Company Property (collectively, the "Company
Environmental Reports"). The Company has previously delivered or made available
to Buyer true and complete copies of each Company Environmental Report. None of
the matters disclosed by the Company Environmental Reports would, individually
or in the aggregate, reasonably be likely to have a Material Adverse Effect.
The Company has no knowledge of any facts or circumstances relating to the
environmental condition of any property owned, leased or otherwise held by the
Company that is not a Company Property that are reasonably likely to result in
a Material Adverse Effect.
(g) For purposes hereof, the terms listed below shall have the following
meanings:
(i) "Claim" shall mean all actions, causes of action, suits, judgments,
executions, claims, Liabilities and demands whatsoever, in law or equity.
(ii) "Environmental Claim" shall mean any Claim investigation or notice
by any person alleging potential liability (including potential liability
for investigatory costs, cleanup costs, governmental response costs,
natural resources damages, property damages, personal injuries or
fatalities, or penalties) arising out of, based on or resulting from (A)
the presence, generation, transportation, treatment, use, storage, disposal
or Release of Materials of Environmental Concern or the threatened Release
of Materials of Environmental Concern at any location, or (B) activities or
conditions forming the basis of any violation, or alleged violation of, or
liability or alleged liability under, any Environmental Law.
(iii) "Environmental Laws" shall mean federal, state, and local laws,
ordinances, common law, orders, statutes, and regulations relating to the
pollution or protection of the environment or of flora or fauna or their
habitat or of human health and safety, or to the cleanup or restoration of
the environment, including, without limitation, CERCLA, the Toxic
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Substances Control Act, as amended, the Hazardous Materials Transportation
Act, as amended, the Resource Conservation and Recovery Act, as amended,
the Clean Water Act, as amended, the Safe Drinking Water Act, as amended,
the Clean Air Act, as amended, the Occupational Safety and Health Act, as
amended, and all analogous laws promulgated or issued by any state or other
Government Authority.
(iv) "Materials of Environmental Concern" shall mean all chemicals,
pollutants, contaminants, wastes, toxic substances, petroleum or any
fraction thereof, petroleum products and hazardous substances or solid or
hazardous wastes as now defined and regulated under any Environmental Laws.
(v) "Release" shall mean any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration.
Section 3.13 Employees and Employee Benefit Plans.
(a) Schedule 3.13(a) sets forth a complete and accurate list of all
employment agreements (the "Employment Agreements") between the Company or any
of its Subsidiaries and any employees of the Company or any of its Subsidiaries.
Except for the employees of the Company or its Subsidiaries who are parties to
such Employment Agreements, all of the employees of the Company and each of its
Subsidiaries are employed on an at-will basis (except for restrictions or
limitations on the at-will basis of such employees imposed by law or equity or
general principles of law or equity), other than such employees party to
Employment Agreements that are not, in the aggregate, material to the Company.
(b) The Company Reports or Schedule 3.13(b) set forth a complete and
accurate list of all material Employee Benefit Plans and all material Benefit
Arrangements which cover Employees of the Company or any of its Subsidiaries
with respect to their employment relationship with the Company or any of its
Subsidiaries (the "Company Plans"). With respect to each Company Plan, the
Company has made available to Buyer true and complete copies of: (i) the plans
and related trust documents and all amendments thereto, (ii) the most recent
summary plan descriptions, if any, and the most recent annual report, if any,
(iii) the most recent actuarial valuation (to the extent applicable), and (iv)
the most recent determination letter issued by the IRS with respect to any
Company Plan intended to be qualified under Section 401(a) of the Code.
(c) With respect to each Company Plan, (i) the Company and each of its
Subsidiaries is, and has been since the date of adoption of each Company Plan,
in compliance in all material respects with the terms of each such Company Plan
and with the requirements prescribed by all applicable statutes, orders or
governmental rules or regulations, (ii) the Company and each of its Subsidiaries
has contributed to each Pension Plan included in the Company Plans not less than
the amounts accrued for such plan for all plan periods for which payment is due,
and (iii) neither the Company nor any of its Subsidiaries has any funding
commitment or other accrued liabilities except as set forth on Schedule 3.13(c)
or as reserved for in the financial statements in or incorporated by reference
into the Company Reports, and in the case of each of clauses (i), (ii), and
(iii), except for such matters as would not, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect.
(d) Except as set forth on Schedule 3.13(d), none of the Company or any of
its Subsidiaries has made any commitment to establish any new Employee Benefit
Plan or Benefit Arrangement, to modify any Employee Benefit Plan or Benefit
Arrangement, or to increase benefits or compensation of Employees of the Company
or any of its Subsidiaries (except for normal increases in compensation
consistent with past practices), and, to the Company's knowledge, no intention
to do so has been communicated to Employees of the Company or any of its
Subsidiaries.
(e) Except as set forth on Schedule 3.13(e), there are no pending or, to
the Company's knowledge, anticipated government audits or claims (excluding
claims for benefits incurred in the ordinary course of Company Plan activities)
against or otherwise involving any of the Company Plans or any fiduciaries
thereof with respect to their duties to the Company Plans and no suit, action or
other litigation (excluding claims for benefits incurred in the ordinary course
of Company Plan activities) has been brought against or with respect to any such
Company Plans.
(f) Neither the Company nor any of the ERISA Affiliates has, at any time
after September 25, 1980, contributed to, or been required to contribute to, any
"multiemployer plan" (as defined in Sections 3(37) and 4001(a)(3) of ERISA).
(g) Except as required by the continuation coverage requirements of Section
601 et seq. of ERISA and Section 4980B of the Code or requirements of state law
and regulations and except as set forth on Schedule 3.13(g), the Company and its
Subsidiaries do not maintain or contribute to any plan or arrangement which
provides or has any liability to provide life insurance, medical or other
employee welfare benefits described in Section 3(1) of ERISA to any Employee or
former Employee following his retirement or termination of employment and, to
the Company's knowledge, the Company and its
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Subsidiaries have never represented, promised or contracted (whether in oral or
written form) to any Employee or former Employee that such benefits would be
provided.
(h) For purposes hereof, "Employee Benefit Plans" means each and all
"employee benefit plans" as defined in Section 3(3) of ERISA maintained or
contributed to by the Company or a Subsidiary or in which the Company or a
Subsidiary participates or participated and which provides benefits to
Employees, including (i) any such plans that are "employee welfare benefit
plans" as defined in Section 3(1) of ERISA, including retiree medical and life
insurance plans ("Welfare Plans"), and (ii) any such plans that constitute
"employee pension benefit plans" as defined in Section 3(2) of ERISA ("Pension
Plans"). "Benefit Arrangements" means life and health insurance,
hospitalization, savings, bonus, deferred compensation, incentive compensation,
holiday, vacation, severance pay, sick pay, sick leave, disability, tuition
refund, service award, company car, scholarship, relocation, patent award,
fringe benefit, individual employment, consultancy or severance contracts and
other polices or practices of the Company or a Subsidiary providing employee or
executive compensation or benefits to Employees maintained or contributed to by
the Company or a Subsidiary, other than Employee Benefit Plans. "Employees" mean
all current employees, former employees and retired employees of the Company or
any of its Subsidiaries, including employees on disability, layoff or leave
status. "Controlled Group Liability" means any and all liabilities (other than
such liabilities that arise solely out of, or relate solely to, the Company
Plans) of the ERISA Affiliates (other than the Company and its Subsidiaries)
under (i) Title IV of ERISA, (ii) Section 302 of ERISA, (iii) Sections 412 and
4971 of the Code, (iv) the continuation coverage requirements of Section 601 et
seq. of ERISA and Section 4980B of the Code, and (v) corresponding or similar
provisions of foreign laws or regulations.
(i) To the Company's knowledge, with respect to each Company Plan that is
subject to Title IV or Section 302 of ERISA or Section 412 or 4971 of the Code:
(i) there does not exist any accumulated funding deficiency within the meaning
of Section 412 of the Code or Section 302 of ERISA, whether or not waived, (ii)
the fair market value of the assets of such plan equals or exceeds the actuarial
present value of all accrued benefits under such plan, on a termination basis,
(iii) no reportable event within the meaning of Section 4043(c) of ERISA has
occurred, with respect to which notice has not been waived, and the consummation
of the transactions contemplated by this Agreement will not result in the
occurrence of any such reportable event, and (iv) all premiums due to the
Pension Benefit Guaranty Corporation have been timely paid in full.
(j) There does not now exist, nor do any circumstances exist that could
result in, any Controlled Group Liability that would be a liability of the
Company following the Closing. Without limiting the generality of the foregoing,
neither the Company nor any ERISA Affiliate has engaged in any transaction
described in Section 4069 or Section 4204 of ERISA.
(k) Neither the execution and delivery of this Agreement, the Kane Purchase
Agreement, the Konover Purchase Agreement nor the consummation of the
transactions contemplated hereby or thereby will (either alone or in conjunction
with any other event) result in, cause the accelerated vesting or delivery of,
or increase the amount or value of, any payment or benefit to any employee of
the Company, except as set forth in Schedule 3.13(k) or any automatic extension
of the term of any Employment Agreement.
(l) To the Company's knowledge, neither the Company nor any of its
Subsidiaries nor any plan fiduciary of any Company Plan has engaged in any
transaction in violation of Sections 404 or 406 of ERISA or any "prohibited
transaction," as defined in Section 4975(c)(1) of the Code, for which no
exemption exists under Section 408 of ERISA or Section 4975(c)(2) or (d) of the
Code, or has otherwise violated the provisions of Part 4 of Title I, Subtitle B
of ERISA. Neither the Company nor any Subsidiary has knowingly participated in a
violation of Part 4 of Title I, Subtitle B of ERISA by any plan fiduciary of any
Company Plan and has not been assessed any civil penalty under Section 502(l) of
ERISA.
(m) Schedule 3.13 (m) sets forth a complete and accurate list of all
amounts paid annually pursuant to short-term or long-term disability benefits
under any Company Plan and the number of Employees receiving such payments, as
well as any Employees, to the Company's knowledge, who are participating in, or
may become eligible to participate in, any Company Plan who are suffering from
serious illness or disease.
Section 3.14 Labor Matters. Except as set forth in Schedule 3.14, none of
the Company or any of its Subsidiaries is a party to, or bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor union organization. Except for the matters set
forth in Schedule 3.14 (none of which matters would, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect), there is
no unfair labor practice or labor arbitration proceeding pending or, to the
knowledge of the Company, threatened against the Company or any of its
Subsidiaries. To the knowledge of the Company, there are no organizational
efforts with respect to the formation of a collective bargaining unit presently
being made or threatened involving employees of the Company or any of its
Subsidiaries.
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Section 3.15 Affiliate Transactions. Schedule 3.15 sets forth a complete
and accurate list of all transactions, series of related transactions or
currently proposed transactions or series of related transactions entered into
by the Company or any of its Subsidiaries since January 1, 1997 which are of
the type required to be disclosed by the Company pursuant to Item 404 of
Regulation S-K of the Securities Laws that are not otherwise disclosed in the
Company Reports. A true and complete copy of all agreements or contracts
relating to any such transaction will be made available to Buyer prior to the
date hereof.
Section 3.16 Insurance. The Company maintains insurance policies,
including liability policies, covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Company and
each of its Subsidiaries (collectively, the "Insurance Policies"), which are of
a type and in amounts customarily carried by persons conducting businesses
similar to those of the Company. There is no material claim by the Company or
any of its Subsidiaries pending under any of the material Insurance Policies as
to which coverage has been questioned, denied or disputed by the underwriters
of such policies.
Section 3.17 Proxy Statement. The Proxy Statement and all of the
information included or incorporated by reference therein (other than any
information supplied or to be supplied by Buyer for inclusion or incorporation
by reference therein) will not, as of the date such Proxy Statement is first
mailed to the stockholders of the Company and as of the time of the meeting of
the stockholders of the Company in connection with the transactions
contemplated hereby, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. The Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations promulgated by the SEC thereunder.
Section 3.18 Vote Required. The affirmative vote of the holders of a
majority (including Buyer and its Controlled Affiliates (as defined in the
Stockholders Agreement) for purposes of determining a quorum, but not for
purposes of determining a majority) of the outstanding shares of Company Common
Stock entitled to vote hereon and duly present in person or by proxy at a
meeting duly called to vote hereon (and with each share of Company Common Stock
entitled to one vote per share) is the only vote of the holders of any class or
series of Company Stock necessary to approve this Agreement, the Registration
Rights Agreement, the Contingent Value Right Agreement, the Stockholders
Agreement and the transactions contemplated hereby and thereby.
Section 3.19 Brokers or Finders. Except as set forth in Schedule 3.19, no
agent, broker, investment banker or other firm or person, including any of the
foregoing that is an Affiliate of the Company, is or will be entitled to any
broker's or finder's fee or any other commission or similar fee from the
Company in connection with this Agreement or any of the transactions
contemplated hereby for which Buyer or any of its Affiliates will be
responsible.
Section 3.20 Maryland Takeover Law. The terms of Sections 3-602 and 3-702
of the Maryland General Corporation Law will not apply to Buyer, any Stock
Purchase or any other transaction contemplated hereby. The resolutions in the
form of Exhibit D hereto have been adopted by the Company and have not been
rescinded and revoked.
Section 3.21 Kane and Konover Properties. The Company hereby makes the
same representations and warranties with respect to the Kane and Konover
Properties as are made by the sellers under the Kane Purchase Agreement and the
Konover Purchase Agreement to the Company, subject to the knowledge and other
qualifications expressly set forth therein (i.e., for the purpose of this
Section 3.21, the Company's knowledge shall be limited to the knowledge,
without further inquiry, of the individuals named in the Kane Purchase
Agreement and the Konover Purchase Agreement).
Section 3.22 Knowledge Defined. As used herein, the phrase "to the
Company's knowledge" (or words of similar import) means the actual knowledge of
C. Cammack Morton, Patrick M. Miniutti, William H. Neville, Linda M. Swearingen
and Michaela M. Twomey after due inquiry of persons likely to have knowledge of
any relevant facts or circumstances and includes any facts, matters or
circumstances set forth in any written notice from any Government Authority or
any other material written notice received by the Company or any of its
Subsidiaries, and also including any matter of which Buyer informs the Company
in writing.
Section 3.23 Accuracy of Information Furnished. To the Company's
knowledge, no representation or warranty by the Company contained in this
Agreement or the exhibits, schedules, lists or other documents delivered to
Buyer by the Company and referred to herein, and no statement contained in any
certificate furnished or to be furnished by or on behalf of the Company
pursuant hereto, or in connection with the transactions contemplated hereby,
contains or will contain any untrue statement of a material fact, or omits or
will omit to state any material fact that is necessary to make the statements
contained herein or therein not misleading.
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ARTICLE 4
Representations and Warranties of Buyer
Buyer hereby represents and warrants to the Company as follows:
Section 4.1 Organization. Buyer is a limited liability company duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Buyer has all requisite corporate power and authority to own,
operate, lease and encumber its properties and to carry on its business as now
conducted, and to enter into this Agreement, the Registration Rights Agreement,
the Contingent Value Right Agreement and the Stockholders Agreement and to
perform its obligations hereunder and thereunder.
Section 4.2 Due Authorization. The execution, delivery and performance of
this Agreement, the Registration Rights Agreement, the Contingent Value Right
Agreement and the Stockholders Agreement have been duly and validly authorized
by all necessary corporate action on the part of Buyer. This Agreement, the
Registration Rights Agreement, the Contingent Value Right Agreement and the
Stockholders Agreement have been duly executed and delivered by Buyer and
constitute the valid and legally binding obligations of Buyer, enforceable
against Buyer in accordance with their terms, subject to applicable bankruptcy,
insolvency, moratorium or other similar laws relating to creditors' rights or
general principles of equity.
Section 4.3 Conflicting Agreements and Other Matters. Neither the
execution and delivery of this Agreement nor the consummation by Buyer of the
transactions contemplated hereby in accordance with the terms hereof, will
conflict with, result in a breach of the terms, conditions or provisions of,
constitute a default under, result in the creation of any mortgage, security
interest, encumbrance, lien or charge of any kind upon any of the properties or
assets of Buyer pursuant to, or require any consent, approval or other action
by or any notice to or filing with any Government Authority pursuant to, the
organizational documents or agreements of Buyer or any agreement, instrument,
order, judgment, decree, statute, law, rule or regulation by which Buyer is
bound, except for filings after any Closing under Section 13(d) or Section 16
of the Exchange Act.
Section 4.4 Acquisition for Investment; Sophistication; Source of Funds.
(a) Buyer is acquiring the Securities for its own account for the purpose
of investment and not with a view to or for sale in connection with any
distribution thereof, and Buyer has no present intention or plan to effect any
distribution of shares of Company Common Stock, provided that the disposition
of Company Common Stock owned by Buyer shall at all times be and remain within
its control, subject to the provisions of this Agreement and the Registration
Rights Agreement. The certificate(s) representing the Securities shall bear a
prominent legend with respect to the restrictions on transfer under the
Securities Act and under applicable state securities laws. Prior to any
proposed transfer of the Securities, unless such transfer is made pursuant to
an effective registration statement under the Securities Act, Buyer will
deliver to the Company an opinion of counsel, reasonably satisfactory in form
and substance to the Company, to the effect that the Securities may be sold or
otherwise transferred without registration under the Securities Act. The
Company will remove the legend relating to Securities Act restrictions from any
Securities at any time two years after issuance if Buyer delivers to the
Company an opinion of counsel, reasonably satisfactory in form and substance to
the Company, to the effect that such Securities are no longer subject to
transfer restrictions under the Securities Act. Upon original issuance thereof,
and until such time as the same shall have been registered under the Securities
Act or sold pursuant to Rule 144 promulgated thereunder (or any similar rule or
regulation), each stock certificate for the Securities shall bear any
restricted securities legend required pursuant to the Stockholders Agreement,
unless such legend is no longer required thereunder. Buyer is able to bear the
economic risk of the acquisition of Company Common Stock pursuant hereto and
can afford to sustain a total loss on such investment, and has such knowledge
and experience in financial and business matters that it is capable of
evaluating the merits and risks of the proposed investment.
(b) Buyer is an "accredited investor" as such term is defined in
Regulation D promulgated under the Securities Act.
(c) Buyer has previously delivered to the Company an audited balance sheet
for Buyer as of December 31, 1996, which was certified by an officer of Buyer
and which fairly presented the financial position of Buyer as of its date in
accordance with GAAP. Such balance sheet discloses either on its face or by
footnote, all material liabilities of Buyer required to be disclosed under
GAAP. The Company agrees to keep such information confidential to the same
extent that Buyer is obligated to keep information confidential pursuant to
Section 5.2(b).
Section 4.5 Resources. Buyer has requisite cash, cash equivalents, equity
commitments or other sources of financing available to consummate the
transactions contemplated hereby.
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Section 4.6 Proxy Statement. None of the information supplied or to be
supplied by Buyer for inclusion or incorporation by reference in the Proxy
Statement will, as of the date the Proxy Statement is first mailed to the
stockholders of the Company and as of the time of the meeting of the
stockholders of the Company in connection with the transactions contemplated
hereby, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading.
Section 4.7 Brokers or Finders. No agent, broker, investment banker or
other firm or person, including any of the foregoing that is an Affiliate of
Buyer is or will be entitled to any broker's or finder's fee or any other
commission or similar fee from Buyer in connection with this Agreement or any
of the transactions contemplated hereby for which the Company or any of its
Affiliates will be responsible.
Section 4.8 REIT Qualification Matters. To Buyer's knowledge, no person
who would be treated as an "individual" for purposes of Section 542(a)(2) of
the Code (as modified by Section 856(h) of the Code) and who owns, directly or
indirectly, equity interests in Buyer will own actually or beneficially
(determined through the application of the constructive ownership rules of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code), in
excess of 9.8% of the value of the outstanding equity interests in Company as
of the date of the applicable Closing.
Section 4.9 Investment Company Matters. Buyer is not, and after giving
effect to the purchase of Company Common Stock contemplated hereby will not be,
an "investment company" or an entity "controlled" by an "investment company",
as such terms are defined in the Investment Company Act of 1940, as amended.
Section 4.10 Ownership of Tenants. To Buyer's knowledge and except as set
forth in Schedule 4.10-B. Buyer does not own, as of the date of the applicable
Closing, actually or constructively (determined through the application of the
constructive ownership rules of Section 318 of the Code, as modified by Section
856(d)(5) of the Code), any stock, securities, or other ownership interest in
any of the tenants of the Company, as set forth in Schedule 4.10-A. Capitalized
terms used but not defined in this Section 4.10 shall have the meaning assigned
to them in the Company Charter. The Company shall advise Buyer within a
reasonable period of time before any Closing of any material changes to
Schedule 4.10-A. The Company may update Schedule 4.10-A from time to time, and
Buyer agrees to promptly notify the Company, to its knowledge, as to its actual
and constructive ownership (determined through the application of the
constructive ownership rules of Section 318 of the Code, as modified by Section
856(d)(5) of the Code) of any additional tenants of the Company, as may be set
forth on such updated schedule.
ARTICLE 5
Covenants Relating to Closings
Section 5.1 Taking of Necessary Action.
(a) Each party hereto agrees to use its commercially reasonable best
efforts promptly to take or cause to be taken all action and promptly to do or
cause to be done all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, the Registration Rights Agreement, the
Contingent Value Right Agreement and the Stockholders Agreement, subject to the
terms and conditions hereof and thereof, including all actions and things
necessary to cause all conditions precedent set forth in Article 7 to be
satisfied. Each party acknowledges that the Company's stockholders' meeting at
which the stockholders will vote on, among other things, the transactions
contemplated hereby is anticipated to occur on May 12, 1998.
(b) As promptly as practicable after the date hereof (it being understood
that the relevant stockholders' meeting is anticipated to occur on May 12,
1998), the Company shall prepare and file with the SEC a preliminary proxy
statement (the "Proxy Statement") by which the Company's stockholders will be
asked to approve, among other things, the issuance of shares of Company Common
Stock contemplated hereby. The Proxy Statement as initially filed with the SEC,
as it may be amended and refiled with the SEC and as it may be mailed to the
Company's stockholders, shall be in form and substance reasonably satisfactory
to Buyer. The Company shall use its reasonable efforts to respond to any
comments of the SEC, and to cause the Proxy Statement to be mailed to the
Company's stockholders at the earliest practicable time. As promptly as
practicable after the date hereof, the Company shall prepare and file any other
filings required of the Company or its Subsidiaries under the Exchange Act, the
Securities Act or any other federal, state or local laws relating to this
Agreement and the transactions contemplated hereby, and state takeover laws
(the "Other Filings"). The Company and Buyer will notify each other promptly of
the receipt of any comments from the SEC or its staff and of any request by the
SEC or its staff or any other government officials for amendments or
supplements to the Proxy Statement or any Other Filing or for additional
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information and will supply each other with copies of all correspondence
between each of them or any of their respective representatives, on the one
hand, and the SEC or its staff or any other government officials, on the other
hand, with respect to the Proxy Statement or any Other Filing. The Proxy
Statement and any Other Filing shall comply in all material respects with all
applicable requirements of law. Buyer shall provide the Company all information
about Buyer required to be included or incorporated by reference in the Proxy
Statement or any Other Filing and shall otherwise cooperate with the Company in
taking the actions described in this paragraph. Whenever any event occurs which
is required to be set forth in an amendment or supplement to the Proxy
Statement or any Other Filing, the Company or Buyer, as the case may be, shall
promptly inform the other party of such occurrence and cooperate in filing with
the SEC or its staff or any other government officials, and/or mailing to
stockholders of the Company, such amendment or supplement. Subject to the
provisions of Section 5.4, the Proxy Statement shall include the recommendation
of the Board that the stockholders of the Company vote in favor of and approve
the issuance of Company Common Stock pursuant to this Agreement.
(c) The Company shall call a meeting of its stockholders to be held as
promptly as practicable for the purpose of voting upon the transactions
(including the issuance of Company Common Stock) contemplated hereby; provided
that should a quorum not be obtained at such meeting of the stockholders, the
meeting of the stockholders shall be postponed or adjourned in order to permit
additional time for soliciting and obtaining additional proxies or votes.
(d) The Company shall use its commercially reasonable best efforts to
obtain the consents set forth in each of Schedules 3.4(d)-A, 3.4(d)-B and
3.4(d)-C.
Section 5.2 Public Announcements; Confidentiality.
(a) Subject to each party's disclosure obligations imposed by law and any
stock exchange or similar rules and the confidentiality provisions contained in
Section 5.2(b), the Company and Buyer will cooperate with each other in the
development and distribution of all news releases and other public information
disclosures with respect to this Agreement, the Registration Rights Agreement,
the Contingent Value Right Agreement, the Stockholders Agreement and any of the
transactions contemplated hereby or thereby. If a party is required by law or
any stock exchange or similar rule to issue a news release or other public
announcement, it shall advise the other party in advance thereof and use
reasonable best efforts to cause a mutually agreeable release or announcement
to be issued.
(b) Buyer agrees that all information provided to Buyer or any of its
representatives pursuant to this Agreement shall be kept confidential, and
Buyer shall not (x) disclose such information to any persons other than the
directors, officers, employees, financial advisors, investors, lenders, legal
advisors, accountants, consultants and affiliates of Buyer who reasonably need
to have access to the confidential information and who are advised of the
confidential nature of such information or (y) use such information in a manner
which would be detrimental to the Company; provided, however, the foregoing
obligation of Buyer shall not (i) relate to any information that (1) is or
becomes generally available other than as a result of unauthorized disclosure
by Buyer or by persons to whom Buyer has made such information available, (2)
is or becomes available to Buyer on a non-confidential basis from a third party
that is not, to Buyer's knowledge, bound by any other confidentiality agreement
with the Company, or (ii) prohibit disclosure of any information if required by
law, rule, regulation, court order or other legal or governmental process.
Section 5.3 Conduct of the Business. Except for transactions contemplated
hereby, during the period from the date hereof to the sooner to occur of (A)
the date on which the Investor Nominees (as defined in the Stockholders
Agreement) first become members of the Board, and (B) if the Stockholder
Approval vote fails, the date of the stockholder meeting at which the
Stockholder Approval failed, each of the Company and each of its Subsidiaries,
except as otherwise consented to or approved by Buyer in writing or as
permitted or required hereby, (x) has conducted and will conduct the business
and has engaged and will engage in transactions only in the ordinary course
consistent with past practice, and (y) will not:
(a) acquire, whether by merger, consolidation, purchase of stock or assets
or other business combination, (i) in a single transaction or group of related
transactions, any business or assets having an aggregate purchase price in
excess of twenty-five percent (25%) of Total Enterprise Value as measured at
the beginning of the fiscal year in which such acquisition is consummated, or
(ii) during any one fiscal year, businesses or assets having an aggregate
purchase price in excess of fifty percent (50%) of Total Enterprise Value as
measured at the beginning of such fiscal year;
(b) sell or dispose of any assets, whether by merger, consolidation, sale
of stock or assets or other business combination, during any one fiscal year,
having an aggregate value in excess of twenty-five percent (25%) of Total
Enterprise Value as measured at the beginning of such fiscal year;
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(c) directly or indirectly, create, incur, issue, assume, guarantee or
otherwise become directly or indirectly liable, contingently or otherwise, with
respect to, any indebtedness if, after giving pro forma effect to such
indebtedness, the Company's ratio of (i) total indebtedness to (ii) Total
Enterprise Value, expressed as a percentage, would be greater than 65%;
(d) make any payment to, or sell, lease, transfer or otherwise dispose of
any of its properties or assets to, or purchase any property or assets from, or
enter into or make or amend any contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any of its Affiliates;
(e) issue Company Stock or options, rights or warrants or other
commitments to purchase or securities convertible into (or exchangeable or
redeemable for) shares of Company Stock, including, without limitation, OP
Units (such options, rights, warrants, other commitments or securities,
"Company Stock Equivalents"); provided, however, Buyer's consent shall not be
required for any issuance of Company Stock or Company Stock Equivalents as long
as the sum of (i) all shares of Company Stock issued by the Company during the
applicable fiscal year and (ii) shares of Company Stock into which Company
Stock Equivalents issued by the Company and each of its Subsidiaries during the
applicable fiscal year are convertible, does not exceed fifty percent (50%) of
all shares of Company Stock outstanding, on a Fully Diluted basis, on the first
day of such fiscal year; provided, further, that in connection with any
issuance by the Company of Company Stock or issuance by the Company or any of
its Subsidiaries of any Company Stock Equivalents, Investor shall be entitled,
to the extent so provided in Section 4.1 of the Stockholders Agreement, to a
participation right on the terms set forth in Section 4.1 of the Stockholders
Agreement. Notwithstanding the first sentence of this Section 5.3(e), (i)
Company Stock issued to the Company or a wholly owned Subsidiary thereof and
(ii) Company Stock and Company Stock Equivalents issued to directors or
employees of the Company or a Subsidiary of the Company in connection with any
employee benefit plan approved by the shareholders of the Company, shall not be
subject to Buyer's consent;
(f) change or amend any provision of the Company Charter or the by-laws of
the Company in a manner that would be materially adverse to Investor;
(g) pursuant to or within the meaning of any bankruptcy law: (i) commence
a voluntary case, (ii) consent to the entry of an order for relief against it
in an involuntary case, (iii) consent to the appointment of a custodian of it
or for all or substantially all of its property, (iv) make a general assignment
for the benefit of its creditors;
(h) in the case of the Company, (1) terminate its eligibility for
treatment as a real estate investment trust, as defined in the Code, or (2)
take any action or fail to take any action which would reasonably be expected
to, alone or in conjunction with any other factors, result in the loss of such
eligibility, unless in the case of a failure to take action, such action is
initiated within thirty days and such action is completed within the period
required under the Code in order to maintain such eligibility; or
(i) subject to the right of the Company to terminate this Agreement
pursuant to Section 9.1(b)(iii) hereof, allow the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above), other than Buyer,
becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule
13d-5 under the Exchange Act), directly or indirectly, of stock having more
than 15% of the voting power of the Company.
Section 5.4 No Solicitation of Transactions. Unless and until this
Agreement is terminated in accordance with its terms, neither the Company nor
its Subsidiaries shall, directly or indirectly, through any officer, director,
agent or otherwise, initiate, solicit or knowingly encourage (including by way
of furnishing non-public information or assistance), or take any other action
to facilitate knowingly, any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any Competing
Transaction, or enter into or maintain or continue discussions or negotiate
with any person or entity in furtherance of such inquiries or to obtain a
Competing Transaction, or agree to or endorse any Competing Transaction, or
authorize or knowingly permit any of the officers, directors or employees of
such party or any of its Subsidiaries or any investment banker, financial
advisor, attorney, accountant or other representative retained by such party or
any of such party's Subsidiaries to take any such action, and the Company shall
notify Buyer orally (within one Business Day) and in writing (as promptly as
practicable) of all of the relevant details relating to all inquiries and
proposals which any officer or director of the Company may receive relating to
any of such matters and if such inquiry or proposal is in writing, the Company
shall deliver to Buyer a copy of such inquiry or proposal; provided, however,
that nothing contained in this Section shall prohibit the Board from complying
with Rule 14e-2 promulgated under the Exchange Act with regard to a tender or
exchange offer or prohibit the Board from taking such other actions as may be
required to comply with its fiduciary obligations. If the Board determines with
the advice of counsel that failure to do so could be held to violate its
fiduciary duties, it may provide information in response to an unsolicited
proposal. If the Company receives a bona fide
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proposal for a Competing Transaction that the Board determines in good faith
(based on the advice of a nationally recognized financial advisor) may provide
greater value to the Company and its stockholders than this Agreement, it may
enter into negotiations with respect to such proposal. The Company will notify
Buyer of any such superior proposal not less than two Business Days prior to
entering into any definitive agreement with respect to a Competing Transaction;
provided, however, that in no event shall the Company enter into a definitive
agreement with respect to a Competing Transaction less than five Business Days
after the Company's initial notification to Buyer of an inquiry or proposal
relating to a Competing Transaction. Within the two-Business-Day or five-
Business-Day period referred to above, Buyer may propose an improved
transaction.
Section 5.5 Information and Access. From the date hereof until the date on
which the Remaining Equity Ownership of Buyer shall be less than
$10,000,000.00, (i) the Company and its Subsidiaries shall afford to Buyer and
Buyer's accountants, counsel and other representatives full and reasonable
access during normal business hours (and at such other times as the parties may
mutually agree) to its properties, books, contracts, commitments, records and
personnel and, during such period, shall furnish promptly to Buyer (1) a copy
of each report, schedule and other document filed or received by it pursuant to
the requirements of the Securities Laws, and (2) all other information
concerning their businesses, personnel and the Company Properties as Buyer may
reasonably request, and (ii) without limiting the generality of the foregoing,
Buyer shall have the right to (1) conduct or cause to be conducted an
environmental, physical, structural, electrical, mechanical and other
inspection and review of any Company Properties, for which inspection Buyer
will and hereby does indemnify and hold the Company harmless from any and all
damages whatsoever caused by such inspection, or (2) request that the Company
update any existing reports, reviews or inspections thereof, in which case the
Company shall promptly so update its reports, reviews and inspections and cause
them to be certified to Buyer by the firm or person who prepared such report or
conducted such review or inspection. Buyer shall pay the expenses of any
outside professional employed by Buyer in connection with Buyer's exercise of
its rights under this Section 5.5. Buyer and its accountants, counsel and other
representatives shall, in the exercise of the rights described in this Section,
not unduly interfere with the operation of the businesses of the Company or its
Subsidiaries.
Section 5.6 Notification of Certain Matters. Each of Buyer and the Company
shall use its good faith efforts to notify the other party in writing of its
discovery of any matter that would render any of such party's or the other
party's representations and warranties contained herein untrue or incorrect in
any material respect, but the failure of either party to so notify the other
party shall not be deemed a breach of this Agreement.
Section 5.7 Delivery of Final Schedules and the Purchase Agreements. The
Company and Buyer acknowledge that, as of the date hereof, not all of the
Schedules referred to in this Agreement have been completed and that the final
Kane Purchase Agreement and the final Konover Purchase Agreement have not been
delivered to Buyer. The Company shall deliver to Buyer within ten Business Days
of the date hereof final Schedules to this Agreement (the "Final Schedules")
and the final Kane Purchase Agreement and the final Konover Purchase Agreement
(to be attached hereto as Exhibits E and F). Following the delivery of the
Final Schedules, if Buyer does not exercise its right to terminate this
Agreement pursuant to 9.1(b)(iv), Buyer shall be deemed to have accepted the
Final Schedules. The Company will provide updates to the Schedules within five
(5) Business Days prior to each Closing to reflect new acquisitions or other
material matters (other than the acquisition of the Kane and Konover
Properties, which is governed by Section 5.8 below) arising since completion of
the Final Schedules (the "Updated Schedules"). Except as provided in Section
9.1(b)(vi) with respect to the Kane and Konover Properties, information
relating to new acquisitions approved by the Board and set forth on Updated
Schedules shall not constitute a failure of a condition to closing as set forth
in Article 7, except to the extent that such new information would result in a
Material Adverse Effect on the Company. Following delivery of any Updated
Schedules, if Buyer does not elect to terminate this Agreement pursuant to
9.1(b)(v) and consummates the applicable Closing, Buyer shall be deemed to have
accepted such Updated Schedules (and shall not be permitted to seek
indemnification for representations and warranties that were true and correct
when made but are rendered untrue as a result of new information set forth in
such Updated Schedules relating to events occurring since the date Buyer was
deemed to have accepted the Final Schedules).
Section 5.8 Delivery of Konover and Kane Schedules. For purposes of this
Agreement, all properties acquired under the Kane Purchase Agreement as of the
date hereof have been included in the Final Schedules to the same extent and
with the same force and effect as all other properties currently owned by the
Company. With respect to the Kane and Konover Properties, the Company shall
make, on the date of the Second Closing, all representations and warranties set
forth herein with respect to the Kane and Konover Properties as if the Company
owned such Kane and Konover Properties as of the date of the Second Closing,
such that the Company shall be deemed as of the Second Closing to (a) own all
of the real and personal property, (b) have assumed any contracts, other
agreements, liabilities or other obligations related to such real and personal
property and (c) own any entities, if applicable, to be transferred to the
Company or an Affiliate thereof pursuant to
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the Kane Purchase Agreement and the Konover Purchase Agreement. Fifteen (15)
Business Days prior to the date of the Second Closing, the Company shall
provide Buyer with schedules (the "Kane and Konover Schedules") relating to all
representations and warranties with respect to the Kane and Konover Properties
to be made on the date of the Second Closing pursuant to this Section 5.8. The
parties hereto agree that the Company may elect prior to the Second Closing to
not acquire up to an aggregate of three properties (the "Kick Out Properties")
pursuant to the terms of the Kane Purchase Agreement and/or the Konover
Purchase Agreement, as applicable, if the Company is released from its
obligations to purchase such properties under the terms of the Kane Purchase
Agreement or the Konover Purchase Agreement, as applicable, and in such case,
if the Company has elected not to purchase such properties: (i) any
representations and warranties made pursuant to this Section 5.8 shall be
deemed not to include any representations and warranties with respect to the
Kick Out Properties, (ii) the Company shall not have breached its
representations and warranties hereunder to the extent it does not close on the
Kick Out Properties and (iii) the failure to close on the Kick Out Properties
shall not by itself constitute a Material Adverse Effect or a failure of a
closing condition under Article 7 hereof (it being understood that if, prior to
the Second Closing, the Company elects not to acquire four or more of the Kane
and Konover Properties, such failure will constitute a Material Adverse Effect
and the failure of a closing condition under Article 7 hereof, and it being
further understood that the failure of the Company to acquire the Kane and
Konover Properties other than the Kick Out Properties, if any, will constitute
a Material Adverse Effect and the failure of a closing condition under Article
7 hereof as to all Subsequent Closings after the Second Closing).
ARTICLE 6
Certain Additional Covenants
Section 6.1 Resale. Buyer acknowledges and agrees that the Company Common
Stock that Buyer will acquire in any Stock Purchase will not be registered
under the Securities Act and may only be sold or otherwise disposed of in one
or more transactions registered under the Securities Act and, where applicable,
relevant state securities laws or as to which an exemption from the
registration requirements of the Securities Act and, where applicable, such
state securities laws is available, and Buyer agrees that the certificates
representing such Company Common Stock shall bear a legend to that effect and a
legend as to its status as restricted securities.
Section 6.2 REIT Compliance. Buyer will make available to the Company
information known to Buyer regarding the ownership of interests in Buyer as
requested by the Company and reasonably necessary for the Company to review the
accuracy of the representations set forth in Sections 4.8 and 4.10.
Section 6.3 REIT Status. From and after the date hereof and so long as
Buyer owns 10% or more of the outstanding Company Common Stock unless the
Directors on the Board nominated by the Buyer consent to doing otherwise, the
Company will elect to be taxed as a REIT in its federal income tax returns,
will comply with all applicable laws, rules and regulations of the Code
relating to a REIT, and will not take any action or fail to take any action
which would reasonably be expected to, alone or in conjunction with any other
factors, result in the loss of its status as a REIT for federal income tax
purposes.
Section 6.4 Ownership of Assets. From and after the date hereof and as
long as Buyer or an Affiliate thereof owns any Company Common Stock, the
Company shall not own, directly or indirectly, 20% or more of its assets, in
the aggregate, through Persons that are not Subsidiaries.
ARTICLE 7
Conditions to Closings
Section 7.1 Conditions of Purchase at Initial Closing. The obligation of
Buyer to purchase and pay for the Purchased Shares at the Initial Closing is
subject to satisfaction or waiver of each of the following conditions
precedent:
(a) Representations and Warranties; Covenants. The representations and
warranties of the Company contained herein shall have been true and correct in
all respects on and as of the date hereof, and shall be true and correct in all
respects on and as of the date of the Initial Closing (including, without
limitation, the Schedules hereto), with the same effect as though such
representations and warranties had been made on and as of the date of the
Initial Closing (except for representations and warranties that speak as of a
specific date or time other than the date of the Initial Closing (which need
only be true and correct in all respects as of such date or time)), other than,
in all such cases, such failures to be true and/or correct as would not in the
aggregate reasonably be expected to have a Material Adverse Effect; provided,
however, that if any of the
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representations and warranties is already qualified in any respect by
materiality or as to Material Adverse Effect for purposes of this Section
7.1(a) such materiality or Material Adverse Effect qualification will be in all
respects ignored (but subject to the overall standard as to Material Adverse
Effect set forth immediately prior to this proviso). The covenants and
agreements of the Company to be performed on or before the date of the Initial
Closing in accordance with this Agreement shall have been duly performed in all
respects. The Company shall have delivered to Buyer at the Initial Closing a
certificate of an appropriate officer in form and substance reasonably
satisfactory to Buyer dated the date of the Initial Closing to such effect.
In making any determination as to Material Adverse Effect under this
Section 7.1(a), the matters set forth in such Section shall be aggregated and
considered together.
(b) No Material Adverse Change. Since the date hereof, there shall not
have been any change, circumstance or event which has had or would reasonably
be expected to have a Material Adverse Effect.
(c) Consents. The Company shall have obtained the consents set forth in
Schedule 3.4(d)-A.
(d) Ownership Limit Waiver. Buyer's ownership of up to the Initial Number
of Shares shall have been exempted on a continuing basis subject to continuing
validity of the representations and warranties of the Buyer in Article 4 hereof
(disregarding the qualification in Sections 4.8 and 4.10 relating to Buyer's
knowledge and assuming no exceptions are set forth in Schedule 4.10-B) and
provided such exemption does not otherwise jeopardize the Company's tax status
as a REIT, from the ownership limit provisions of Article IV of the Company
Charter and the Board shall have taken such action provided for under Article
IV of the Company Charter to grant such exemption to Buyer. For purposes of
this paragraph (d), references to Buyer, shall also be deemed to be references
to any person who would be an Investor within the meaning of the Stockholders
Agreement, provided such person has made the representations and warranties of
the Buyer in Article 4 hereof.
(e) Employment Agreements. Waivers in connection with each Employment
Agreement shall have been entered into to the extent necessary to provide (i)
that the transactions contemplated by this Agreement, the Kane Purchase
Agreement and the Konover Purchase Agreement (together with this Agreement and
the Kane Purchase Agreement, the "Transaction Documents") will not trigger any
actual or contingent obligation under such Employment Agreement (including any
payment or other obligation, forgiveness of debt, other release from obligation
or acceleration of vesting of restricted stock, stock options or other awards,
but excluding any automatic extension of the term of any Employment Agreement);
and (ii) that the transactions contemplated by the Transaction Documents will
not be taken into account in determining whether any subsequent transaction or
event will trigger any such obligation.
(f) Restricted Stock Plan. Waivers in connection with The Factory Stores
of America, Inc. 1996 Restricted Stock Plan (the "Restricted Stock Plan") and
any award agreements thereunder shall have been entered into to the extent
necessary to provide (i) that the transactions contemplated by the Transaction
Documents will not trigger, directly or indirectly, the acceleration of vesting
of any restricted stock granted under the Restricted Stock Plan; and (ii) that
the transactions contemplated by the Transaction Documents will not be taken
into account in determining whether any subsequent transaction or event will
trigger any such acceleration of vesting.
(g) Stock Option Plan. Waivers in connection with The Factory Stores of
America, Inc. Amended and Restated 1993 Employee Stock Incentive Plan (the
"Stock Incentive Plan") and any award agreements thereunder shall have been
entered into to the extent necessary to provide (i) that the transactions
contemplated by the Transaction Documents will not result in the acceleration
of vesting of any stock options granted under the Stock Incentive Plan; and
(ii) that the transactions contemplated by the Transaction Documents will not
be taken into account in determining whether any subsequent transaction or
event will trigger any such acceleration of vesting.
(h) Title Policies. The Company shall deliver updates of all Title
Policies dated the date of the Initial Closing, in form and substance
consistent in all material respects with the representations and warranties set
forth in Section 3.11(a) of this Agreement.
(i) NYSE Approval. On or prior to the date of the Initial Closing, the New
York Stock Exchange shall have approved, with respect to Buyer's ownership of
up to the Initial Number of Shares at the Initial Closing, this Agreement, the
Registration Rights Agreement, the Stockholders Agreement, the Contingent Value
Right Agreement and the transactions contemplated hereby and thereby.
Section 7.2 Conditions to Purchase at Second Closing. The obligations of
Buyer to purchase and pay for the Purchased Shares at the Second Closing are
subject to satisfaction or waiver of each of the following conditions
precedent:
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(a) Representations and Warranties; Covenants. The representations and
warranties of the Company contained herein shall have been true and correct in
all respects on and as of the date hereof, and shall be true and correct in all
respects on and as of the date of the Second Closing (including, without
limitation, the Schedules hereto), with the same effect as though such
representations and warranties had been made on and as of the date of the
Second Closing (except for representations and warranties that speak as of a
specific date or time other than the date of the Second Closing (which need
only be true and correct in all respects as of such date or time)), other than,
in all such cases, such failures to be true and/or correct as would not in the
aggregate reasonably be expected to have a Material Adverse Effect; provided,
however, that if any of the representations and warranties is already qualified
in any respect by materiality or as to Material Adverse Effect for purposes of
this Section 7.2(a) such materiality or Material Adverse Effect qualification
will be in all respects ignored (but subject to the overall standard as to
Material Adverse Effect set forth immediately prior to this proviso). The
covenants and agreements of the Company to be performed on or before the date
of the Second Closing in accordance with this Agreement shall have been duly
performed in all respects. The Company shall have delivered to Buyer at the
Second Closing a certificate of an appropriate officer in form and substance
reasonably satisfactory to Buyer dated the date of the Second Closing to such
effect.
(b) Stockholder Approval. The issuance of Company Common Stock pursuant to
this Agreement, the election of three Investor Nominees to the Board and the
amendment of the Company Charter as set forth in Section 3.4 of the
Stockholders Agreement shall have been approved by the majority vote of the
Company's stockholders other than Buyer (the "Stockholder Approval").
(c) Consents. The Company shall have obtained the consents set forth in
Schedule 3.4(d)-B.
(d) Estoppel Certificates. The Company shall have delivered estoppel
certificates for 50% of the tenants at the properties listed on Schedule
7.2(d), in form and substance satisfactory to Buyer.
(e) Title Policies. The Company shall deliver updates of all Title
Policies with respect to the Kane and Konover Properties.
(f) NYSE Approval. On or prior to the date of the Second Closing, the New
York Stock Exchange shall have approved this Agreement, the Registration Rights
Agreement, the Stockholders Agreement, the Contingent Value Right Agreement and
the transactions contemplated hereby and thereby.
(g) Opinion of Counsel. Buyer shall have received an opinion of Alston &
Bird LLP, substantially in the form of Exhibit G hereto, that (i) commencing
with the Company's taxable year ending December 31, 1993, the Company has been
organized in conformity with the requirements for qualifications as a REIT and
its proposed method of operation, as described in certain representations of
the Company, will enable the Company to meet the requirements for qualification
and taxation as a REIT under the Code, and (ii) to the extent the Company has
met qualifications as a REIT, it has been a "domestically controlled" REIT.
(h) Filing of Tax Return. The Buyer and each of its Subsidiaries shall
have filed with the appropriate taxing authority all Tax Returns required to be
filed by it for the year ended December 31, 1997.
Section 7.3 Conditions of Purchase at All Closings. The obligations of
Buyer to purchase and pay for the Purchased Shares at each Closing (including
the Initial Closing, the Second Closing and any Subsequent Closing, except
where otherwise indicated) are subject to satisfaction or waiver of each of the
following conditions precedent:
(a) Representations and Warranties; Covenants. The representations and
warranties of the Company contained herein shall have been true and correct in
all respects on and as of the date hereof, and shall be true and correct in all
respects on and as of the relevant Closing Date (including, without limitation,
the Schedules hereto), with the same effect as though such representations and
warranties had been made on and as of such Closing Date (except for
representations and warranties that speak as of a specific date or time other
than such Closing Date (which need only be true and correct in all respects as
of such date or time)), other than, in all such cases, such failures to be true
and/or correct as would not in the aggregate reasonably be expected to have a
Material Adverse Effect; provided, however, that if any of the representations
and warranties is already qualified in any respect by materiality or as to
Material Adverse Effect for purposes of this Section 7.3(a) such materiality or
Material Adverse Effect qualification will be in all respects ignored (but
subject to the overall standard as to Material Adverse Effect set forth
immediately prior to this proviso). The covenants and agreements of the Company
to be performed on or before the relevant Closing Date in accordance with this
Agreement shall have been duly performed in all respects. The Company shall
have delivered to Buyer at the relevant Closing a certificate of an appropriate
officer in form and substance reasonably satisfactory to Buyer dated the
relevant Closing Date to such effect.
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(b) No Material Adverse Change. Since the date of the immediately
preceding Closing, there shall not have been any change, circumstance or event
which has had or would reasonably be expected to have a Material Adverse
Effect.
(c) No Material Breach. The Company shall be in compliance in all material
respects with its covenants and other obligations under this Agreement, the
Stockholders Agreement, the Contingent Value Right Agreement and the
Registration Rights Agreement. The Company shall have satisfied the conditions
of (i) Section 7.1(a) at the Initial Closing, (ii) Section 7.2(a) at the Second
Closing, and (iii) Section 7.3(a) at all Closings.
(d) No Injunction. There shall not be in effect any final order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits consummation of the transactions contemplated hereby and there shall
be no pending Actions which would reasonably be expected to have a material
adverse effect on the ability of the Company to consummate the transactions
contemplated hereby or to issue the Purchased Shares.
(e) REIT Status. The Company shall have elected to be taxed as a REIT in
its most recent federal income tax return, and shall be in compliance with all
applicable laws, rules and regulations, including the Code, necessary to permit
it to be taxed as a REIT, unless the Investor Nominees (as defined in the
Stockholders Agreement) shall have consented to changing such election. The
Company shall not have taken any action or have failed to take any action which
would reasonably be expected to, alone or in conjunction with any other
factors, result in the loss of its status as a REIT for federal income tax
purposes, unless the Investor Nominees (as defined in the Stockholders
Agreement) shall have consented to taking or omitting to take such action.
(f) Domestically Controlled REIT. To the Company's knowledge, the Company
is, and after giving effect to the relevant Closing will be, a
"domestically-controlled" REIT within the meaning of Section 897(h)(4)(B) of
the Code.
(g) Asset Test. The Board shall have determined that the Company satisfied
the "5% asset test" of Section 856(c)(5) of the Code, or such successor
provision as may be applicable, for the most recently ended calendar quarter as
required by the Code.
(h) Consents. On each Closing other than the Initial Closing and the
Second Closing, the Company shall have obtained the consents, if required, set
forth in Schedule 3.4(d)-C.
(i) Opinion of Counsel. On or prior to the date of each Closing, the
Company shall have delivered to Buyer the opinions of Alston & Bird LLP,
counsel for the Company, in form and substance reasonably acceptable to Buyer.
Section 7.4 Conditions of Sale. The obligation of the Company to issue and
sell any Purchased Shares at any Closing (including the Initial Closing, the
Second Closing and each Subsequent Closing, except where otherwise indicated
below) is subject to satisfaction or waiver of each of the following conditions
precedent:
(a) Representations and Warranties; Covenants. The representations and
warranties of Buyer contained herein shall have been true and correct in all
respects on and as of the date hereof, and shall be true and correct in all
respects on and as of the relevant Closing Date with the same effect as though
such representations and warranties had been made on and as of the relevant
Closing Date (except for representations and warranties that speak as of a
specific date or time other than such Closing Date (which need only be true and
correct in all respects as of such date or time)), other than, in all such
cases, such failures to be true and/or correct as would not in the aggregate
reasonably be expected to have a Material Adverse Effect on the Company or
Buyer's ability to consummate the transactions contemplated hereby; provided,
however, that if any of the representations and warranties is already qualified
in any respect by materiality or as to Material Adverse Effect for purposes of
this Section 7.4(a) such materiality or Material Adverse Effect qualification
will be in all respects ignored (but subject to the overall standard as to
Material Adverse Effect set forth immediately prior to this proviso). The
covenants and agreements of Buyer to be performed on or before the relevant
Closing Date in accordance with this Agreement shall have been duly performed
in all respects, other than (except for Buyer's obligation to pay the relevant
Purchase Price at the relevant Closing as to which the proviso set forth in
this other-than clause shall not apply) for such failures to have been
performed as would not in the aggregate reasonably be expected to have a
Material Adverse Effect on the Company's or Buyer's ability to consummate the
transactions contemplated hereby; provided, however, that if any such covenant
or agreement is already qualified in any respect by materiality or as to
Material Adverse Effect for purposes of determining whether this condition has
been satisfied, such materiality or Material Adverse Effect qualification will
be in all respects ignored and such covenant or agreement shall have been
performed in all respects without regard to such qualification (but subject to
the overall exception as to Material Adverse Effect set forth immediately prior
to this proviso). Buyer shall have delivered to the Company at the relevant
Closing a certificate of an appropriate officer in form and substance
reasonably satisfactory to the Company dated the relevant Closing Date to such
effect.
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(b) Stockholder Approval. Except in the case of the Initial Closing, the
issuance of the Company Common Stock pursuant to this Agreement shall have
received Stockholder Approval.
(c) No Injunction. There shall not be in effect any final order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits consummation of the transactions contemplated hereby and there shall
be no pending Actions which would reasonably be expected to have a material
adverse effect on the ability of Buyer to consummate the transactions
contemplated hereby or to acquire the Purchased Shares.
(d) Consents. The Company shall have obtained the consents set forth in
Schedule 3.4(d)-A in the case of the Initial Closing, in Schedule 3.4(d)-B in
the case of the Second Closing, and in Schedule 3.4(d)-C in the case of each
other Subsequent Closing.
ARTICLE 8
Survival; Indemnification
Section 8.1 Survival. Other than the representations contained in Sections
4.8 and 4.10 (which shall survive for as long as the Buyer owns Purchased
Shares), the representations contained in Sections 3.2 and 3.3(a) (which shall
survive indefinitely), the representations contained in Section 3.12 (which
shall survive until the sixth anniversary of the date of the Initial Closing)
and the representations contained in 3.8 and 3.13 (which shall survive for a
period equal to the applicable statute of limitations for any taxes or
penalties imposed and payable in breach of such representations and
warranties), all representations, warranties and (except as provided by the
last sentence of this Section 8.1) covenants and agreements of the parties
contained herein, including indemnity or indemnification agreements contained
herein, or in any Schedule or Exhibit hereto, or any certificate, document or
other instrument delivered in connection herewith shall survive the Initial
Closing, the Second Closing, any Subsequent Closing and the termination of this
Agreement pursuant to Section 9.1 hereof (notwithstanding the exercise of
Buyer's put option pursuant to Section 2.9 hereof) until the twelve month
anniversary of the latest of the Initial Closing, the Second Closing, any
Subsequent Closing and the termination of this Agreement pursuant to Section
9.1 hereof; provided, however, that there shall be no termination with respect
to any representation and warranty as to which either (a) a bona fide claim has
been asserted prior to such date or (b) the Company had actual knowledge of any
breach thereof prior to any Closing Date. No Action or proceeding may be
brought with respect to any of the representations and warranties, or any of
the covenants or agreements which survive until such twelve month anniversary,
unless written notice thereof, setting forth in reasonable detail the claimed
misrepresentation or breach of warranty or breach of covenant or agreement,
shall have been delivered to the party alleged to have breached such
representation or warranty or such covenant or agreement prior to such twelve
month anniversary; provided, however, that, if Buyer shall have complied with
this Section 8.1, the damages for breach by the Company of any of the
representations and warranties, or any of the covenants or agreements which
survive until such twelve month anniversary, shall be measured with respect to
all of Buyer's purchases of Company Common Stock hereunder and not with respect
only to Buyer's purchases hereunder made prior to such twelve month
anniversary, but such measurement shall not in any event include any shares of
Company Stock that Buyer may have purchased other than from the Company. Those
covenants or agreements that contemplate or may involve actions to be taken or
obligations in effect after the Initial Closing shall survive in accordance
with their terms.
Section 8.2 Indemnification by Buyer or the Company.
(a) Subject to Section 8.1, from and after any Closing Date, Buyer shall
indemnify and hold harmless the Company, its Affiliates and its Subsidiaries
and its and their respective directors, officers, employees, stockholders,
partners, members and representatives, and their respective successors and
assigns, from and against any and all damages, claims, losses, expenses, costs,
obligations, and liabilities, including liabilities for all reasonable
attorneys' fees and expenses (including attorney and expert fees and expenses
incurred to enforce the terms of this Agreement) (collectively, "Loss and
Expenses") suffered, directly or indirectly, by the Company by reason of, or
arising out of, (i) any breach as of the date made or deemed made or required
to be true of any representation or warranty made by Buyer in or pursuant to
this Agreement, or (ii) any failure by Buyer to perform or fulfill any of its
covenants or agreements set forth herein. Notwithstanding any other provision
of this Agreement to the contrary, in no event shall Loss and Expenses include
a party's incidental or consequential damages.
(b) Subject to Section 8.1, from and after any Closing Date, the Company
shall indemnify and hold harmless Buyer, its Affiliates and its Subsidiaries
and its and their respective directors, officers, employees, stockholders,
partners, members and representatives, and their respective successors and
assigns (each, an "Indemnified Party"), from and against any and all Loss and
Expenses, suffered, directly or indirectly, by Buyer by reason of, or arising
out of, (i) any breach as of the date
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made or deemed made or required to be true of any representation or warranty
made by the Company in or pursuant to this Agreement and any statements made in
any certificate delivered pursuant to this Agreement, or (ii) any failure by
the Company to perform or fulfill any of its covenants or agreements set forth
herein. Notwithstanding any other provision of this Agreement to the contrary,
in no event shall Loss and Expenses include a party's incidental or
consequential damages. Separate and apart from the Company's obligation to
indemnify Buyer pursuant to the terms of this Section 8.2(b), the Company shall
purchase on Buyer's behalf insurance against Environmental Liabilities in the
amount of $2,000,000 annually per each occurrence and $10,000,000 per annum
(exclusive of legal defense costs) of coverage, and shall pay any deductible
applicable thereto, and shall maintain such insurance on Buyer's behalf for a
period of seven years. For purposes hereof, "Environmental Liabilities" shall
include any liability, loss cost or expense arising under Environmental Laws or
from Environmental Claims, including, without limitation, costs of
investigation, cleanup, remedial or response action, the costs associated with
posting financial assurances for the completion of response, remedial or
corrective actions, the preparation of any closure or other necessary or
required plans or analyses, or other reports or analyses submitted to or
prepared by regulating agencies, including the cost of health assessments,
epidemiological studies and the like, retention of engineers and other expert
consultants, legal counsel, capital improvements, operation and maintenance
testing counsel, capital improvements, operation and maintenance testing and
monitoring costs, power and utility costs and pumping taxes or fees, and
administrative costs incurred by governmental agencies.
(c) In the event that (i) the closing condition set forth in Section
7.2(g)(ii) hereof is not satisfied and, notwithstanding the failure of such
closing condition, the Second Closing has occurred, (ii) Buyer has not
exercised its put option pursuant to Section 2.9 hereof and (iii) the Company
indemnifies an Indemnified Party pursuant to the terms of Section 8.2(b) hereof
in connection with the failure of the Company to qualify as a "domestically
controlled REIT" (any payments payable under clause (iii) upon occurrence of
the events set forth in clauses (i) - (iii), the "Indemnified Taxes"), the
Company will be obligated to pay to such Indemnified Party, in addition to any
Indemnified Taxes, an additional amount equal to the sum of (i) the product of
(A) the amount of the Indemnified Taxes and (B) a fraction, the numerator of
which equals the percentage of the outstanding Company Common Stock owned by
Investor as of the date such indemnification arises (expressed as a percentage)
(the "Investor Ownership Percentage") and the denominator of which equals the
difference between the number one (1) and the Investor Ownership Percentage and
(ii) any Taxes imposed on such Indemnified Party in connection with the receipt
of payments pursuant to this Section 8.2(c) (including any amounts paid under
this clause (ii)). For the avoidance of doubt, this in the event the closing
condition set forth in Section 7.2(g)(ii) hereof is satisfied, this Section
8.2(c) shall not be applicable.
(d) Notwithstanding the foregoing, (i) neither Buyer nor the Company shall
be responsible for any Loss and Expenses as provided by paragraphs (a) and (b)
(except with respect to the Indemnified Taxes and any amounts payable pursuant
to Section 8.2(c) hereof, which shall not be subject to any minimum threshold),
respectively, of this Section 8.2 until the cumulative aggregate amount of such
Loss and Expenses suffered by Buyer or the Company, as the case may be, exceeds
$500,000, in which case Buyer or the Company, as the case may be, shall then be
liable for all such Loss and Expenses, and (ii) the cumulative aggregate
indemnity obligation of each of Buyer and the Company under this Section 8.2
shall in no event exceed the actual aggregate amount paid by Buyer for the
shares of Company Common Stock and the Contingent Value Rights purchased by it
from the Company pursuant to this Agreement. Except with respect to third-party
claims being defended in good faith or claims for indemnification with respect
to which there exists a good faith dispute, the indemnifying party shall
satisfy its obligations hereunder within 30 days of receipt of a notice of
claim under this Article 8.
Section 8.3 Third-Party Claims. If a claim by a third party is made
against an Indemnified Party and if such Indemnified Party intends to seek
indemnity with respect thereto under this Article, such Indemnified Party shall
promptly notify the indemnifying party in writing of such claims setting forth
such claims in reasonable detail; provided, however, the foregoing
notwithstanding, the failure of any Indemnified Party to give any notice
required to be given hereunder shall not affect such Indemnified Party's right
to indemnification hereunder except to the extent the indemnifying party from
whom such indemnity is sought shall have been prejudiced in its ability to
defend the claim or action for which such indemnification is sought by reason
of such failure. The indemnifying party shall have 20 days after receipt of
such notice to undertake, through counsel of its own choosing and at its own
expense, the settlement or defense thereof, and the Indemnified Party shall
cooperate with it in connection therewith; provided, however, that the
Indemnified Party may participate in such settlement or defense through counsel
chosen by such Indemnified Party, provided that the fees and expenses of such
counsel shall be borne by such Indemnified Party. The Indemnified Party shall
not pay or settle any claim which the indemnifying party is contesting.
Notwithstanding the foregoing, the Indemnified Party shall have the right to
pay or settle any such claim, provided that in such event it shall waive any
right to indemnity therefor by the indemnifying party. If the indemnifying
party does not notify the Indemnified Party within 20 days after the receipt of
the Indemnified Party's notice of a claim of
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indemnity hereunder that it elects to undertake the defense thereof, the
Indemnified Party shall have the right to contest, settle or compromise the
claim but shall not thereby waive any right to indemnity therefor pursuant to
this Agreement.
ARTICLE 9
TERMINATION
Section 9.1 Termination.
(a) This Agreement may be terminated prior to the Initial Closing by:
(i) the mutual consent of the Company and Buyer at any time;
(ii) Buyer at any time (if it is not in breach of any of its material
obligations hereunder) in the event of a breach or failure by the Company
that is material in the context of the transactions contemplated hereby of
any representation, warranty, covenant or agreement by the Company
contained herein which has not been, or cannot be, cured within 30 Business
Days after written notice of such breach is given to the Company;
(iii) the Company at any time (if it is not in breach of any of its
material obligations hereunder) in the event of a breach or failure by
Buyer that is material in the context of the transactions contemplated
hereby of any representation, warranty, covenant or agreement by Buyer
contained herein which has not been, or cannot be, cured within 30 Business
Days after written notice of such breach is given to Buyer; or
(iv) either the Company or Buyer at any time, if the Initial Closing
shall not occur on a Target Date, unless the failure of such occurrence
shall be due to the failure of the party seeking to terminate this
Agreement to perform or observe any material covenant or agreement set
forth herein required to be performed or observed by such party on or
before the date of the Initial Closing.
(b) This Agreement may be terminated at any time by:
(i) either the Company or Buyer, in the event that the stockholders of
the Company vote upon and fail to approve the issuance of Company Common
Stock contemplated hereby (it being understood that the Initial Closing
shall have occurred prior to the date of the meeting of holders of shares
of Company Stock to so approve);
(ii) Buyer, (1) if the Board shall have withdrawn, modified or failed to
make or refrained from making its recommendation that the stockholders of
the Company approve the issuance of Company Common Stock pursuant to this
Agreement as provided for in Section 3.2(b) and Section 5.1(b) or (2) if
the Board at any time refuses to reaffirm, at Buyer's request, such
recommendation and its determination to make such recommendation to the
stockholders of the Company, except, in each case, as permitted by Section
5.4, or (3) if no meeting at which the stockholders of the Company are
asked to vote upon the transactions contemplated by this Agreement shall
have duly occurred on or prior to August 31, 1998;
(iii) the Company, if the Board in compliance with Section 5.4 hereof
determines in good faith to terminate in favor of a Competing Transaction,
subject to the Company's obligation to pay Buyer certain fees pursuant to
Section 9.3 hereof;
(iv) Buyer on or before five Business Days following the date on which
the Final Schedules, the Kane Purchase Agreement (with completed schedules)
and the Konover Purchase Agreement (with completed schedules) have been
delivered by the Company to Buyer if Buyer, in its sole discretion,
believes that the Final Schedules, the Kane Purchase Agreement or the
Konover Purchase Agreement disclose facts that are material and adversely
affect the Company;
(v) Buyer on or before five Business Days following the date any Updated
Schedules have been delivered by the Company to Buyer if Buyer, in its sole
discretion, believes that the Updated Schedules disclose facts that are
material and adversely affect the Company;
(vi) Buyer on or before five Business Days following the date on which
the Kane and Konover Schedules have been delivered by the Company to Buyer,
if Buyer reasonably believes that the Kane and Konover Schedules disclose
facts that have a material adverse effect on the value of the Kane and
Konover Properties to the Company; or
(vii) Buyer if the Second Closing does not occur by September 30, 1998
(other than as a result of a material breach by Buyer of its obligations
under this Agreement).
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Notwithstanding anything to the contrary in this Agreement, no provision
of this Agreement shall be construed to permit the Company to prevent Buyer
from purchasing the Initial Number of Shares (other than if the Company
terminates this Agreement prior to the date of the Initial Closing pursuant to
Section 9.1(a)(iii)).
Section 9.2 Procedure and Effect of Termination. In the event of
termination of this Agreement by either or both of the Company and Buyer
pursuant to Section 9.1, written notice thereof shall forthwith be given by the
terminating party to the other party hereto, and this Agreement shall thereupon
terminate and become void and have no effect, and the transactions contemplated
hereby shall be abandoned without further action by the parties hereto (other
than the right of Buyer to purchase the Initial Number of Shares as set forth
in the last paragraph of Section 9.1 of this Agreement), except that the
provisions of Sections 5.2 (Public Announcements; Confidentiality), 9.3
(Expenses), 10.2 (Governing Law), and 10.4 (Notices), and, in the event of any
termination following any Closing hereunder, the provisions of Article 8
(Survival; Indemnification), and any related definitional, interpretive or
other provisions necessary for the logical interpretation of such provisions,
shall survive the termination of this Agreement; provided, however, that such
termination shall not relieve any party hereto of any liability for any breach
of this Agreement.
Section 9.3 Expenses.
(a) Whether or not any Stock Purchase is consummated, all reasonable
out-of-pocket legal and other costs and expenses incurred by Buyer in
connection with this Agreement and the transactions contemplated hereby shall
be reimbursed by the Company as of the date hereof (by wire transfer of same
day funds); provided that Buyer shall not have breached any of its
representations and warranties in any material respect. In addition, the
Company shall promptly reimburse Buyer for all reasonable out-of-pocket legal
and other costs and expenses incurred after the date hereof in connection with
Buyer (i) monitoring the Company and the performance of the Purchased Shares
and (ii) performing its duties under each of the Governing Documents.
(b) At any time prior to the Initial Closing or, if the Initial Closing
has occurred, at any time prior to the Second Closing, if this Agreement is
terminated, the Company shall pay Buyer a fee in the amount of $2,250,000 (the
"Break-up Fee"); provided, that Buyer is not in material default under this
Agreement, that Buyer has not breached any of its representations and
warranties in any material respect, and that Buyer has satisfied in all
material respects its covenants relating to the Initial Closing and
contemplated by the terms hereof to be performed at or prior to the time of the
Company's stockholders' meeting. In addition, in the event the Board, prior to
the stockholders meeting referenced in Section 5.1(b) of this Agreement, is
contacted by another person regarding a Competing Transaction or has
information relating to a Competing Transaction to be proposed by another
person, and the Company enters into a Competing Transaction with such person or
any Affiliate of such person on or prior to the one year anniversary of the
date this Agreement is terminated, the Company shall pay Buyer an additional
fee in the amount of $3,000,000 (the "Topping Fee"). Notwithstanding the
foregoing, in the event a Topping Fee is paid to Buyer and the amount of cash
received by Buyer pursuant to (i) the Break-up Fee PLUS (ii) the Topping Fee
PLUS (iii) the 19.9% Sale Transaction Profit exceeds $7,750,000, Buyer shall
refund to the Company the amount of such excess within thirty days.
ARTICLE 10
Miscellaneous
Section 10.1 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each
party hereto and delivered to the other party. Copies of executed counterparts
transmitted by telecopy, telefax or other electronic transmission service shall
be considered original executed counterparts for purposes of this Section,
provided receipt of copies of such counterparts is confirmed.
Section 10.2 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT
REFERENCE TO THE CHOICE OF LAW PRINCIPLES THEREOF.
Section 10.3 Entire Agreement. This Agreement (including agreements
incorporated herein) and the Schedules and Exhibits hereto contain the entire
agreement between the parties with respect to the subject matter hereof and
there are no agreements, understandings, representations or warranties between
the parties other than those set forth or referred to herein. This Agreement is
not intended to confer upon any person not a party hereto (and their successors
and assigns) any rights or remedies hereunder.
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Section 10.4 Notices. All notices and other communications hereunder shall
be sufficiently given for all purposes hereunder if in writing and delivered
personally, sent by documented overnight delivery service or, to the extent
receipt is confirmed, telecopy, telefax or other electronic transmission
service to the appropriate address or number as set forth below. Notices to the
Company shall be addressed to:
FAC Realty Trust, Inc.
11000 Regency Parkway, 3rd fl.
East Tower
Cary, NC 27511
Attention: C. Cammack Morton
Telecopy: (919) 462-8799
with a copy to:
Alston & Bird LLP
310 UCS Plaza
3605 Glenwood Ave.
P.O. Drawer 31107
Raleigh, North Carolina 27622-1107
Attention: Brad S. Markoff, Esq.
Telecopy:(919) 881-3175
or at such other address and to the attention of such other person as the
Company may designate by written notice to Buyer. Notices to Buyer shall be
addressed to:
Lazard Freres Real Estate Investors, LLC
Thirty Rockefeller Plaza, 63rd Floor
New York, NY 10020
Attention: Arthur P. Solomon and Murry N. Gunty
Telecopy Number: (212) 632-6052
with a copy to:
Latham & Watkins
885 Third Avenue
New York, NY 10022
Attention: R. Ronald Hopkinson, Esq.
Telecopy Number: (212) 751-4864
Section 10.5 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors.
Except as specifically provided hereby, Buyer shall not be permitted to assign
any of its rights hereunder to any third party, other than to one or more
Affiliates of LFREI, a majority of the voting power and the economic interests
of which are Beneficially Owned (as that term is defined in the Stockholders
Agreement) by LFREI, provided that such Affiliates make the representations set
forth in Article 4 hereof and agree to be bound hereby and by the Stockholders
Agreement, and provided that Buyer shall remain liable hereunder, and provided
that any bona fide financial institution to which Buyer or any permitted
transferee has Transferred (as that term is used in the Stockholders Agreement)
(including upon foreclosure of a pledge) shares of Company Stock for the
purpose of securing bona fide indebtedness of Buyer or such permitted
transferee and which has agreed to be bound by this Agreement and the
Stockholders Agreement shall also be entitled to enforce the rights of Buyer
hereunder.
Section 10.6 Headings. The Section, Article and other headings contained
in this Agreement are inserted for convenience of reference only and will not
affect the meaning or interpretation of this Agreement. All references to
Sections or Articles contained herein mean Sections or Articles of this
Agreement unless otherwise stated.
Section 10.7 Amendments and Waivers. This Agreement may not be modified or
amended except by an instrument or instruments in writing signed by the party
against whom enforcement of any such modification or amendment is sought.
Either party hereto may, only by an instrument in writing, waive compliance by
the other party hereto with any term or provision hereof on the part of such
other party hereto to be performed or complied with. The waiver by any party
hereto of a breach of any term or provision hereof shall not be construed as a
waiver of any subsequent breach.
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Section 10.8 Interpretation; Absence of Presumption.
(a) For the purposes hereof, (i) words in the singular shall be held to
include the plural and vice versa and words of one gender shall be held to
include the other gender as the context requires, (ii) the terms "hereof",
"herein", and "herewith" and words of similar import shall, unless otherwise
stated, be construed to refer to this Agreement as a whole (including all of
the Schedules and Exhibits hereto) and not to any particular provision of this
Agreement, and Article, Section, paragraph, Exhibit and Schedule references are
to the Articles, Sections, paragraphs, Exhibits and Schedules to this Agreement
unless otherwise specified, (iii) the word "including" and words of similar
import when used in this Agreement shall mean "including, without limitation,"
unless the context otherwise requires or unless otherwise specified, (iv) the
word "or" shall not be exclusive, and (v) provisions shall apply, when
appropriate, to successive events and transactions.
(b) This Agreement shall be construed without regard to any presumption or
rule requiring construction or interpretation against the party drafting or
causing any instrument to be drafted.
Section 10.9 Severability. Any provision hereof which is invalid or
unenforceable shall be ineffective to the extent of such invalidity or
unenforceability, without affecting in any way the remaining provisions hereof.
Section 10.10 Further Assurances. The Company and Buyer agree that, from
time to time, whether before, at or after any Closing Date, each of them will
execute and deliver such further instruments of conveyance and transfer and
take such other action as may be necessary to carry out the purposes and
intents hereof.
Section 10.11 Specific Performance. Buyer and the Company each acknowledge
that, in view of the uniqueness of the parties hereto, the parties hereto would
not have an adequate remedy at law for money damages in the event that this
Agreement were not performed in accordance with its terms, and therefore agree
that the parties hereto shall be entitled to specific enforcement of the terms
hereof in addition to any other remedy to which the parties hereto may be
entitled at law or in equity.
Section 10.12 Interpretation of Schedules. Any matter set forth on any
Schedule shall be deemed to be referred to on all other Schedules to which such
matter logically relates and where such reference would be appropriate and can
reasonably be inferred from the matters disclosed on the first Schedule as if
set forth on such other Schedules.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
parties hereto.
PROMETHEUS SOUTHEAST RETAIL LLC
By: LF Strategic Realty Investor II,
L.P., its sole member
By: Lazard Freres Real Estate
Investors, LLC, its general partner
By: /s/ Murry N. Gunty
---------------------------------
Name: Murry N. Gunty
------------------------------
Title: Principal
-------------------------------
FAC REALTY TRUST, INC.
By: /s/ C. Cammack Morton
------------------------------------
Name: C. Cammack Morton
Title: Chief Executive Officer
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APPENDIX B
STOCKHOLDERS AGREEMENT
by and between
PROMETHEUS SOUTHEAST RETAIL LLC
and
FAC REALTY TRUST, INC.
dated as of February 24, 1998
THIS STOCKHOLDERS AGREEMENT (this "Agreement"), dated as of February 24,
1998 is made by and between Prometheus Southeast Retail LLC ("Buyer"), an
affiliate of Lazard Freres Real Estate Investors, LLC ("LFREI"), and FAC Realty
Trust, Inc., a Maryland corporation (the "Company"). Capitalized terms not
otherwise defined herein have the meaning ascribed to them in the Stock
Purchase Agreement (as hereinafter defined).
RECITALS:
WHEREAS, the Company and Buyer have entered into a Stock Purchase
Agreement, dated as of the date hereof (the "Stock Purchase Agreement"),
pursuant to which the Company has agreed to sell, and Buyer has agreed to
purchase, certain shares of common stock, par value $0.01 per share, of the
Company (the "Company Common Stock"), together with Contingent Value Rights,
upon the terms and subject to the conditions set forth therein;
WHEREAS, it is a condition to the transactions contemplated by the Stock
Purchase Agreement and the parties believe it to be in their best interests
that they enter into this Agreement and provide for certain rights and
restrictions with respect to the investment by Investor (as hereinafter
defined) in the Company and the corporate governance of the Company;
WHEREAS, the Company and Buyer believe that the combination in a strategic
partnership of the leadership, expertise and experience in retail development
and operations of the Company and the investment and capital markets expertise
and access to capital of Buyer and its Affiliates will significantly enhance
the Company's ability to pursue its growth and operating strategies; and
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements contained herein and for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound hereby, the parties hereto hereby agree as follows:
ARTICLE 1
Definitions
As used in this Agreement, the following terms shall have the following
respective meanings:
Section 1.1 "Affiliate" shall have the meaning ascribed thereto in Rule
12b-2 promulgated under the 1934 Act, and as in effect on the date hereof.
Section 1.2 "Aggregate Purchase Price" shall mean, on any date, the amount
equal to the aggregate consideration paid by Buyer on and prior to such date in
connection with the purchase of the Purchased Shares pursuant to the Stock
Purchase Agreement.
Section 1.3 "Agreement" shall have the meaning set forth in the first
paragraph hereof.
Section 1.4 "Approval Rights Termination Date" shall mean the first date
on which the ratio (expressed as a percentage) of (i) the sum of (A) the
remaining Investment of Investor (and any transferee or assignee of Investor or
any group of transferees or assignees) on such date and (B) the remaining
Commitment to Invest of Investor (or any transferee or assignee of Investor or
group of transferees or assignees) on such date to (ii) the sum of (A) the Fair
Market Value of all Company
B-1
Stock outstanding, as measured on such date, and (B) the Fair Market Value of
all OP Units outstanding, as measured on such date, is less than 15%.
Section 1.5 "Beneficially Own" shall mean, with respect to any security,
having direct or indirect (including through any Subsidiary or Affiliate)
"beneficial ownership" of such security, as determined pursuant to Rule 13d-3
under the 1934 Act, including pursuant to any agreement, arrangement or
understanding, whether or not in writing; provided, however, that all of the
shares of Company Common Stock which Buyer has agreed to purchase under the
Stock Purchase Agreement but which have not yet been purchased shall be deemed
to be Beneficially Owned by Investor until the Remaining Equity Ownership is
zero.
Section 1.6 "Board" shall mean the board of directors of the Company.
Section 1.7 "Buyer" shall have the meaning set forth in the first
paragraph hereof.
Section 1.8 "Code" shall mean the Internal Revenue Code of 1986, as
amended, and any successor thereto, including all of the rules and regulations
promulgated thereunder.
Section 1.9 "Commitment to Invest" shall mean, for any person and on any
date, the product of (A) the number of shares of Company Common Stock such
person is committed to purchase from the Company under the Stock Purchase
Agreement on or after such date and (B) the Fair Market Value of the Company
Common Stock on such date.
Section 1.10 "Company" shall have the meaning set forth in the first
paragraph hereof.
Section 1.11 "Company Charter" shall have the meaning set forth in the
Stock Purchase Agreement.
Section 1.12 "Company Common Stock" shall have the meaning set forth in
the second paragraph hereof.
Section 1.13 "Company Stock" shall mean, collectively, the Company Common
Stock and other shares of capital stock of the Company.
Section 1.14 "Company Stock Equivalents" shall have the meaning set forth
in Section 3.2(e).
Section 1.15 "Control" shall mean with respect to any person, the power to
direct the management and policies of such person, directly or indirectly,
whether through ownership of voting securities, by contract or otherwise.
"Controlled" shall have a correlative meaning.
Section 1.16 "Declaration Date" shall have the meaning set forth in
Section 3.3(b).
Section 1.17 "Director" shall mean a member of the Board.
Section 1.18 "Eligible Securities" shall have the meaning set forth in
Section 3.3.
Section 1.19 "Executive Committee" shall mean the five-member executive
committee of the Board.
Section 1.20 "Exercise Notice" shall have the meaning set forth in Section
4.1(c).
Section 1.21 "Fair Market Value" shall mean, with respect to Company Stock
on any day, the average of the last reported sales price for such Company Stock
for 60 consecutive calendar days before such date, and, with respect to OP
Units on any day, the average of the last reported sales price for Company
Common Stock for 60 consecutive calendar days before such date. In the event
the "Fair Market Value" for such Company Stock or OP Units cannot be determined
as aforesaid, the "Fair Market Value" for such Company Stock or OP Units, as
applicable, shall be determined by the Independent Directors of the Company as
they, in good faith, consider appropriate. Such determination may be challenged
in good faith by the Investor, and any dispute shall be resolved at the
Company's cost, by an investment banking firm of recognized national standing
selected by the Company and acceptable to Investor and shall be made in good
faith and be conclusive absent manifest error.
Section 1.22 "15% IRR Amount" shall mean, on any day, an aggregate dollar
amount that allows Buyer to realize a 15% internal rate of return on the
Aggregate Purchase Price paid by Buyer as of such date, on a compounded,
annualized basis (inclusive of all cash dividends paid to Buyer with respect to
the Purchased Shares (not including any special fees, expenses or other
consideration payable to Investor, but not to all other stockholders of the
Company).
Section 1.23 "Final Threshold Date" shall mean the first date on which the
sum of (A) the remaining Investment of Investor (and any transferee or assignee
of Investor or any group of transferees or assignees) on such date and (B) the
remaining Commitment to Invest of Investor (or any transferee or assignee of
Investor or group of transferees or assignees) on such date, is less than
$10,000,000.00.
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Section 1.24 "Fully Diluted" shall mean, with respect to the Company
Stock, the total number of outstanding shares of Company Stock (for such
purposes, treating as outstanding Company Stock all options or warrants to
purchase and securities convertible into (or exchangeable or redeemable for)
Company Stock, including, without limitation, OP Units), outstanding as of the
relevant measurement date, assuming exercise, conversion, exchange or
redemption of such other securities.
Section 1.25 "Government Authority" shall mean any government or state (or
any subdivision thereof) of or in the United States, or any agency, authority,
bureau, commission, department or similar body or instrumentality thereof, or
any governmental court or tribunal.
Section 1.26 "Group" shall mean a "group" as such term is used in Section
13(d)(3) of the 1934 Act.
Section 1.27 "Independent Directors" shall have the meaning set forth in
Section 2.1(d).
Section 1.28 "Initial Investor Nominees" shall have the meaning set forth
in Section 2.1(a).
Section 1.29 "Investment" shall mean, for any person and on any date, the
sum of (i) product of (A) the number of shares of Company Stock held by such
person and (B) the Fair Market Value of the Company Stock on such date and (ii)
the product of (A) the number of OP Units held by such person and (B) the Fair
Market Value of the OP Units on such date.
Section 1.30 "Investor" shall mean Buyer, and shall also include any
Affiliate of LFREI, a majority or more of the voting power and economic
interests of which is Beneficially Owned by LFREI, or, for purposes only of the
provisions of the Registration Rights Agreement, any bona fide financial
institution to which any Investor has transferred (including upon foreclosure
of a pledge) shares of Company Stock for the purpose of securing bona fide
indebtedness of any Investor and which has agreed to be bound by this
Agreement.
Section 1.31 "Investor Nominees" shall have the meaning set forth in
Section 2.1(a).
Section 1.32 "Key Committees" shall have the meaning set forth in Section
2.2(a).
Section 1.33 "1933 Act" shall mean the Securities Act of 1933, as amended.
Section 1.34 "1934 Act" shall mean the Securities Exchange Act of 1934, as
amended.
Section 1.35 "Offer Period" shall have the meaning set forth in Section
3.3(a).
Section 1.36 "Offer Price" shall have the meaning set forth in Section
3.3.
Section 1.37 "Offer to Purchase" shall have the meaning set forth in
Section 3.3.
Section 1.38 "Participation Notice" shall have the meaning set forth in
Section 4.1(c).
Section 1.39 "Person" shall mean any individual, corporation, partnership,
limited liability company, joint venture, trust, unincorporated organization,
other form of business or legal entity or Government Authority.
Section 1.40 "Preliminary Threshold Date" shall mean the first date on
which the sum of (A) the remaining Investment of Investor (and any transferee
or assignee of Investor or any group of transferees or assignees) on such date
and (B) the remaining Commitment to Invest of Investor (or any transferee or
assignee of Investor or group of transferees or assignees) on such date, is
less than $50,000,000.00.
Section 1.41 "Purchase Date" shall have the meaning set forth in Section
3.3(a).
Section 1.42 "Purchased Shares" shall have the meaning set forth in the
Stock Purchase Agreement.
Section 1.43 "Registrable Securities" shall have the meaning set forth in
the Registration Rights Agreement.
Section 1.44 "Registration Rights Agreement" shall mean the Registration
Rights Agreement, dated as of the date hereof, by and between the Company and
Buyer.
Section 1.45 "Securities Filings" shall have the meaning set forth in
Section 3.1(a)(iii).
Section 1.46 "Stockholder Approval" shall have the meaning set forth in
the Stock Purchase Agreement.
Section 1.47 "Stockholder Approval Date" shall mean the date on which a
duly called and held meeting of shareholders of the Company is held at which
meeting (i) a quorum is present and (ii) Stockholder Approval is obtained.
B-3
Section 1.48 "Stock Purchase Agreement" shall have the meaning set forth
in the second paragraph hereof.
Section 1.49 "Supermajority Board Approval" shall have the meaning set
forth in Section 3.2.
Section 1.50 "Second Threshold Date" shall mean the first date on which
the sum of (A) the remaining Investment of Investor (and any transferee or
assignee of Investor or any group of transferees or assignees) on such date and
(B) the remaining Commitment to Invest of Investor (or any transferee or
assignee of Investor or group of transferees or assignees) on such date, is
less than $25,000,000.00.
Section 1.51 "Total Enterprise Value" shall have the meaning given to it
in the Stock Purchase Agreement.
Section 1.52 "Transfer Agent" shall have the meaning set forth in Section
3.3(c).
ARTICLE 2
Board of Directors
Section 2.1 Members of the Board
(a) From and after the Stockholder Approval Date, if any, and until the
Preliminary Threshold Date, the Company and Investor shall take all actions
necessary to cause the Board to be structured to consist of no less than nine
members, of which three members will be designees of Investor (the "Investor
Nominees"), two of which shall be chosen at the sole discretion of Investor
(the "Initial Investor Nominees") and one of which shall be subject to the
reasonable approval of the Company, and the Company and Investor will take all
actions necessary to cause such nominees to become members of the Board as soon
as practicable after the Stockholder Approval Date. If necessary to effectuate
the placement of the Investor Nominees on the Board, the Company shall solicit
the resignations of the appropriate number of Directors to the extent necessary
to permit the Investor Nominees to serve. The Initial Investor Nominees are
expected to be Art Solomon and Murry Gunty; provided, that Investor may at any
time appoint any other person, subject to the provisions of Section 2.1(d) of
this Agreement, as an Initial Investor Nominee without the consent of the
Company. At any time before the Preliminary Threshold Date, if the total size
of the Board is increased, the number of Investor Nominees shall also be
increased such that at least one-third of the members of the Board shall be
Investor Nominees.
(b) From and after the Preliminary Threshold Date and until the Second
Threshold Date, the Company and Investor shall take all actions necessary to
cause the Board to be structured to consist of no less than nine members, of
which at least two members will be Investor Nominees, and the Company and
Investor will take all actions necessary to cause such nominees to become, or
continue to be, members of the Board as soon as practicable after the
Preliminary Threshold Date. At any time before the Second Threshold Date, if
the total size of the Board is increased, the number of Investor Nominees shall
also be increased such that at least two-ninths of the members of the Board
shall be Investor Nominees.
(c) From and after the Second Threshold Date and until the Final Threshold
Date, the Company and Investor shall take all actions necessary to cause the
Board to be structured to consist of no less than nine members, of which at
least one member will be an Investor Nominee, and the Company and Investor will
take all actions necessary to cause such nominee(s) to become, or continue to
be, member(s) of the Board as soon as practicable after the Second Threshold
Date. At any time before the Final Threshold Date, if the total size of the
Board is increased, the number of Investor Nominees shall also be increased
such that at least one-ninth of the members of the Board shall be Investor
Nominees.
(d) Investor will not name any person as an Investor Nominee if (i) such
person is not reasonably experienced in business, financial or real estate
matters, (ii) such person has been convicted of, or has pled nolo contendere
to, a felony, (iii) the election of such person would violate any law, or (iv)
any event required to be disclosed pursuant to Item 401(f) of Regulation S-K of
the 1934 Act has occurred with respect to such person. Investor shall use its
reasonable efforts to afford the independent directors of the Company (the
"Independent Directors") a reasonable opportunity to meet any individual that
Investor is considering naming as an Investor Nominee.
(e) The Company will support the nomination of and the election of each
Investor Nominee to the Board, and the Company will exercise all authority
under applicable law to cause each Investor Nominee to be elected to the Board.
Without limiting the generality of the foregoing, with respect to each meeting
of shareholders of the Company at which Directors are to be elected, the
Company shall use its reasonable efforts to solicit from the shareholders of
the Company eligible to vote in the election of Directors proxies in favor of
each Investor Nominee.
B-4
Section 2.2 Committee Representation; Subsidiary Boards
(a) The Company shall amend its by-laws to (i) establish the Executive
Committee, which shall be delegated the authority to the maximum extent
permitted by law to approve any matter permissible under law for authorization
by an executive committee, and (ii) provide that each of the Executive
Committee, the compensation committee, the audit committee, any special
committee(s) of the Board, and any other committees which shall be charged with
exercising substantial authority on behalf of the Board (other than any
committee charged with the approval of the transactions contemplated by the
Stock Purchase Agreement or this Agreement, or any committee charged with
evaluating any Competing Transaction) (the foregoing, the "Key Committees")
shall (A) until the Preliminary Threshold Date, be comprised of members, at
least one-third of whom are Investor Nominees, (B) until the Second Threshold
Date, be comprised of members, at least two- ninths of whom are Investor
Nominees, and (C) until the Final Threshold Date, be comprised of members, at
least one-ninth of whom are Investor Nominees.
Notwithstanding the foregoing, if none of the Directors who are Investor
Nominees would be considered "independent" of the Company, "disinterested,"
"non-employee directors" and "outside directors" (i) for purposes of any
applicable rule of the New York Stock Exchange or any other securities exchange
or other self-regulating organization (such as the National Association of
Securities Dealers) requiring that members of the audit committee of the Board
be independent of the Company, (ii) for purposes of any law or regulation that
requires, in order to obtain or maintain favorable tax, securities, corporate
law or other material legal benefits with respect to any plan or arrangement
for employee compensation or benefits, that the members of the committee of the
Board charged with responsibility for such plan or arrangement be "independent"
of the Company, "disinterested," "non-employee directors" or "outside
directors," or (iii) for purposes of any special committee formed in connection
with any transaction or potential transaction involving the Company and any of
Investor, its Affiliates or any Group of which Investor is a member or such
other transaction or potential transaction which would involve an actual or
potential conflict of interest on the part of the Directors who are Investor
Nominees, then a Director who is an Investor Nominee shall not be required to
be appointed to any such committee; provided, however, that the committees of
the Board shall be organized such that, to the extent practicable, the only
items to be considered by a Key Committee on which no Director who is an
Investor Nominee may serve will be those items which prevent the Director who
is an Investor Nominee from serving on such Key Committee. Any members of any
Key Committee who are Investor Nominees shall, in the event of any vacancy in
such membership, be replaced by a Director who is an Investor Nominee elected
by a majority of the Directors who are Investor Nominees.
(b) Until the Final Threshold Date, at least one Director who is an
Investor Nominee shall serve as a member of the board of directors or
comparable governing body of each Subsidiary of the Company, if any, that is a
corporation or other person with a board of directors or board of trustees.
Section 2.3 Vacancies. In the event that any Investor Nominee shall cease
to serve as a Director for any reason other than the fact that Investor no
longer has a right to nominate a Director, the vacancy resulting thereby shall
be filled by an Investor Nominee designated by Investor; provided, however,
that any Investor Nominee so designated shall satisfy the qualification
requirements set forth in Section 2.1(b).
ARTICLE 3
Covenants; Transfer Provisions
Section 3.1 Operating Statements; Public Company Status
(a) From and after the date of this Agreement until the Final Threshold
Date, if any, the Company will:
(i) deliver to Investor, as soon as practicable after the end of each
month or other reporting period, any operating and financial statements and
management reports (x) of the Company, and (y) of each Subsidiary of the
Company not consolidated with the Company, which are regularly provided to
the senior management of the Company, each as, at and for the end of such
month or other reporting period, and such other statements or reports as
are reasonably requested by Investor, all in such form as are prepared by
the Company for internal use by management (including, as applicable, by
e-mail);
(ii) deliver to Investor copies of all other information distributed by
the Company to the Board, any other equity investor in the Company or any
of the Company's partners in joint ventures;
B-5
(iii) deliver to Investor, as promptly as practicable following filing, a
copy of each report, schedule or other document filed by the Company
pursuant to the requirements of any federal or state securities laws
(collectively, the "Securities Filings"); and
(iv) continue to comply in all material respects with the reporting
requirements of Section 13 or 15(d) of the 1934 Act.
(b) Until the Final Threshold Date, the Company and Investor will afford
one another a reasonable opportunity to review any Securities Filing, any other
filing with a Government Authority and any press release or similar public
announcement which refers to, describes or mentions such other party or any
Affiliate of such other party prior to the time that such filing is filed with
or sent to the applicable Government Authority or such announcement is
disseminated.
Section 3.2 Conduct of Actions. From and after the Stockholder Approval
Date until the Approval Rights Termination Date, if any, notwithstanding the
fact that a vote of the Board or the Executive Committee may not be required
under applicable law, the Company shall not, and shall not permit any of its
Subsidiaries without the affirmative vote of over sixty-seven percent (67%) of
all of the Directors ("Supermajority Board Approval") to:
(a) acquire, whether by merger, consolidation, purchase of stock or assets
or other business combination, (i) in a single transaction or group of related
transactions, any business or assets having an aggregate purchase price in
excess of twenty-five percent (25%) of Total Enterprise Value as measured at
the beginning of the fiscal year in which such acquisition is consummated, or
(ii) during any one fiscal year, businesses or assets having an aggregate
purchase price in excess of fifty percent (50%) of Total Enterprise Value as
measured at the beginning of such fiscal year;
(b) sell or dispose of any assets, whether by merger, consolidation, sale
of stock or assets or other business combination, during any one fiscal year,
having an aggregate value in excess of twenty-five percent (25%) of Total
Enterprise Value as measured at the beginning of such fiscal year;
(c) directly or indirectly, create, incur, issue, assume, guarantee or
otherwise become directly or indirectly liable, contingently or otherwise, with
respect to, any indebtedness if, after giving pro forma effect to such
indebtedness, the Company's ratio of (i) total indebtedness to (ii) Total
Enterprise Value, expressed as a percentage, would be greater than 65%;
(d) make any payment to, or sell, lease, transfer or otherwise dispose of
any of its properties or assets to, or purchase any property or assets from, or
enter into or make or amend any contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any of its Affiliates;
(e) issue Company Stock or options, rights or warrants or other
commitments to purchase or securities convertible into (or exchangeable or
redeemable for) shares of Company Stock, including, without limitation, OP
Units (such options, rights, warrants, other commitments or securities,
"Company Stock Equivalents"); provided, however, that Supermajority Board
Approval shall not be required for any issuance of Company Stock or Company
Stock Equivalents as long as the sum of (i) all shares of Company Stock issued
by the Company during the applicable fiscal year and (ii) shares of Company
Stock into which Company Stock Equivalents issued by the Company and each of
its Subsidiaries during the applicable fiscal year are convertible, does not
exceed fifty percent (50%) of all shares of Company Stock outstanding, on a
Fully Diluted basis, on the first day of such fiscal year; provided, further,
that in connection with any issuance by the Company of Company Stock or
issuance by the Company or any of its Subsidiaries of any Company Stock
Equivalents, Investor shall be entitled, to the extent so provided in Section
4.1 of this Agreement, to a participation right on the terms set forth in
Section 4.1 of this Agreement. Notwithstanding the first sentence of this
Section 3.2(e), (i) Company Stock issued to the Company or a wholly owned
Subsidiary thereof and (ii) Company Stock and Company Stock Equivalents issued
to directors or employees of the Company or a Subsidiary of the Company in
connection with any employee benefit plan approved by the shareholders of the
Company, shall not be subject to Supermajority Board Approval;
(f) change or amend any provision of the Company Charter or the by-laws of
the Company in a manner that would be materially adverse to Investor;
(g) pursuant to or within the meaning of any bankruptcy law: (i) commence
a voluntary case, (ii) consent to the entry of an order for relief against it
in an involuntary case, (iii) consent to the appointment of a custodian of it
or for all or substantially all of its property, (iv) make a general assignment
for the benefit of its creditors;
B-6
(h) in the case of the Company, (1) terminate its eligibility for
treatment as a real estate investment trust, as defined in the Code, or (2)
take any action or fail to take any action which would reasonably be expected
to, alone or in conjunction with any other factors, result in the loss of such
eligibility, unless in the case of a failure to take action, such action is
initiated within thirty days and such action is completed within the period
required under the Code in order to maintain such eligibility; or
(i) subject to the right of the Company to terminate the Stock Purchase
Agreement pursuant to Section 9.1(b)(iii) thereof, allow the consummation of
any transaction (including, without limitation, any merger or consolidation)
the result of which is that any "person" (as defined above), other than Buyer,
becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule
13d-5 under the Exchange Act), directly or indirectly, of stock having more
than 15% of the voting power of the Company.
Section 3.3 Offer to Purchase. At any time prior to December 31, 2003
(after completion of the purchase of all of the Purchased Shares pursuant to
the Stock Purchase Agreement), the Company may make an irrevocable offer to
purchase (the "Offer to Purchase") to all holders of shares of Company Common
Stock that are Registrable Securities (such shares, "Eligible Securities") all
(and not less than all) outstanding shares of Eligible Securities at a per
share offer price (the "Offer Price") in cash equal to (i) the greater of (A)
$19.00 MULTIPLIED BY the number of outstanding shares of Purchased Shares on
such date LESS the aggregate amount of cash dividends paid (not including any
special fees, expenses or other consideration payable to Investor, but not to
all other stockholders of the Company) on the Purchased Shares between the date
of the Initial Closing and such date and (B) the 15% IRR Amount on such date,
DIVIDED BY (ii) the number of outstanding shares of Purchased Shares on such
date. In making an Offer to Purchase, the Company shall follow the procedures
set forth below:
(a) The Offer to Purchase shall remain open for a period of 20 Business
Days following its commencement and no longer, except to the extent that a
longer period is required by applicable law (the "Offer Period"). No later than
five Business Days after the termination of the Offer Period (the "Purchase
Date"), the Company shall purchase all shares of Eligible Securities tendered
in response to the Offer to Purchase. Payment for any Eligible Securities so
purchased shall be made in the same manner as dividends are paid.
(b) If the Purchase Date is on or after the date on which dividends are
declared (the "Declaration Date"), any accrued or unpaid dividends shall be
paid to the person in whose name the applicable Eligible Security is registered
at the close of business on the Declaration Date, and no additional dividends
shall be payable to holders of Eligible Securities pursuant to the Offer to
Purchase.
(c) Upon the commencement of an Offer to Purchase, the Company, within
five days of such commencement, shall send, by first class mail, a notice to
the transfer agent for Company Common Stock (the "Transfer Agent") and each
holder of Eligible Securities. The notice shall contain all instructions and
material necessary to enable such holders to tender Eligible Securities
pursuant to the Offer to Purchase. The Offer to Purchase shall be made to all
holders of Eligible Securities. The notice, which shall govern the terms of the
Offer to Purchase, shall state:
(i) that the Offer to Purchase is being made pursuant to Section 3.3
hereof and the length of time the Offer to Purchase shall remain open;
(ii) the Offer Price and the Purchase Date;
(iii) that any Eligible Securities not tendered shall remain outstanding;
(iv) that, unless the Company fails to make the applicable payment, any
Eligible Securities tendered will cease to be outstanding;
(v) that holders of Eligible Securities electing to have any shares
purchased shall be required to surrender such shares, with a validly
executed certificate of transfer, or transfer by book-entry transfer, to
the Company or the Transfer Agent at the address specified in the notice at
least three days before the Purchase Date; and
(vi) that holders of Eligible Securities shall be entitled to withdraw
their election if the Company or the Transfer Agent, as the case may be,
receives, not later than the expiration of the Offer Period, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the number of shares the holder delivered for purchase and a
statement that such holder is withdrawing his election to have such shares
purchased.
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For the avoidance of doubt, neither Investor nor any of its assignees are
required to accept an Offer to Purchase. The provisions governing an Offer to
Purchase are set forth in this Agreement for the purpose of clarifying the
terms of the Contingent Value Right Agreement.
Section 3.4 Amendment of Documents. The Company shall take all actions
necessary to amend the Company Charter and the Company's by-laws in order to
give effect to Article 2 and Section 3.2 of this Agreement. Such amendments to
the Company Charter and the Company's by-laws shall be in form and substance
reasonably satisfactory to Buyer and otherwise consistent with the terms of
this Agreement.
Section 3.5 Voting. On any matter that requires a vote of the stockholders
of the Company under the Company's Charter or by-laws or under any applicable
law, Buyer shall vote any Company Common Stock acquired by it pursuant to
Section 4.1(b) hereof pro rata based on the votes of the other stockholders of
the Company.
Section 3.6 Mergers. For a period of five years following the date of the
Initial Closing, Buyer shall not take any action to cause the Company to
consolidate or merge with or into another person if, pursuant to the terms of
such consolidation or merger, the stockholders of the Company (other than
Buyer) shall receive consideration in a form, or in an amount, different from
Buyer. In addition, if on any date Buyer shall, in one or a series of related
transactions, transfer a number of shares of Company Common Stock greater than
50% of the aggregate number of shares of Company Common Stock outstanding on
such date to a person (other than an Affiliate of Buyer) and such person's
Affiliates, such person shall be subject to the limitations set forth in this
Section 3.6 as if such person were a party to this Agreement.
ARTICLE 4
Participation Rights
Section 4.1
(a) Right to Participate. From and after the date hereof until the
Preliminary Threshold Date, if any, Investor shall be entitled to a
participation right to purchase or subscribe for up to that number of
additional shares of capital stock (including as "capital stock" for purposes
of this Section, any security, option, warrant, call, commitment, subscription,
right to purchase or other agreement of any character that is convertible into
or exchangeable or redeemable for shares of capital stock of the Company or any
of its Subsidiaries, including, without limitation, OP Units (and all
references in this Section to capital stock shall, as appropriate, be deemed to
be references to any such securities), and also including additional shares of
capital stock to be issued pursuant to the conversion, exchange or redemption
of any security, option, warrant, call, commitment, subscription, right to
purchase or other agreement of any character that is convertible into or
exchangeable or redeemable for shares of capital stock, including, without
limitation, OP Units, as if the price at which such additional shares of
capital stock is issued pursuant to any such conversion, exchange or redemption
were the market price on the date of such issuance) to be issued or sold by the
Company which represents the same proportion of the total number of shares of
capital stock to be issued or sold by the Company (including the shares of
capital stock to be issued to Investor upon exercise of its participation
rights hereunder; it being understood and agreed that the Company will
accordingly be required to either increase the number of shares of capital
stock to be issued or sold so that Investor may purchase additional shares to
maintain its proportionate interest, or to reduce the number of shares of
capital stock to be issued or sold to Persons other than Investor) as is
represented by the number of shares of Company Stock and OP Units owned by
Investor prior to such sale or issuance (and including for this purpose any
shares of Company Common Stock to be acquired pursuant to the Stock Purchase
Agreement, but not yet issued) relative to the number of shares of Company
Stock and OP Units outstanding prior to such sale or issuance (and including
for this purpose any shares of Company Common Stock to be acquired pursuant to
the Stock Purchase Agreement, but not yet issued); provided, however, that the
provisions of this Section shall not apply to the issuance or sale by the
Company of any of its capital stock issued to the Company or any of its
Subsidiaries or pursuant to options, rights or warrants or other commitments or
securities in effect or outstanding on the date of the Stock Purchase Agreement
(including, without limitation, any options issued or to be issued pursuant to
the Employment Agreements).
(b) Issuance of OP Units. Upon exercise of its participation rights under
this Section 4.1 by Buyer in connection with the issuance by the Company of OP
Units, Buyer shall have the right to purchase, and, upon such exercise, the
Company will be required to issue to Buyer, the number of shares of Company
Common Stock equal to the number of OP Units Buyer is entitled to purchase
under Section 4.1(a) hereof. Such shares of Company Common Stock shall be
issued by the Company in lieu of such number of OP Units Buyer would otherwise
be entitled to purchase under Section 4.1(a) hereof.
(c) Notice. In the event the Company proposes to issue or sell any shares
of capital stock in a transaction giving rise to the participation rights
provided for in this Section, the Company shall send a written notice (the
"Participation Notice")
B-8
to Investor setting forth the number of shares of such capital stock of the
Company that the Company proposes to sell or issue, the price (before any
commission or discount) at which such shares are proposed to be issued (or, in
the case of an underwritten or privately placed offering in which the price is
not known at the time the Participation Notice is given, the method of
determining such price and an estimate thereof), and all other relevant
information as to such proposed transaction as may be necessary for Investor to
determine whether or not to exercise the rights granted in this Section. At any
time within 20 days after its receipt of the Participation Notice, Investor may
exercise its participation rights to purchase or subscribe for shares of such
shares of capital stock, as provided for in this Section, by so informing the
Company in writing (an "Exercise Notice"). Each Exercise Notice shall state the
percentage of the proposed sale or issuance that the Investor elects to
purchase. Each Exercise Notice shall be irrevocable, subject to the conditions
to the closing of the transaction giving rise to the participation right
provided for in this Section.
(d) Abandonment of Sale or Issuance. The Company shall have the right, in
its sole discretion, at all times prior to consummation of any proposed sale or
issuance giving rise to the participation right granted by this Section, to
abandon, rescind, annul, withdraw or otherwise terminate such sale or issuance,
whereupon all participation rights in respect of such proposed sale or issuance
pursuant to this Section shall become null and void, and the Company shall have
no liability or obligation to Investor or any Affiliate thereof who has
acquired shares of Company Stock pursuant to the Stock Purchase Agreement or
from Investor with respect thereto by virtue of such abandonment, rescission,
annulment, withdrawal or termination.
(e) Terms of Sale. The purchase or subscription by Investor or an
Affiliate thereof, as the case may be, pursuant to this Section shall be on the
same price and other terms and conditions, including the date of sale or
issuance, as are applicable to the purchasers or subscribers of the additional
shares of capital stock of the Company whose purchases or subscriptions give
rise to the participation rights (except that the price to Investor to make
such purchase or subscription shall be net of an amount equal to fifty percent
(50%) of any underwriting, placement agent or similar fee associated with such
purchase or subscription paid or to be paid in connection with such purchase or
subscription), which price and other terms and conditions shall be
substantially as stated in the relevant Participation Notice (which standard
shall be satisfied if the price, in the case of a negotiated transaction, is
not greater than 110% of the estimated price set forth in the relevant
Participation Notice or, in the case of an underwritten or privately placed
offering, is not greater than the greater of (i) 110% of the estimated price
set forth in the relevant Participation Notice, and (ii) the most recent
closing price on or prior to the date of the pricing of the offering);
provided, however, that in the event the purchases or subscriptions giving rise
to the participation rights are effected by an offering of securities
registered under the 1933 Act and in which offering it is not legally
permissible for the securities to be purchased by Investor to be included, such
securities to be purchased by Investor will be purchased in a concurrent
private placement.
(f) Timing of Sale. If, with respect to any Participation Notice, Investor
fails to deliver an Exercise Notice within the requisite time period, the
Company shall have 120 days after the expiration of the time in which the
Exercise Notice is required to be delivered in which to sell not more than 110%
of the number of shares of capital stock of the Company described in the
Participation Notice (plus, in the event such shares are to be sold in an
underwritten public offering, an additional number of shares of capital stock
of the Company, not in excess of 15% of 110% of the number of shares of capital
stock of the Company described in the Participation Notice, in respect of any
underwriters overallotment option) and not less than 90% of the number of
shares of capital stock of the Company described in the Participation Notice at
a price of not less than 90% of the estimated price set forth in the
Participation Notice. If, at the end of 120 days following the expiration of
the time in which the Exercise Notice is required to be delivered, the Company
has not completed the sale or issuance of capital stock of the Company in
accordance with the terms described in the Participation Notice (or at a price
which is at least 90% of the estimated price set forth in the Participation
Notice), or in the event of any contemplated sale or issuance within such
120-day period but outside such price parameters, the Company shall again be
obligated to comply with the provisions of this Section with respect to, and
provide the opportunity to participate in, any proposed sale or issuance of
shares of capital stock of the Company; provided, however, that notwithstanding
the foregoing, if the price at which such capital stock is to be sold in an
underwritten offering (or a privately placed offering in which the price is not
less than 97% of the most recent closing price at the time of the pricing of
the offering) is not at least 90% of the estimated price set forth in the
Participation Notice, the Company may inform Investor of such fact and Investor
shall be entitled to elect, by written notice delivered within five Business
Days following such notice from the Company, to participate in such offering in
accordance with the provisions of this Section.
B-9
ARTICLE 5
Miscellaneous
Section 5.1 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party. Copies of executed
counterparts transmitted by telecopy, telefax or other electronic transmission
service shall be considered original executed counterparts for purposes of this
Section, provided receipt of copies of such counterparts is confirmed.
Section 5.2 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND WITHOUT
REFERENCE TO THE CHOICE OF LAW PRINCIPLES THEREOF.
Section 5.3 Entire Agreement. This Agreement (including agreements
incorporated herein) and the Schedules and Exhibits hereto contain the entire
agreement between the parties with respect to the subject matter hereof and
there are no agreements, understandings, representations or warranties between
the parties other than those set forth or referred to herein. This Agreement is
not intended to confer upon any person not a party hereto (and their successors
and assigns) any rights or remedies hereunder.
Section 5.4 Expenses. All legal and other costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall
be paid as set forth in the Stock Purchase Agreement. Without limiting the
foregoing, the Company shall pay all costs and expenses incurred in connection
with the solicitation of votes of shareholders of the Company to approve the
transactions contemplated by the Stock Purchase Agreement.
Section 5.5 Notices. All notices and other communications hereunder shall
be sufficiently given for all purposes hereunder if in writing and delivered
personally, sent by documented overnight delivery service or, to the extent
receipt is confirmed, telecopy, telefax or other electronic transmission
service to the appropriate address or number as set forth below. Notices to the
Company shall be addressed to:
FAC Realty Trust, Inc.
11000 Regency Parkway, 3rd fl.
East Tower
Cary, NC 27511
Attention: C. Cammack Morton
Telecopy: (919) 462-8799
with a copy to:
Alston & Bird LLP
310 UCS Plaza
3605 Glenwood Ave.
P.O. Drawer 31107
Raleigh, North Carolina 27622-1107
Attention: Brad S. Markoff, Esq.
Telecopy: (919) 881-3175
or at such other address and to the attention of such other person as the
Company may designate by written notice to Investor. Notices to Buyer or
Investor shall be addressed to:
Lazard Freres Real Estate Investors, LLC
30 Rockefeller Plaza, 63rd Floor
New York, NY 10020
Attention: Murry Gunty
Telecopy: (212) 632-6060
with a copy to:
Latham & Watkins
885 Third Ave, Suite 10000
New York, NY 10022
Attention: R. Ronald Hopkinson, Esq.
Telecopy: (212) 751-4864
B-10
Section 5.6 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors.
Neither party shall be permitted to assign any of its rights hereunder to any
third party without the prior written consent of the other party, except that
any Investor may, without such consent, assign its rights hereunder, in whole
or in part, to the same extent as Buyer is permitted to assign its rights under
the Stock Purchase Agreement, provided that such person agrees to be bound by
this Agreement.
Section 5.7 Headings. The Section, Article and other headings contained in
this Agreement are inserted for convenience of reference only and will not
affect the meaning or interpretation of this Agreement. All references to
Sections or Articles contained herein mean Sections or Articles of this
Agreement unless otherwise stated.
Section 5.8 Amendments and Waivers. This Agreement may not be modified or
amended except by an instrument or instruments in writing signed by the party
against whom enforcement of any such modification or amendment is sought. Any
party hereto may, only by an instrument in writing, waive compliance by another
party hereto with any term or provision hereof on the part of such other party
hereto to be performed or complied with. The waiver by any party hereto of a
breach of any term or provision hereof shall not be construed as a waiver of
any subsequent breach.
Section 5.9 Interpretation; Absence of Presumption
(a) For the purposes hereof, (i) words in the singular shall be held to
include the plural and vice versa and words of one gender shall be held to
include the other gender as the context requires, (ii) the terms "hereof",
"herein", and "herewith" and words of similar import shall, unless otherwise
stated, be construed to refer to this Agreement as a whole (including all of
the Schedules and Exhibits hereto) and not to any particular provision of this
Agreement, and Article, Section, paragraph, Schedule and Exhibit references are
to the Articles, Sections, paragraphs, Schedules and Exhibits to this Agreement
unless otherwise specified, (iii) the word "including" and words of similar
import when used in this Agreement shall mean "including, without limitation,"
unless the context otherwise requires or unless otherwise specified, (iv) the
word "or" shall not be exclusive, and (v) provisions shall apply, when
appropriate, to successive events and transactions.
(b) This Agreement shall be construed without regard to any presumption or
rule requiring construction or interpretation against the party drafting or
causing any instrument to be drafted.
Section 5.10 Severability. Any provision hereof which is invalid or
unenforceable shall be ineffective to the extent of such invalidity or
unenforceability, without affecting in any way the remaining provisions hereof.
Section 5.11 Further Assurances. The Company and Investor agree that, from
time to time, each of them will, and will cause their respective Affiliates to,
execute and deliver such further instruments and take such other action as may
be necessary to carry out the purposes and intents hereof.
Section 5.12 Specific Performance. The Company and Investor each
acknowledge that, in view of the uniqueness of arrangements contemplated by
this Agreement, the parties hereto would not have an adequate remedy at law for
money damages in the event that this Agreement were not performed in accordance
with its terms, and therefore agree that the parties hereto shall be entitled
to specific enforcement of the terms hereof in addition to any other remedy to
which the parties hereto may be entitled at law or in equity.
Section 5.13 Investor Breach. In the event Investor shall have breached
(i) its obligation to effect a purchase of Company Common Stock pursuant to the
Stock Purchase Agreement which breach is neither cured nor desisted from within
30 days of receipt of written notice of such breach, or (ii) any of its
obligations under this Agreement which breach is neither cured nor desisted
from within 30 days of receipt of written notice of such breach and which would
reasonably be expected to materially adversely affect the Company, the Company
shall no longer be required to perform any of its obligations hereunder.
Section 5.14 Confidentiality. Buyer and Investor agree that all
information provided to any of them or any of their representatives pursuant to
this Agreement shall be kept confidential, and such parties shall not (x)
disclose such information to any persons other than the directors, officers,
employees, financial advisors, legal advisors, accountants, consultants and
affiliates of such parties who reasonably need to have access to the
confidential information and who are advised of the confidential nature of such
information or (y) use such information in a manner which would be detrimental
to the Company; provided, however, the foregoing obligation of such parties
shall not (a) relate to any information that (i) is or becomes generally
available other than as a result of unauthorized disclosure by such parties or
by persons to whom such parties have made such information available, (ii) is
or becomes available to such parties on a non-confidential basis from a third
party that is not, to such parties' knowledge, bound by any other
confidentiality agreement with the Company, or (b) prohibit disclosure of any
information if required by law, rule, regulation, court order or other legal or
governmental process.
B-11
Section 5.15 Public Releases and Announcements. The Company agrees that
until a Termination Event, it shall endeavor to provide to Investor advance
copies of, or, in the case of oral announcements, advance notice of, any public
release or announcement concerning the Company to be issued, released or made
by the Company or any of its Affiliates, in each case, if possible, at least
one Business Day prior to such release or announcement.
Section 5.16 Termination. In the event the Stockholder Approval Date does
not occur prior to August 31, 1998, this Agreement shall terminate.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
parties hereto.
PROMETHEUS SOUTHEAST RETAIL LLC
By: F Strategic Realty Investor II,
L.P. its sole member
By: Lazard Freres Real Estate
Investors, LLC its general partner
By: /s/ Murry N. Gunty
---------------------------------
Name: Murry N. Gunty
-----------------------------
Title: Principal
-----------------------------
FAC REALTY TRUST, INC.
By: /s/ C. Cammack Morton
---------------------------------
Name: C. Cammack Morton
Title: Chief Executive Officer
B-12
APPENDIX C
REGISTRATION RIGHTS AGREEMENT
by and between
FAC REALTY TRUST, INC.
and
PROMETHEUS SOUTHEAST RETAIL LLC
Dated as of February 24, 1998
REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of February 24,
1998, by and between FAC Realty Trust, Inc., a Maryland corporation (the
"Company") and Prometheus Southeast Retail LLC ("Buyer"), an affiliate of
Lazard Freres Real Estate Investors, LLC ("LFREI"). Capitalized terms not
otherwise defined herein have the meaning ascribed to them in the Stock
Purchase Agreement (as herein after defined).
WHEREAS, the Company and Buyer have entered into a Stock Purchase
Agreement, dated as of the date hereof (the "Stock Purchase Agreement"), that
provides for the purchase by Buyer and sale by the Company to Buyer of shares
of Company Common Stock and Contingent Value Rights; and
WHEREAS, in order to induce Buyer to enter into the Stock Purchase
Agreement, the Company has agreed to provide the registration rights set forth
herein;
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound hereby, the parties hereto hereby agree as follows:
Section 1. Definitions. As used herein, the following terms shall have the
following meanings:
(a) "Agreement" shall have the meaning set forth in the first paragraph
hereof.
(b) "Buyer" shall mean Buyer, and shall also include any Affiliate of
LFREI, a majority or more of the voting power and of the economic interests of
which is Beneficially Owned by LFREI.
(c) "Commencement Date" shall mean the date of the Initial Closing.
(d) "Commission" shall mean the Securities and Exchange Commission, and
any successor thereto.
(e) "Company" shall have the meaning set forth in the first paragraph
hereof.
(f) "Company Registration Expenses" shall mean the fees and disbursements
of counsel and independent public accountants for the Company incurred in
connection with the Company's performance of or compliance with this Agreement,
including the expenses of any special audits or "cold comfort" letters required
by or incident to such performance and compliance, and any premiums and other
costs of policies of insurance obtained by the Company against liabilities
arising out of the sale of any securities.
(g) "Contingent Value Right Agreement" means that certain Contingent Value
Right Agreement, dated as of the date hereof, between the Company and Buyer.
(h) "Demand Registration" shall have the meaning set forth in Section
2(a).
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and any successor thereto, and the rules and regulations thereunder.
(j) "NASD" shall mean the National Association of Securities Dealers, Inc.
(k) "Registrable Securities" shall mean (i) any and all shares of Company
Common Stock acquired by Buyer pursuant to the Stock Purchase Agreement, (ii)
any and all securities acquired by Buyer pursuant to Section 4.2 of the
Stockholders
C-1
Agreement, (iii) any and all shares of Company Common Stock issued, if any, by
the Company pursuant to its payment obligations under the Contingent Value
Right Agreement, and (iv) any securities issued or issuable with respect to any
Company Common Stock or other securities referred to in clause (i), (ii) or
(iii) by way of conversion, exchange, stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization or otherwise. As to any particular
Registrable Securities, once issued such securities shall cease to be
Registrable Securities when (A) a registration statement with respect to the
sale of such securities shall have become effective under the Securities Act
and such securities shall have been disposed of in accordance with such
registration statement, (B) such securities shall have been sold in accordance
with Rule 144 (or any successor provision) under the Securities Act or (C) such
securities are eligible to be resold pursuant to Rule 144(k).
(l) "Registration Expenses" shall mean all registration, filing and stock
exchange or NASD fees, all fees and expenses of complying with securities or
blue sky laws, all printing expenses, messenger and delivery expenses, any fees
and disbursements of any separate counsel retained by Buyer, and transfer
taxes, if any, and any premiums and other costs of policies of insurance
obtained by Buyer against liabilities arising out of the public offering of
securities, including Company Registration expenses, but specifically excludes
any fees and disbursements of underwriters customarily paid by sellers of
securities who are not the issuers of such securities and all underwriting
discounts and commissions.
(m) "Registration Suspension Period" shall have the meaning set forth in
Section 2(b).
(n) "Securities Act" shall mean the Securities Act of 1933, as amended,
and any successor thereto, and the rules and regulations thereunder.
(o) "Stock Purchase Agreement" shall have the meaning set forth in the
second paragraph hereof.
(p) "Suspension Notice" shall have the meaning set forth in Section 2(b).
(q) "Underwritten/Placed Offering" shall mean a sale of securities of the
Company to an underwriter or underwriters for reoffering to the public or on
behalf of a person other than the Company through an agent for sale to the
public.
Section 2. Demand Registration
(a) Obligation to File. At any time following the Commencement Date,
promptly upon the written request of Buyer, the Company will use its best
efforts to file with the Commission a registration statement under the
Securities Act for the offering of all of the Registrable Securities which
Buyer requests to be registered (the "Demand Registration"). The Demand
Registration shall be on an appropriate form and the Demand Registration and
any form of prospectus included therein shall reflect such plan of distribution
or method of sale as Buyer notifies the Company, including the sale of some or
all of the Registrable Securities in a public offering or, if requested by
Buyer, subject to receipt by the Company of such information (including
information relating to purchasers) as the Company reasonably may require, (i)
in a transaction constituting an offering outside the United States which is
exempt from the registration requirements of the Securities Act in which the
seller undertakes to effect registration after the completion of such offering
in order to permit such shares to be freely tradeable in the United States,
(ii) in a transaction constituting a private placement under Section 4(2) of
the Securities Act in connection with which the seller undertakes to effect a
registration after the conclusion of such placement to permit such shares to be
freely tradeable by the purchasers thereof, or (iii) in a transaction under
Rule 144A of the Securities Act in connection with which the seller undertakes
to effect a registration after the conclusion of such transaction to permit
such shares to be freely tradeable by the purchasers thereof. The Company shall
use its best efforts to cause the Demand Registration to be declared effective
by the Commission within 60 days from the date of receipt of the written
request, and, upon the request of Buyer, keep the Demand Registration effective
for up to 90 days, unless the distribution of securities registered thereunder
has been earlier completed; provided, however, that if such Demand Registration
will require the Company to prepare or file audited financial statements with
respect to any fiscal year by a date prior to the date on which the Company
would otherwise be required to prepare and file such audited financial
statements, then Buyer must notify the Company at least 30 days in advance of
the date upon which such audited financial statements will be required to be
filed. During the period during which the Demand Registration is effective, the
Company shall supplement or make amendments to the Demand Registration, if
required by the Securities Act or if reasonably requested by Buyer or an
underwriter of Registrable Securities, including to reflect any specific plan
of distribution or method of sale, and shall use its best efforts to have such
supplements and amendments declared effective, if required, as soon as
practicable after filing.
(b) Black-Out Periods of Buyer. Notwithstanding anything herein to the
contrary, (i) the Company shall have the right from time to time to require
Buyer not to sell under the Demand Registration or to suspend the effectiveness
thereof during the period starting with the date 30 days prior to the Company's
good faith estimate, as certified in writing by an executive officer of the
Company to Buyer, of the proposed date of filing of a registration statement or
a preliminary prospectus
C-2
supplement relating to an existing shelf registration statement, in either
case, pertaining to an underwritten public offering of equity securities of the
Company for the account of the Company, and ending on the date 75 days
following the effective date of such registration statement or the date of
filing of the final prospectus supplement, and (ii) the Company shall be
entitled to require Buyer not to sell under the Demand Registration or to
suspend the effectiveness thereof (but not for a period exceeding 75 days in
any calendar year), if the Company determines, in its good faith judgment, that
such offering or continued effectiveness would interfere with any material
financing, acquisition, disposition, corporate reorganization or other material
transaction involving the Company or any of its subsidiaries or public
disclosure thereof would be required prior to the time such disclosure might
otherwise be required, or when the Company is in possession of material
information that it deems advisable not to disclose in a registration
statement.
Once any registration statement filed pursuant to this Section 2 or in
which Registrable Securities are included pursuant to Section 3 has been
declared effective, any period during which the Company fails to keep such
registration statement effective and usable for resale of Registrable
Securities for the period required by Section 4(b) shall be referred to as a
"Registration Suspension Period." A Registration Suspension Period shall
commence on and include the date that the Company gives written notice to Buyer
of its determination that such registration statement is no longer effective or
usable for resale of Registrable Securities (the "Suspension Notice") to and
including the date when the Company notifies Buyer that the use of the
prospectus included in such registration statement may be resumed for the
disposition of Registrable Securities.
(c) Number of Demand Registrations. The Company shall be obligated to
effect, under this Section 2, only four Demand Registrations (no more than two
of which may be requested in any two-year period). A Demand Registration shall
not be deemed to have been effected, nor shall it be sufficient to reduce the
number of Demand Registrations available to Buyer under this Section 2, if such
registration cannot be used by Buyer for more than 60 days as a result of any
stop order, injunction or other order of the Commission or other Government
Authority for any reason other than an act or omission of Buyer and all the
Registerable Securities registered thereunder are not sold.
(d) Size of Demand Registration. The Company shall not be required to
effect a Demand Registration of less than a fair market value, based on the
closing market price on the trading day immediately prior to the date of notice
(as reported in the Wall Street Journal), of $10,000,000, except that if the
fair market value, based on the closing market price on the trading day
immediately prior to the date of notice (as reported in the Wall Street
Journal), of the Registrable Securities outstanding is less than $10,000,000,
then the Company shall be required to effect a Demand Registration of all of
the remaining Registrable Securities outstanding.
(e) Notice. The Company shall give Buyer prompt notice in the event that
the Company has suspended sales of Registrable Securities under Section 2(b).
(f) Expenses. All Registration Expenses incurred in connection with the
Demand Registrations which may be requested under this Section 2 shall be borne
by the Company, with Buyer only paying underwriting fees and discounts.
(g) Selection of Underwriters. Any and all underwriters or other agents
involved in any sale of Registrable Securities pursuant to a registration
statement contemplated by this Section 2 shall include such underwriter(s) or
other agent(s) as selected by Buyer and approved of by the Company, which
approval shall not be unreasonably withheld; provided that any Affiliate of
Buyer shall in all events be approved by the Company.
Section 3. Incidental Registrations
(a) Notification and Inclusion. If the Company proposes to register any of
its common equity securities under the Securities Act (other than a
registration relating solely to the sale of securities to participants in a
dividend reinvestment plan, a registration on Form S-4 relating to a business
combination or similar transaction permitted to be registered on such Form S-4,
a registration on Form S-8 relating solely to the sale of securities to
participants in a stock or employee benefit plan, a registration permitted
under Rule 462 under the Securities Act registering additional securities of
the same class as were included in an earlier registration statement for the
same offering, and declared effective, or a shelf registration statement under
the Securities Act covering common equity securities with an aggregate offering
price of less than $50.0 million), whether or not for sale for its own account,
the Company shall, at each such time after the Commencement Date until Buyer no
longer holds Registerable Securities, promptly give written notice of such
registration to Buyer. Upon the written request of Buyer given within 10 days
after receipt of such notice by Buyer, the Company shall seek to include in
such proposed registration such Registrable Securities as Buyer shall request
be so included and shall use its reasonable best efforts to cause a
registration statement covering all of the Registrable Securities that Buyer
has requested to be registered to become effective under the Securities Act.
The Company shall be under no obligation to complete any offering of securities
it proposes to make under this Section 3 and shall incur no liability to Buyer
for its failure to do so. If, at any time after giving
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written notice of its intention to register any securities and prior to the
effective date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to register or to
delay registration of such securities, the Company may, at its election, give
written notice of such determination to Buyer and, thereupon, (i) in the case
of a determination not to register, the Company shall be relieved of its
obligation to register any Registrable Securities in connection with such
registration (but not from its obligation to pay the Registration Expenses
incurred in connection therewith) and (ii) in the case of a determination to
delay registering, the Company shall be permitted to delay registering any
Registrable Securities for the same period as the delay in registering such
other securities.
(b) Cut-back Provisions. If a registration pursuant to this Section 3
involves an Underwritten/Placed Offering of the securities so being registered,
whether or not solely for sale for the account of the Company, which securities
are to be distributed by or through one or more underwriters of recognized
standing under underwriting terms customary for such transaction, and the
underwriter or the managing underwriter, as the case may be, of such
Underwritten/Placed Offering shall inform the Company of its belief that the
amount of securities requested to be included in such registration or offering
exceeds the amount which can be sold in (or during the time of) such offering
without delaying or jeopardizing the success of the offering (including the
price per share of the securities to be sold), then the Company will include in
such registration (i) first, all the securities of the Company which the
Company proposes to sell for its own account or the account of others (other
than Buyer) requesting inclusion in such registration pursuant to rights to
registration on request, and (ii) second, to the extent of the amount which the
Company is so advised can be sold in (or during the time of) such offering,
Registrable Securities and other securities requested to be included in such
registration, pro rata among Buyer and others exercising incidental
registration rights, on the basis of the shares of Company Common Stock owned
by all such persons.
(c) Expenses. The Company shall bear and pay all Company Registration
Expenses incurred in connection with any registration of Registrable Securities
pursuant to this Section 3 for Buyer, and all Registration Expenses incurred in
connection with any registration of any securities for the Company's own
account referred to in the first sentence of Section 3(a), and Buyer shall bear
and pay all underwriting fees and discounts incurred in connection with any
registration of Registrable Securities pursuant to this Section 3 for Buyer.
(d) Duration of Effectiveness. At the request of Buyer, the Company shall,
subject to Section 2(b), use its reasonable best efforts to keep any
registration statement for which Registrable Securities are included under this
Section 3 effective and usable for up to 90 days (subject to extension for the
length of any Registration Suspension Period), unless the distribution of
securities registered thereunder has been earlier completed; provided, however,
that in no event will the Company be required to prepare or file audited
financial statements with respect to any fiscal year by a date prior to the
date on which the Company would be so required to prepare and file such audited
financial statements if such registration statement were no longer effective
and usable.
Section 4. Registration Procedures. In connection with the filing of any
registration statement as provided in Section 2 or 3, the Company shall use its
reasonable best efforts to, as expeditiously as reasonably practicable:
(a) prepare and file with the Commission the requisite registration
statement (including a prospectus therein) to effect such registration and use
its reasonable best efforts to cause such registration statement to become
effective, provided that before filing such registration statement or any
amendments or supplements thereto, the Company will furnish to the counsel
selected by Buyer copies of all such documents proposed to be filed, which
documents will be subject to the review of such counsel before any such filing
is made, and the Company will comply with any reasonable request made by such
counsel to make changes in any information contained in such documents relating
to Buyer;
(b) prepare and file with the Commission such amendments and supplements
to such registration statement and the prospectus used in connection therewith
as may be necessary to maintain the effectiveness of such registration and to
comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such registration statement until the
earlier of such time as all of such securities have been disposed of and the
date which is 90 days after the date of initial effectiveness of such
registration statement;
(c) furnish to Buyer such number of conformed copies of such registration
statement and of each such amendment and supplement thereto (in each case
including all exhibits), such number of copies of the prospectus contained in
such registration statements (including each complete prospectus and any
summary prospectus) and any other prospectus filed under Rule 424 under the
Securities Act, in conformity with the requirements of the Securities Act, and
such other documents, including documents incorporated by reference, as Buyer
may reasonably request;
(d) register or qualify all Registrable Securities under such other
securities or blue sky laws of such jurisdictions as Buyer shall reasonably
request, to keep such registration or qualification in effect for so long as
such registration statement
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remains in effect, and take any other action which may be reasonably necessary
or advisable to enable Buyer to consummate the disposition in such
jurisdictions of the securities owned by Buyer, except that the Company shall
not for any such purpose be required to qualify generally to do business as a
foreign corporation in any jurisdiction wherein it would not but for the
requirements of this paragraph be obligated to be so qualified, or to consent
to general service of process in any such jurisdiction, or to subject the
Company to any material tax in any such jurisdiction where it is not then so
subject;
(e) cause all Registrable Securities covered by such registration
statement to be registered with or approved by such other Government Authority
as may be reasonably necessary to enable Buyer to consummate the disposition of
such Registrable Securities;
(f) furnish to Buyer a signed counterpart, addressed to Buyer (and the
underwriters, if any), of
(i) an opinion of counsel for the Company, dated the effective date of
such registration statement (and, if such registration includes an
underwritten public offering, dated the date of the closing under the
underwriting agreement), reasonably satisfactory in form and substance to
Buyer, and
(ii) to the extent permitted by then applicable rules of professional
conduct, a "comfort" letter, dated the effective date of such registration
statement (and, if such registration includes an underwritten public
offering, dated the date of the closing under the underwriting agreement),
signed by the independent public accountants who have certified the
Company's financial statements included in such registration statement,
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of the
accountants' letter, with respect to events subsequent to the date of such
financial statements, all as are customarily covered in opinions of
issuer's counsel and in accountants' letters delivered to the underwriters
in underwritten public offerings of securities;
(g) immediately notify Buyer at any time when the Company becomes aware
that a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made, and at
the request of Buyer promptly prepare and furnish to Buyer a reasonable number
of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such
securities, such prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made;
(h) comply or continue to comply in all material respects with the
Securities Act and the Exchange Act and with all applicable rules and
regulations of the Commission, and make available to its security holders, as
soon as reasonably practicable, an earnings statement covering the period of at
least 12 months, but not more than 18 months, beginning with the first full
calendar month after the effective date of such registration statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act, and not file any amendment or supplement to such registration
statement or prospectus to which Buyer shall have reasonably objected on the
grounds that such amendment or supplement does not comply in all material
respects with the requirements of the Securities Act, having been furnished
with a copy thereof at least five Business Days prior to the filing thereof;
(i) provide a transfer agent and registrar for all Registrable Securities
covered by such registration statement not later than the effective date of
such registration statement; and
(j) list all Company Common Stock covered by such registration statement
on any securities exchange on which any of the Company Common Stock is then
listed.
Buyer shall furnish in writing to the Company such information regarding
Buyer (and any of its affiliates), the Registrable Securities to be sold, the
intended method of distribution of such Registrable Securities, and such other
information requested by the Company as is necessary for inclusion in the
registration statement relating to such offering pursuant to the Securities Act
and the rules of the Commission thereunder. Such writing shall expressly state
that it is being furnished to the Company for use in the preparation of a
registration statement, preliminary prospectus, supplementary prospectus, final
prospectus or amendment or supplement thereto, as the case may be.
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Buyer agrees by acquisition of the Registrable Securities that upon
receipt of any notice from the Company of the happening of any event of the
kind described in paragraph (g) of this Section 4, Buyer will forthwith
discontinue its disposition of Registrable Securities pursuant to the
registration statement relating to such Registrable Securities until Buyer's
receipt of the copies of the supplemented or amended prospectus contemplated by
paragraph (g) of this Section 4.
Section 5. Requested Underwritten Offerings. If requested by the
underwriters for any underwritten offerings by Buyer, under a registration
requested pursuant to Section 2(a), the Company will enter into a customary
underwriting agreement with such underwriters for such offering, to contain
such representations and warranties by the Company and such other terms as are
customarily contained in agreements of this type, including indemnities to the
effect and to the extent provided in Section 7. Buyer shall be a party to such
underwriting agreement and may, at its option, require that any or all of the
conditions precedent to the obligations of such underwriters under such
underwriting agreement be conditions precedent to the obligations of Buyer.
Buyer shall not be required to make any representations or warranties to or
agreement with the Company or the underwriters other than representations,
warranties or agreements regarding Buyer and Buyer's intended method of
distribution and any other representation or warranty required by law.
Section 6. Preparation; Reasonable Investigation. In connection with the
preparation and filing of the registration statement under the Securities Act,
the Company will give Buyer, its underwriters, if any, and their respective
counsel, the opportunity to participate in the preparation of such registration
statement, each prospectus included therein or filed with the Commission, and
each amendment thereof or supplement thereto, and will give each of them such
access to its books and records and such opportunities to discuss the business
of the Company with its officers, its counsel and the independent public
accountants who have certified its financial statements as shall be necessary,
in the opinion of Buyer's and such underwriters' respective counsel, to conduct
a reasonable investigation within the meaning of the Securities Act.
Section 7. Indemnification
(a) Indemnification by the Company. In the event of any registration of
any Registrable Securities of the Company under the Securities Act, the Company
will, and hereby does, indemnify and hold harmless (i) Buyer and each other
person who participates as an underwriter in the offering or sale of such
securities, (ii) each person, if any, who controls (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) Buyer or
any another person referenced in clause (i) above (any of the persons referred
to in this clause (ii) being hereinafter referred to as a "controlling person")
and (iii) the respective officers, directors, partners, employees,
representatives and agents of Buyer or any controlling person (any person
referred to in clause (i), (ii) or (iii) may hereinafter be referred to as a
"Buyer Indemnitee"), against any losses, claims, damages or liabilities, joint
or several, to which any Buyer Indemnitee may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration statement
under which such Registrable Securities were registered under the Securities
Act, any preliminary prospectus, final prospectus or summary prospectus
contained therein, or any amendment or supplement thereto, or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, and the Company will reimburse such
Buyer Indemnitee for any reasonable legal or any other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, liability, action or proceedings; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement in reliance upon and in conformity with written information
furnished to the Company by a Buyer Indemnitee specifically stating that it is
for use in the preparation thereof; and provided, further, that the Company
shall not be liable to any person who participates as an underwriter in the
offering or sale of Registrable Securities or any other person, if any, who
controls such underwriter within the meaning of the Securities Act in any such
case to the extent that any such loss, claim, damage, liability (or action or
proceeding in respect thereof) or expense arises out of such person's failure
to send or give a copy of the final prospectus or supplement to the persons
asserting an untrue statement or alleged untrue statement or omission or
alleged omission at or prior to the written confirmation of the sale of
Registrable Securities to such person if such statement or omission was
corrected in such final prospectus or supplement. Such indemnity shall remain
in full force and effect regardless of any investigation made by or on behalf
of any Buyer Indemnitee and shall survive the transfer of such securities by
Buyer.
(b) Indemnification by Buyer. The Buyer will, and hereby does, indemnify
and hold harmless (in the same manner and to the same extent as set forth in
paragraph (a) of this Section 7) the Company, each director of the Company,
each officer of the Company and each other person, if any, who controls the
Company within the meaning of the Securities Act, and
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each other person who participates as an underwriter in the offering or sale of
such securities and each other person who controls any such underwriter within
the meaning of the Securities Act, with respect to any untrue statement or
alleged untrue statement of a material fact in or omission or alleged omission
to state a material fact from such registration statement, any preliminary
prospectus, final prospectus or summary prospectus contained therein, or any
amendment or supplement thereto, if such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by Buyer
specifically stating that it is for use in the preparation of such registration
statement, preliminary prospectus, final prospectus, summary prospectus,
amendment or supplement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Company or any such
director, officer, or controlling person and shall survive the transfer of such
securities by Buyer.
(c) Notices of Claims, etc. Promptly after receipt by an indemnified party
of notice of the commencement of any action or proceeding involving a claim
referred to in the preceding paragraphs of this Section 7, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party, give written notice to the latter of the commencement of such action;
provided, however, that the failure of any indemnified party to give notice as
provided herein shall not relieve the indemnifying party of its obligations
under the preceding paragraphs of this Section 7, except to the extent that the
indemnifying party is actually prejudiced by such failure to give notice. In
case any such action is brought against an indemnified party, unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist in respect of such claim, the
indemnifying party shall be entitled to participate in and to assume the
defense thereof, jointly with any other indemnifying party similarly notified
to the extent that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to the indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof other than reasonable costs of investigation.
(d) Other Indemnification. Indemnification similar to that specified in
the preceding paragraphs of this Section 7 (with appropriate modifications)
shall be given by the Company and Buyer with respect to any required
registration or other qualification of securities under any federal or state
law or regulation of Governmental Authority other than the Securities Act.
(e) Indemnification Payments. The indemnification required by this Section
7 shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as and when bills are received or expense, loss,
damage or liability is incurred.
(f) Contribution. If, for any reason, the foregoing indemnity is
unavailable, or is insufficient to hold harmless an indemnified party, then the
indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of the expense, loss, damage or liability, (i) in
such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and the indemnified party on the other
(determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or omission relates to information supplied
by the indemnifying party or the indemnified party and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission), or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law or provides a lesser sum to
the indemnified party than the amount hereinafter calculated, in the proportion
as is appropriate to reflect not only the relative fault of the indemnifying
party and the indemnified party, but also the relative benefits received by the
indemnifying party on the one hand and the indemnified party on the other, as
well as any other relevant equitable considerations. No indemnified party
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any indemnifying
party who was not guilty of such fraudulent misrepresentation.
Section 8. Covenants Relating to Rule 144. The Company will file in a
timely manner (taking into account any extensions granted by the Commission),
information, documents and reports in compliance with the Exchange Act and
will, at its expense, forthwith upon the request of Buyer, deliver to Buyer a
certificate, signed by the Company's principal financial officer, stating (a)
the Company's name, address and telephone number (including area code), (b) the
Company's Internal Revenue Service identification number, (c) the Company's
Commission file number, (d) the number of shares of Company Common Stock and
the number of shares of Company Preferred Stock outstanding as shown by the
most recent report or statement published by the Company, and (e) whether the
Company has filed the reports required to be filed under the Exchange Act for a
period of at least 90 days prior to the date of such certificate and in
addition has filed the most recent annual report required to be filed
thereunder. If at any time the Company is not required to file reports in
compliance with either Section 13 or Section 15(d) of the Exchange Act, the
Company will, at its expense, forthwith upon the written request of Buyer, make
available adequate current public information with respect to the Company
within the meaning of paragraph (c)(2) of Rule 144 of the General Rules and
Regulations promulgated under the Securities Act.
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Section 9. Miscellaneous
(a) Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party. Copies of executed
counterparts transmitted by telecopy, telefax or other electronic transmission
service shall be considered original executed counterparts for purposes of this
Section 9(a), provided receipt of copies of such counterparts is confirmed.
(b) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO THE
CHOICE OF LAW PRINCIPLES THEREOF.
(c) Entire Agreement. This Agreement (including agreements incorporated
herein) contains the entire agreement between the parties with respect to the
subject matter hereof and there are no agreements or understandings between the
parties other than those set forth or referred to herein. This Agreement is not
intended to confer upon any person not a party hereto (and their successors and
assigns) any rights or remedies hereunder.
(d) Notices. All notices and other communications hereunder shall be
sufficiently given for all purposes hereunder if in writing and delivered
personally, sent by documented overnight delivery service or, to the extent
receipt is confirmed, telecopy, telefax or other electronic transmission
service to the appropriate address or number as set forth below. Notices to the
Company shall be addressed to:
FAC Realty Trust, Inc.
11000 Regency Parkway, 3rd Fl.
East Tower
Cary, NC 27511
Attention: C. Cammack Morton
Telecopy:
(919) 462-8799
with a copy to:
Alston & Bird LLP
310 UCS Plaza
3605 Glenwood Ave.
P.O. Drawer 31107
Raleigh, North Carolina 27622-1107
Attention: Brad S. Markoff, Esq.
Telecopy:(919) 881-3175
or at such other address and to the attention of such other person as the
Company may designate by written notice to Buyer. Notices to Buyer shall be
addressed to:
Lazard Freres Real Estate Investors, LLC
30 Rockefeller Plaza, 63rd Floor
New York, NY 10020
Attention: Murry Gunty
Telecopy: (212) 632-6060
with a copy to:
Latham & Watkins
885 Third Avenue, Suite 1000
New York, NY 10022
Attention: R. Ronald Hopkinson, Esq.
Telecopy:(212) 751-4864
(e) Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors. Neither
party shall be permitted to assign any of its rights hereunder to any third
party, except that if Buyer transfers any or all Registrable Securities to
another person, such transferee shall be considered an intended
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beneficiary hereof and may exercise all rights of Buyer hereunder (provided
that any transferee that holds less than 50% of all outstanding Registrable
Securities shall not be entitled to request a Demand Registration pursuant to
Section 2 hereof).
(f) Headings. The Section and other headings contained in this Agreement
are inserted for convenience of reference only and will not affect the meaning
or interpretation of this Agreement. All references to Sections or other
headings contained herein mean Sections or other headings of this Agreement
unless otherwise stated.
(g) Amendments and Waivers. This Agreement may not be modified or amended
except by an instrument or instruments in writing signed by the party against
whom enforcement of any such modification or amendment is sought. Either party
hereto may, only by an instrument in writing, waive compliance by the other
party hereto with any term or provision hereof on the part of such other party
hereto to be performed or complied with. The waiver by any party hereto of a
breach of any term or provision hereof shall not be construed as a waiver of
any subsequent breach.
(h) Interpretation; Absence of Presumption. For the purposes hereof, (i)
words in the singular shall be held to include the plural and vice versa and
words of one gender shall be held to include the other gender as the context
requires, (ii) the terms "hereof", "herein", and "herewith" and words of
similar import shall, unless otherwise stated, be construed to refer to this
Agreement as a whole and not to any particular provision of this Agreement, and
Section, paragraph or other references are to the Sections, paragraphs, or
other references to this Agreement unless otherwise specified, (iii) the word
"including" and words of similar import when used in this Agreement shall mean
"including, without limitation," unless the context otherwise requires or
unless otherwise specified, (iv) the word "or" shall not be exclusive, and (v)
provisions shall apply, when appropriate, to successive events and
transactions.
This Agreement shall be construed without regard to any presumption or
rule requiring construction or interpretation against the party drafting or
causing any instrument to be drafted.
(i) Severability. Any provision hereof which is invalid or unenforceable
shall be ineffective to the extent of such invalidity or unenforceability,
without affecting in any way the remaining provisions hereof.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
parties hereto.
PROMETHEUS SOUTHEAST RETAIL LLC
By: LF Strategic Realty Investor II,
L.P., its sole member
By: Lazard Freres Real Estate
Investors, LLC, its general partner
By: /s/ Murry N. Gunty
---------------------------------
Name: Murry N. Gunty
Title: Principal
FAC REALTY TRUST, INC.
By: /s/ C. Cammack Morton
---------------------------------
Name: C. Cammack Morton
Title: Chief Executive Officer
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APPENDIX D
CONTINGENT VALUE RIGHT AGREEMENT
THIS CONTINGENT VALUE RIGHT AGREEMENT, dated as of February 24, 1998 (this
"Agreement"), is made by and between Prometheus Southeast Retail LLC ("Buyer"),
an affiliate of Lazard Freres Real Estate Investors, LLC, and FAC Realty Trust,
Inc., a Maryland corporation (the "Company"). Capitalized terms not otherwise
defined herein have the meaning ascribed to them in the Stock Purchase
Agreement (as hereinafter defined):
RECITALS:
WHEREAS, the Company and Buyer have entered into a Stock Purchase
Agreement, dated as of the date hereof (the "Stock Purchase Agreement"),
pursuant to which the Company has agreed to sell, and Buyer has agreed to
purchase, certain shares of common stock, par value $0.01 per share, of the
Company (the "Company Common Stock"), upon the terms and subject to the
conditions set forth therein; and
WHEREAS, it is a condition to the transactions contemplated by the Stock
Purchase Agreement and the parties believe it to be in their best interests
that they enter into this Agreement and provide for certain contingent value
rights for the benefit of Buyer;
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements contained herein and for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound hereby, the parties hereto hereby agree as follows:
SECTION 1.
Definitions
As used in this Agreement, the following terms shall have the following
respective meanings:
Section 1.1 -- Adjustment Number
"Adjustment Number" shall mean the number equal to (i) the Make-Whole
Amount DIVIDED BY (ii) the Fair Market Value on the Determination Date.
Section 1.2 -- Affiliate
"Affiliate" with respect to any entity, shall mean a person or entity
directly or indirectly controlling, controlled by, or under common control
with, such entity, where "control" has the meaning given such term under Rule
405 of the Securities Act of 1933.
Section 1.3 -- Approval Rights Termination Date
"Approval Rights Termination Date" shall have the meaning given to it in
the Stockholders Agreement.
Section 1.4 -- Board
"Board" shall mean the board of directors of the Company.
Section 1.5 -- Board Member Default
"Board Member Default" shall mean (i) on any day prior to the Preliminary
Threshold Date, the failure of at least one-third of the members of the Board
to consist of Investor Nominees, (ii) on any day prior to the Second Threshold
Date, the failure of at least two-ninths of the members of the Board to consist
of Investor Nominees, and (iii) on any day prior to the Final Threshold Date,
the failure of at least one-ninth of the members of the Board to consist of
Investor Nominees.
Section 1.6 -- Contingent Value Right.
"Contingent Value Right" shall mean the right granted under this Agreement
to receive the payments set forth in Section 2.2 hereof, subject to the
limitations and conditions provided in this Agreement.
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Section 1.7 -- Default Date
"Default Date" shall have the meaning given to it in Section 4.2.
Section 1.8 -- Determination Date
"Determination Date" shall mean January 1, 2004.
Section 1.9 -- Fair Market Value
"Fair Market Value" shall have the meaning given to it in the Stockholders
Agreement.
Section 1.10 -- 15% IRR Amount
"15% IRR Amount" shall have the meaning given to it in the Stockholders
Agreement.
Section 1.11 -- Final Threshold Date
"Final Threshold Date" shall have the meaning given to it in the
Stockholders Agreement.
Section 1.12 -- Investment Value
"Investment Value" shall mean the amount equal to (i) the number of
Purchased Shares MULTIPLIED BY (ii) the Fair Market Value on the Determination
Date.
Section 1.13 -- Investor Nominee
"Investor Nominee" shall have the meaning given to it in the Stockholders
Agreement.
Section 1.14 -- Make-Whole Amount
"Make-Whole Amount" shall mean, on the Determination Date, a dollar
amount, never less than 0, equal to the lesser of (a) (i) the greater of (A)
the 15% IRR Amount on the Determination Date or (B) the $19.00 Amount on the
Determination Date LESS (ii) the Investment Value on the Determination Date and
(b) 4,500,000 MULTIPLIED BY the Fair Market Value on the Determination Date.
Section 1.15 -- $19.00 Amount
"$19.00 Amount" shall mean, on any day, the amount equal to (i) $19.00
MULTIPLIED BY the number of Purchased Shares on such date LESS (ii) the
aggregate amount of cash dividends paid (not including any special fees,
expenses or other consideration payable to Investor, but not to all
stockholders of the Company) on the Purchased Shares between the date of the
Initial Closing and such date.
Section 1.16 -- Offer to Purchase
"Offer to Purchase" shall have the meaning given to it in the Stockholders
Agreement.
Section 1.17 -- Payment Date
"Payment Date" shall have the meaning given to it in Section 2.2(b).
Section 1.18 -- Preliminary Threshold Date
"Preliminary Threshold Date" shall have the meaning given to it in the
Stockholders Agreement.
Section 1.19 -- Purchased Shares
"Purchased Shares" shall have the meaning given to it in the Stock
Purchase Agreement.
Section 1.20 -- Second Threshold Date
"Second Threshold Date" shall have the meaning given to it in the
Stockholders Agreement.
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Section 1.21 -- Stockholders Agreement
"Stockholders Agreement" shall mean that certain Stockholders Agreement,
dated the date hereof, by and between Buyer and the Company.
Section 1.22 -- Termination Event
"Termination Event" shall mean the occurrence of (i) the completion of an
Offer to Purchase, (ii) the notification by Buyer to the Company that it will
not accept the Offer to Purchase, (iii) a date, on or after September 1, 2003,
but prior to December 31, 2003, on which the amount equal to (A) the Fair
Market Value on such date MULTIPLIED BY (B) the number of Purchased Shares
equals or exceeds the amount equal to (A) $21.00 MULTIPLIED BY the number of
Purchased Shares on such date LESS (B) the aggregate amount of cash dividends
paid (not including any special fees, expenses or other consideration payable
to Investor, but not to all other stockholders of the Company) on the Purchased
Shares between the date of the Initial Closing and the Determination Date, (iv)
the failure to secure Stockholder Approval by August 31, 1998 and (v) the date
immediately following the Payment Date.
Section 1.23 -- Total Enterprise Value
"Total Enterprise Value" shall have the meaning given to it in the
Stockholders Agreement.
SECTION 2.
Grant of Contingent Value Rights
Section 2.1 -- Grant of Contingent Value Rights
In consideration of the investment by Buyer in the Company pursuant to the
Stock Purchase Agreement and for other good and valuable consideration, on the
date hereof the Company grants to Buyer, subject to the terms and conditions
set forth in this Agreement, the Contingent Value Rights.
Section 2.2 -- Determination and Method of Payment
(a) Subject to the provisions herein, the Contingent Value Rights shall
entitle Buyer to receive payment of an aggregate amount equal to the Make-Whole
Amount.
(b) The Make-Whole Amount shall be paid within ten days after the
Determination Date (the "Payment Date"), at the election of the Company, either
(i) in cash or (ii) in shares of Company Common Stock. In the event the Company
elects to satisfy its payment obligations under this Agreement in shares of
Company Common Stock, the Company shall issue to Buyer such number of shares of
Company Common Stock equal to the Adjustment Number.
SECTION 3
Representations, Warranties and Covenants
Section 3.1 -- Representations and Warranties
The Company represents and warrants to Buyer that:
(a) the Company has full corporate power and authority to issue, sell and
deliver the Contingent Value Rights to Buyer as provided in this Agreement and
the Stock Purchase Agreement and to carry out all the terms and provisions to
be performed by the Company herein and therein;
(b) the Contingent Value Rights have been duly authorized by the Company
for issuance to Buyer pursuant to this Agreement and the Stock Purchase
Agreement; and
(c) the execution and delivery of this Agreement and the Stock Purchase
Agreement by the Company, the issuance of the Contingent Value Rights to Buyer
pursuant to this Agreement and the Stock Purchase Agreement and the performance
of the obligations of the Company under this Agreement and the Stock Purchase
Agreement do not: (i) violate any federal or Maryland statute, rule or
regulation applicable to the Company, (ii) violate the provisions of the
Company's Charter or by-laws, (iii) result in the breach of or a default under
this Agreement, the Stock Purchase Agreement, the Registration Rights
Agreement, the Stockholders Agreement or any other material agreement to which
the Company is a party or any
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court order which would materially impair the ability of Buyer to receive the
benefits of the Contingent Value Rights or (iv) require any consents,
approvals, authorizations, registrations, declarations or filings by the
Company under any federal or Maryland statute, rule or regulation applicable to
the Company which would materially impair the ability of Buyer to receive the
benefits of the Contingent Value Rights.
Section 3.2 -- Covenants
The Company covenants and agrees with Buyer that, from the date hereof
until the occurrence of a Termination Event, it will not enter into any
indenture, mortgage, deed of trust, sale/leaseback agreement, loan agreement or
other similar financing agreement or instrument or other agreement or
instrument by which the Company, any of its Subsidiaries or any of the property
or assets of the Company or any of its Subsidiaries would be bound that would
materially impair the ability of the Company to fulfill its obligations under
this Agreement.
SECTION 4
Termination
Section 4.1 -- Termination
Following a Termination Event, all Contingent Value Rights and this
Agreement shall terminate.
SECTION 5
Approval Rights
Section 5.1 -- Approval Rights
From and after the Stockholder Approval Date until the Approval Rights
Termination Date, in the event a Board Member Default occurs, the Company shall
not, and shall not permit any of its Subsidiaries, without the written consent
of Buyer (or any transferee of Buyer that succeeds Buyer in its rights and
obligations under the Stockholders Agreement), to:
(a) acquire, whether by merger, consolidation, purchase of stock or assets
or other business combination, (i) in a single transaction or group of related
transactions, any business or assets having an aggregate purchase price in
excess of twenty-five percent (25%) of Total Enterprise Value as measured at
the beginning of the fiscal year in which such acquisition is consummated, or
(ii) during any one fiscal year, businesses or assets having an aggregate
purchase price in excess of fifty percent (50%) of Total Enterprise Value as
measured at the beginning of such fiscal year;
(b) sell or dispose of any assets, whether by merger, consolidation, sale
of stock or assets or other business combination, during any one fiscal year,
having an aggregate value in excess of twenty-five percent (25%) of Total
Enterprise Value as measured at the beginning of such fiscal year;
(c) directly or indirectly, create, incur, issue, assume, guarantee or
otherwise become directly or indirectly liable, contingently or otherwise, with
respect to, any indebtedness if, after giving pro forma effect to such
indebtedness, the Company's ratio of (i) total indebtedness to (ii) Total
Enterprise Value, expressed as a percentage, would be greater than 65%;
(d) make any payment to, or sell, lease, transfer or otherwise dispose of
any of its properties or assets to, or purchase any property or assets from, or
enter into or make or amend any contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any of its Affiliates;
(e) issue Company Stock or options, rights or warrants or other
commitments to purchase or securities convertible into (or exchangeable or
redeemable for) shares of Company Stock, including, without limitation, OP
Units (such options, rights, warrants, other commitments or securities,
"Company Stock Equivalents"); provided, however, that Buyer's consent shall not
be required for any issuance of Company Stock or Company Stock Equivalents as
long as the sum of (i) all shares of Company Stock issued by the Company during
the applicable fiscal year and (ii) shares of Company Stock into which Company
Stock Equivalents issued by the Company and each of its Subsidiaries during the
applicable fiscal year are convertible, does not exceed fifty percent (50%) of
all shares of Company Stock outstanding, on a Fully Diluted basis, on the first
day of such fiscal year; provided, further, that in connection with any
issuance by the Company of Company Stock or issuance by the Company or any of
its Subsidiaries of any Company Stock Equivalents, Investor shall be entitled,
to the extent so provided in Section 4.1 of the Stockholders Agreement, to a
participation right on the terms set forth in Section 4.1 of the Stockholders
Agreement. Notwithstanding the first sentence of this Section 5.1(e), (i)
Company Stock issued
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to the Company or a wholly owned Subsidiary thereof and (ii) Company Stock and
Company Stock Equivalents issued to directors or employees of the Company or a
Subsidiary of the Company in connection with any employee benefit plan approved
by the shareholders of the Company, shall not be subject to the consent of
Buyer;
(f) change or amend any provision of the Company Charter or the by-laws of
the Company in a manner that would be materially adverse to Investor;
(g) pursuant to or within the meaning of any bankruptcy law: (i) commence
a voluntary case, (ii) consent to the entry of an order for relief against it
in an involuntary case, (iii) consent to the appointment of a custodian of it
or for all or substantially all of its property, (iv) make a general assignment
for the benefit of its creditors;
(h) in the case of the Company, (1) terminate its eligibility for
treatment as a real estate investment trust, as defined in the Code, or (2)
take any action or fail to take any action which would reasonably be expected
to, alone or in conjunction with any other factors, result in the loss of such
eligibility, unless in the case of a failure to take action, such action is
initiated within thirty days and such action is completed within the period
required under the Code in order to maintain such eligibility; or
(i) subject to the right of the Company to terminate the Stock Purchase
Agreement pursuant to Section 9.1(b)(iii) thereof, allow the consummation of
any transaction (including, without limitation, any merger or consolidation)
the result of which is that any "person" (as defined above), other than Buyer,
becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule
13d-5 under the Exchange Act), directly or indirectly, of stock having more
than 15% of the voting power of the Company.
SECTION 6
Miscellaneous
Section 6.1 -- Date of Effectiveness
This Agreement shall be effective upon the date of the Initial Closing.
Section 6.2 -- Notices
All notices and other communications hereunder shall be sufficiently given
for all purposes hereunder if in writing and delivered personally, sent by
documented overnight delivery service or, to the extent receipt is confirmed,
telecopy, telefax or other electronic transmission service to the appropriate
address or number as set forth below. Notices to the Company shall be addressed
to:
FAC Realty Trust, Inc.
11000 Regency Parkway, 3rd fl.
East Tower
Cary, NC 27511
Attention: C. Cammack Morton
Telecopy: (919) 462-8799
with a copy to:
Alston & Bird LLP
310 UCS Plaza
3605 Glenwood Ave.
P.O. Drawer 31107
Raleigh, North Carolina 27622-1107
Attention: Brad S. Markoff, Esq.
Telecopy: (919) 881-3175
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or at such other address and to the attention of such other person as the
Company may designate by written notice to Investor. Notices to Buyer or
Investor shall be addressed to:
Lazard Freres Real Estate Investors, LLC
30 Rockefeller Plaza, 63rd Floor
New York, NY 10020
Attention: Murry Gunty
Telecopy: (212) 632-6060
with a copy to:
Latham & Watkins
885 Third Ave, Suite 10000
New York, NY 10022
Attention: R. Ronald Hopkinson, Esq.
Telecopy: (212) 751-4864
Section 6.3 -- Severability
Any provision hereof which is invalid or unenforceable shall be
ineffective to the extent of such invalidity or unenforceability, without
affecting in any way the remaining provisions hereof.
Section 6.4 -- Amendments and Waivers
This Agreement may not be modified or amended except by an instrument or
instruments in writing signed by the party against whom enforcement of any such
modification or amendment is sought. Any party hereto may, only by an
instrument in writing, waive compliance by another party hereto with any term
or provision hereof on the part of such other party hereto to be performed or
complied with. The waiver by any party hereto of a breach of any term or
provision hereof shall not be construed as a waiver of any subsequent breach.
Section 6.5 -- Counterparts
This Agreement may be executed in one or more counterparts, all of which
shall be considered one and the same agreement, and shall become effective when
one or more counterparts have been signed by each of the parties and delivered
to the other party. Copies of executed counterparts transmitted by telecopy,
telefax or other electronic transmission service shall be considered original
executed counterparts for purposes of this Section, provided receipt of copies
of such counterparts is confirmed.
Section 6.6 -- Assignment
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors. The Company shall not be
permitted to assign any of its rights hereunder to any third party without the
prior written consent of Buyer. Buyer may, upon written notice to the Company,
assign all, or a portion, of its rights hereunder to any third party without
the prior consent of the Company.
Section 6.7 -- Headings
The Section and other headings contained in this Agreement are inserted
for convenience of reference only and will not affect the meaning or
interpretation of this Agreement. All references to Sections contained herein
mean Sections of this Agreement unless otherwise stated.
Section 6.8 -- Governing Law
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO THE CHOICE OF LAW PRINCIPLES
THEREOF.
Section 6.9 -- Entire Agreement
This Agreement (including agreements incorporated herein) contain the
entire agreement between the parties with respect to the subject matter hereof
and there are no agreements, understandings, representations or warranties
between the
D-6
parties other than those set forth or referred to herein. This Agreement is not
intended to confer upon any person not a party hereto (and their successors and
assigns) any rights or remedies hereunder.
Section 6.10 -- Expenses
All legal and other costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid as set forth
in the Stock Purchase Agreement. Without limiting the foregoing, the Company
shall pay all costs and expenses incurred in connection with the solicitation
of votes of shareholders of the Company to approve the transactions
contemplated by the Stock Purchase Agreement.
Section 6.11 -- Interpretation; Absence of Presumption
(a) For the purposes hereof, (i) words in the singular shall be held to
include the plural and vice versa and words of one gender shall be held to
include the other gender as the context requires, (ii) the terms "hereof",
"herein", and "herewith" and words of similar import shall, unless otherwise
stated, be construed to refer to this Agreement as a whole and not to any
particular provision of this Agreement, (iii) the word "including" and words of
similar import when used in this Agreement shall mean "including, without
limitation," unless the context otherwise requires or unless otherwise
specified, (iv) the word "or" shall not be exclusive, and (v) provisions shall
apply, when appropriate, to successive events and transactions.
(b) This Agreement shall be construed without regard to any presumption or
rule requiring construction or interpretation against the party drafting or
causing any instrument to be drafted.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
parties hereto.
PROMETHEUS SOUTHEAST RETAIL LLC
By: LF Strategic Realty Investor II,
L.P., its sole member
By: Lazard Freres Real Estate
Investors, LLC, its general partner
By: /s/ Murry N. Gunty
------------------------------
Name: Murry N. Gunty
Title: Principal
FAC REALTY TRUST, INC.
By: /s/ C. Cammack Morton
------------------------------
Name: C. Cammack Morton
Title: Chief Executive Officer
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(This Page Intentionally Left Blank)
APPENDIX E
Donaldson, Lufkin & Jenrette
Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue, New York, New York 10172 - (212) 892-3000
Robert I. Brody
Managing Director
Investment Banking
(212) 892-6846
March 31, 1998
Board of Directors
FAC Realty Trust, Inc.
11000 Regency Parkway, Suite 300
Cary, NC 27511
Dear Sirs:
You have requested our opinion as to the fairness from a financial point
of view to FAC Realty Trust (the "Company") of the consideration to be received
by the Company pursuant to the terms of the draft Stock Purchase Agreement,
dated as of February 24, 1998 (the "Agreement"), by and between the Company and
Prometheus Southeast Realty LLC (the "Investor"), an affiliate of Lazard Freres
Real Estate Investors, LLC, pursuant to which, among other things, the Investor
will invest up to $200 million in the Company (the "Transaction") by purchasing
from the Company (i) an aggregate of 21,052,632 shares of the Company's common
stock, par value $0.01 per share (the "Company Common Stock") and (ii)
contingent value rights (the "Contingent Value Rights") of the Company as
described in the draft Contingent Value Rights Agreement dated February 10,
1998 by and between the Company and the Investor (the "Contingent Value Rights
Agreement").
In arriving at our opinion, we have reviewed the drafts of each of the
Stock Purchase Agreement, Stockholders Agreement dated as of February 24, 1998
by and between the Company and the Investor, and Contingent Value Rights
Agreement and the exhibits thereto. We also have reviewed financial and other
information that was publicly available or furnished to us by the Company
including information provided during discussions with the Company's
management. Included in the information provided during discussions with the
Company's management were certain financial projections of the Company for the
period beginning January 1, 1998 and ending December 31, 2002 prepared by the
management of the Company. In addition, we have compared certain financial and
securities data of the Company with various other companies whose securities
are traded in public markets, reviewed the historical stock prices and trading
volumes of the Company Common Stock, reviewed prices and premiums paid in
certain other transactions and conducted such other financial studies, analyses
and investigations as we deemed appropriate for purposes of this opinion. We
are not requested to, nor did we, solicit the interest of any other party in
engaging in a transaction alternative to the Transaction.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to us from public sources, that was provided to us by the Company or its
representatives, or that was otherwise reviewed by us. In particular, we have
relied upon the estimates of the management of the Company of the financial
impact of the Transaction on the Company. With respect to the financial
projections supplied to us, we have assumed that they have been reasonably
prepared on the basis reflecting the best currently available estimates and
judgments of the management of the Company as to the future operating and
financial performance of the Company. In particular, we assumed the pro forma
adjustments and projections made for certain pending property acquisitions
accurately reflect the future financial performance of such acquisitions. We
have not made, and do not assume any responsibility for making any independent
appraisal or evaluation of any assets or liabilities or for making any
independent verification of any of the information reviewed by us.
We have assumed, with your consent, that the drafts of the Stock Purchase
Agreement, Stockholders Agreement and Contingent Value Rights Agreement which
we reviewed will conform in all material respects to those documents when in
final form. We have also assumed, at management's direction, that the Agreement
is not contingent on the closing of any pending property acquisitions.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments
E-1
may affect this opinion, we do not have any obligation to update, revise or
reaffirm this opinion. We are expressing no opinion herein as to fairness of
any consideration paid for any pending or recently completed property
acquisitions. Our opinion does not address the relative merits of the
Transaction and the other business strategies being considered by the Company's
Board of Directors, nor does it address the Board's decision to proceed with
the Transaction. Our opinion does not constitute a recommendation to any
stockholder as to how such stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of
its investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwriting, sales and distributions of listed and unlisted securities,
private placement and valuations for corporate and other purposes. DLJ has
performed investment banking and other services for the Company in the past and
has been compensated for such services.
Based upon the foregoing and such other factors as we deem relevant, we
are of the opinion that the consideration to be received by the Company in
exchange for issuing the Company Common Stock and Contingent Value Rights
pursuant to the Agreement is fair to the Company from a financial point of
view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ ROBERT I. BRODY
--------------------------------------
Robert I. Brody
Managing Director
E-2
APPENDIX F
ALSTON & BIRD LLP
601 Pennsylvania Avenue, N.W.
North Building, 11th Floor
Washington, D.C. 20004-2601
202-508-3300
Fax: 202-508-3333
www.alston.com
James E. Croker, Jr. Direct Dial: 202-508-3309
E-mail: jcroker@alston.com
March 23, 1998
Board of Directors
FAC Realty Trust, Inc.
11000 Regency Parkway, Suite 300
Cary, North Carolina 27511
Gentlemen:
You have requested our opinion in connection with the purchase (the
"Initial Purchase") by Prometheus Southeast Retail LLC (the "Investor") of
2,350,000 shares of common stock, par value $.01 per share, of FAC Realty
Trust, Inc. (the "Company") pursuant to the Amended and Restated Stock Purchase
Agreement between the Company and the Investor dated as of March 23, 1998 (the
"Agreement"). In this connection, we have reviewed the Agreement and the
Company's charter. We have made such legal and factual examinations and
inquiries as we have deemed necessary or appropriate for purposes of this
opinion. We have relied upon representations of the Company and its affiliates
and certain officers thereof regarding the ownership of the Company. We have
also relied upon the letter from the Investor to the Company attached hereto as
Exhibit A.
Based upon and subject to the foregoing and the further limitations and
qualifications hereinafter expressed, it is our opinion that the Initial
Purchase will not cause the Company to fail to qualify as a real estate
investment trust as defined in section 856 of the Internal Revenue Code of
1986, as amended.
This opinion letter is delivered solely for your benefit in connection
with the Initial Purchase and may not be used or relied upon by any other
person or for any other purpose without our prior written consent in each
instance. Our opinion expressed herein is as of the date hereof, and we
undertake no obligation to advise you of any changes in applicable law or any
other matters that may come to our attention after the date hereof that may
affect our opinion expressed herein.
Very truly yours,
/s/ ALSTON & BIRD LLP
-----------------------------------
ALSTON & BIRD LLP
One Atlantic Center
1201 West Peachtree Street 1211 East Morehead Street 3605 Glenwood Avenue
Atlanta, GA 30309-3424 P.O. Drawer 34009 P.O. Drawer 31107
404-881-7000 Charlotte, NC 28234-4009 Raleigh, NC 27622-1107
Fax: 404-881-7777 704-331-6000 919-420-2200
Fax: 704-334-2014 Fax: 919-881-3175
F-1
March 23, 1998
FAC Realty Trust, Inc.
11000 Regency Parkway, Suite 300
Cary, North Carolina 27511
Attn: C. Cammack Morton
Re: Waiver of charter-imposed ownership limitations
Ladies and Gentlemen:
In connection with the purchase (the "Initial Purchase") by Prometheus
Southeast Realty LLC (the "Buyer") of 2,350,000 shares of common stock of FAC
Realty Trust, Inc. (the "Company") on the date hereof, we hereby make the
representations, undertakings and agreements called for by Section A(4)(i) of
Article IV of the Company's charter in order that the Board of Directors of the
Company may (with respect to the Initial Purchase) exempt the Buyer from the
restrictions set forth in Section A(4)(b)(i) of the Company's charter on
ownership of Equity Stock in excess of the Equity Stock Ownership Limit and
ownership of Common Stock in excess of the Common Stock Ownership Limit. All
capitalized terms used herein but not defined herein shall have the meanings
set forth in the Company's charter.
PROMETHEUS SOUTHEAST RETAIL LLC
By: /s/ LF STRATEGIC REALTY INVESTOR II, L.P.
-----------------------------------------------
By: /s/ LAZARD FRERES REAL ESTATE INVESTORS, LLC,
-----------------------------------------------
its general partner
By: /s/ MURRY N. GUNTY
------------------------------------
Title: Principal
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(This Page Intentionally Left Blank)
(This Page Intentionally Left Blank)
************************************APPENDIX************************************
PROXY FAC REALTY TRUST, INC.
for Annual Meeting of Stockholders, August 5, 1998
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints C. Cammack Morton and Patrick M. Miniutti,
or any of them, with full power of substitution, the attorney and proxy of the
undersigned, to appear and to vote all of the shares of common stock of FAC
Realty Trust, Inc. (the "Company") which the undersigned would be entitled to
vote if personally present at the Annual Meeting of Stockholders of the Company
to be held at the Carolina Inn, 211 Pittsboro Street, Chapel Hill, North
Carolina 27516, on August 5, 1998, at 1:00p.m., and any adjournment thereof.
Receipt of copies of the Annual Report to Stockholders, the Notice of the
Annual Meeting of Stockholders and the Proxy Statement is hereby acknowledged.
This Proxy will be voted in accordance with the instructions marked
herein, and in accordance with the recommendation of the Board of Directors if
no instructions to the contrary are marked herein. If any other business is
transacted at the Annual Meeting (including matters incident to the conduct of
the Annual Meeting), this Proxy will be voted in the discretion of, and in
accordance with, the best judgment of the proxies (no other business is
currently known).
1. Election of six directors to serve until the 1999 annual meeting or until
their successors are duly elected and qualified (Proposal One); Nominees:
C. Cammack Morton, Patrick M. Miniutti, Robert O. Amick, William D. Eberle,
J. Richard Futrell, Jr. and John W. Gildea.
[ ] FOR ALL (except as noted below) [ ] WITHHOLD AUTHORITY AS TO ALL
(Instruction: To withhold authority to vote for any individual nominee, print
the nominee's name for which authority is withheld below.)
2. Approval of the transaction (the "Transaction") contemplated by a Stock
Purchase Agreement between the Company and Prometheus Southeast Retail, LLC (the
"Investor"), an affiliate of Lazard Freres Real Estate Investors, LLC, which
involves the purchase by the Investor of a controlling interest in the Company
(21,052,632 shares of Common Stock) for $200 million or $9.50 per share
(Proposal Two);
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Amendment of the Company's charter to change its name to "Konover Property
Trust, Inc." (Proposal Three);
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Amendment of the Company's charter to increase the number of authorized
shares from 75,000,000 to 130,000,000 (Proposal Four);
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. Amendment of the Company's 1993 Employee Stock Incentive Plan to increase
the number of shares of Common Stock reserved for issuance thereunder from
1,100,000 to 2,800,000 (Proposal Five); and
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. Amendment of the Company's 1995 Outside Directors' Stock Award Plan to
increase the number of shares of Common Stock reserved for issuance thereunder
from 25,000 to 150,000 (Proposal Six).
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Note: Please date and sign exactly as the name appears on this proxy. Joint
owners should each sign. If the signer is a corporation, please sign full
corporate name by a duly authorized officer. Executors, trustees, etc. should
give full title as such.
Dated:
Signature
Signature
Please mark boxes in blue or
black ink. Please return
promptly in the enclosed
envelope which requires no
postage if mailed in the U.S.A.
PLEASE MARK, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE SO AS TO ENSURE A QUORUM AT THE MEETING. THIS IS IMPORTANT WHETHER YOU
OWN FEW OR MANY SHARES. DELAY IN RETURNING YOUR PROXY MAY SUBJECT THE COMPANY
TO ADDITIONAL EXPENSE.