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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-13531
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TRAMMELL CROW COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 75-2721454
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
2001 ROSS AVENUE
SUITE 3400
DALLAS, TEXAS 75201
(Address of principal executive offices) (Zip Code)
(214) 863-3000
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
At March 24, 1998, there were 33,911,416 shares of Common Stock outstanding
with an aggregate market value on that date of $965,413,929, based upon the
average of the low bid and high asked price of Common Stock on the New York
Stock Exchange on such date. As of the same date 20,163,235 shares of Common
Stock were held by non-affiliates of the Company, having an aggregate market
value on that date of $574,021,088.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be furnished to stockholders
in connection with its 1998 Annual Meeting of Stockholders are incorporated by
reference in Part III of this Report.
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
Trammell Crow Company (the "Company") is one of the largest diversified
commercial real estate services companies in the United States. Through the
Company's 140 offices in the United States and Canada, the Company is organized
to deliver a comprehensive range of service offerings to clients which include
leading multinational corporations, institutional investors and other users of
real estate services. In addition, the Company has a strategic alliance with
Trammell Crow International, which has eight offices in Europe, Asia and South
America. The Company has established itself as a market leader in each of its
primary businesses. The Company, which is headquartered in Dallas, Texas, was
founded in 1948 by Mr. Trammell Crow. From its founding through the 1980's, the
Company's primary business was the development and management of industrial,
office and retail projects. In 1991 the Company was reconstituted as a real
estate services company. This reconstitution entailed the separation of the
Company's commercial real estate asset base and related operations from its real
estate services business. The Company continued to operate the real estate
services business while ownership of the commercial real estate asset base was
segregated into a large number of separate entities distinct from the Company,
with independent management and operations. Many of these entities are managed
by subsidiaries of Crow Realty Investors, L.P., which is wholly owned by certain
affiliates and descendants of Mr. Trammell Crow.
As a means of addressing the comprehensive real estate service requirements
of its diverse group of clients, the Company is organized into five principal
lines of business. The Company's property management services business provides
services relating to all aspects of building operations, tenant relations and
oversight of building improvement processes, primarily for building owners who
do not occupy the properties managed by the Company. The brokerage services
business advises buyers, sellers, landlords and tenants in connection with the
sale and leasing of office, industrial and retail space and land. Infrastructure
management entails providing comprehensive day-to-day occupancy related
services, principally to large corporations which occupy commercial facilities
in multiple locations. Specific infrastructure management services include
administration, day-to-day maintenance and repair of client occupied facilities
and strategic functions such as space planning, relocation coordination,
facilities management and portfolio management. The development and construction
services provided by the Company include financial planning, site acquisition,
procurement of approvals and permits, design and engineering coordination,
construction bidding and management and tenant finish coordination, project
close-out and user move coordination, general contracting and project finance
advisory services. The Company's retail services business provides tenant
representation, disposition, development and financial services to national and
global retail customers, and the Company believes that its August 22, 1997
acquisition of the business of Doppelt & Company ("Doppelt") significantly
increases the scale and improves the quality of the Company's existing retail
services business.
RECENT DEVELOPMENTS
In February, 1998, the Company entered into a memorandum of understanding
(the "AMB MOU") with AMB Property L.P. ("AMB") relating to the formation of a
strategic alliance to develop and manage industrial properties in targeted
distribution markets. Particular emphasis will be placed on multi-tenant freight
forwarding facilities adjacent to major airports and industrial submarkets of
targeted metropolitan areas such as Chicago, Seattle and Northern New Jersey.
The AMB MOU contemplates that all of the Company's management contracts with
AMB, covering approximately 13.8 million square feet of industrial space as of
February 1998, will be converted from industry standard contracts terminable
upon 30 days notice to five-year term contracts terminable only for cause.
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On March 16, 1998, the Company purchased all of the issued and outstanding
capital stock of Tooley & Company, Inc., a California real estate services
company primarily engaged in office management and leasing ("Tooley").
Management of the Company believes that the acquisition of Tooley will allow the
Company to diversify from its perceived strength in the Los Angeles industrial
real estate market into the office market through the acquisition of one of the
leading office-focused real estate services companies in California. According
to the March 16, 1998 edition of the Los Angeles Business Journal, as of March
9, 1998, Tooley had more square feet of office space under management than any
other real estate services firm operating in Los Angeles County. In exchange for
the stock of Tooley, the Company paid a cash purchase price of approximately
$23.1 million to BCB Holdings, LLC, a Delaware limited liability company
("Seller") whose members are William L. Tooley, Craig Ruth and Robert N. Ruth.
The purchase price for Tooley's capital stock was derived through negotiation
between the Company and Seller. The Company has also agreed to pay to Seller up
to $3.0 million of additional purchase price if Tooley achieves certain
performance standards in the future. In addition, the Company has agreed to make
certain payments to Seller based upon the future performance of certain of
Tooley's projects. A copy of the Stock Purchase Agreement dated as of March 16,
1998 by and among the Company, Tooley, Seller, William L. Tooley and Craig Ruth
has been filed as an exhibit to this Annual Report on Form 10-K. See "ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K". In connection
with the acquisition, each of Messrs. Tooley, Ruth and Ruth entered into
Employment Agreements with the Company. Each of such employment agreements,
subject to earlier termination in accordance with such agreements, has a term
equal to three years. Pursuant to the terms of their respective employment
agreements, William L. Tooley and Craig Ruth received an aggregate of $1.0
million at closing in exchange for certain covenants to not compete. The Company
borrowed all funds used to make the cash payments at the closing from
NationsBank under the Company's master line of credit. See "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES."
COMPETITIVE ADVANTAGES
The Company believes that it holds several important competitive advantages
in the real estate services industry.
COMPREHENSIVE SERVICE OFFERINGS. The Company offers a comprehensive menu of
services designed to provide its clients with single-point solutions to all of
their commercial real estate services needs. The Company believes that its broad
service offerings give it a critical advantage in an industry where many
competitors offer fewer services. By offering a full array of services, the
Company is able to maximize the effect it has on its clients' businesses while
becoming highly integrated into its clients' operations. Further, the Company's
comprehensive service offerings decrease the Company's economic exposure to a
downturn in any one of its primary businesses.
CLIENT FOCUS. The Company is organized to meet all of its clients' real
estate services needs. This orientation has commonly allowed the Company to
commence client relationships by offering a single service and later expand
these relationships through an understanding of the client's business and its
highly specific service requirements. Moreover, the Company has carefully
selected the criteria--such as industry, geographic location and property
type--which it applies in actively seeking new client engagements in each of its
core businesses, thereby concentrating its efforts in areas where it can provide
maximum value-added services.
GEOGRAPHIC SCOPE. The Company's 140 offices in the United States and Canada
have allowed the Company to develop and maintain extensive knowledge of local
real estate markets across the United States and Canada. Approximately 85% of
the Company's employees are based in markets other than Dallas, Texas, where the
Company's executive offices are located. In addition, the Company has a
strategic alliance with Trammell Crow International, which has eight offices in
Europe, Asia and South America. The broad geographic scope provided by this
local office network allows the Company to serve as a single-
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source, full service provider to multinational corporations and institutional
investors with real estate interests that span regional and national boundaries.
The broad geographic service area covered by the Company also tends to limit its
exposure to an economic downturn in any single market, which provides it with a
competitive advantage over regional firms that operate in a more limited number
of geographic areas.
TECHNOLOGY. The Company is developing extensive technology applications to
better meet customer needs, principally through enhanced sharing of vital market
information and through proprietary applications designed to provide
significantly enhanced control over clients' real estate related expenses. In
addition, the Company has developed a centralized call center strategy designed
to provide responses to customer needs 24 hours a day. This service will
leverage human assets and technology to deliver required support and coverage to
properties that were previously managed from several distinct service locations.
The Company expects to begin call center operations in mid-April of 1998. The
Company has also developed the architecture for a proprietary total occupancy
cost management system using applications that are connected and distributed
across the Company's local area and wide area networks. This system is designed
to provide centralized and comprehensive cost studies and analyses on building
portfolios to customers.
MANAGEMENT/PERSONNEL. The Company believes that a key component of its
success is the experience and quality of its management team and the employees
that comprise the network through which the Company serves its clients. The
Company's seven-member executive committee has an average of approximately 14
years of experience with the Company. Moreover, the Company has experienced very
low turnover among this senior management group. The Company believes this low
turnover is linked to its collegial internal culture and a long-standing effort
to promote talented individuals from within the organization. The Company also
believes that its growth strategy, incentive-based compensation and the high
level of ownership by Company insiders provide further motivation to achieve a
high level of performance. At December 31, 1997, the members of the Company's
executive committee owned approximately 11.4% of the outstanding Common Stock,
and the total employee ownership of outstanding Common Stock was in excess of
59%.
COMPETITIVE ENVIRONMENT
In recent years, the real estate industry has experienced a steady recovery
from the severe downturn of the early 1990's which had caused a sharp reduction
in commercial and industrial property values, the withdrawal of credit, a
related reduction in new development and pressure on fee income derived from
servicing and maintaining all classes of property. The Company believes that the
recovery now underway has provided the industry with improved prospects for
growth across all of the Company's traditional service lines. Moreover,
important new trends in the real estate services business--especially among
corporations and institutional investors affected by consolidation within their
own industries--now present the Company with new opportunities to capitalize
upon the recovery in these markets.
GROWTH IN THE MARKET FOR REAL ESTATE SERVICES. The commercial real estate
services industry is large and growing. According to the U.S. Statistical
Abstract for 1996, the total US commercial real estate asset base is
approximately 68 billion square feet, with 33 billion square feet representing
industrial, office and retail properties which serve as the target market for
commercial real estate service providers. In 1996, The Outsourcing Institute
estimated that this asset base produced roughly $15 billion annually in service-
related revenues which, since 1993, have grown at 260% of the rate of growth for
the overall economy. Despite this size and growth, the commercial real estate
services industry remains a highly fragmented sector. For example, less than 20%
of the market for property management services is now serviced by outside firms,
and the Company believes that other market segments are also significantly under
served and represent a sizeable growth opportunity.
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The ongoing recovery in the real estate industry has also stimulated a
revival of activity in the more traditional development and construction
business. This sector was relatively inactive in recent years, principally due
to the sharp decline in property values and the overabundant supply of new
product in the market. As property values have rebounded in many of the nation's
principal markets, new construction starts have increased. This trend provides
an opportunity for the Company to earn fees associated with new development and
to participate in development projects as both an advisor and as principal.
OUTSOURCING. Outsourcing is a rapidly growing trend in the United States.
Through outsourcing, organizations seek to reduce costs, improve profitability
and refocus management and other resources on core competencies. This trend has
resulted in the development of well established providers offering an expanding
range of outsourced services, including information processing, teleservicing
and flexible staffing. Increasingly, organizations are also seeking outside
providers for efficient and expert delivery of real estate management services.
For example, the Company believes that the total potential revenues associated
with outsourcing of infrastructure management services may be in excess of $50
billion per year. In addition to corporations and institutional investors,
potential new clients include governmental entities, which now collectively own
in excess of 15 billion square feet of commercial real estate in the United
States.
CONSOLIDATION. The traditionally fragmented real estate services industry
is witnessing rapid consolidation in customers' selection of service providers
and in alliances and combinations among providers themselves. When outsourcing
real estate services, corporations and institutions have increasingly sought to
consolidate the number of providers used and engage firms that can offer a full
range of services across a wide geographic area. As the industry becomes more
sophisticated, customers require the flexibility, multi-market perspective and
technological and physical resources that large firms possess.
As the real estate services industry has grown, it has been accompanied by
downward pressure on fees and the increased use of fee structures which reflect
shared risk and emphasize the achievement of performance targets. These trends
benefit firms with significant scale and the ability to spread fixed costs over
a larger revenue base, and have accelerated consolidation among real estate
service providers.
The Company believes that few real estate services providers can meet the
demands of large corporate and institutional customers and that many companies
are facing pressure to combine with others to remain competitive. In the
Company's view, the competitive imperatives presented by this consolidation
trend include the need to maintain comprehensive service offerings, serve an
expansive geographic area and operate the business with sufficient scale to
achieve significant cost efficiencies.
GROWTH STRATEGY
The Company intends to pursue growth opportunities by capitalizing upon its
existing areas of expertise, its long-standing client relationships and the
broad industry trends now affecting the market. Key elements of its growth
strategy are as follows:
EXPAND CLIENT RELATIONSHIPS. Many of the Company's existing clients have
substantial real estate and occupancy costs in numerous locations, and therefore
represent the most immediate opportunity to increase revenues through
cross-selling the services offered by the Company. The Company has made numerous
successful efforts to capitalize on this opportunity, including the
establishment of a national customer initiative which targets additional client
engagements.
EXPAND THE BREADTH OF SERVICE OFFERINGS. Since its reconstitution as a real
estate services company in 1991, the Company has continuously sought to expand
and enhance its breadth of service offerings, principally through internal
measures such as the creation of new service businesses. For example, based on
its long-standing position as a premier property management company, the Company
was well positioned to take advantage of the trend toward outsourcing of real
estate services. This led to the
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creation of the Company's infrastructure management services business, which
provided 21.9% of the Company's total revenues in 1997, up from 9.4% in 1993.
CO-INVESTMENT. The Company will also focus on expansion of its efforts to
make selective co-investments of capital alongside corporate and institutional
clients. Through this effort, the Company intends to leverage its relationships
with these clients and to use its extensive knowledge of the real estate
industry to create new opportunities to invest capital. The Company believes
that its knowledge of local real estate markets and its experience in each of
its primary service businesses provide it with an advantage in identifying and
evaluating investment opportunities. The Company will seek co-investments that
generate investment returns while still allowing the Company to earn fees in
exchange for services provided in the development, operation and management of
the project. The Company has the additional financial flexibility to pursue a
controlled and highly disciplined approach to investment and co-investment.
ACQUISITIONS AND JOINT VENTURES. In addition to pursuing internal growth,
the Company is committed to a strategy of selective acquisitions of
complementary businesses. For example, in August 1997 the Company acquired the
business of Doppelt, which the Company considers to be one of the premier
national retail tenant representation firms in the country. Through this
acquisition, the Company has elevated itself to a leadership position in both
the tenant representation and disposition businesses, and anticipates expanding
its presence in these businesses through its recruiting activities at a local
level. In addition, the Company recently acquired Tooley, a Los Angeles based
real estate services company primarily engaged in office management and leasing.
Management of the Company believes that the acquisition of Tooley will allow the
Company to diversify from its perceived strength in the Los Angeles industrial
real estate market into the office market through the acquisition of one of the
leading office-focused real estate services companies in Los Angeles and Orange
Counties. The Company continuously surveys the marketplace for other potential
acquisitions which might further enhance the quality or the breadth of services
it can offer clients.
PROPERTY MANAGEMENT SERVICES
The Company is the largest commercial property manager in the United States
and has held that position for the past nine years (based upon information
contained in National Real Estate Investor's annual "Top Property Managers
Survey"). The Company's property management service business currently serves
approximately 500 clients and 13,700 tenants nationwide through its locally
based property management teams present in 70 markets. The Company managed 215
million, 207 million, 212 million, 210 million and 204 million square feet of
commercial property at the end of 1993, 1994, 1995, 1996 and 1997, respectively,
and its 1997 property management revenues were $87.8 million, down from $91.0
million in 1993. This decline in revenues over the past five years has been
outpaced by the increase in revenues from the Company's other primary
businesses. In 1993, revenues from property management constituted 52% of the
Company's total revenue, but by 1997 they represented 28% of the Company's total
revenues.
The objective of the Company's property management business is to enhance
its clients' investment values by maintaining high levels of occupancy and
lowering property operating costs by offering a wide range of property
management services. The property management services offered by the Company
consist of (i) building management services such as maintenance, landscaping,
security, energy management, owner's insurance, life safety, environmental risk
management and capital repairs; (ii) tenant relations services such as
promotional activities, processing tenant work orders and lease administration
services; (iii) interfacing with the Company's development and construction
services personnel in coordinating tenant finish; and (iv) financial management
services including financial reporting and analysis utilizing software systems
supported by the Company's in-house design and development capability for
customized requirements.
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The Company expects that most of its new property management engagements
will result from property transfers and projects that the Company develops for
institutional investors. To the extent that institutional investors continue to
make direct investments in real estate, the Company believes that it will be in
an advantageous position to win new property management engagements due to its
existing relationships with large institutional investors and its ability to
provide single-source solutions for their multi-market and multi-functional
requirements.
The properties managed by the Company are typically served by locally based
teams of property managers and maintenance personnel supported by various
corporate level service functions, including technology support and purchasing.
Client accounts are typically managed at the Company's national office to assure
consistency of quality and to promote greater cross-selling of the Company's
services.
The Company typically receives monthly management fees for the property
management services it provides, based upon a specified percentage of the
monthly gross income generated from the property under management. In certain
cases, the Company's property management agreements entitle it to receive a
minimum fee based on the net rentable square footage or a percentage of the
expected full occupancy fee of the property. The amount of the management fee
varies depending upon local market conditions, the leasing engagement,
arrangements for expense reimbursements and specific services required.
Incentive fees are sometimes negotiated in turnaround or other unusual
circumstances. The Company also may be reimbursed for a portion of its
administrative and payroll costs directly attributed to the properties under
management.
A typical property management agreement of the Company provides for an
indefinite term, but permits the property owner or the Company to terminate the
agreement upon thirty days prior written notice. The Company believes that these
are customary termination provisions in the industry. The Company historically
has been successful in retaining property management agreements, but has lost
agreements in circumstances where a property has been sold and the new property
owner assumes direct responsibility for managing the property or retains one of
the Company's competitors to manage the property.
As part of its strategic alliance with AMB, the Company expects (subject to
the negotiation of mutually satisfactory definitive documentation regarding the
alliance) to convert all of its property management contracts with AMB from
industry standard contracts terminable upon 30 days notice to contracts with
five year terms terminable only for cause. See "--Recent Developments."
BROKERAGE SERVICES
The Company has historically been an active provider of commercial brokerage
services, and in recent years its brokerage business has expanded significantly
from an already substantial base. Over the past five years the Company's
revenues from brokerage services have increased by over 93%, and in 1997
totalled $91.1 million, or 29.0% of the Company's total revenues. In 1997, the
Company facilitated approximately 6,000 sales and lease transactions. As of
December 31, 1997, the Company employed 335 brokers, having added approximately
100 brokerage professionals during the year. The Company employed approximately
150, 146, 195 and 235 brokers at the end of 1993, 1994, 1995 and 1996,
respectively.
The Company has historically provided project leasing services (leasing
space in real estate owned by clients and managed by the Company) for the
properties in its property management portfolio. In 1993 the Company began to
expand its brokerage services beyond project leasing to include tenant
representation (representing clients seeking to acquire real estate through
lease or purchase), investment sales (representing clients buying or selling
income producing real estate), listings (representing clients disposing of
surplus space) and land sales (representing clients buying or selling unimproved
land).
The Company typically receives fees for brokerage services based on a
percentage of the value of the lease or sale transaction. Some transactions may
stipulate a fixed fee or include an incentive bonus
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component based on the performance of the brokerage professional or client
satisfaction. Although transaction volume can be subject to economic conditions,
brokerage fee structures remain relatively constant through both economic
upswings and downturns.
Project leasing revenues are derived from the turnover of tenants in the
Company's property management and leasing portfolio of approximately 240 million
square feet. Lease terms for these properties average four years, resulting in
approximately 60 million square feet of space "rolling" each year, providing the
Company a commission paid by the owner of the property for renewing the existing
tenant's lease or releasing the space to a new tenant. The Company's tenant
representation revenues are derived from the other side of the transaction,
representing the tenants whose leases are expiring. Listing revenues generally
increase in economic downswings as companies dispose of surplus space, while
investment sales and land revenues generally increase in economic upswings as
available capital drives the trading of income producing properties and
corporate demand for additional space drives the purchase of land for new
development.
The Company regards its brokerage force as an integral part of its delivery
system for the broad services the Company provides to its client base. Access to
a large network of experienced brokers is often a valuable asset when seeking
new property management, infrastructure management, development and construction
and retail services business. The presence of its brokers in on-site project
leasing offices can provide the Company with insights into its customers'
non-brokerage real estate needs and early opportunities to capture the client's
real estate services business. The sheer number of transactions in which its
brokers are involved can also be a source of information from which the Company
can seek to identify business opportunities in specific local or regional
markets.
The Company actively engages its brokerage force in the execution of its
marketing strategy. Brokerage personnel often work in close concert with the
Company's "city leaders," who are the professionals with overall responsibility
for operations in major national markets. Through this arrangement, key
personnel are kept abreast of national trends and of the full range of services
provided to customers in other areas in the United States and around the world.
The ongoing dialogue among these professionals serves to increase their level of
expertise, and is supplemented by other more formal education such as that
provided at "Trammell Crow University," which offers sales and motivational
training as well as direct exposure to personnel from the Company's other lines
of business. Moreover, the brokerage force is financially rewarded for
cross-selling efforts which result in new engagements for the Company, such as a
development project, the acquisition of a new infrastructure management account,
or assistance across geographic service lines which enables the Company to
acquire additional brokerage business. Brokerage personnel also earn commissions
and are eligible for profit sharing programs, participations and other forms of
incentive compensation. These incentives are designed to underscore the
Company's belief that the brokerage business is often a key point of entry for
new clients, and is thus integral to firm-wide efforts to cross-sell a full
range of services.
The Company intends to more aggressively recruit and hire (either
individually or through acquisitions) additional brokerage professionals
experienced primarily in the areas of investment sales and tenant
representation. The Company believes that the quality brand identification of
its name, the platform of a full range of services to offer clients, the ability
to learn and execute additional real estate services and the Company's
incentive-based compensation system create an environment conducive to
attracting the most experienced and capable brokerage professionals.
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INFRASTRUCTURE MANAGEMENT SERVICES
The Company is a leading provider of infrastructure management services to
major corporations in the United States and Canada. The Company has established
multi-year relationships with its infrastructure management services clients,
often providing dedicated personnel on-site and integrating its accounting and
management information systems with those of its clients. The Company's
infrastructure management revenues have grown from $16.4 million in 1993 to
$68.7 million in 1997, representing 21.9% of the Company's total 1997 revenues.
The goal of the Company's infrastructure management services business is to
align the facilities and support services of its clients with their operational
and strategic business objectives. Occupancy-related costs frequently represent
the largest corporate expense item after compensation and benefits. The Company
believes that organizations are increasingly outsourcing their infrastructure
management functions to reduce costs, improve profitability, and refocus
management and other resources on core competencies.
The Company administers infrastructure management services through its
wholly-owned subsidiary, Trammell Crow Corporate Services, Inc., which combines
a centralized administrative, marketing and leadership organization with
client-based delivery systems. The infrastructure management services offered by
the Company consist of (i) strategic services, such as consulting, development,
properties portfolio management, real estate asset management, management of
accounting and information systems, and organizational and process strategies;
(ii) facility management (the day-to-day maintenance and repair of facilities);
(iii) facility planning and project management (such as construction, space
planning, site consolidations, facilities design, moves, adds, and changes, and
furniture, signage, and cabling); (iv) transaction services (such as
acquisitions, dispositions, project leasing, and subleasing, where, rather than
providing services on a transaction-by-transaction basis according to the
industry's traditional model, the Company seeks to manage a client's entire
firm-wide property acquisition and divestiture program); and (v) office services
(such as security, reprographics, mail, cafeteria, shipping and receiving, and
reception services, most often provided through a subcontractor).
The Company offers the following infrastructure management service delivery
options: (i) dedicated Company employees located at a client site; (ii) a team
of Company employees dedicated to a client but located off the client's site at
Company offices; and (iii) a flexible, nationwide network of Company personnel
providing the full menu of the Company's real estate services from the Company's
city offices. Most of the Company's infrastructure management engagements
provide for on-site presence of Company employees, which the Company believes
enhances client communication, provides focused personal service, protects the
proprietary information of the client and enables the Company to monitor client
satisfaction on an ongoing basis.
The Company has developed expertise in providing infrastructure management
services to clients in the financial services, healthcare, oil and gas and
technology/communications industries. The growth, consolidation and regulatory
changes taking place in these industries have increased the importance of
infrastructure management to these corporations and have caused them to seek to
improve productivity by rationalizing facilities organization and eliminating
redundant assets. The Company believes that there is opportunity to grow by
targeting clients within these industries. For example, within the financial
services industry, the Company has grown from one client in 1993 to 14 clients
as of December 31, 1997, and from 3 million square feet under management in 1993
to approximately 45 million square feet as of December 31, 1997.
The Company also believes that it has an opportunity to achieve growth in
its infrastructure management services business by developing expertise in
additional industries. In an effort to expand into the higher education
industry, in February 1998, the Company entered into an agreement (the "UPenn
Contract") with the University of Pennsylvania ("UPenn") pursuant to which the
Company will become the exclusive provider of certain infrastructure management
services with respect to designated properties
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and grounds of UPenn that are expected to encompass at least 9.4 million square
feet. The Company will provide management of operations, maintenance, utilities,
facilities planning and design, small renovation work, grounds-keeping, owner
representation for construction, and accounting and financial reporting services
to UPenn. The Company will also provide real estate portfolio and transaction
management services, such as property acquisitions and dispositions and
construction management services. The UPenn Contract has a one-year term with an
automatic nine-year extension subject to UPenn's receipt of a favorable tax
ruling from the Internal Revenue Service. In conjunction with the extension, the
Company will make a payment to UPenn of $26.0 million and, subject to certain
conditions, six additional payments of $1.0 million per year beginning in June
2002.
The Company seeks to enter into multi-year infrastructure management
contracts with its clients. Most contracts are structured so the Company
receives a monthly base fee and annual incentives if certain agreed-upon
performance targets are satisfied. Most contracts also provide for the
reimbursement of client-related personnel costs and associated overhead
expenses. In many cases, these revenue sources are augmented by variable
commission-based revenues from brokerage, facility planning and project
management activities.
DEVELOPMENT AND CONSTRUCTION SERVICES
Since 1991, the Company has focused its efforts in the commercial real
estate development business on providing development and construction services
to third party build-to-suit customers and investors in office, industrial and
retail projects. While the Company has decreased its economic exposure to the
cyclical nature of the real estate investment markets by shifting to a service
oriented approach, it has retained the capability to implement active and
sizeable development programs, primarily on behalf of its clients, but also for
its own account. In 1997, revenues from the Company's development and
construction business were $50.8 million (consisting of $40.1 million in service
revenues, $0.5 million in income from investments in unconsolidated subsidiaries
and $10.2 million in gain on disposition of real estate), representing 16.2% of
the total revenues for the Company. Since 1992, the Company has developed and
redeveloped approximately 42.7 million square feet of projects with aggregate
project costs of approximately $2.6 billion. In 1997, the Company started
approximately 12.3 million square feet of development projects with an estimated
aggregate cost of $858.4 million. In 1993, 1994, 1995 and 1996, the Company
started approximately 2.8 million, 5.1 million, 10.0 million and 12.4 million
square feet, respectively, of development projects.
The Company provides its clients with services that are vital in all stages
of the development and construction process, including: (i) evaluating project
feasibility, budgeting, scheduling and cash flow analysis; (ii) site
identification, due diligence and acquisition; (iii) procurement of approvals
and permits, including zoning and other entitlements; (iv) coordination of
project design and engineering, (v) construction bidding and management and
tenant finish coordination; (vi) project close-out and user move coordination;
(vii) general contracting; and (viii) project finance advisory services.
The Company's development and construction services engagements are
typically staffed with a local/ regional team which includes a senior company
executive in the role of project general manager and one or more specialists in
the areas of physical project development and construction. The Company
currently employs approximately 25 senior executives with an average of 13 years
experience in all aspects of sourcing development projects and providing general
management and project finance advisory capabilities for those projects. The
Company also employs approximately 55 other individuals with an average of more
than 10 years experience who are responsible for various aspects of the
development process, including the execution of physical development and
construction management responsibilities. The Company intends to dedicate
approximately 10 of these full-time employees to promote and oversee its
development and construction services business on a national basis while
continuing to leverage the expertise and contacts of the Company's local and
regional development professionals. This national team will focus on enhancing
the value of large scale development projects, mitigating development and
9
<PAGE>
construction risk in the Company's portfolio of business and accessing the
capital markets to arrange for development programs/funds with institutional
investors.
The Company typically receives a fee for its development services that is
based on a negotiated percentage of a project's cost. Incentive bonuses may be
received for completing a project under budget and within certain critical time
deadlines. The Company has also been flexible in negotiating other incentive
compensation arrangements that allow the Company to participate in the
investment returns on projects it develops for its clients. The Company may make
a co-investment with its clients (typically no more than 5% of a project's full
construction and development cost), receive its pro rata return on its
investment in the project and also receive an incentive participation in the
project because of the Company's role in sourcing the development project and/or
executing a variety of services in the development process. The Company's
investments or co-investments in real estate projects may result in an ownership
interest substantially greater than the general 5% ownership guideline. To
facilitate this activity and to further mitigate risk, the Company established
two discretionary development and investment funds which have raised $24.0
million, of which, as of December 31, 1997, $21.8 million had been invested in
projects with an aggregate construction cost of approximately $220.3 million.
In October 1997, the Company executed a non-binding memorandum of
understanding (the "Kennedy MOU") with Kennedy Associates Real Estate Counsel,
Inc. ("Kennedy") regarding a development program for multi-tenant office and
business park development projects (the "Kennedy Development Program"). Under
the arrangement described in the Kennedy MOU, subject to certain conditions, the
Company and Kennedy would enter into a series of agreements pursuant to which
Kennedy would obtain a 100% ownership interest in the project and the Company
would agree to develop, market and manage the project in exchange for
development, marketing and management fees and development incentive fees. The
Kennedy MOU contemplates that the markets in which this development program
would initially focus would be suburban Philadelphia, northern Virginia,
Washington, DC, Baltimore, northern New Jersey, Pittsburgh, Chicago, Milwaukee,
Kansas City, Denver, Los Angeles, San Francisco, Seattle and Portland. The
Company has also executed a non-binding memorandum of understanding (the "TriNet
MOU") with TriNet Corporate Realty Trust, Inc. ("TriNet") regarding a
development program for office, research and development and industrial pre-sale
build-to-suit projects (the "TriNet Development Program"). Under the arrangement
described in the TriNet MOU, subject to certain conditions, a joint venture
entity owned by the Company and TriNet would enter into a land purchase
agreement for the project site and a lease agreement with the tenant who would
occupy the project site. The Company, TriNet and the joint venture entity would
then enter into a series of definitive agreements pursuant to which the joint
venture entity would take ownership of the project during construction and
obtain construction financing, and the Company would receive certain fees in
exchange for development services it renders in connection with the project and
would receive profits on the sale of the project by the joint venture entity to
TriNet.
In February, 1998, the Company entered into a memorandum of understanding
(the "AMB MOU") with AMB Property L.P. ("AMB") relating to the formation of a
strategic alliance to develop and manage industrial properties in targeted
distribution markets. Particular emphasis will be placed on multi-tenant freight
forwarding facilities adjacent to major airports and industrial submarkets of
targeted metropolitan areas such as Chicago, Seattle and Northern New Jersey.
The AMB MOU contemplates that all of the Company's management contracts with
AMB, covering approximately 13.8 million square feet of industrial space as of
February 1998, will be converted from industry standard contracts terminable
upon 30 days notice to five-year term contracts terminable only for cause.
The market for development and construction services is cyclical and is
driven by various economic conditions. The Company believes that current market
conditions should increase the short and medium term demand for development
services offered by the Company. The demand for commercial real estate
properties in the suburban office, downtown office and industrial markets has
increased over the last several years, driven mainly by the acquisition
activities of buyers, including real estate investment trusts
10
<PAGE>
and other investors. Finally, the current values of development properties are
often meeting and exceeding the replacement costs for those properties, while
construction costs remain relatively stable.
The Company's development activities generate business opportunities for the
Company's other service lines which will support the Company's earnings when
development and construction revenues decrease as a result of market conditions.
Because the Company provides development and construction services to third
parties, including clients who invest in build-to-suit projects, the Company
believes that the adverse effect on its revenues when speculative development
activities are curtailed in a market down cycle should be mitigated. When
development activity reaches a down cycle in the future, the Company intends to
use professionals from its development and construction services business to
pursue opportunistic property acquisitions with its established capital
partners.
RETAIL SERVICES
The Company's retail services business focuses on providing comprehensive
real estate services to major retailers and retail real estate owners. In 1996,
the Company formed a subsidiary, Trammell Crow Retail Services, Inc. ("TCRS"),
to consolidate the focus of the Company's retail services management group and
to take better advantage of market growth opportunities. The Company believes
that by providing its full array of real estate services through TCRS, it is
able to better serve its national retail customers (who demand specialized
property and market knowledge) and compete with other service providers whose
sole focus is a retail customer base. The Company's revenues from retail
services in 1997 were $5.3 million, representing 1.7% of the Company's total
revenues for 1997. After giving pro forma effect to the Doppelt Acquisition (as
described below) as of January 1, 1997, the Company's revenues from its retail
service business in 1997 would have been $10.4 million.
The primary services provided to the Company's retail clients include
brokerage services, such as tenant representation for site acquisition and
surplus space dispositions, and development services, such as predevelopment
activities, project finance advisory services and construction oversight. The
Company also acquires, rehabilitates and sells certain retail properties which
the Company believes to be undervalued. In the future, the Company will seek to
combine the expertise of its retail business leaders with that of its
development services personnel to formulate programs for developing retail
assets, both for the Company's account and for the account of third parties,
including third parties in which the Company may own an equity interest.
The Company delivers tenant representation services and disposition services
through TCRS utilizing a network of the Company's local brokers (including those
formerly employed by Doppelt & Company) and third-party providers. The Company
generates commission revenue from these services which are shared with brokers
in the local markets. The Company believes that the Doppelt Acquisition will
enhance its ability to recruit brokerage professionals, build its local retail
brokerage capabilities and capture a greater portion of these commission
revenues.
Development services are delivered through BTS, Inc., the Company's national
retail build-to-suit subsidiary. BTS, Inc. specializes in predevelopment
activities, including land acquisition and procurement of entitlements. For its
development services to third parties, the Company typically earns a base fee
plus an incentive fee that is paid out of the sale proceeds upon project
completion.
The Company intends to establish a fund to acquire freestanding retail
properties and resell those properties within an anticipated hold period of no
more than six months after their acquisition. The Company's goal will be to
generate revenue through this activity by collecting rental income during the
period that the asset is owned and by capturing a spread on the purchase and
sale of the properties. The Company also intends to make selective investments
in retail real estate projects for its own account. The Company believes that,
by providing real estate services to its national retail customers, it has
developed a proficiency in identifying retail investment opportunities and
formulating and implementing retail development programs.
11
<PAGE>
In furtherance of its goal to be the leading national retail real estate
company, in August 1997 the Company acquired substantially all of the assets of
Doppelt pursuant to an Acquisition Agreement (the "Acquisition Agreement"). As
consideration for these assets, TCRS delivered to Doppelt (i) approximately
$20.7 million in cash, (ii) a subordinated promissory note of Trammell Crow
Company, a Texas close corporation and predecessor to the Company (the
"Predecessor Company"), payable to Doppelt in the principal amount of $6.0
million, and (iii) the right to receive up to $2.0 million of additional
purchase price if future commissions collected by TCRS from any source exceed
$7.0 million, subject to reduction based on the amount of certain of Doppelt's
uncollected accounts receivable and certain leases executed by Doppelt as of
August 22, 1997, for which a commission is not collected by TCRS prior to August
22, 1999. The Predecessor Company also paid Mr. Doppelt $2.0 million upon the
execution of an employment agreement. Pursuant to the Acquisition Agreement, the
Predecessor Company delivered to Doppelt a promissory note in the principal
amount of $6.0 million. In November 1997, the Company issued to Doppelt &
Company 342,857 shares of Common Stock (the "Doppelt Shares") in payment of the
note. Doppelt has been in operation since 1981 and has specialized in
supplementing or, in some cases, replacing the real estate departments of retail
companies by providing tenant representation and lease disposition services to
its clients.
COMPETITION
The Company competes in several business lines within the commercial real
estate industry, each of which is highly competitive on a national and a local
level. Depending on the business line, the Company faces competition from other
real estate services providers, consulting firms and in-house corporate real
estate and infrastructure management departments. Some of the Company's
principal competitors in certain of these business lines have capabilities and
financial resources equal to or greater than those of the Company and a broader
global presence. Many of the Company's competitors are local or regional firms
which are smaller than the Company on an overall basis, but may be substantially
larger than the Company on a local or regional basis. While the Company does not
believe that any of its competitors are dominant in the business lines in which
the Company operates, the providers of real estate services that compete with
the Company on a national level include LaSalle Partners Incorporated, CB
Commercial/Koll Management Services, Cushman & Wakefield, Inc. and Insignia
Financial Group. The Company has faced increased competition in recent years
which has, in some cases, resulted in lower service fees, or compensation
arrangements more closely aligned with the Company's performance in rendering
services to its clients. In recent years, there has also been a significant
increase in the number of REITs which self-manage their real estate assets.
Continuation of this trend could decrease the demand for services offered by the
Company, and thereby increase competition. In general, the Company expects the
industry to become increasingly competitive in the future. There can be no
assurance that such competition will not have a material adverse effect on the
Company's business, financial condition or results of operations.
EMPLOYEES
As of December 31, 1997, the Company had approximately 3,400 employees.
Employees of the Company at certain properties located in the San Francisco,
California metropolitan market are currently represented by a labor union.
Management believes that its ongoing labor relations are good. The collective
bargaining agreement with employees with Tri-State Center I, Inc. and Tri-State
Center II, Inc., both affiliates of the Company, will expire on May 31, 1998,
and the collective bargaining agreement with employees of Itasca Center III,
L.P. and Urban Center XI, L.P., both affiliates of the Company, will expire on
May 31, 1998.
INSURANCE
The Company has the types of insurance coverage, including comprehensive
general liability and excess umbrella liability insurance, that it believes are
appropriate for a company in the lines of business in which it operates. The
Company's management will use its discretion in determining the amounts,
coverage limits and deductibility provisions of appropriate insurance coverage
on the Company's properties and operations at a reasonable cost and on suitable
terms. This might result in insurance coverage that,
12
<PAGE>
in the event of a substantial loss, would not be sufficient to pay the full
value of the damages suffered by the Company.
TRADEMARKS
The trade name "Trammell Crow" is material to the Company's business. The
Company has entered into a License Agreement with CFH Trade-Names, L.P. ("CFH"),
an affiliate of Crow Family Partnership, L.P. ("Crow Family"), with respect to
such business and trade names (the "License Agreement"). See "ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
ENVIRONMENTAL LIABILITY
Various federal, state and local laws and regulations impose liability on
current or previous real property owners or operators for the cost of
investigating, cleaning up or removing contamination caused by hazardous or
toxic substances at the property. In the Company's role as a property manager,
it could be held liable as an operator for such costs. Such liability may be
imposed without regard to the legality of the original actions and without
regard to whether the Company knew of, or was responsible for, the presence of
such hazardous or toxic substances, and such liability may be joint and several
with other parties. If the liability is joint and several, the Company could be
responsible for payment of the full amount of the liability, whether or not any
other responsible party is also liable. Further, any failure by the Company to
disclose environmental issues could subject the Company to liability to a buyer
or lessee of the property. In addition, some environmental laws create a lien on
the contaminated site in favor of the government for damages and costs it incurs
in connection with the contamination. The operator of a site also may be liable
under common law to third parties for damages and injuries resulting from
hazardous substances or environmental contamination at a site, including
liabilities relating to the presence of asbestos-containing materials. There can
be no assurance that any of such liabilities to which the Company or any of its
affiliates may become subject will not have a material adverse effect on the
Company's business and results of operations.
Some of the properties owned, operated, or managed by the Company are on,
adjacent to or near properties that have contained in the past, or currently
contain, underground and/or above-ground storage tanks used to store regulated
substances such as petroleum products or other hazardous or toxic substances.
Some of the properties owned, operated or managed by the Company are in the
vicinity of properties which are currently, or have been, subject to releases of
regulated substances and remediation activity, and the Company is currently
aware of several properties owned, operated or managed by the Company which may
be impacted by regulated substances which may have migrated from adjacent or
nearby properties or which may be within the borders of areas suspected to be
impacted by regional groundwater contamination. In addition, the Company is
aware of the presence or the potential presence of regulated substances at
several properties owned, operated or managed by it which may have resulted from
historical or ongoing soil or groundwater activities on those properties. Based
on the information available to date, the Company believes that the
environmental issues described above are being or have been appropriately
managed and will not have a material adverse effect on the Company.
There can be no assurance that environmental liabilities or claims will not
adversely affect the Company in the future.
GOVERNMENT REGULATION
The Company and its brokers, salespersons and, in some instances, property
managers are regulated by the states in which they do business. These
regulations include licensing procedures, prescribed fiduciary responsibilities
and anti-fraud prohibitions. The Company's activities are also subject to
various federal and state fair advertising, trade, housing and real estate
settlement laws and regulations and are affected by laws and regulations
relating to real estate and real estate finance and development. In particular,
a number of states and localities have imposed environmental controls and zoning
restrictions on the development of real estate.
13
<PAGE>
The Company is subject to laws governing its relationship with employees,
including minimum wage requirements, overtime, working conditions and work
permit requirements. The Company believes that it has the necessary permits and
approvals to operate each of its properties and their respective businesses.
Under the Americans with Disabilities Act of 1990, all public accommodations
are required to meet certain federal requirements related to access and use by
disabled persons. While the Company believes that its properties in which it
holds an equity interest are substantially in compliance with these
requirements, a determination that the Company is not in compliance with the ADA
could result in the imposition of fines or an award of damages to private
litigants.
ITEM 2. PROPERTIES
The Company's executive offices are located at 2001 Ross Avenue, 3400
Trammell Crow Center, Dallas, Texas 75201 and consist of approximately 25,000
square feet of leased office space. The Company's telephone number at such
address is (214) 863-3000. The Company's lease at its executive offices will
expire on December 31, 1999.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation incidental to its
business. In the Company's opinion, no litigation to which the Company is
currently a party, if decided adversely to the Company, is likely to have a
material adverse effect on the Company's results of operation or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter ended December
31, 1997.
14
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock was listed on the New York Stock Exchange ("NYSE") on
November 25, 1997 under the symbol "TCW." At March 24, 1998, 33,911,416 shares
were held by approximately 212 stockholders of record. The following table sets
forth the high and low sales prices as reported on the NYSE Composite
Transaction Tape on a quarterly basis for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1997
Fourth Quarter....................................... $ 25.75 $ 20.25
</TABLE>
The Board of Directors intends to retain earnings to finance its growth and
for general corporate purposes and, therefore, does not anticipate paying any
dividends in the foreseeable future. Any future payment of dividends will be at
the discretion of the Board of Directors and will depend upon the Company's
results of operations, financial condition, cash requirements and other factors
deemed relevant by the Board of Directors, including the terms of the Company's
indebtedness. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES."
From 1994 through 1997, the Predecessor Company declared annual cash
dividends which were paid during the first six months of each year and were
based upon the Predecessor Company's earnings in the prior year. The aggregate
amount of dividends paid to the Predecessor Company's shareholders during the
years ended December 31, 1994, 1995 and 1996 were $1,672,000, $2,475,000 and
$2,890,000, respectively. In April 1997, the Predecessor Company paid dividends
based on 1996 earnings in the aggregate amount of approximately $8,200,000. In
October 1997, the Predecessor Company declared and paid dividends in an
aggregate amount of approximately $6,826,000 based on earnings through September
30, 1997. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-- REINCORPORATION TRANSACTIONS."
RECENT SALES OF UNREGISTERED SECURITIES
On August 21, 1997, the Company was incorporated in Delaware and 1,000
shares of Common Stock were issued to Crow Family Partnership, L.P. ("Crow
Family") for $1,000 in cash. Such shares were issued without registration under
the Securities Act, in reliance on Section 4(2) of the Securities Act.
On August 22, 1997, TCRS acquired the business of Doppelt and the Company
issued a convertible subordinated note to Doppelt which was converted
immediately prior to the consummation of the Offering (as defined herein) into
342,857 shares of Common Stock. The note represents a portion of the
consideration paid in connection with the Doppelt Acquisition. The shares of
Common Stock issued to Doppelt upon conversion of the note were issued without
registration under the Securities Act, in reliance on Section 4(2) of the
Securities Act. See "ITEM 1. BUSINESS--RETAIL SERVICES."
Immediately prior to the closing of the Offering, in connection with the
Reincorporation Merger, the Company issued to the shareholders of the
Predecessor Company 25,502,964 shares of Common Stock. Such shares were issued
without registration under the Securities Act, in reliance on Section 4(2) of
the Securities Act and Rule 506 promulgated thereunder. See "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--REINCORPORATION TRANSACTIONS."
Immediately prior to the closing of the Offering, the Company issued to CFH
2,295,217 shares of Common Stock. The shares were issued in consideration of the
execution of the License Agreement. Such shares were issued without registration
under the Securities Act, in reliance on Section 4(2) of the Securities Act and
Rule 506 promulgated thereunder. See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
15
<PAGE>
APPLICATION OF OFFERING PROCEEDS
As of March 27, 1998, the net proceeds to the Company from the initial
public offering of shares of the Company's Common Stock completed in 1997 (the
"Offering") (File No. 333-34859, declared effective November 24, 1997) of
approximately $90.2 million have been used as follows: (i) approximately $31.0
million was used to repay all outstanding indebtedness under a credit facility
that was terminated upon the closing of the Offering, (ii) approximately $1.6
million was paid to J. McDonald Williams in connection with the termination of
the Company's consulting arrangements with Mr. Williams, (iii) approximately
$8.4 million was used to repay other indebtedness of the Company, as described
below and (iv) approximately $26.3 million was used for development purchases.
The remaining proceeds were used for working capital. See "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
LIQUIDITY AND CAPITAL RESOURCES" and "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS." Pending the use of proceeds, the Company invested the net
proceeds in investment grade short-term, interest bearing securities.
Approximately $31.0 million of the net proceeds from the Offering were used
to repay indebtedness owed by the Company under a credit facility that was
terminated upon the closing of the Offering. Approximately $30.0 million of such
indebtedness was incurred on August 22, 1997, bore interest at a rate of 6.625%
per year and had a maturity date of February 22, 1998. Approximately $7.0
million of such indebtedness was incurred in order to refinance certain
indebtedness of the Predecessor Company and approximately $22.7 million of such
indebtedness was incurred in connection with the Doppelt Acquisition. An
additional $1.0 million was incurred in October 1997 for working capital
purposes. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES."
Approximately $8.4 million of the net proceeds from the Offering were used
to reduce certain indebtedness of the Company. Of the $8.4 million of
indebtedness, approximately $4.4 million represented deferred compensation
payables owed to former employees of the Company which accrued interest at an
annual rate of 8.25% and had no stated maturity. The remaining indebtedness
included approximately $2.4 million owed under various lines of credit (which
accrued interest at annual rates ranging from 8.0% to 8.5% and had stated
maturities extending from March 1998 to April 2000), approximately $0.9 million
owed to former shareholders (which accrued interest at an annual rate of 6.1%
and had stated maturities extending from January 2000 to February 2000) and
approximately $0.7 million of indebtedness owed to Mr. Williams (which accrued
interest at an annual rate of 10.5% and had a stated maturity of October 1,
2006). See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
16
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below have been derived from the
consolidated financial statements of the Company. The consolidated financial
statements of the Company as of December 31, 1996 and 1997 and for each of the
three years in the period ended December 31, 1997 have been audited by Ernst &
Young LLP, independent auditors, whose report thereon appears elsewhere in this
report.
The selected financial data should be read in conjunction with "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," and the financial statements and notes thereto of the Company
contained elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Property management services............................ $ 90,954 $ 99,609 $ 92,970 $ 90,179 $ 87,756
Brokerage services...................................... 47,299 48,652 61,960 72,095 91,053
Infrastructure management services...................... 16,401 27,063 38,681 50,836 68,719
Development and construction services................... 14,377 12,792 20,382 22,732 40,054
Retail services......................................... 1,306 1,966 1,510 2,393 5,318
Income from unconsolidated subsidiaries................. 465 3,141 114 594 512
Gain on disposition of real estate...................... -- 4,646 5,026 6,630 10,241
Other................................................... 3,759 3,039 6,559 9,996 9,986
--------- --------- --------- --------- ---------
Total revenues.......................................... 174,561 200,908 227,202 255,455 313,639
Salaries, wages and benefits............................ 106,606 115,330 130,248 137,794 161,425
Non-recurring compensation costs........................ -- -- -- -- 33,085
Commissions............................................. 15,856 20,788 23,730 27,119 39,121
General and administrative.............................. 35,365 35,282 40,671 41,421 55,884
Profit sharing.......................................... 8,292 16,562 15,893 20,094 23,514
Other................................................... 4,255 7,284 8,526 9,087 17,997
--------- --------- --------- --------- ---------
Operating costs and expenses............................ 170,374 195,246 219,068 235,515 331,026
--------- --------- --------- --------- ---------
Income (loss) before income taxes....................... 4,187 5,662 8,134 19,940 (17,387)
Income tax provision (benefit).......................... 1,854 2,636 3,793 7,826 (3,367)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary gain................. 2,333 3,026 4,341 12,114 (14,020)
Extraordinary gain...................................... 188 782 -- -- --
--------- --------- --------- --------- ---------
Net income (loss)....................................... $ 2,521 $ 3,808 $ 4,341 $ 12,114 $ (14,020)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma loss per share (basic and diluted)(1)......... $ (.42)
---------
---------
OTHER DATA:
EBITDA, as adjusted(2).................................. $ 16,969 $ 29,686 $ 32,033 $ 48,915 $ 59,522
Cash provided by (used in) operating activities......... 7,556 15,907 10,648 25,148 (4,978)
Cash used in investing activities....................... (1,974) (2,748) (646) (5,019) (21,322)
Cash provided by (used in) financing activities......... (4,412) 93 (5,457) (1,779) 64,542
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 22,358 $ 35,610 $ 40,155 $ 58,505 $ 96,747
Total assets............................................ 55,774 99,867 114,315 194,314 326,236
Long-term debt.......................................... 8,425 9,762 7,065 12,361 2,430
Notes payable on real estate held for sale.............. -- 22,914 13,182 67,810 76,623
Deferred compensation................................... 14,661 21,468 25,883 20,963 8,391
Total liabilities....................................... 43,767 85,516 95,090 160,018 169,305
Minority interest....................................... 27 278 3,932 3,294 19,859
Stockholders' equity.................................... 11,980 14,074 15,293 31,002 137,072
</TABLE>
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<PAGE>
Summarized operating data by business line for the year ended December 31,
1997 (in thousands):
<TABLE>
<CAPTION>
DEVELOPMENT
PROPERTY INFRASTRUCTURE AND
MANAGEMENT BROKERAGE MANAGEMENT CONSTRUCTION RETAIL TOTAL
------------ ----------- ------------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service revenues.................... $ 87,756 $ 91,053 $ 68,719 $ 40,054 $ 5,318 $ 292,900
Income from unconsolidated
subsidiaries...................... -- -- -- 512 -- 512
Gain on disposition of real
estate............................ -- -- -- 10,241 -- 10,241
Other............................... 6,678 189 193 1,678 1,248 9,986
------------ ----------- ------------- ------------ --------- ---------
Total revenues...................... 94,434 91,242 68,912 52,485 6,566 313,639
Operating costs and expenses(3)..... 104,070 100,041 70,800 48,797 7,318 331,026
------------ ----------- ------------- ------------ --------- ---------
Income (loss) before income taxes... $ (9,636) $ (8,799) $ (1,888) $ 3,688 $ (752) $ (17,387)
------------ ----------- ------------- ------------ --------- ---------
------------ ----------- ------------- ------------ --------- ---------
EBITDA, as adjusted(2).............. $ 16,421 $ 10,639 $ 8,471 $ 22,520 $ 1,471 $ 59,522
</TABLE>
- ------------------------------
(1) Based on 33,583,467 pro forma weighted average shares outstanding, which
includes the shares issued in connection with the Company's initial public
offering and related transactions as outstanding for the full year. Prior
years' earnings per share is not relevant due to the change in capital
structure effected in connection with the Reincorporation Transactions in
1997.
(2) EBITDA, as adjusted, represents earnings before interest, income taxes,
depreciation and amortization, royalty and consulting fees, profit sharing,
the non-cash, non-recurring charge to income related to the stock options
granted under the Predecessor Company's 1997 Stock Option Plan assumed by
the Company in connection with the Reincorporation Transactions (the
"Assumed Option Plan") and the non-recurring charge to income resulting from
the settlement of claims by certain former employees arising out of a
terminated stock appreciation rights plan. Management believes that EBITDA,
as adjusted, can be a meaningful measure of the Company's operating
performance, cash generation and ability to service debt. However, EBITDA,
as adjusted, should not be considered as an alternative to: (i) net earnings
(determined in accordance with generally accepted accounting principles
("GAAP")); (ii) operating cash flow (determined in accordance with GAAP); or
(iii) liquidity. There can be no assurance that the Company's calculation of
EBITDA, as adjusted, is comparable to similarly titled items reported by
other companies.
(3) Includes a non-cash, non-recurring charge to compensation expense of
$33,085,000 related to options granted under the Assumed Option Plan as
follows: Property Management--$13,554,000; Brokerage--$10,431,000;
Infrastructure Management-- $4,095,000; Development and
Construction--$3,815,000; and Retail--$1,190,000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto and the other
information included in Item 14(a)(1) and (2) of this Annual Report on Form
10-K.
REINCORPORATION TRANSACTIONS
The Company is a Delaware corporation that was formed in August 1997 to
become the successor to Trammell Crow Company, a Texas close corporation (the
"Predecessor Company"). In connection with the Offering, the Company and TCC
Merger Sub, Inc., a wholly owned subsidiary of the Company ("Merger Sub"),
entered into a series of transactions (the "Reincorporation Transactions") to
convert the legal form in which the Predecessor Company's business and
operations were held from a Texas close corporation to a Delaware corporation.
As part of the Reincorporation Transactions, immediately prior to the
closing of the Offering, CFH, an affiliate of Crow Family (which was then the
Company's sole stockholder), entered into the License Agreement with the
Company, pursuant to which CFH transferred to the Company, subject to certain
quality standards, the perpetual right (the "Trade Name License") to use the
name "Trammell Crow Company," and variations thereof, throughout the world. See
"ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." In exchange for the
grant of the Trade Name License, the Company issued to CFH 2,295,217 shares of
Common Stock. See "ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS--RECENT SALES OF UNREGISTERED SECURITIES."
18
<PAGE>
Following the grant of the Trade Name License, Merger Sub was merged (the
"Reincorporation Merger") with and into the Predecessor Company. As a result of
the Reincorporation Merger, the Predecessor Company survived as a wholly-owned
subsidiary of the Company and all of the shares of the Predecessor Company's
common stock issued and outstanding immediately prior to the effective time of
the Reincorporation Merger were converted into, in the aggregate, 25,502,964
shares of Common Stock. Upon completion of the Reincorporation Merger, the
Company and certain of its stockholders entered into a Stockholders' Agreement.
See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
OVERVIEW
Trammell Crow Company is one of the largest diversified commercial real
estate service firms in the United States. As a means of addressing the
comprehensive real estate service requirements of its diverse group of clients,
the Company is organized into five principal lines of business. Property
management services include serving the clients' needs with respect to all
aspects of building operations, tenant relations and oversight of building
improvement processes, primarily for building owners who do not occupy the
properties managed by the Company. Brokerage services include advising buyers,
sellers, landlords and tenants in connection with the sale and leasing of
office, industrial and retail space and land. Infrastructure management entails
providing comprehensive day-to-day occupancy related services, principally to
large corporations which occupy commercial facilities in multiple locations.
Specific infrastructure management services include administration, day-to-day
maintenance and repair of client occupied facilities and strategic functions
such as space planning, relocation coordination, facilities management and
portfolio management. The development and construction services provided by the
Company include financial planning, site acquisition, procurement of approvals
and permits, design and engineering coordination, construction bidding and
management and tenant finish coordination, project close-out and user move
coordination, general contracting and project finance advisory services. The
Company's retail services business provides tenant representation, disposition,
development and financial services to national and global retail customers.
The Company has benefited from the recovery of the real estate market in the
early 1990's. The Company's annual revenues increased to $313.6 million in 1997
from $227.2 million in 1995. This revenue growth was achieved during a period
when the composition of the Company's revenues shifted significantly as the
Company increased the role which brokerage, infrastructure management,
development and construction and retail services play in its overall strategy.
Rising rental and occupancy rates have largely mitigated the adverse effects
that a decrease in square footage under the Company's management might otherwise
have had on the Company's property management services revenues, and have had
the residual effect of increasing revenues from the Company's other business
lines. The steady cash flows produced by the Company's property management
services business have allowed the Company to expand its presence in these
complementary service businesses to meet the needs of its client base. From 1995
to 1997, revenues from property management services decreased by approximately
5.6%, and as a percentage of the Company's total revenues, they declined from
40.9% to 28.0%. Over this same period, revenues from brokerage, infrastructure
management, development and construction (including gain on disposition of real
estate and income from unconsolidated subsidiaries) and retail services
increased from a combined 56.3% of total revenues to 68.9% of total revenues.
The Company's revenue streams consist primarily of recurring payments made
pursuant to service contracts and variable transaction-oriented payments. The
Company typically receives base monthly fees from clients for services provided
in its property management business. A majority of the fees generated by the
Company's infrastructure management business are contractual and recurring in
nature. The fees generated in the Company's brokerage and retail service
businesses are typically paid in connection with the consummation of a
transaction such as the purchase or sale of commercial property or the execution
of a lease. The Company typically earns fees for development and construction
services which are based upon a negotiated percentage of a project's cost, and
the Company may receive incentive bonuses for completing
19
<PAGE>
a development project under budget and within certain critical time deadlines.
Although the fees generated by the Company's brokerage service and development
and construction service businesses are not typically recurring in nature, a
majority of the aggregate revenues generated by these businesses in 1997 was
earned in the performance of services relating to properties included in the
Company's approximately 240 million square feet property management and leasing
portfolio. In 1997, the percentage of the Company's total revenues generated by
each of its property management, brokerage, infrastructure management,
development and construction and retail service businesses was 28.0%, 29.0%,
21.9%, 16.2% and 1.7%, respectively.
A majority of the Company's revenues that are not generated by its primary
businesses are generated by an insurance agency subsidiary and are based upon
commissions on insurance written on properties included in the Company's
property management and leasing portfolio and on workmen's compensation
insurance for the Company's employees. Despite a reduction in square feet under
the Company's management over the last five years, these other revenues have
increased significantly because of more favorable commission rates with
insurance carriers. In 1997, this subsidiary generated revenues of $4.2 million.
The Company's operating expenses in 1997 consisted of salaries, wages and
benefits, commissions, general and administrative expenses, rent, depreciation
and amortization expense, interest, profit sharing, royalty and consulting fees
and minority interest. Excluding the non-recurring charge to compensation for
certain stock options granted under the Assumed Option Plan in 1997, salaries,
wages and benefits and commissions, which constitute a majority of the Company's
total operating costs and expenses, tend to be relatively constant as a
percentage of revenues on an annual basis.
Since 1991 the Company has maintained a profit sharing plan for key
employees (the "Profit Sharing Plan"). Each participant in the Profit Sharing
Plan has an account that is adjusted annually to reflect the participant's
percentage of the earnings of a profit sharing unit or a designated project,
cash distributions and other matters. Distributions to participants may only be
made from available cash (as defined in the Profit Sharing Plan), and any
difference between the amount expended and the amount paid to the participants
is recorded as deferred compensation. The Company's Board of Directors approves
the amount of earnings before profit sharing which will be available to profit
sharing participants. In September and October 1997, the Company made
distributions of approximately $11.3 million in the aggregate in partial payment
of deferred compensation balances. In connection with the Offering, the Company
terminated any future profits participation under the Profit Sharing Plan and
partially terminated ongoing participation in existing projects. Of the
approximately $21.3 million balance that was accrued as deferred compensation
under the Profit Sharing Plan as of the time of the Offering, approximately $4.4
million was paid in January 1998 to retired Profit Sharing Plan participants
from the proceeds of the Offering, and the remaining $16.9 million will be paid,
without interest, in roughly equal quarterly installments in 1998 and 1999.
Profit sharing expense attributable to projects, to the extent profit
participation in projects was not terminated prior to the closing of the
Offering, will continue to accrue until the projects are sold by the Company.
Management believes that the termination of any future profits participation
under the Profit Sharing Plan should have a positive effect on the Company's net
income. Payment of deferred compensation balances during 1998 and 1999 should
decrease the Company's net cash flow.
Prior to consummation of the Reincorporation Transactions, two significant
stockholders of the Company received royalty and consulting fees under certain
agreements totalling approximately 12% of earnings before profit sharing.
Expense under these arrangements aggregated $6.2 million, $4.0 million and $2.4
million in 1997, 1996 and 1995, respectively. The royalty agreement and
consulting arrangements were terminated in connection with the Offering. In
January 1998, the Company paid approximately $1.6 million to J. McDonald
Williams as a result of the termination of the consulting arrangements.
Management expects that the termination of the royalty agreement and consulting
arrangements should
20
<PAGE>
have a positive effect on the Company's net income. See "ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
Over the last three years, an average of 32.6% of the Company's income
before income taxes (adjusted in 1997 to add back the non-cash charge related to
the options granted under the Assumed Option Plan and the expense related to the
settlement of claims by certain former employees arising out of the termination
of a Stock Appreciation Rights Plan) has been generated in the fourth quarter,
due primarily to a calendar year-end focus by the commercial real estate
industry on the completion of transactions. In addition, an increasing
percentage of the Company's property management and infrastructure management
contracts provide for bonus payments if the Company achieves certain performance
targets. Such incentive payments are generally earned in the fourth quarter. In
contrast, the Company's non-variable operating expenses, which are treated as
expenses when incurred during the year, are relatively constant on a quarterly
basis. See "--QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY."
While the Company has primarily used internally generated funds to achieve
growth, it intends to continue to pursue an aggressive growth strategy by
expanding client relationships, expanding the breadth of its service offerings,
making selective co-investments with its clients and pursuing selective
strategic acquisitions. The Company believes that its ability to pursue
acquisitions will be greatly enhanced by its ability to use external sources of
capital, including the public capital markets and the commercial banking
industry, to finance such acquisitions.
RESULTS OF OPERATIONS
The following table sets forth items from the Company's Consolidated
Statements of Operations for each of the three years in the period ended
December 31, 1997, as a percent of revenue for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Property management services........................................... 40.9% 35.3% 28.0%
Brokerage services..................................................... 27.3% 28.2% 29.0%
Infrastructure management services..................................... 17.0% 19.9% 21.9%
Development and construction services.................................. 9.0% 8.9% 12.8%
Retail services........................................................ 0.7% 0.9% 1.7%
Income from unconsolidated subsidiaries................................ 0.1% 0.2% 0.2%
Gain on sale of real estate............................................ 2.2% 2.6% 3.3%
Other.................................................................. 2.8% 4.0% 3.1%
----- ----- -----------
Total revenues....................................................... 100.0% 100.0% 100.0%
Salaries, wages & benefits............................................. 57.3% 53.9% 62.0%
Commissions............................................................ 10.4% 10.6% 12.5%
General and administrative............................................. 17.9% 16.2% 17.8%
Profit sharing......................................................... 7.0% 7.9% 7.5%
Other.................................................................. 3.8% 3.6% 5.7%
----- ----- -----------
Total operating costs and expenses................................... 96.4% 92.2% 105.5%
----- ----- -----------
Income (loss) before income taxes...................................... 3.6% 7.8% (5.5)%
Income tax expense (benefit)........................................... 1.7% 3.1% (1.1)%
----- ----- -----------
Net income (loss)...................................................... 1.9% 4.7% (4.4)%
----- ----- -----------
----- ----- -----------
</TABLE>
21
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
CONSOLIDATED RESULTS
TOTAL REVENUE. The Company's total revenues grew $58.1 million, or 22.7%,
to $313.6 million in 1997 from $255.5 million in 1996.
Property management services revenue, which represented 28.0% of the
Company's total revenue in 1997, decreased $2.4 million, or 2.7%, to $87.8
million in 1997 from $90.2 million in 1996. This decrease was primarily due to
an overall decrease in the number of square feet under management, and a
relative increase in the number of square feet under management constituted by
industrial properties, which typically generate lower property management
revenues per square foot than office, retail and other commercial property
types.
Brokerage services revenue, which represented 29.0% of the Company's 1997
total revenue, increased $19.0 million, or 26.4%, to $91.1 million in 1997 from
$72.1 million in 1996. The revenue growth resulted from the increase in tenant
representation fees and in investment sales revenue resulting from
implementation of the Company's strategy to aggressively pursue these business
lines. The Company added approximately 100 brokers in 1997 to support this
growth.
Infrastructure management services revenues, which represented 21.9% of the
Company's 1997 total revenues, increased $17.9 million, or 35.2%, to $68.7
million in 1997 from $50.8 million in 1996. The revenue growth resulted
primarily from the addition of new customers. Additionally, the Company was able
to expand project management and facility management services provided to
existing customers.
On a combined basis, development and construction service fees, gain on
disposition of real estate and income from unconsolidated subsidiaries totalled
$50.8 million in 1997, which represented 16.2% of the Company's 1997 total
revenue. These combined revenues increased $20.8 million, or 69.3%, from $30.0
million in 1996. This revenue growth was primarily due to a $7.4 million
increase in development fees from $9.3 million in 1996 to $16.7 million in 1997
and an increase in construction management services fees of $2.5 million to
$11.0 million in 1997 from $8.5 million in 1996. Additionally, gain on sale of
real estate increased $3.6 million, or 54.5%, from $6.6 million in 1996 to $10.2
million in 1997.
Retail services revenue, which represented 1.7% of the Company's 1997 total
revenue, increased $2.9 million, or 121%, to $5.3 million in 1997 from $2.4
million in 1996, primarily as a result of the acquisition of Doppelt in August
1997.
OPERATING COSTS AND EXPENSES. The Company's operating costs and expenses
increased by $95.5 million, or 40.6%, to $331.0 million in 1997 from $235.5
million in 1996. The increase in operating costs is primarily due to the
non-recurring charges as a result of the completion of the Offering in December
1997. The 41.2% increase in salaries and benefits is primarily due to the $33.1
million non-cash charge related to the options granted under the Assumed Option
Plan. The remaining increase in salaries is due to the increased staffing
required for the infrastructure management services business. The increase in
commissions is due to the growth in the Company's brokerage services and retail
services businesses. Approximately $4.4 million of the increase in general and
administrative expense relates to the non-recurring charge to income resulting
from the settlement of claims by certain former employees arising out of a
terminated Stock Appreciation Rights Plan. The remaining increase in general and
administrative expenses represents approximately $2.3 million in operating
expenses relating to rental properties which were not operational in 1996 and
the increased expenditures associated with the Company's technological support
systems. The Company's profit sharing expense increased by $3.4 million, or
16.9%, to $23.5 million in 1997 from $20.1 million in 1996 due to the increase
in earnings available for profit sharing. Other operating costs increased due to
$3.1 million of interest expense on real estate held for sale that became
operational in 1997, the $1.6 million accrued in connection with the termination
of the consulting agreement with Mr. Williams and increased amortization as a
result of the Doppelt acquisition.
22
<PAGE>
In 1998, the Company anticipates that the decrease in operating expenses
attributable to the termination of future profits participation under the Profit
Sharing Plan and royalty and consulting agreements will be partially offset by
an increase in compensation expense due to the impact of the new compensation
structure adopted in connection with the Offering.
INCOME (LOSS) BEFORE INCOME TAXES. The Company's income before income taxes
decreased $37.3 million, to a loss of $17.4 million in 1997 from a profit of
$19.9 million in 1996.
NET INCOME (LOSS). Net income decreased $26.1 million, to a loss of $14.0
million in 1997 from a profit of $12.1 million in 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
CONSOLIDATED RESULTS
TOTAL REVENUE. The Company's total revenue grew $28.3 million, or 12.4%, to
$255.5 million in 1996 from $227.2 million in 1995.
Property management services revenue, which represented 35.3% of the
Company's total revenue in 1996, decreased $2.8 million, or 3.0%, to $90.2
million in 1996 from $93.0 million in 1995. This decrease was primarily due to
the net reduction in square footage of property management assignments and a
relative increase in the number of square feet under management constituted by
industrial properties, which typically generate lower property management
revenues per square foot than office, retail and other commercial property
types. Recognizing a trend toward a consolidation of service providers utilized
by large institutional owners and investors, the Company implemented a national
marketing program focused on its large customers. The implementation of this
strategic initiative increased square footage under management for these
customers by 11.3 million square feet, or 12.9%, to 99.1 million square feet in
1996 from 87.8 million square feet in 1995.
Brokerage services revenue, which represented 28.2% of 1996 total revenues,
increased $10.1 million, or 16.4%, to $72.1 million in 1996 from $62.0 million
in 1995. This revenue growth resulted primarily from an increase in tenant
representation fees of $3.6 million, or 29.0%, to $16.0 million in 1996 from
$12.4 million in 1995 and the increase in investment sales revenue of $4.0
million, or 56.5%, to $11.1 million in 1996 from $7.1 million in 1995. The
Company believes that this revenue growth is attributable to the continuation of
a strategic initiative to expand its marketing services beyond project leasing
to include tenant representation, investment sales and land sales. This strategy
resulted in an increase in the aggregate number of brokers by 40, or 20.5%, to
235 in 1996 from 195 in 1995.
Infrastructure management services revenue, which represented 19.9% of the
Company's total revenues in 1996 increased $12.1 million, or 31.4%, to $50.8
million in 1996 from $38.7 million in 1995. The revenue growth resulted
primarily from the addition of new customers and the expansion of services
provided to existing customers. In addition, in September 1996, the Company
acquired the remaining outstanding stock of Primaris Corporate Services, Ltd., a
Canadian provider of infrastructure management services. This acquisition,
accounted for under the purchase method, increased revenues by approximately
$0.9 million in 1996.
Development and construction revenues include development and construction
service fees, gain on disposition of real estate and income from unconsolidated
subsidiaries. Development and construction revenue, which represented 11.7% of
1996 total revenue, increased $4.5 million or 17.4%, to $30.0 million in 1996
from $25.5 million in 1995. The revenue growth was primarily due to increases in
gross profit on general contracting services of $1.0 million, or 34.8%, to $3.9
million in 1996 from $2.9 million in 1995, a decrease in development fees of
$0.5 million, or 5.8%, to $8.5 million in 1996 from $9.0 million in 1995 and an
increase in gain on sale of real estate of $1.6 million, or 31.9%, to $6.6
million in 1996 from $5.0 million in 1995. Income from unconsolidated
subsidiaries increased $0.5 million or 421%, to $0.6 million in 1996
23
<PAGE>
from $0.1 million in 1995. In general, these service revenues are affected by
the timing of development transactions.
OPERATING COSTS AND EXPENSES. The Company's operating costs and expenses
increased by $16.4 million, or 7.5%, to $235.5 million in 1996 from $219.1
million in 1995. The increase in operating costs and expenses is primarily due
to increased salaries, wages and benefits (associated with the increased
staffing required for the infrastructure management service business) and
increased commissions (associated with increased brokerage services revenues).
The Company's profit sharing increased by $4.2 million, or 26.4%, to $20.1
million in 1996 from $15.9 million in 1995 due to the increase in profitability.
As a percentage of total revenue, operating costs and expenses declined to 92.2%
in 1996 from 96.4% in 1995, primarily as a result of the Company's ability to
spread its fixed costs over a greater revenue base.
INCOME BEFORE INCOME TAXES. The Company's income before income taxes
increased $11.8 million, or 145.1%, to $19.9 million in 1996 from $8.1 million
in 1995 due to the factors described above.
NET INCOME. Net income increased $7.8 million, or 179.1%, to $12.1 million
in 1996 from $4.3 million in 1995. As a percent of total revenue, net income
increased to 4.7% in 1996 from 1.9% in 1995.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
The following table presents unaudited quarterly results of operations data
for the Company for each of the four quarters of 1997, 1996 and 1995. This
quarterly information is unaudited but, in the opinion of management, reflects
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the information for the periods presented. The results of
operations for any quarter are not necessarily indicative of results for any
future period. Revenues and income before income taxes during the fourth fiscal
quarter historically have been somewhat greater than in the first three fiscal
quarters, primarily because the Company's clients have a demonstrated tendency
to close transactions toward the end of the fiscal year. The timing and
introduction of new contracts and other factors may also cause quarterly
fluctuations in the Company's results of operations. The fourth quarter of 1997
includes a non-cash, non-recurring charge to income of $33.1 million related to
options granted under the Assumed Option Plan and a $4.4 million non-recurring
charge to income resulting from the settlement of claims by certain former
employees arising out of a terminated Stock Appreciation Rights Plan.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- --------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1997:
Revenues............................................. $ 62,098 $ 69,344 $ 81,797 $ 100,400
Income (loss) before income taxes.................... 2,624 4,402 7,575 (31,988)
Net income (loss).................................... $ 1,601 $ 2,685 $ 4,568 $ (22,874)
1996:
Revenues............................................. $ 56,397 $ 54,299 $ 65,515 $ 79,244
Income before income taxes........................... 3,025 3,507 5,934 7,474
Net income........................................... $ 1,876 $ 2,093 $ 3,673 $ 4,472
1995:
Revenues............................................. $ 47,415 $ 53,692 $ 54,530 $ 71,565
Income before income taxes........................... 663 2,693 2,028 2,750
Net income........................................... $ 420 $ 1,371 $ 1,082 $ 1,468
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources requirements include
expenditures for real estate held for sale and payments on notes payable
associated with its development and construction activities; the
24
<PAGE>
funding of working capital needs, primarily accounts receivable from its clients
and affiliates; and the funding of capital investments. Historically, the
Company has financed its operations, investments and acquisitions with
internally generated funds, and additional liquidity has been available to the
Company through deferred compensation arrangements under its Profit Sharing
Plan. The Company terminated future profits participation under the Profit
Sharing Plan in connection with the Offering, and the Company expects that its
cash flow from operations in future periods will be greater as a result of this
change. In addition, the Company has historically financed its development and
construction services activities with construction loans secured by underlying
real estate.
Net cash flow used in operating activities totaled $5.0 million for the year
ended December 31, 1997, compared to net cash provided by operating activities
of $25.1 million in 1996. The primary reasons for this change are a decrease in
debt proceeds for real estate held for sale as the Company used internal sources
for funding these transactions. In addition, the Company made mid-year royalty,
consulting and profit sharing cash distributions for 1997 activity which are
typically paid during the first quarter of the following year. The Company also
paid more federal taxes during the year due to a higher net income (before the
effect of the non-cash charge related to the options granted under the Assumed
Option Plan). Net cash flows provided by operating activities totaled $25.1
million and $10.6 million for the years ended December 31, 1996 and 1995,
respectively. The changes in these cash flows for these periods can be
attributed primarily to increases in net income, fluctuations in the net
proceeds from real estate development and construction and variations in
accounts receivable, accounts payable and accrued expenses.
Net cash flow used in investing activities totaled $21.3 million for the
year ended December 31, 1997 compared to $5.0 million for the same period in
1996. This change is primarily attributable to the acquisition of Doppelt in
August 1997, investments in unconsolidated subsidiaries and distributions to
minority interest. These decreases were offset by distributions from
unconsolidated subsidiaries and contributions from minority interest. Net cash
flows used in investing activities totaled $5.0 million and $0.6 million for the
years ended December 31, 1996 and 1995, respectively. The changes in these cash
flows for these periods can be attributed primarily to an increase in technology
related fixed asset expenditures and decrease in contributions from minority
interest.
Net cash flow provided by financing activities totaled $64.5 million for the
year ended December 31, 1997 compared to the net cash flow used in financing
activities of $1.8 million for the same period in 1996. The reasons for this
change are due to an increase of debt proceeds, the repayment of stock loans and
the net Offering proceeds received of $90.2 million. These increases were offset
by increased debt repayments and dividends paid during the year. Net cash flows
used in financing activities totaled $1.8 million and $5.5 million for the years
ended December 31, 1996 and 1995, respectively. The changes in these cash flows
for these periods can be attributed primarily to an increase in debt proceeds
offset by repurchasing common stock into treasury.
In August 1996, the Company offered stock to certain employees and directors
in a private offering. In connection with the private offering, the Company
utilized a credit facility in the amount of $7.75 million from First Tennessee
Bank, N.A. A portion of the funds borrowed under this credit facility were used
to finance the repurchase of common stock and the remainder was loaned to
certain stockholders to allow such stockholders to pay certain tax liabilities.
This credit facility was a fully amortizing 5-year obligation which bore
interest at the base rate as announced by First Tennessee Bank, NA from time to
time plus 0.5% per annum. All amounts outstanding under this credit facility
were repaid at August 22, 1997.
On August 22, 1997, the Predecessor Company established a $35 million credit
facility with Bankers Trust Company and certain other lenders (the "BT Credit
Facility"). Under the terms of the BT Credit Facility, the Company was able to
obtain loans which were Base Rate Loans or Eurodollar Rate Loans. Base Rate
Loans bore interest at a base rate (which was the higher of the prime rate
announced from time to time by Bankers Trust Company or an average federal funds
rate plus .5%) plus a margin which ranged from 0.0% to 0.75% depending upon the
Predecessor Company's leverage ratio at the date the margin was
25
<PAGE>
determined. Eurodollar Rate Loans bore interest at an adjusted Eurodollar rate
plus a margin which ranged from 0.625% to 1.75% depending upon the Predecessor
Company's leverage ratio at the date the margin was determined. During 1997, the
Company borrowed $31.0 million under the BT Credit Facility. Approximately $7.0
million of this amount was used to refinance the debt incurred with First
Tennessee in connection with the private placement in 1996, approximately $22.7
million was used to make certain cash payments in connection with the Doppelt
Acquisition and approximately $1.0 million was used for working capital
purposes. The Company used approximately $31.0 million of the net proceeds from
the Offering to repay all amounts outstanding under the BT Credit Facility.
On December 1, 1997, the Company obtained a $150 million master line of
credit from NationsBank of Texas, N.A., a national banking association (the
"NationsBank Facility"). The Company expects to borrow under the NationsBank
Facility to finance future strategic acquisitions, fund its co-investment
activities and provide the Company with an additional source of working capital.
The NationsBank Facility contains various covenants such as the maintenance of
minimum equity and liquidity and covenants relating to certain key financial
data. The NationsBank facility also includes limitations on payment of cash
dividends or other distributions of assets and certain restrictions on
investments and acquisitions that can be made by the Company. The covenants
contained in the NationsBank Facility and the amount of the Company's other
borrowings and contingent liabilities may have the effect of limiting the credit
available to the Company under the NationsBank Facility to an amount less than
the $150 million commitment. As of December 31, 1997, the Company had not
borrowed against the credit facility and the amount available thereunder was
approximately $92.5 million. As of March 27, 1998, the Company had borrowed
$33.0 million under the NationsBank Facility, including $10.0 million to fund
its co-investment activities and $23.0 million for the acquisition of Tooley.
The shares of certain wholly-owned subsidiaries having 5% or more of the
consolidated assets, revenues or earnings of the Company, and subsidiaries which
are engaged primarily in the business of real estate development and ownership,
whose assets are not subject to any financing, having more than 5% of the
consolidated assets, revenues or earnings of the Company, are pledged as
security for this credit facility.
The Company intends to retain earnings to finance its growth and, therefore,
does not anticipate paying any dividends in the foreseeable future. The Company
believes that funds generated from operations, together with existing cash and
available credit under the NationsBank Facility will be sufficient to finance
its current operations, planned capital expenditure requirements, payment
obligations for development purchases and internal growth for the foreseeable
future. The Company's need, if any, to raise additional funds to meet its
working capital and capital requirements will depend upon numerous factors,
including the success and pace of its implementation of its growth strategy. The
Company regularly monitors capital raising alternatives to be able to take
advantage of available avenues to supplement its working capital, including
strategic corporate partnerships or other alliances, bank borrowings and the
sale of equity and/or debt securities.
IMPACT OF YEAR 2000
The Company has begun to assess the impact of the Year 2000 issue on its
operations, including the processing of its own transactions and the processing
of transactions for customers under both property management contracts and
infrastructure management services contracts.
Based on preliminary assessments, commenced in 1997, of the systems and
software used to process its own transactions, the Company believes that such
systems and software are Year 2000 compliant, or can be modified or replaced on
a timely basis to be compliant, without material cost to the Company. The
Company has recently begun assessments of the systems and software used to
process certain of its customers' transactions. Until the Company completes a
thorough assessment of its systems and software (including systems and software
used to process its customers' transactions), the Company cannot estimate the
costs and time period that will be required for any indicated modifications or
replacements of such systems and software. The Company expects to finish such
assessment, design an action plan (which will
26
<PAGE>
include specific remediation steps and timetables, expected costs, and
identification of the resources required for implementation) and begin
implementation of such action plan during 1998.
The Company also recognizes that Year 2000 issues could have an extensive
impact on the physical operation of buildings managed by the Company, such as
operation of elevators and energy management and security access systems.
Included in the Company's plans for addressing Year 2000 issues is a program to
assist the Company's customers with the identification and remediation of Year
2000 issues associated with critical systems at the customers' properties.
In addition, the Company has begun discussions with its vendors regarding
the need to be Year 2000 compliant. Although the Company has no reason to
believe that its vendors are not Year 2000 compliant (or will not be compliant
on a timely basis), the Company is unable to determine at this time the effect
that non-compliance by vendors would have on the Company's operations.
EFFECTS OF INFLATION
The Company does not believe that inflation has had a significant impact on
its results of operations in recent years. However, there can be no assurance
that the Company's business will not be affected by inflation in the future.
FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this Annual
Report on Form 10-K, including without limitation statements containing the
words "believes" "anticipates," "expects" and words of similar import, are
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other matters which may cause the actual
results, performance or achievements of the Company or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such risks,
uncertainties and other matters include, but are not limited to, (i) the fact
that a significant portion of the Company's historic revenues have been derived
from significant business activities with certain entities which are affiliated
with Crow Family, (ii) the conduct of investment or development activities by
affiliates of Crow Family that are directly competitive with the Company's
activities, (iii) confusion that may be created in the market place between the
Company and affiliates of Crow Family, (iv) the control over the affairs and
policies of the Company that could be exercised by the Company's directors,
officers, employees and affiliates due to their significant stock ownership, (v)
the Company's ability to continue to pursue an aggressive growth strategy
(including through acquisitions), (vi) the ability of the Company to manage
fluctuations in the Company's net earnings and cash flow which could result from
the Company's increased participation as a principal in real estate investments,
(vii) the Company's ability to compete in highly competitive national and local
business lines and (viii) the Company's ability to attract and retain qualified
personnel in all areas of its business (particularly management). In addition,
the Company's ability to achieve certain anticipated results will be subject to
other factors affecting the Company's business that are beyond the Company's
control, including but not limited to general economic conditions and the effect
of government regulation on the conduct of the Company's business. Given these
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such statements or publicly announce any updates or revisions to any of the
forward-looking statements contained herein to reflect any change in the
Company's expectation with regard thereto or any change in events, conditions,
circumstances or assumptions underlying such statements.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the List of Financial Statements and Financial
Statement Schedule on page F-2 for a listing of the Company's financial
statements and notes thereto and for the financial statement schedule contained
herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in accountants and no disagreements with
accountants on any matter of accounting principles or practices or financial
statement disclosures during the twenty-four months ended December 31, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the headings "ELECTION OF DIRECTORS,"
"DIRECTORS," "EXECUTIVE OFFICERS" and "COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT" contained in the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Exchange Act in connection with the Company's
1998 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the heading "Executive Compensation"
contained in the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A of the Exchange Act in connection with the Company's 1998 Annual
Meeting of Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the headings "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS, DIRECTORS AND MANAGEMENT" contained in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act in connection with the Company's 1998 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the headings "ELECTION OF DIRECTORS,"
"EXECUTIVE COMPENSATION" and "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"
contained in the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A of the Exchange Act in connection with the Company's 1998 Annual
Meeting of Stockholders is incorporated herein by reference.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The financial statements filed as part of this Report at Item 8 are
listed in the List of Financial Statements and Financial Statement
Schedule on page F-2 of this Report.
(a)(2) The financial statement schedule filed as part of this Report at Item 8
is listed in the List of Financial Statements and Financial Statement
Schedule on page F-2 of this Report.
(a)(3) The following documents are filed or incorporated by reference as
exhibits to this Report:
<TABLE>
<C> <S>
2.1* Agreement and Plan of Merger dated August 22, 1997, among the
Company, the Predecessor Company, TCC Merger Sub, Inc. and certain
other parties thereto
2.2* First Amendment to Agreement and Plan of Merger dated as of
November 22, 1997
3.1* Certificate of Incorporation of the Company
3.2* Bylaws of the Company
4.1* Form of certificate for shares of Common Stock of the Company
10.1* Credit Agreement dated August 18, 1997, among the Company, Bankers
Trust Company and the lenders listed therein
10.2* Form of License Agreement among the Company and CFH
10.3* Form of Indemnification Agreement, with schedule of signatures
10.4* Predecessor Company's 1997 Stock Option Plan
10.5* Company's Long-Term Incentive Plan
10.6* Company's 1995 Profit Sharing Plan
10.7* Acquisition Agreement dated August 15, 1997, among the Company,
TCRS, Doppelt and Jeffrey J. Doppelt
10.8* Subordinated Promissory Note dated August 22, 1997, between the
Company and Doppelt
10.9* Stockholders' Agreement dated August 22, 1997, among TCRS, the
Company, Doppelt and Jeffrey J. Doppelt
10.10* Form of Stockholders' Agreement among the Company, Crow Family
Partnership L.P., CFH Trade-Names, L.P., J. McDonald Williams and
certain other signatories thereto
10.11 Stock Purchase Agreement dated as of March 16, 1998 by and among
the Company, BCB Holdings, LLC, Tooley & Company, Inc., William L.
Tooley and Craig Ruth
21.1* Subsidiaries of the Company
24.1 Power of Attorney for J. McDonald Williams
24.2 Power of Attorney for William F. Concannon
24.3 Power of Attorney for James D. Carreker
24.4 Power of Attorney for James R. Erwin
24.5 Power of Attorney for Jeffrey M. Heller
</TABLE>
29
<PAGE>
<TABLE>
<C> <S>
24.6 Power of Attorney for Rowland T. Moriarity
24.7 Power of Attorney for Robert E. Sulentic
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File Number 333-34859) filed with the Securities and Exchange
Commission on September 3, 1997 and incorporated herein by reference.
(b) Reports on Form 8-K
During the last quarter of the Company's fiscal year ended December 31,
1997, no reports on Form 8-K were filed with the Securities and Exchange
Commission by the Company.
(c) The exhibits required by Item 601 of Regulation S-K are filed as part of
this Report.
(d) The required financial statements and financial schedule are filed as
part of this Report.
30
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
TRAMMELL CROW COMPANY
By: /s/ GEORGE L. LIPPE
-----------------------------------------
George L. Lippe
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
President and Chief
GEORGE L. LIPPE Executive Officer
- ------------------------------ (Principal Executive March 31, 1998
George L. Lippe Officer); Director
Executive Vice President
ASUKA NAKAHARA and Chief Financial
- ------------------------------ Officer (Principal March 31, 1998
Asuka Nakahara Financial Officer)
WILLIAM P. LEISER Executive Vice President
- ------------------------------ and Treasurer (Principal March 31, 1998
William P. Leiser Accounting Officer)
J. MCDONALD WILLIAMS*
- ------------------------------ Chairman of the Board and March 31, 1998
J. McDonald Williams Director
HARLAN R. CROW
- ------------------------------ Director March 31, 1998
Harlan R. Crow
WILLIAM F. CONCANNON*
- ------------------------------ Director March 31, 1998
William F. Concannon
JAMES D. CARREKER*
- ------------------------------ Director March 31, 1998
James D. Carreker
JAMES R. ERWIN*
- ------------------------------ Director March 31, 1998
James R. Erwin
JEFFREY M. HELLER*
- ------------------------------ Director March 31, 1998
Jeffrey M. Heller
<PAGE>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
ROWLAND T. MORIARITY*
- ------------------------------ Director March 31, 1998
Rowland T. Moriarity
ROBERT E. SULENTIC*
- ------------------------------ Director March 31, 1998
Robert E. Sulentic
Asuka Nakahara, by signing his name hereto, does hereby sign this Annual
Report Form 10-K on behalf of each of the above-named directors of the Company
on the date indicated below, pursuant to powers of attorney executed by each of
such directors and contemporaneously filed herewith with the Commission.
ASUKA NAKAHARA
- ------------------------------
*Asuka Nakahara March 31, 1998
ATTORNEY-IN-FACT
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2), (c) AND (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1997
TRAMMELL CROW COMPANY AND SUBSIDIARIES
DALLAS, TEXAS
F-1
<PAGE>
FORM 10-K--ITEM 14(a)(1) AND (2)
TRAMMELL CROW COMPANY AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of Trammell Crow Company and
Subsidiaries, for the year ended December 31, 1997, are included in Item 8:
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996......................... F-4
Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and
1995............................................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1997, 1996 and 1995................................................................ F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995............................................................................... F-7
Notes to Consolidated Financial Statements........................................... F-8
The following consolidated financial statement schedule of Trammell Crow Company and
Subsidiaries is included in Item 14(d):
Schedule III--Real Estate Investments and Accumulated Depreciation................... F-22
Notes to Schedule III--Real Estate Investments and Accumulated Depreciation.......... F-23
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Trammell Crow Company
We have audited the accompanying consolidated balance sheets of Trammell
Crow Company (a Delaware corporation; formerly a Texas close corporation) and
Subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Trammell Crow Company and Subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
March 4, 1998
F-3
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
ASSETS 1997 1996
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE AND PER
SHARE DATA)
<S> <C> <C>
Current assets
Cash and cash equivalents............................................................. $ 96,747 $ 58,505
Accounts receivable, net of allowance for doubtful accounts of $955 in 1997 and $947
in 1996............................................................................. 40,602 32,980
Receivables from affiliates........................................................... 926 2,275
Notes and other receivables........................................................... 4,007 4,936
Income taxes recoverable.............................................................. 4,939 --
Deferred income taxes................................................................. 3,870 88
Real estate held for sale............................................................. 98,567 71,122
Other current assets.................................................................. 9,220 2,932
--------- ---------
Total current assets................................................................ 258,878 172,838
Furniture and equipment, net............................................................ 6,309 6,323
Deferred income taxes................................................................... 14,397 7,796
Investments in unconsolidated subsidiaries.............................................. 11,244 3,831
Goodwill, net........................................................................... 27,111 --
Other assets............................................................................ 8,297 3,526
--------- ---------
$ 326,236 $ 194,314
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable...................................................................... $ 18,523 $ 12,426
Accrued expenses...................................................................... 56,270 36,128
Payables to affiliates................................................................ 4,466 5,649
Income taxes payable.................................................................. -- 3,253
Current portion of long-term debt..................................................... 875 3,409
Notes payable on real estate held for sale............................................ 76,623 67,810
Other current liabilities............................................................. 2,185 1,023
--------- ---------
Total current liabilities........................................................... 158,942 129,698
Long-term debt, less current portion.................................................... 1,555 8,952
Deferred compensation................................................................... 8,391 20,963
Other liabilities....................................................................... 417 405
--------- ---------
Total liabilities................................................................... 169,305 160,018
Minority interest....................................................................... 19,859 3,294
Stockholders' equity
Preferred stock; $0.01 par value; 30,000,000 shares authorized; none issued or
outstanding......................................................................... -- --
Common stock; $0.01 par value; 100,000,000 shares authorized; 33,892,038 shares issued
and outstanding in 1997............................................................. 339 --
Paid-in capital....................................................................... 150,647 24,084
Retained earnings (deficit)........................................................... (12,734) 16,312
Less: Stockholder loans............................................................... (1,180) (9,394)
--------- ---------
Total stockholders' equity.............................................................. 137,072 31,002
--------- ---------
$ 326,236 $ 194,314
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-4
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
------------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C>
REVENUES
Property management services............................................ $ 87,756 $ 90,179 $ 92,970
Brokerage services...................................................... 91,053 72,095 61,960
Infrastructure management services...................................... 68,719 50,836 38,681
Development and construction services................................... 40,054 22,732 20,382
Retail services......................................................... 5,318 2,393 1,510
------------- ---------- ----------
292,900 238,235 215,503
Income from investments in unconsolidated subsidiaries.................. 512 594 114
Gain on disposition of real estate...................................... 10,241 6,630 5,026
Other income............................................................ 9,986 9,996 6,559
------------- ---------- ----------
313,639 255,455 227,202
COSTS AND EXPENSES
Salaries, wages, and benefits........................................... 161,425 137,794 130,248
Non-recurring compensation costs........................................ 33,085 -- --
Commissions............................................................. 39,121 27,119 23,730
General and administrative.............................................. 55,884 41,421 40,671
Profit sharing.......................................................... 23,514 20,094 15,893
Depreciation............................................................ 3,514 3,196 3,841
Amortization............................................................ 714 -- --
Interest................................................................ 5,515 1,726 1,722
Royalty and consulting fees............................................. 6,212 3,959 2,443
Minority interest....................................................... 2,042 206 520
------------- ---------- ----------
331,026 235,515 219,068
------------- ---------- ----------
Income (loss) before income taxes......................................... (17,387) 19,940 8,134
Income tax expense (benefit).............................................. (3,367) 7,826 3,793
------------- ---------- ----------
Net income (loss)......................................................... $ (14,020) $ 12,114 $ 4,341
------------- ---------- ----------
------------- ---------- ----------
Pro forma loss per share (basic and diluted).............................. $ (.42) * *
------------- ---------- ----------
------------- ---------- ----------
Pro forma weighted average common shares outstanding...................... 33,583,467
-------------
-------------
</TABLE>
- ------------------------
* Information is not relevant due to change in capital structure.
See accompanying notes.
F-5
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON SHARES COMMON COMMON RETAINED
-------------------- STOCK STOCK PAR PAID-IN EARNINGS TREASURY STOCKHOLDER
ISSUED TREASURY SUBSCRIBED VALUE (1) CAPITAL (DEFICIT) STOCK LOANS TOTAL
---------- -------- ---------- --------- -------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995...................... 9,350 675 $ 361 $-- $ 9,293 $ 5,333 $ (914) $-- $ 14,073
Net income................ -- -- -- -- -- 4,341 -- -- 4,341
Dividends................. -- -- -- -- -- (2,475 ) -- -- (2,475)
Sale of common stock
previously subscribed... 390 -- (361) -- 361 -- -- -- --
Purchase of common
stock................... -- 774 -- -- -- -- (1,337) -- (1,337)
Sale of common stock...... -- (400) -- -- -- -- 691 -- 691
---------- -------- ----- --------- -------- -------- -------- ----------- --------
Balance at December 31,
1995...................... 9,740 1,049 -- -- 9,654 7,199 (1,560) -- 15,293
Net income................ -- -- -- -- -- 12,114 -- -- 12,114
Dividends................. -- -- -- -- -- (2,890 ) -- -- (2,890)
Purchase of common
stock................... -- 2,481 -- -- -- -- (3,943) -- (3,943)
Sale of common stock...... 9,634 (3,530) -- -- 14,430 (111 ) 5,503 (9,394) 10,428
---------- -------- ----- --------- -------- -------- -------- ----------- --------
Balance at December 31,
1996...................... 19,374 -- -- -- 24,084 16,312 -- (9,394) 31,002
Net loss.................. -- -- -- -- -- (14,020 ) -- -- (14,020)
Dividends................. -- -- -- -- -- (15,026 ) -- -- (15,026)
Purchase of stock......... -- 963 -- -- -- -- (2,388) -- (2,388)
Repayment of stockholder
loans................... -- -- -- -- -- -- -- 8,214 8,214
Sale of stock in public
offering................ 5,750,000 -- -- 58 100,567 -- -- -- 100,625
Offering costs............ -- -- -- -- (10,420) -- -- -- (10,420)
Non-cash charge for August
1997 options............ -- -- -- -- 33,085 -- -- -- 33,085
Issuance and exchange of
shares in
reincorporation
transactions............ 27,779,807 -- -- 278 (278) -- -- -- --
Conversion of note payable
into common stock....... 342,857 -- -- 3 5,997 -- -- -- 6,000
Retirement of treasury
shares.................. -- (963) -- -- (2,388) -- 2,388 -- --
---------- -------- ----- --------- -------- -------- -------- ----------- --------
Balance at December 31,
1997...................... 33,892,038 -- $-- $339 $150,647 $(12,734) $ -- $(1,180) $137,072
---------- -------- ----- --------- -------- -------- -------- ----------- --------
---------- -------- ----- --------- -------- -------- -------- ----------- --------
</TABLE>
- ------------------------------
(1) Common stock par value for 1995 and 1996 rounds to less than $1.
See accompanying notes.
F-6
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................................... $ (14,020) $ 12,114 $ 4,341
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities
Depreciation................................................................ 3,514 3,196 3,841
Amortization................................................................ 714 -- --
Minority interest........................................................... 2,042 206 520
Deferred income tax provision (benefit)..................................... (5,462) 1,602 (2,040)
Income from investments in unconsolidated subsidiaries...................... (512) (594) (114)
Gain on disposition of real estate.......................................... (10,241) (6,630) (5,026)
Non-cash charge for August 1997 options..................................... 33,085 -- --
Changes in operating assets and liabilities
Accounts receivable....................................................... (6,007) (6,757) (8,214)
Receivables from affiliates............................................... 3,083 (1,585) 1,466
Notes and other assets.................................................... (7,509) (2,286) (2,228)
Expenditures for real estate held for sale................................ (109,068) (92,975) (37,641)
Proceeds from sale of real estate......................................... 51,542 48,555 43,472
Proceeds from real estate notes payable................................... 89,763 91,428 21,705
Payments on real estate notes payable..................................... (45,550) (36,800) (31,438)
Accounts payable and accrued expenses..................................... 20,159 4,558 17,277
Payables to affiliates.................................................... (1,275) 1,850 1,203
Income taxes recoverable/payable.......................................... (8,192) 2,775 (454)
Deferred compensation..................................................... (234) 5,750 4,416
Other liabilities......................................................... (810) 741 (438)
---------- --------- ---------
Net cash provided by (used in) operating activities............................. (4,978) 25,148 10,648
---------- --------- ---------
INVESTING ACTIVITIES
Expenditures for furniture and equipment........................................ (3,469) (3,277) (2,077)
Acquisition of Doppelt and Company.............................................. (22,658) -- --
Investments in unconsolidated subsidiaries...................................... (7,404) (2,305) (1,873)
Distributions from unconsolidated subsidiaries.................................. 6,912 1,408 170
Contributions from minority interest............................................ 10,350 11 3,631
Distributions to minority interest.............................................. (5,053) (856) (497)
---------- --------- ---------
Net cash used in investing activities........................................... (21,322) (5,019) (646)
---------- --------- ---------
FINANCING ACTIVITIES
Principal payments on debt...................................................... (47,467) (4,538) (5,688)
Proceeds from debt.............................................................. 36,146 9,834 2,664
Payment of deferred financing fees.............................................. (1,031) -- --
Purchase of common stock........................................................ (730) (3,943) (1,010)
Proceeds from sale of common stock.............................................. 100,625 15 1,052
Stock offering costs............................................................ (10,420) (257) --
Collections of stockholder loans................................................ 2,445 -- --
Dividends paid.................................................................. (15,026) (2,890) (2,475)
---------- --------- ---------
Net cash provided by (used in) financing activities............................. 64,542 (1,779) (5,457)
---------- --------- ---------
Net increase in cash and cash equivalents....................................... 38,242 18,350 4,545
Cash and cash equivalents, beginning of year.................................... 58,505 40,155 35,610
---------- --------- ---------
Cash and cash equivalents, end of year.......................................... $ 96,747 $ 58,505 $ 40,155
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes.
F-7
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Trammell Crow Company, a Delaware corporation (the Company), was
incorporated on August 21, 1997 to become the successor to Trammell Crow
Company, a Texas close corporation (the Predecessor Company). In connection with
the Company's initial public offering, a wholly-owned subsidiary of the Company
was merged with and into the Predecessor Company (the Reincorporation Merger)
with the Predecessor Company surviving the merger as a wholly-owned subsidiary
of the Company. The Company provides commercial real estate services primarily
in the United States. Its principal lines of business include property
management, brokerage, infrastructure management, development and construction,
and retail services.
USE OF ESTIMATES
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiaries, and other subsidiaries over which
the Company has control. Intercompany accounts and transactions have been
eliminated. The Company's investments in subsidiaries in which it has the
ability to exercise significant influence over operating and financial policies,
but does not have control are accounted for on the equity method. Accordingly,
the Company's share of the earnings of these subsidiaries is included in
consolidated net income. Investments in other subsidiaries are carried at cost.
These unconsolidated subsidiaries primarily own real estate development
projects.
REVENUE RECOGNITION
The Company recognizes fees from property management services and
infrastructure management services over the terms of the respective management
contracts. Most of the property management contracts are cancelable at will or
with 30 days' notice. The infrastructure management contracts generally range
from three to five years. Brokerage service revenue relating to leasing services
and the related expense are generally recognized half upon the execution of a
lease contract and the remainder upon tenant occupancy. Sales brokerage revenue
is recognized upon closing. Development and construction services includes fees
from development and construction management projects and net construction
revenues, which are gross construction revenues net of subcontract costs. For
projects exceeding three months, fees are recognized using the
percentage-of-completion method. For contracts under three months, fees are
recognized upon completion of the contract. Gross construction revenues totaled
$61,837, $46,034 and $22,335 and subcontract costs totaled $52,853, $41,123 and
$19,397 in 1997, 1996 and 1995, respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and short-term, highly liquid
investments with maturities of 90 days or less when purchased.
F-8
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is computed using
the straight-line method over useful lives ranging from three to 10 years.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income taxes result from temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
federal income tax purposes, and are measured using the enacted tax rates and
laws that will be in effect when the differences reverse.
PRO FORMA EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, EARNINGS PER SHARE. SFAS 128 replaced
primary and fully diluted earnings per share with basic and diluted earnings per
share.
In accordance with the requirements of the Securities and Exchange
Commission, the weighted average shares outstanding used to calculate basic and
diluted earnings per share included the shares issued in connection with the
Company's initial public offering and related transactions for the full year.
Options to purchase 4,788,046 shares of common stock were outstanding during a
portion of 1997 (see Note 8) but were not included in the computation of diluted
earnings per share because the Company incurred a net loss for the year and
therefore, the effect would be antidilutive.
CONCENTRATION OF CREDIT RISK
The Company provides services to owners of real estate assets primarily in
the United States. The Company performs credit evaluations of its customers and
generally does not require collateral. The risk associated with this
concentration is limited because of the large number of customers and their
geographic dispersion.
LONG-LIVED ASSETS
Long-lived assets, including goodwill, are evaluated when indicators of
impairment are present and provisions for possible losses are recorded when
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount.
GOODWILL
Goodwill reflects the excess of purchase price over the fair value of net
assets purchased. Goodwill is amortized on a straight-line basis over 30 years.
Accumulated amortization of goodwill was $384 and $23 at December 31, 1997 and
1996, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"), which establishes standards for the way in which public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in
F-9
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
interim financial reports issued to shareholders. It also establishes standards
for related disclosure about products and services, and major customers. This
statement is effective for financial statements for periods beginning after
December 15, 1997. The Company is currently evaluating the impact SFAS 131 will
have on its financial statement disclosures.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.
2. REAL ESTATE HELD FOR SALE
The Company provides build-to-suit services for its customers and also
develops or purchases projects for investment purposes. Therefore, the Company
has ownership of real estate until such projects are sold. Real estate held for
sale is carried at the lower of cost or fair value less selling expenses. At
December 31, real estate held for sale consists of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land.................................................................... $ 40,269 $ 26,635
Buildings and improvements.............................................. 58,298 44,487
--------- ---------
$ 98,567 $ 71,122
--------- ---------
--------- ---------
</TABLE>
The estimated costs to complete the 17 projects under construction at
December 31, 1997, total $54,837. Projects are expected to be sold within one
year of completion. At December 31, 1997, the Company had commitments for the
sale of ten of the projects. Gains are recognized upon sale of the project.
In 1997, rental revenues, which are included in development and construction
services revenue, and net income relating to real estate held for sale was
$6,086 and $658, respectively. Operations from real estate held for sale were
insignificant in 1996 and 1995.
3. FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Furniture and equipment, at cost...................................... $ 19,875 $ 18,097
Less: Accumulated depreciation........................................ (13,566) (11,774)
---------- ----------
Furniture and equipment, net.......................................... $ 6,309 $ 6,323
---------- ----------
---------- ----------
</TABLE>
F-10
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
Summarized financial information for unconsolidated subsidiaries in which
the Company has an investment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
BALANCE SHEET:
Real estate held for sale.................................................. $ 179,973
Other assets............................................................... 52,687
--------
Total assets............................................................. $ 232,660
--------
--------
Notes payable on real estate held for sale................................. $ 122,267
Other liabilities.......................................................... 28,573
Equity..................................................................... 81,820
--------
Total liabilities and equity............................................. $ 232,660
--------
--------
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
STATEMENT OF OPERATIONS:
Total revenues............................................................. $ 47,277
Total expenses............................................................. (44,154)
--------
Net income............................................................... $ 3,123
--------
--------
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Profit sharing.......................................................... $ 12,752 $ 10,931
Payroll and bonuses..................................................... 14,825 10,191
Commissions............................................................. 11,132 7,808
Stock Appreciation Rights Plan settlement............................... 4,228 --
Deferred income......................................................... 3,288 --
Insurance accrual....................................................... 1,128 901
Interest................................................................ 55 473
Other................................................................... 8,862 5,824
--------- ---------
$ 56,270 $ 36,128
--------- ---------
--------- ---------
</TABLE>
F-11
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Borrowings under a $150,000 line of credit with a bank; due December 1999,
with two 1-year extension options; bearing interest at 1) the greater of
prime or the Federal Funds Effective Rate plus 1/2% or 2) the
Eurocurrency rate plus a margin ranging from 1 1/4 to 1 3/4%; interest
payable monthly.......................................................... $ -- $ --
Borrowings under a $7,750 line of credit with a bank; bearing interest at
8.75%; terminated in 1997................................................ -- 7,750
Borrowings under revolving lines of credit with banks; totaling $3,300 and
$2,800 in 1997 and 1996, respectively; expiring in 1998; bearing interest
at rates ranging from prime plus .5% to prime plus 1%; secured by certain
assets................................................................... -- 514
Note payable under a loan agreement with the majority stockholders; bearing
interest at 10.5%; paid in full in December 1997......................... -- 1,378
Capital lease obligations primarily for furniture and equipment; with
maturity dates ranging from 1998 to 2002; bearing interest at various
rates ranging from 3.3% to 14% per annum in 1997; secured by the
underlying assets and certain accounts receivable........................ 1,579 2,719
Notes payable to former stockholders; due in 2000; bearing interest at
6.1%; principal and interest payable upon maturity....................... 851 --
--------- ---------
Total long-term debt....................................................... 2,430 12,361
Less current portion of long-term debt..................................... 875 3,409
--------- ---------
$ 1,555 $ 8,952
--------- ---------
--------- ---------
</TABLE>
The shares of certain wholly-owned subsidiaries having 5% or more of the
consolidated assets, revenues or earnings of the Company, and subsidiaries which
are engaged primarily in the business of real estate development and ownership,
whose assets are not subject to any financing, having more than 5% of the
consolidated assets, revenues or earnings of the Company, are pledged as
security for the $150,000 line of credit.
The Company is subject to various covenants associated with the $150,000
line of credit such as maintenance of minimum equity and liquidity and certain
key financial data. In addition, the Company may not pay dividends exceeding 50%
of the previous year's net income before depreciation and amortization, and
there are certain restrictions on investments and acquisitions that can be made
by the Company. If certain financial ratios fall below a specified level, the
Company will be required to make payments equal to cash flow until such time as
the ratios reach the pre-established levels. At December 31, 1997, the Company
is in compliance with all debt covenants.
The covenants associated with the $150,000 line of credit and the amount of
the Company's other borrowings and contingent liabilities may have the effect of
limiting the credit available to the Company
F-12
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. LONG-TERM DEBT (CONTINUED)
under the line of credit to an amount less than the $150,000 commitment. At
December 31, 1997, the Company has $92,461 available under its $150,000 line of
credit. Beginning March 1998, the Company must pay a quarterly fee equal to .25%
of the unused commitments under the line.
The Company also has other revolving lines of credits with banks totaling
$3,300 at December 31, 1997, of which $2,876 is available.
Principal maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998................................................................ $ 875
1999................................................................ 459
2000................................................................ 1,006
2001................................................................ 85
2002................................................................ 5
---------
$ 2,430
---------
---------
</TABLE>
Based on current rates available to the Company for debt with similar terms,
there is not a significant difference between the carrying amounts of the
long-term debt and their fair values.
7. NOTES PAYABLE ON REAL ESTATE HELD FOR SALE
The Company has loans secured by real estate held for sale (the majority of
which are construction loans) totaling $76,623 and $67,810 as of December 31,
1997 and 1996, respectively. Interest rates range from 8.25% to 12.0%.
Generally, interest only is payable on the real estate loans, with all unpaid
principal and interest due at maturity. The unused commitments on real estate
loans total $33,684 at December 31, 1997. All real estate loans have been
classified as current liabilities on the balance sheet since the loans are
expected to be repaid as the related projects are sold (see Note 2).
Capitalized interest in 1997 and 1996 totaled $1,642 and $539, respectively.
At December 31, 1997, $18,000 of the $76,623 real estate loans are recourse to
the Company.
Based on current rates available to the Company for debt with similar terms,
there is not a significant difference between the carrying amounts of the notes
payable on real estate held for sale and their fair values.
8. STOCKHOLDERS' EQUITY
Prior to the reincorporation transactions, the Predecessor Company had five
classes of common stock, all of which held the same voting rights, except for
voting rights with respect to certain specific actions.
In August 1996, the Predecessor Company completed a private offering to
Company employees and directors of 9,634 shares of Class E Common Stock. In
connection with the offering, the Company provided financing of $9,394 to
stockholders, which is reflected as a reduction of stockholders' equity. These
stockholder loans are to be repaid at prime plus .5% interest (9.0% at December
31, 1997). Principal and interest are payable annually and the notes mature in
March 2001. Principal and interest payments of $8,214 and $649, respectively,
were received in 1997.
The Company was capitalized with the issuance of 1,000 common shares to a
Predecessor Company stockholder. As a result of the Reincorporation Merger, the
outstanding shares of common stock of the
F-13
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. STOCKHOLDERS' EQUITY (CONTINUED)
Predecessor Company were exchanged for 25,502,964 shares of common stock of the
Company. The Company also issued 2,295,217 shares of common stock to a
Predecessor Company stockholder in exchange for a trade name license.
On November 24, 1997, the Company's registration statement was declared
effective for its initial public offering of 5,750,000 shares of its common
stock (including exercise of the over-allotment option of 750,000 shares) at a
public offering price of $17.50 per share (the Offering). The proceeds to the
Company from the Offering were $90,205, net of offering expenses.
The holders of shares of the Company's common stock are entitled to one vote
for each share held on all matters submitted to a vote of common stockholders.
Each share of common stock is entitled to participate equally in dividends, when
and if declared, and in the distribution of assets in the event of liquidation,
dissolution or winding up of the Company, subject in all cases to any rights of
outstanding shares of preferred stock.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" (FAS No. 123),
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, compensation expense is recognized
to the extent the market price of the underlying stock on the date of grant
exceeds the exercise price of the option.
In connection with the reincorporation transactions, the Company assumed the
Trammell Crow Company 1997 Option Plan (the Assumed Option Plan), which provided
for the issuance of up to 1,626 shares of the Predecessor Company's Class E
common stock. On August 1, 1997, the Predecessor Company granted to certain
employees options to acquire 1,626 shares of Class E common stock. In connection
with the reincorporation transactions, these options were converted into options
to purchase 2,423,769 shares of the Company's common stock at an exercise price
of $3.85 per share. The options vested at the closing of the Offering and became
exercisable 30 days after that date. The options expire 10 years from the date
of grant. The Company recognized a non-cash, non-recurring charge to
compensation of $33,085 for these options.
In connection with the Offering, the Company established the Trammell Crow
Company Long-Term Incentive Plan (the Long-Term Plan). The Long-Term Plan
provides for the issuance of up to 5,334,878 shares of common stock. In
connection with the Offering, the Company granted to certain employees options
to acquire 2,348,455 shares of common stock at an exercise price of $17.50 per
share. The options vest over a three-year period, with one-third vesting on each
of the three anniversaries of the grant date, and expire 10 years from the date
of grant. In December 1997, the Company granted to non-employee directors of the
Company options to acquire 15,822 shares of common stock at an exercise price of
$22.75 per share. The options vested immediately upon granting and expire 10
years from the date of grant.
The Long-Term Plan also provides for the awards of Stock Appreciation
Rights, Restricted Stock and Performance Units. No such awards have been made as
of December 31, 1997.
At December 31, 1997, common shares reserved for future issuance under the
Assumed Option Plan and the Long-Term Plan total 7,758,647 shares.
Pro forma information regarding net income and earnings per share is
required by FAS No. 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value
F-14
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. STOCKHOLDERS' EQUITY (CONTINUED)
method. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions:
risk-free interest rates ranging from 5.76% to 6.40%; a dividend yield of 0%;
volatility factors of the expected market price of the Company's common stock of
0.318; and a weighted-average expected life of the options of 8 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
differently than those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For the purpose of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. For the year
ended December 31, 1997, the Company's pro forma net loss is $18,473 and pro
forma loss per share (basic and diluted) is $.55. These pro forma disclosures
are not likely to be representative of the effects on reported net income for
future years since few options have vested at December 31, 1997.
A summary of the Company's stock option activity, and related information,
for the year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE
EXERCISE PRICE OF $17.50 TO
OF $3.85 (BELOW $22.75 (AT
MARKET PRICE AT MARKET PRICE AT
GRANT DATE) GRANT DATE) TOTAL
--------------- --------------- ----------
<S> <C> <C> <C>
OPTIONS OUTSTANDING:
Number of options at January 1, 1997.......... -- -- --
Granted....................................... 2,423,769 2,364,277 4,788,046
Exercised..................................... -- -- --
Forfeited..................................... -- -- --
Expired....................................... -- -- --
--------------- --------------- ----------
Number of options at December 31, 1997........ 2,423,769 2,364,277 4,788,046
--------------- --------------- ----------
--------------- --------------- ----------
Weighted-average exercise price............... $ 3.85 $ 17.54
Weighted-average fair value of options
granted..................................... $ 15.18 $ 8.79
Weighted-average remaining contractual life... 9.6 years 9.9 years
OPTIONS EXERCISABLE:
Number of options............................. 2,423,769 15,822 2,439,591
Weighted-average exercise price............... $ 3.85 $ 22.75
</TABLE>
F-15
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. INCOME TAXES
Components of deferred income taxes are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Assets................................................................... $ 18,946 $ 8,047
Liabilities.............................................................. (679) (163)
--------- ---------
$ 18,267 $ 7,884
--------- ---------
--------- ---------
Current.................................................................. $ 3,870 $ 88
Noncurrent............................................................... 14,397 7,796
--------- ---------
$ 18,267 $ 7,884
--------- ---------
--------- ---------
</TABLE>
The components of the net deferred tax asset are summarized below as of
December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets
Deferred compensation.................................................. $ 4,395 $ 6,856
Bad debts.............................................................. 316 313
Depreciation........................................................... 507 546
Basis difference on real estate held for sale.......................... 2,012 --
Compensation expense relating to stock options......................... 12,559 --
Stock Appreciation Rights Plan Settlement.............................. 1,605 --
Other.................................................................. 64 332
--------- ---------
21,458 8,047
Less: Valuation allowance.............................................. (2,512) --
--------- ---------
Total deferred tax assets.............................................. 18,946 8,047
Deferred tax liabilities
State taxes............................................................ (523) --
Goodwill amortization.................................................. (115) --
Other.................................................................. (41) (163)
--------- ---------
Total deferred tax liabilities......................................... (679) (163)
--------- ---------
Net deferred tax asset................................................... $ 18,267 $ 7,884
--------- ---------
--------- ---------
</TABLE>
F-16
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes consists of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current
Federal...................................................... $ 1,646 $ 5,202 $ 4,893
State........................................................ 449 1,022 940
--------- --------- ---------
2,095 6,224 5,833
Deferred
Federal...................................................... (4,862) 1,602 (2,040)
State........................................................ (600) -- --
--------- --------- ---------
(5,462) 1,602 (2,040)
--------- --------- ---------
$ (3,367) $ 7,826 $ 3,793
--------- --------- ---------
--------- --------- ---------
</TABLE>
The differences between the provisions for income taxes and the amounts
computed by applying the statutory federal income tax rates to income (loss)
before income taxes for the years ended December 31 are:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Tax at statutory rate applied to income (loss) before income
taxes......................................................... $ (5,912) $ 6,780 $ 2,766
State income taxes, net of federal tax benefit.................. (611) 674 589
Increase in taxes resulting from non-deductible meals,
entertainment and other....................................... 644 372 438
Valuation allowance............................................. 2,512 -- --
--------- --------- ---------
$ (3,367) $ 7,826 $ 3,793
--------- --------- ---------
--------- --------- ---------
</TABLE>
10. OPERATING LEASES
The Company has commitments under operating leases for office space and
office equipment. During the years ended December 31, 1997, 1996 and 1995, rent
expense was $6,906, $7,814 and $7,255, including $1,770, $3,037 and $2,987,
respectively, paid to affiliates of the Company.
F-17
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. OPERATING LEASES (CONTINUED)
Minimum future rentals under noncancelable operating lease commitments in
effect at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
AFFILIATE NONAFFILIATE TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
1998........................................................ $ 936 $ 4,494 $ 5,430
1999........................................................ 935 2,971 3,906
2000........................................................ 882 1,994 2,876
2001........................................................ 759 1,401 2,160
2002........................................................ 696 1,145 1,841
Thereafter.................................................. -- 236 236
----------- ----------- ---------
$ 4,208 $ 12,241 $ 16,449
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
Rental amounts include fixed operating expense payments but do not include
increases for rate escalations.
11. EMPLOYEE BENEFIT PLANS
The Company's employees participate in a defined contribution savings plan,
which provides the opportunity for pretax contributions by employees. The
Company matches 50% of the employee's contributions up to 6% of the employee's
annual earnings or a maximum of $4.5 per annum. The Company's contribution
expense for 1997, 1996, and 1995 was $2,122, $1,741, and $2,154, respectively.
The Company has a profit sharing plan for key employees (the Profit Sharing
Plan). Each participant has a profit sharing account that is adjusted annually
for the participant's percentage of the earnings for a profit sharing unit, cash
distributions, tax rate changes, and other adjustments. Distributions to
participants are limited to Available Cash, as defined. Any difference between
the amount expensed and the amount paid to the participants is recorded as
deferred compensation. The Company's management board approved the percentage of
earnings available to profit sharing participants. Such percentages were
approximately 58%, 58% and 73% of earnings before profit sharing, as defined, in
1997, 1996, and 1995, respectively. In connection with the Offering, the Company
terminated any future awards under the Profit Sharing Plan.
Effective January 1, 1993, the Company initiated the All Employee Cash
Profit Sharing Program whereby 3% of earnings, as defined, was paid as bonuses
to employees not participating in the key employee profit sharing plan. Expense
related to the program, which is included in salaries, wages and benefits, was
$1,577, $1,205, and $818 in 1997, 1996, and 1995, respectively. In connection
with the Offering, the Company terminated this program.
Effective March 1, 1998, the Company established the Trammell Crow Company
Employee Stock Purchase Plan (the ESPP), subject to stockholder approval.
Employees may elect to have monthly payroll deductions of 1% to 10%, which is
used to purchase, on a semi-annual basis, stock of the Company at a 15% discount
from market value. The ESPP is available to all employees. The Company has
reserved 1,000,000 shares of common stock for issuance under the ESPP. Shares
may also be issued from treasury, if available.
F-18
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. GAIN ON DISPOSITION OF REAL ESTATE
During 1997, the Company sold thirteen real estate projects for an aggregate
sale price of $51,542, resulting in a gain on sale of $10,241. During 1996, the
Company sold sixteen real estate projects for an aggregate sale price of
$48,555, resulting in a gain on sale of $6,630. During 1995, the Company sold
nine real estate projects for an aggregate sale price of $43,472, resulting in a
gain on sale of $5,026.
In March 1997, the Company contributed real estate held for sale of $35,400
and the related $35,400 note payable to a partnership and received a 16% limited
partner interest. No gain was recognized.
13. ACQUISITIONS
In August 1997, the Company acquired substantially all of the assets of
Doppelt & Company (Doppelt), a Cleveland, Ohio-based company that specializes in
new store roll out strategies and problem real estate disposition services. The
Company paid $20,658 in cash, issued a promissory note of $6,000, which was
prepaid by the Company in November 1997 with 342,857 shares of common stock, and
granted the seller the right to receive an additional $2,000 of purchase price
if future commissions collected by the Company exceed $7,000, subject to certain
reductions. The Company also paid Mr. Doppelt $2,000 as consideration for an
employment agreement, which includes non-compete provisions. In connection with
the acquisition, which was accounted for using the purchase method of
accounting, the Company recorded goodwill of $27,416. The operations of Doppelt
are included in the Company's operations from the date of acquisition.
14. RELATED PARTY TRANSACTIONS
In 1997, 1996 and 1995, the Company derived 7%, 9%, and 11%, respectively,
of its total revenues from services provided principally to the stockholders of
the Company. The fees received are comparable to those charged to unaffiliated
customers.
Under certain agreements, two significant stockholders were entitled to
receive royalty and consulting fees totaling approximately 12% of Earnings
Before Profit Sharing, as defined. Accrued royalties and consulting fees at
December 31, 1997 and 1996, are included in payables to affiliates. These
agreements were terminated in connection with the Offering. The Company paid
$1,556 to one of the stockholders in January 1998 and has agreed to pay all
remaining unpaid amounts by April 15, 1998.
In conjunction with the issuance of stock in 1996, the Company issued tax
loans to the stockholders totaling $4,734 in order for the stockholders to pay
the incremental taxes related to the stock purchased. As of December 31, 1997
and 1996, $43 and $1,620, respectively, is outstanding and included in notes and
other receivables. These notes bear interest at 5.9% and are due in August 1999;
however, these loans may be repaid earlier based on cash available for profit
sharing distributions.
In January 1997, the Company formed a joint venture with an affiliate of one
of the stockholders to provide management information services. Both parties
share equally in any distributions from the joint venture (none through December
31, 1997). The Company entered into a 5-year management information system
agreement with the joint venture for related services and, in 1997, paid fees
totaling $4,135 for such services.
15. COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company has guaranteed $37,250 of real estate
notes payable of others. These notes are collateralized by the underlying real
estate. The Company has outstanding letters of credit
F-19
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
totaling $13,163 at December 31, 1997, of which $4,663 was released through
February 1998. The remaining letter of credit expires in July 1999.
In addition, at December 31, 1997, the Company has several completion and
budget guarantees relating to development projects. Management does not expect
to incur any material losses under these guarantees.
On November 2, 1997 the Company settled claims asserted by certain former
employees arising out of the termination of the Company's Stock Appreciation
Rights Plan. In connection with the settlement, the Company paid $127 in 1997
and accrued $4,228 for additional payments which are due by May 1998.
The Company and its subsidiaries are defendants in other lawsuits that arose
in the normal course of business. In management's judgment, the ultimate
liability, if any, from such legal proceedings will not have a material effect
on the Company's financial position.
16. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is summarized below for the three years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest paid........................................................... $ 7,575 $ 1,520 $ 2,833
Income taxes paid....................................................... 10,454 3,288 6,320
Profit sharing distributions paid....................................... 21,927 12,021 7,722
Non cash activities for the three years ended December 31:
Assumption of stockholder loan........................................ -- -- 327
Write-off of pursuit costs and intangibles............................ -- -- 361
Conversion of deferred compensation balances to stock................. -- 10,670 --
Stockholder loans..................................................... -- 9,394 --
Payment of stockholder and tax loans with deferred compensation
balances............................................................ 12,338 -- --
Conversion of Doppelt note payable to stock........................... 6,000 -- --
</TABLE>
17. UNAUDITED INTERIM FINANCIAL INFORMATION
Unaudited summarized financial information by quarter is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
1997: MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ----------------------------------------------------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenues....................................... $ 62,098 $ 69,344 $ 81,797 $ 100,400
Net income (loss).................................... 1,601 2,685 4,568 (22,874)
<CAPTION>
QUARTER ENDED
--------------------------------------------------
1996: MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ----------------------------------------------------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenues....................................... $ 56,397 $ 54,299 $ 65,515 $79,244
Net income........................................... 1,876 2,093 3,673 4,472
</TABLE>
F-20
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
17. UNAUDITED INTERIM FINANCIAL INFORMATION (CONTINUED)
In the fourth quarter of 1997, the Company recognized a non-cash,
non-recurring charge to compensation of $33,085 for options granted prior to the
Offering at an exercise price substantially less than the fair value (see Note
8). The Company also expensed $4,355 in the fourth quarter relating to
settlement of litigation with participants under the Stock Appreciation Rights
Plan (see Note 15).
F-21
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
SCHEDULE III--REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST 12/31/97 BALANCE
--------------------------------- ---------------------------------
FURNITURE, COSTS FURNITURE,
BUILDINGS FIXTURES SUBSEQUENT BUILDINGS FIXTURES
RELATED AND & TO AND &
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS EQUIPMENT ACQUISITION LAND IMPROVEMENTS EQUIPMENT
- ------------------------------ ------------ ------- ------------ --------- ---------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RETAIL:
Diamond Bar--Diamond Bar,
CA.......................... $ 5,650 $ 1,475 $ 4,290 $ -- $ -- $ 1,475 $ 4,290 $ --
Dry-Wadsworth--Arvada, CO..... -- 473 495 -- 76 473 571 --
Petsmart--Edmond, OK.......... 1,434 900 -- -- 587 900 587 --
Fairbanks--Fairbanks, AK...... 2,136 --(A) -- -- 2,557 -- 2,557 --
Gateway Plaza--Aurora, CO..... 6,574 1,018 5,793 -- 62 1,018 5,855 --
Lost Pines--Bastrop, TX....... 1,407 521 40 -- 1,214 521 1,254 --
Village Green--Yorba Linda,
CA.......................... 2,750 1,890 2,316 -- -- 1,890 2,316 --
Walgreen's--Houston, TX....... 2,440 2,525 35 -- -- 2,525 35 --
OFFICE:
Bowie--Austin, TX............. 1,785 442 1,767 -- 78 442 1,845 --
Kelley Clarke--Portland, OR... 1,955 530 -- -- 1,501 530 1,501 --
INDUSTRIAL:
349 Oyster Point--San
Francisco, CA............... 3,806 1,577 -- -- 2,670 1,754 2,493 --
Bolingbrook--Bolingbrook,
IL.......................... 6,239 1,406 -- -- 7,061 1,406 7,061 --
Centrepoint--Chino, CA........ 5,313 4,588 -- -- 692 4,588 692 --
CH-NW Place II--Houston, TX... 5,174 698 176 -- 4,292 698 4,468 --
Cooper--Reno, NV.............. 4,074 1,513 2,537 -- 23 1,513 2,560 --
Dunsirn BTS--Reno, NV......... 451 401 -- -- 38 401 38 --
McCormick--Irving, TX......... -- 496 -- -- 445 761 180 --
OCP II--Orlando, FL........... 2,478 499 1,751 -- 1,444 499 3,195 --
Peerless--Allen, TX........... 2,424 1,496 102 -- 1,761 1,508 1,851 --
TC Longmont--Longmont, CO..... 8,300 1,155 6,708 -- 136 1,155 6,844 --
Wooddale--Wooddale, IL........ 11,694 4,034 301 -- 7,804 4,034 8,105 --
LAND:
56th & Warner--Phoenix, AZ.... -- 1,578 -- -- 76 1,654 -- --
AEW #10--Mt. Laurel Township,
NJ.......................... -- 327 -- -- -- 327 -- --
Andover--Andover, MA.......... -- 291 -- -- 291 -- -- --
Chapel Hills--Colorado
Springs, CO................. 430 770 -- -- 35 805 -- --
Cleveland--Cleveland, OH...... -- 260 -- -- -- 260 -- --
Freeport I--Irving, TX........ -- 2,746 -- -- -- 2,746 -- --
Oxnard--Oxnard, CA............ -- 280 -- -- -- 280 -- --
Quarry Crossing--San Antonio,
TX.......................... -- 2,557 -- -- -- 2,557 -- --
Sadler--Memphis, TN........... -- 123 -- -- -- 123 -- --
Silver Lake Pond--Charlotte,
NC.......................... 109 109 -- -- -- 109 -- --
Summitt Plaza--Orlando, FL.... -- 572 -- -- -- 572 -- --
TC Riverside--Belcamp, MD..... -- 919 -- -- -- 919 -- --
Westridge at Gateway--Dallas,
TX.......................... -- 1,535 -- -- -- 1,535 -- --
------------ ------- ------------ --------- ---------- ------- ------------ ---------
Total....................... $76,623 $39,704 $26,311 $ -- $32,552 $40,269 $58,298 $ --
------------ ------- ------------ --------- ---------- ------- ------------ ---------
------------ ------- ------------ --------- ---------- ------- ------------ ---------
<CAPTION>
TOTAL DATE OF DATE DEPRECIABLE
DESCRIPTION (B) CONSTRUCTION ACQUIRED LIVES (C)
- ------------------------------ ------- ------------ -------- -----------
<S> <C> <C> <C> <C>
RETAIL:
Diamond Bar--Diamond Bar,
CA.......................... $5,765 1981 1997
Dry-Wadsworth--Arvada, CO..... 1,044 1995 1995
Petsmart--Edmond, OK.......... 1,487 1997 1997
Fairbanks--Fairbanks, AK...... 2,557 1997 n/a
Gateway Plaza--Aurora, CO..... 6,873 1984 1996
Lost Pines--Bastrop, TX....... 1,775 1997 1997
Village Green--Yorba Linda,
CA.......................... 4,206 1986 1997
Walgreen's--Houston, TX....... 2,560 1997 1997
OFFICE:
Bowie--Austin, TX............. 2,287 1986 1997
Kelley Clarke--Portland, OR... 2,031 1997 1997
INDUSTRIAL:
349 Oyster Point--San
Francisco, CA............... 4,247 1997 1997
Bolingbrook--Bolingbrook,
IL.......................... 8,467 1995 1995
Centrepoint--Chino, CA........ 5,280 1997/1998 1997
CH-NW Place II--Houston, TX... 5,166 1997 1997
Cooper--Reno, NV.............. 4,073 1992 1997
Dunsirn BTS--Reno, NV......... 439 1997 1997
McCormick--Irving, TX......... 941 1997 1997
OCP II--Orlando, FL........... 3,694 1982 1997
Peerless--Allen, TX........... 3,359 1997 1997
TC Longmont--Longmont, CO..... 7,999 1979/1988 1997
Wooddale--Wooddale, IL........ 12,139 1996/1997 1996
LAND:
56th & Warner--Phoenix, AZ.... 1,654 n/a 1997
AEW #10--Mt. Laurel Township,
NJ.......................... 327 n/a 1997
Andover--Andover, MA.......... 291 n/a 1995
Chapel Hills--Colorado
Springs, CO................. 805 n/a 1997
Cleveland--Cleveland, OH...... 260 n/a 1996
Freeport I--Irving, TX........ 2,746 n/a 1997
Oxnard--Oxnard, CA............ 280 n/a 1996
Quarry Crossing--San Antonio,
TX.......................... 2,557 n/a 1997
Sadler--Memphis, TN........... 123 n/a 1997
Silver Lake Pond--Charlotte,
NC.......................... 109 n/a 1997
Summitt Plaza--Orlando, FL.... 572 n/a 1997
TC Riverside--Belcamp, MD..... 919 n/a 1997
Westridge at Gateway--Dallas,
TX.......................... 1,535 n/a 1997
-------
Total....................... $98,567
-------
-------
</TABLE>
- ----------------------------------
(A) Property is subject to a ground lease.
(B) The aggregate cost for Federal income tax purposes is approximately $103
million.
(C) All real estate investments have been held for sale since acquisition and
are therefore not depreciated.
F-22
<PAGE>
TRAMMELL CROW COMPANY AND SUBSIDIARIES
NOTES TO SCHEDULE III--REAL ESTATE INVESTMENTS AND
ACCUMULATED DEPRECIATION
Changes in real estate investments and accumulated depreciation for the
three years ended December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------ -------- --------
<S> <C> <C> <C>
Real estate investments:
Balance at beginning of year.................... $ 71,122 $ 20,274 $ 20,215
Additions and improvements.................... 104,147 92,975 38,549
Sales and transfers........................... (76,702)(A) (42,127) (38,490)
------------ -------- --------
Balance at end of year.......................... $ 98,567 $ 71,122 $ 20,274
------------ -------- --------
------------ -------- --------
</TABLE>
- ------------------------
(A) Includes $35,400 contributed to a partnership in March 1997.
F-23
<PAGE>
EXECUTION COPY
STOCK PURCHASE AGREEMENT
by and among
TRAMMELL CROW COMPANY,
TOOLEY & COMPANY, INC.
BCB HOLDINGS, LLC
and
THE FORMER STOCKHOLDERS NAMED HEREIN
DATED AS OF
MARCH 16, 1998
<PAGE>
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered into
as of March 16, 1998 (the "Effective Date"), by and among Tooley & Company,
Inc., a California corporation (the "Company"), BCB Holdings, LLC, a Delaware
limited liability company ("Seller"), William L. Tooley ("X") and Craig Ruth
("Y" and collectively with X, the "Former Stockholders") and Trammell Crow
Company, a Delaware corporation ("Buyer").
R E C I T A L S :
A. Seller owns as of the Effective Date all of the issued and outstanding
Common Stock of the Company, par value $1.00 per share, (the "Company Common
Stock"), representing all of the issued and outstanding capital stock of the
Company (collectively, the "Shares"), as of the Effective Date, free and clear
of all Liens.
B. Buyer desires to purchase from Seller, and Seller desires to sell to
Buyer, the Shares in consideration of the Purchase Price (hereinafter defined),
upon the terms and subject to the conditions set forth herein.
A G R E E M E N T S
NOW, THEREFORE, in consideration of the respective representations,
warranties, agreements and conditions hereinafter set forth, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, hereby agree as
follows:
ARTICLE 1
DEFINED TERMS
1.1 DEFINED TERMS. The following terms shall have the following meanings
in this Agreement:
-1-
<PAGE>
"ACCOUNTS RECEIVABLE" means all of Company's accounts receivable as
would be classified as an account receivable on the asset side of a balance
sheet of the Company prepared in accordance with GAAP.
"ACQUISITION COSTS" means, collectively, the Trophy Acquisition Costs
and the Sapphire Acquisition Costs.
"ACTUAL AR POST-DEVELOPMENT EBITDA" has the meaning set forth in
Section 2.9(a)(ii)(C).
"ACTUAL AR POST-DEVELOPMENT EBITDA PRODUCT" means the product obtained
when the amount of the Actual AR Post-Development EBITDA is multiplied by a
number equal to FOUR AND ONE-HALF (4.5).
"ACTUAL AR PRE-DEVELOPMENT EBITDA" has the meaning set forth in
Section 2.9(a)(iii).
"ADDITIONAL CONSIDERATION" has the meaning set forth in Section 2.9.
"ADJUSTED PRECLOSING SALES INCOME" has the meaning set forth in
Section 2.13(c).
"ADJUSTMENT" has the meaning set forth in Section 2.7.
"AFFILIATE" means, with respect to any person, any other person
controlling, controlled by or under common control with such person. For
purposes of this definition and this Agreement, the term "control" (and
correlative terms) means the power, whether by contract, equity ownership or
otherwise, to direct the policies or management of a person.
"AGGREGATE PROJECTS NOI" means the aggregate NOI to the Company
resulting from management, leasing, tenant improvement and development fees
generated by the Projects, but shall exclude any reimbursement received by the
Company to offset fees or expenses paid by the Company in connection with any
Project.
"ALPHABET REDEVELOPMENT" has the meaning set forth on SCHEDULE 1.
"APPLICABLE LAWS" means all laws, statutes, rules, regulations,
ordinances, judgments, orders, decrees, injunctions, and writs of any
Governmental Entity having jurisdiction over the Company or the Business, as
they may be in effect at or prior to the Closing.
"AR MANAGEMENT AGREEMENT" has the meaning set forth in Section
2.9(a)(ii).
"AR POST-DEVELOPMENT BUDGET" has the meaning set forth in Section
2.9(a)(ii)(A).
"AR POST-DEVELOPMENT BUDGET ADVANCE" has the meaning set forth in
Section 2.9(a)(ii)(B).
-2-
<PAGE>
"AR POST-DEVELOPMENT MEASUREMENT DATE" means the first anniversary of
the first day of the month immediately following the month during which the
redevelopment of Alphabet Redevelopment has been completed.
"AR POST-DEVELOPMENT MEASUREMENT PERIOD" means the period beginning
on the AR Post-Development Measurement Date and ending on the first anniversary
of the AR Post-Development Measurement Date.
"AR PRE-DEVELOPMENT MEASUREMENT DATE" means the first anniversary of
the first day of the month immediately following the month during which the
Company has begun performance of fee generating services under the AR Management
Agreement.
"AR PRE-DEVELOPMENT MEASUREMENT PERIOD" means the period beginning on
the AR Pre-Development Measurement Date and ending on the first anniversary of
the AR Pre-Development Measurement Date.
"ARTICLES OF INCORPORATION" means those certain Articles of
Incorporation of the Company filed with the Secretary of State of California, as
amended to date.
"AUDITED FINANCIAL STATEMENTS" has the meaning set forth in Section
3.1(e)(i).
"BALANCE SHEET" has the meaning set forth in Section 3.1(e)(i).
"BALANCE SHEET DATE" has the meaning set forth in Section 3.1(e)(ii).
"BENEFIT PROGRAM OR AGREEMENT" has the meaning set forth in Section
3.1(q)(i).
"BUSINESS" means the Company's business of providing commercial
property leasing, management, brokerage, development and tenant improvement
construction supervision services.
"BUSINESS DAY" means any day other than (i) a Saturday or Sunday or
(ii) a day on which commercial banks in New York, New York, Dallas, Texas or Los
Angeles, California are authorized or required to be closed.
"BUYER" has the meaning set forth in the first paragraph of this
Agreement and includes its permitted successors and assigns.
"BUYER INDEMNIFIED COSTS" means (i) all Buyer Indemnified
Representation Costs; (ii) all damages, losses, claims, liabilities, demands,
charges, suits, penalties, costs, and expenses (including court costs and
reasonable legal fees and expenses incurred in investigating and preparing for
any litigation or proceeding) that any of the Buyer Indemnified Parties incurs
and that arise out of any breach by the Company of any of the covenants or
agreements (other than breaches of covenants to be performed by the Company
after the Closing) of the Company under this Agreement or any other Transaction
Document executed in connection herewith; (iii) all Buyer Indemnified
Transferred Asset Costs; (iv) all damages, losses, claims, liabilities, demands,
charges, suits, penalties, costs and expenses (including court costs and
reasonable legal fees and
-3-
<PAGE>
expenses incurred in investigating and preparing for any litigation or
proceeding) that any of the Buyer Indemnified Parties incurs that arise out
of the matters disclosed on SCHEDULE 3.1(o); and (v) all Buyer Indemnified
Savings Costs; provided, however, that to the extent that the Company or
Buyer, as the case may be, receives any amounts with respect to any matters
listed in items (i) through (v) above pursuant to any insurance policy for
the benefit of Buyer or the Company, the amounts so received shall not be
deemed "Buyer Indemnified Costs" for purposes of this Agreement.
"BUYER INDEMNIFIED FORMER STOCKHOLDER COSTS" means, with respect to
any Former Stockholder, all damages, losses, claims, liabilities, demands,
charges, suits, penalties, costs and expenses (including court costs and
reasonable legal fees and expenses incurred in investigating and preparing for
any litigation or proceeding) that any of the Buyer Indemnified Parties incurs
and that arise out of any breach or default by such Former Stockholder of or
under any of its representations, warranties, covenants or agreements under this
Agreement or any of the other Transaction Documents.
"BUYER INDEMNIFIED PARTIES" means Buyer and each officer, director,
employee, stockholder and Affiliate of Buyer. After the Closing, the Company
shall be deemed to be a Buyer Indemnified Party.
"BUYER INDEMNIFIED REPRESENTATION COSTS" means any and all damages,
losses, claims, liabilities, demands, charges, suits, penalties, costs, and
expenses (including court costs and reasonable legal fees and expenses incurred
in investigating and preparing for any litigation or proceeding) that any of the
Buyer Indemnified Parties incurs and that arise out of any breach or default by
the Company of any of its representations or warranties under this Agreement or
any agreement or document executed in connection herewith.
"BUYER INDEMNIFIED SAVINGS COSTS" means all damages, losses, claims,
liabilities, demands, charges, suits, penalties, costs and expenses (including
court costs and reasonable legal fees and expenses incurred in investigating and
preparing for any litigation or proceeding) that any of the Buyer Indemnified
Parties incurs that arise out of the Buyer Indemnified Savings Matters from and
after the Effective Date.
"BUYER INDEMNIFIED SAVINGS MATTERS" means the matters described on
EXHIBIT A attached hereto.
"BUYER INDEMNIFIED SELLER COSTS" means all damages, losses, claims,
liabilities, demands, charges, suits, penalties, costs and expenses (including
court costs and reasonable legal fees and expenses incurred in investigating and
preparing for any litigation or proceeding) that any of the Buyer Indemnified
Parties incurs and that arise out of any breach or default by Seller of or under
any of its representations, warranties, covenants or agreements under this
Agreement or any of the other Transaction Documents.
"BUYER INDEMNIFIED TRANSFERRED ASSET COSTS" means (i) any and all
damages, losses, claims, liabilities, demands, charges, suits, penalties, costs,
and expenses (including court costs and reasonable legal fees and expenses
incurred in investigating and preparing for any
-4-
<PAGE>
litigation or proceeding) that any of the Buyer Indemnified Parties incurs as
a result of the ownership of the Transferred Assets or the operation of the
Transferred Assets by the Company, Seller or the Former Stockholders, without
regard to whether the circumstances giving rise to such liability occur prior
to or following the Closing, and (ii) any and all Taxes and other
out-of-pocket costs payable by the Company as a result of the transfer of the
Transferred Assets to Seller or the Former Stockholders as contemplated in
Section 4.1, but excluding any Taxes or Tax liability with respect to the
Transferred Assets included in the definition of Debt.
"CASH BONUS AMOUNT" has the meaning set forth in Section 2.12.
"CASH BONUSES" has the meaning set forth in Section 2.12.
"CASH PURCHASE PRICE" has the meaning set forth in Section 2.2.
"CERCLA" has the meaning set forth in the definition of Environmental
Laws contained in this Section 1.1.
"CERCLIS" has the meaning set forth in Section 3.1(n)(vi).
"CLOSING" means the consummation of the transactions contemplated by
this Agreement in accordance with the provisions of Article 7.
"CLOSING BALANCE SHEET" has the meaning set forth in Section 2.5(a).
"CLOSING BONUSES" has the meaning set forth in Section 2.13(a).
"CODE" shall mean the United States Internal Revenue Code of 1986, as
amended. All references to the Code, U.S. Treasury regulations or other
governmental pronouncements shall be deemed to include references to any
applicable successor regulations or amending pronouncement.
"COMMONLY CONTROLLED ENTITY" has the meaning set forth in Section
3.1(q)(iii).
"COMPANY" has the meaning set forth in the first paragraph of this
Agreement.
"COMPANY COMMON STOCK" has the meaning set forth in the recitals.
"COMPANY TRANSACTION COSTS" means the aggregate amount of all legal,
accounting, advisory, broker or finders fees (and all related costs and
expenses) of the Company incurred in connection with this Agreement or the
transactions contemplated hereby (whether incurred on behalf of the Company, on
behalf of Seller or on behalf of any Former Stockholder, to the extent such
fees, costs and expenses have not been paid by the Company before the Effective
Date).
"CONTINGENT CONSIDERATION" means the payments Buyer is obligated to
make pursuant to Sections 2.8(a), 2.8(b) and 2.8(c).
-5-
<PAGE>
"CONTINGENT CONSIDERATION AMOUNT" shall mean an amount equal to
$3,000,000.
"CONTINGENT CONSIDERATION ESCROW AGREEMENT" means the Contingent
Consideration Escrow Agreement among Buyer, the Seller Representative and the
Escrow Agent substantially in the form attached hereto as EXHIBIT B.
"CONTINGENT CONSIDERATION LETTER OF CREDIT" means (a) during any
period in which the Original Contingent Consideration Letter of Credit is held
under the Contingent Consideration Escrow Agreement, the Original Contingent
Consideration Letter of Credit, and (b) during any period in which a substitute
letter of credit is held under the Contingent Consideration Escrow Agreement as
described in Section 2.8(e) or otherwise in compliance with the terms of the
Contingent Consideration Escrow Agreement, such substitute letter of credit.
"CONTRACTS" means all agreements, contracts, or other binding
commitments, arrangements or plans, written or oral (including any amendments
and other modifications thereto), to which the Company is a party or is
otherwise bound.
"DEBT", without duplication, means (a) all indebtedness (including the
principal amount thereof or, if applicable, the accreted amount thereof and the
amount of accrued and unpaid interest thereon) of the Company, whether or not
represented by bonds, debentures, notes or other securities, for the repayment
of money borrowed, (b) all deferred indebtedness of the Company for the payment
of the purchase price of property or assets purchased, (c) any outstanding
reimbursement obligation of the Company with respect to letters of credit,
bankers' acceptances or similar facilities issued for the account of the
Company, (d) any payment obligation of the Company under any interest rate swap
agreement, forward rate agreement, interest rate cap or collar agreement or
other financial agreement or arrangement entered into for the purpose of
limiting or managing interest rate risks, (e) all indebtedness for borrowed
money secured by any Lien existing on property owned by the Company, whether or
not indebtedness secured thereby shall have been assumed, (f) all guaranties,
endorsements, assumptions and other contingent obligations of the Company in
respect of, or to purchase or to otherwise acquire, indebtedness for borrowed
money of others, and (g) all premiums, penalties and change of control payments
required to be paid or offered in respect of any of the foregoing as a result of
the consummation of the transactions contemplated by this Agreement regardless
if any of such are actually paid. Notwithstanding the foregoing, as used in
this Agreement, Debt will not include any liabilities to the extent that such
liabilities are considered in the calculation of Estimated Working Capital.
"DELIVERING PARTY" has the meaning set forth in Section 2.10.
"DISALLOWED RECEIVABLES" means Accounts Receivable of the Company that
arise from transactions occurring on or before the date that is the 60th day
before the Effective Date.
"EBITDA" means earnings before interest expense, taxes, depreciation
and amortization; provided, however, that no corporate overhead or burden of
the Buyer or its national or local operations will be included in the
calculation of EBITDA for any Project unless there is additional corporate
overhead or burden created by such Projects, in which event a
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deduction for such additional overhead or burden shall be included in the
calculation of EBITDA for such Project.
"EFFECTIVE DATE" means the date of this Agreement, which is also the
date of Closing.
"EMPLOYEES" means all individuals as to whom an employer-employee
relationship with the Company exists as of the Effective Date.
"EMPLOYMENT AGREEMENTS" means the collective reference to the
Employment Agreements entered into by the Buyer and X, Y and Z, respectively, as
of the date hereof.
"ENVIRONMENTAL COSTS OR LIABILITIES" has the meaning set forth in
Section 3.1(n)(iv).
"ENVIRONMENTAL LAWS" means the following Applicable Laws pertaining to
the protection of the environment, natural resources, public or employee health
and safety: the Comprehensive Environmental Response Compensation and Liability
Act (42 U.S.C. Section 9601 ET SEQ.) ("CERCLA"), the Emergency Planning and
Community Right to Know Act, the Superfund Amendments and Reauthorization Act of
1986, the Resource Conservation and Recovery Act, the Hazardous and Solid Waste
Amendments Act of 1984, the Clean Air Act, the Clean Water Act, the Toxic
Substances Control Act, the Safe Drinking Water Act, the Occupational Safety and
Health Act of 1970, the Oil Pollution Act of 1990, the Hazardous Materials
Transportation Act, and any similar or analogous statutes, regulations and
decisional law of any Governmental Entity, as each of the foregoing may be
amended and in effect at or prior to the Closing.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERRONEOUS PARTY" has the meaning set forth in Section 2.5(b).
"ESCROW AGENT" means Norwest Bank Texas, N.A., and includes its
successors and assigns.
"ESCROW AGREEMENTS" shall mean the collective reference to the
Indemnification Escrow Agreement and the Contingent Consideration Escrow
Agreement.
"ESTIMATED WORKING CAPITAL" has the meaning set forth in
Section 2.5(a).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"EXHIBITS" means the exhibits attached to this Agreement.
"EXTRAORDINARY PAYMENTS" means payments or other distributions
required to be made, pursuant to any oral or written contracts or other
agreements, to any directors, officers, Employees or agents of the Company as a
result of the transactions contemplated by the
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Transaction Documents, including all severance payments, termination payments
or other amounts payable (including, without limitation, the estimated costs
of benefits required to be provided) under the terms of any employment
agreement (whether such payments or other distributions are paid on or before
the Effective Date or are payable on or after the Effective Date).
"FINAL BALANCE SHEET" has the meaning set forth in Section 2.5(b).
"FINAL CONTINGENT CONSIDERATION QUARTER" means the calendar quarter in
which it is determined that Buyer is required to pay an amount of Contingent
Consideration to the Seller Representative which, when added to the amounts
previously paid by Buyer to the Seller Representative pursuant to Section 2.8,
if any, equals the Contingent Consideration Amount.
"FINAL DETERMINATION" shall be deemed to occur when (i) there is a
decision, judgment, decree or other order by any court of competent
jurisdiction, which decision, judgment, decree or other order has become final
(i.e. all allowable appeals have been exhausted by either party to the action)
and (ii) the time for instituting a claim has expired, or if a claim was timely
filed, the time for instituting suit with respect thereto has expired.
"FINAL SAPPHIRE LTI EBITDA" shall mean the actual EBITDA from leasing
and tenant improvement fees under the Sapphire Management Agreement for the
Initial Sapphire Measurement Period.
"FINAL SAPPHIRE LTI EBITDA PRODUCT" means the product obtained when
the amount of the Final Sapphire LTI EBITDA is multiplied by a number equal to
FOUR AND ONE-HALF (4.5).
"FINAL SAPPHIRE MEASUREMENT DATE" means the third anniversary of the
Initial Sapphire Measurement Date.
"FINAL SAPPHIRE MEASUREMENT PERIOD" means the period beginning on the
Initial Sapphire Measurement Date and ending on the Final Sapphire Measurement
Date.
"FINAL TROPHY LTI EBITDA" shall mean the actual EBITDA from leasing
and tenant improvement fees under the Trophy Management Agreement for the
Initial Trophy Measurement Period.
"FINAL TROPHY LTI EBITDA PRODUCT" means the product obtained when the
amount of the Final Trophy LTI EBITDA is multiplied by a number equal to FOUR
AND ONE-HALF (4.5).
"FINAL TROPHY MEASUREMENT DATE" means the third anniversary of the
Initial Trophy Measurement Date.
"FINAL TROPHY MEASUREMENT PERIOD" means the period beginning on the
Initial Trophy Measurement Date and ending on the Final Trophy Measurement Date.
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"FINAL WORKING CAPITAL" has the meaning set forth in Section 2.5(b).
"FINANCIAL STATEMENTS"has the meaning set forth in Section 3.1(e)(i).
"FIRST YEAR EXCESS PAID CLAIMS AMOUNT" has the meaning set forth in
Section 8.6(e).
"FORMER EMPLOYEES" means all individuals as to whom an
employer-employee relationship with the Company existed prior to the
Effective Date, but does not exist on the Effective Date, who remain entitled
to benefits under any applicable welfare or benefit plan or program.
"FORMER STOCKHOLDERS" has the meaning set forth in the first paragraph
of this Agreement.
"GAAP" means accrual accounting using generally accepted accounting
principles in the United States.
"GOVERNMENTAL ENTITY" means any governmental department, commission,
board, bureau, agency, court or other instrumentality of the United States or
any state, county, parish or municipality, jurisdiction, or other political
subdivision thereof.
"HAZARDOUS SUBSTANCES" has the meaning set forth in
Section 3.1(n)(iv).
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"INCAPACITATED FORMER STOCKHOLDER" has the meaning set forth in
Section 2.11.
"INDEMNIFICATION ESCROW AGREEMENT" means the Indemnification Escrow
Agreement among Buyer, the Seller Representative and the Escrow Agent
substantially in the form attached hereto as EXHIBIT C.
"INDEMNIFICATION HOLDBACK AMOUNT" means an amount equal to $1,100,000.
"INDEMNIFICATION TAX SAVINGS AMOUNT" has the meaning set forth in
Section 8.10.
"INDEMNIFIED COST DEDUCTION" has the meaning set forth in Section
8.10.
"INDEMNIFIED COSTS" means the Buyer Indemnified Costs, the Buyer
Indemnified Former Stockholder Costs, the Buyer Indemnified Seller Costs or the
Seller Indemnified Costs, as the case may be.
"INDEMNIFIED PARTIES" means the Buyer Indemnified Parties or the
Seller Indemnified Parties, as the case may be.
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"INDEMNIFIED REPRESENTATION COSTS" means the Buyer Indemnified
Representation Costs or the Seller Indemnified Representation Costs, as the case
may be.
"INDEMNIFYING PARTY" means any person who is obligated to provide
indemnification hereunder.
"INDEMNITY PAYMENT" has the meaning set forth in Section 8.10.
"INDEMNITY RETURN" has the meaning set forth in Section 8.10.
"INITIAL CONTINGENT CONSIDERATION DETERMINATION DATE" means the date
on which it is determined pursuant to Section 2.10 that Seller is entitled to
receive Contingent Consideration pursuant to Sections 2.8(b) or 2.8(c).
"INITIAL CONTINGENT CONSIDERATION QUARTER" shall mean the first
calendar quarter following the Effective Date during which the cumulative
Aggregate Projects NOI equals or exceeds $1,500,000, as determined pursuant to
Section 2.10.
"INITIAL SAPPHIRE EBITDA" means the sum of (i) actual EBITDA from
property management fees under the Sapphire Management Agreement for the Initial
Sapphire Measurement Period plus (ii) the Initial Sapphire LTI EBITDA.
"INITIAL SAPPHIRE EBITDA PRODUCT" means the product obtained when the
amount of the Initial Sapphire EBITDA is multiplied by a number equal to FOUR
AND ONE-HALF (4.5).
"INITIAL SAPPHIRE LTI EBITDA" shall mean the actual EBITDA from
leasing and tenant improvement fees under the Sapphire Management Agreement for
the Initial Sapphire Measurement Period; provided, however, that if the Initial
Sapphire Measurement Period Lease Turnover exceeds 880,000 square feet, the
Initial Sapphire LTI EBITDA shall for all purposes under this Agreement be
deemed to be an amount equal to the product obtained when (i) the actual EBITDA
from leasing and tenant improvement fees under the Sapphire Management Agreement
for the Initial Sapphire Measurement Period, IS MULTIPLIED BY (ii) a fraction,
the numerator of which is 880,000 and the denominator of which is the Initial
Sapphire Measurement Period Lease Turnover.
"INITIAL SAPPHIRE LTI EBITDA PRODUCT" means the product obtained when
the amount of the Initial Sapphire LTI EBITDA is multiplied by a number equal to
FOUR AND ONE-HALF (4.5).
"INITIAL SAPPHIRE MEASUREMENT DATE" means the first anniversary of the
first day of the month following the month during which the Company has begun
performance of fee generating services under the Sapphire Management Agreement.
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"INITIAL SAPPHIRE MEASUREMENT PERIOD" means the period beginning on
the Initial Sapphire Measurement Date and ending on the first anniversary of the
Initial Sapphire Measurement Date.
"INITIAL SAPPHIRE MEASUREMENT PERIOD LEASE TURNOVER" shall mean a
number of square feet equal to the number of square feet with respect to which
leases are entered into or lease renewals are executed with respect to Project
Sapphire during the Initial Sapphire Measurement Period.
"INITIAL TROPHY EBITDA" means the sum of (i) actual EBITDA from
property management fees under the Trophy Management Agreement for the Initial
Trophy Measurement Period plus (ii) the Initial Trophy LTI EBITDA.
"INITIAL TROPHY EBITDA PRODUCT" means the product obtained when the
amount of the Initial Trophy EBITDA is multiplied by a number equal to FOUR AND
ONE-HALF (4.5).
"INITIAL TROPHY LTI EBITDA" shall mean the actual EBITDA from leasing
and tenant improvement fees under the Trophy Management Agreement for the
Initial Trophy Measurement Period; provided, however, that if the Initial Trophy
Measurement Period Lease Turnover exceeds 550,000 square feet, the Initial
Trophy LTI EBITDA shall for all purposes under this Agreement be deemed to be an
amount equal to the product obtained when (i) the actual EBITDA from leasing and
tenant improvement fees under the Trophy Management Agreement for the Initial
Trophy Measurement Period, IS MULTIPLIED BY (ii) a fraction, the numerator of
which is 550,000 and the denominator of which is the Initial Trophy Measurement
Period Lease Turnover.
"INITIAL TROPHY LTI EBITDA PRODUCT" means the product obtained when
the amount of the Initial Trophy LTI EBITDA is multiplied by a number equal to
FOUR AND ONE-HALF (4.5).
"INITIAL TROPHY MEASUREMENT DATE" shall mean the first anniversary of
the first day of the month following the month during which the Company has
begun performance of fee generating services under the Trophy Management
Agreement.
"INITIAL TROPHY MEASUREMENT PERIOD" means the period beginning on the
Initial Trophy Measurement Date and ending on the first anniversary of the
Initial Trophy Measurement Date.
"INITIAL TROPHY MEASUREMENT PERIOD LEASE TURNOVER" shall mean a number
of square feet equal to the number of square feet with respect to which leases
are entered into or lease renewals are executed with respect to Project Trophy
during the Initial Trophy Measurement Period.
"INTELLECTUAL PROPERTY" means all trademarks, Know-how, copyrights,
copyright registrations and applications for registration, patents, business
names (including the right to use the name of the Company or derivatives
thereof) and all other intellectual property rights whether
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registered or not, licensed to or owned by the Company, including the
goodwill related to the foregoing.
"IRS" means the Internal Revenue Service of the United States.
"ISSUER" means NationsBank of Texas, N.A., or another United States
bank having assets and a net worth (as established by the most recent public
financial information of such bank, copies of which shall be provided by Buyer
to the Seller Representative) equal to or greater than that of NationsBank of
Texas, N.A. as of the Effective Date.
"KNOW-HOW" means all plans, design drawings, specifications and
performances criteria, operating instructions and maintenance manuals,
manufacturing information (including production documentation, methods, layouts
and supplier and cost information), copies of on-site computer software and
related documentation (including, without limitation, source and object code to
the extent available), prototypes, models or samples, ideas, concepts and data,
research records, all promotional literature, customer and supplier lists and
similar data and information and all other confidential or proprietary technical
and business information.
"KNOWLEDGE" means, (a) with respect to X and Y, the actual knowledge
of such party and (b) with respect to the Company, Seller and Buyer, the actual
knowledge of any officers and directors of such party.
"LICENSES" means all licenses, permits or authorizations issued to the
Company by any Governmental Entity, including those listed on Schedule 3.1(g).
"LIENS" has the meaning set forth in Section 3.1(m).
"MARKET TERMINATION FEE" means, with respect to any management
agreement, the product obtained when (i) the net present value of the stated
gross annual management fees over the remaining stated term of the agreement
(discounted at an annual rate equal to 10%) is multiplied by (ii) 13.6%.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the
business, operations, properties (taken as a whole), condition (financial or
otherwise), results of operations or assets (taken as a whole), liabilities or
prospects of the Company.
"MATERIAL CONTRACT" has the meaning set forth in Section 3.1(p)(i).
"MINIMUM LOSS" has the meaning set forth in Section 8.6(a).
"NOI" means an amount equal to the excess of the Company's gross
revenues generated by a Project from management, leasing, tenant improvement and
development fees (excluding any reimbursement received by the Company to offset
fees or expenses paid by the Company in connection with such Project) over the
costs incurred by the Company in connection with generating such fees,
determined on an accrual basis of accounting consistent with GAAP and the
Buyer's normal accounting practices; provided, however, that no corporate
overhead or
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burden of Buyer or its national or local operations will be included in the
calculation of NOI for any Project unless there is additional corporate
overhead or burden created by such Project, in which event a deduction for
such additional overhead or burden shall be included in the calculation of
NOI for such Project.
"NOL" has the meaning set forth in Section 2.13(a).
"NOL COSTS" has the meaning set forth in Section 2.13(b).
"NOL OFFSET" has the meaning set forth in Section 2.13(a).
"NOL OFFSET AMOUNT" has the meaning set forth in Section 2.13(a).
"NOI REPAYMENT AMOUNT" has the meaning set forth in Section 2.13(d).
"NOL RETURN" has the meaning set forth in Section 2.13(a).
"NOL SAVINGS AMOUNT" has the meaning set forth in Section 2.13(b).
"NPL" has the meaning set froth in Section 3.1(n)(vi).
"ORIGINAL CONTINGENT CONSIDERATION LETTER OF CREDIT" means the
original irrevocable letter of credit in favor of the Seller Representative and
the Escrow Agent substantially in the form of EXHIBIT D, to be issued by Issuer,
or another United States bank having assets and a net worth (as established by
the most recent public financial information of such bank, copies of which shall
be provided by Buyer to the Seller Representative) equal to or greater than the
Issuer's, for the sum of $3,000,000 and held in accordance with the provisions
of the Contingent Consideration Escrow Agreement.
"OWNED REAL PROPERTY" means any parcels of real property owned in fee
and used or held for use by the Company and all buildings, structures,
improvements and fixtures thereon, together with all rights of way, easements,
privileges and appurtenances pertaining or belonging thereto, including any
right, title and interest of the Company in and to any street or other property
adjoining any portion of such property.
"PBGC" has the meaning set forth in Section 3.1(q)(iii).
"PERMITS" has the meaning set forth in Section 3.1(n)(iii).
"PERMITTED ENCUMBRANCES" means Liens that are (i) arise out of Taxes
not in default and payable without penalty or interest or the validity of which
is being contested in good faith by appropriate proceedings, (ii) represent the
rights of customers, vendors, suppliers and subcontractors in the ordinary
course of business under contracts or under general principles of commercial
law, or (iii) that individually and in the aggregate cannot reasonably be
expected to interfere with the conduct of the normal business operations of the
Company.
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"PERSON" means an individual, corporation, partnership, limited
liability company, association, trust, unincorporated organization, or other
entity.
"PERSONAL PROPERTY" means all of the machinery, equipment, computer
programs, computer software, installations, tools, motor vehicles, fixtures,
furniture, furnishings, leasehold improvements, office equipment, inventories,
supplies, plant, spare parts, and other tangible property which is owned or
leased by the Company and which is used or held for use in the Business.
"PLAN" has the meaning set forth in Section 3.1(q)(i).
"PRECLOSING SALES INCOME" has the meaning set forth in Section
2.13(c).
"PROJECT RAINS" has the meaning set forth in SCHEDULE 1.
"PROJECT SAPPHIRE" has the meaning set forth in SCHEDULE 1.
"PROJECT TROPHY" has the meaning set forth in SCHEDULE 1.
"PROJECTS" means the collective reference to Project Sapphire, Project
Trophy and Alphabet Redevelopment.
"PURCHASE PRICE" means the consideration payable by Buyer as provided
in Section 2.2 hereof.
"RAINS MEASUREMENT PERIOD" means the period beginning on the first day
of the month following the month during which the Company has begun performance
of fee generating services under the Rains Management Agreement and ending one
year after such date.
"RAINS MANAGEMENT AGREEMENT" has the meaning set forth in Section
2.8(a).
"RECEIVING PARTY" has the meaning set forth in Section 2.10.
"REDUCTIONS" means the aggregate amount of (i) any Debt of the Company
outstanding as of the Effective Date (to the extent that such Debt is not
included in the determination of the Estimated Working Capital), (ii) any
Extraordinary Payments payable by the Company as a result of the transactions
contemplated by this Agreement (to the extent that such Extraordinary Payments
are not included in the determination of Estimated Working Capital), if any, and
(iii) the Company Transaction Costs (to the extent that such Company Transaction
Costs are not included in the determination of Estimated Working Capital).
"REFEREE" has the meaning set forth in Section 2.5(b).
"RESTATED TAX SAVINGS AMOUNT" has the meaning set forth in Section
8.10.
"SAPPHIRE ACQUISITION COSTS" has the meaning set forth in
Section 2.9(d).
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"SAPPHIRE BUDGET" has the meaning set forth in Section 2.9(c)(i).
"SAPPHIRE BUDGET ADVANCE" has the meaning set forth in Section
2.9(c)(ii).
"SAPPHIRE LOOKBACK LEASE TURNOVER" means a number equal to the
quotient obtained when (i) the number of square feet with respect to which
leases are entered into or lease renewals are executed with respect to Project
Sapphire during the Final Sapphire Measurement Period, IS DIVIDED BY (ii) a
number equal to THREE (3).
"SAPPHIRE MANAGEMENT AGREEMENT" has the meaning set forth in Section
2.9(c).
"SCHEDULES" means the Schedules attached to this Agreement.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"SELLER" has the meaning set forth in the first paragraph of this
Agreement.
"SELLER DEMAND NOTE" means the $78,791 full recourse promissory note
dated as of the Effective Date made payable to the order of the Company by
Seller as of the Effective Date.
"SELLER INDEMNIFIED COSTS" means (i) all Seller Indemnified
Representation Costs, (ii) any and all damages, losses, claims, liabilities,
demands, charges, suits, penalties, costs, and expenses (including court costs
and reasonable legal fees and expenses incurred in investigating and preparing
for any litigation or proceeding) that any of the Seller Indemnified Parties
incurs and that arise out of any breach by Buyer of any of the covenants or
agreements under this Agreement or any other Transaction Documents and (iii) any
and all damages, losses, claims, liabilities, demands, charges, suits,
penalties, costs, and expenses (including court costs and reasonable legal fees
and expenses incurred in investigating and preparing for any litigation or
proceeding) that any of the Seller Indemnified Parties incurs and that arise out
of any breach by the Company of a covenant or agreement under this Agreement or
any other Transaction Documents to be performed after the Closing.
"SELLER INDEMNIFIED PARTIES" means each of the Former Stockholders,
Seller and the Company, and each officer, director, employee, stockholder, and
Affiliate of the Company; provided, however, that the Company will be deemed to
be a Seller Indemnified Party only before the Effective Date.
"SELLER INDEMNIFIED REPRESENTATION COSTS" means any and all damages,
losses, claims, liabilities, demands, charges, suits, penalties, costs, and
expenses (including court costs and reasonable legal fees and expenses incurred
in investigating and preparing for any litigation or proceeding) that any of the
Seller Indemnified Parties incurs and that arise out of any breach or default by
Buyer of any of the representations or warranties under this Agreement or any
agreement or document executed in connection herewith.
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"SELLER REPRESENTATIVE" has the meaning set forth in Section 2.11.
"SENIOR CREDIT FACILITY" means the Credit Agreement dated as of
December 1, 1997, among Buyer, the Lenders listed therein, NationsBank of Texas,
N.A., as Administrative Agent and as Issuing Bank, Bankers Trust Company, as
Documentation Agent, and NationsBanc Montgomery Securities, Inc. and BT Alex.
Brown Incorporated, as Co-Arrangers, and the agreements, instruments and other
documents entered into in connection therewith.
"SHARES" has the meaning set forth in the recitals.
"STOCKHOLDERS DEMAND NOTE" means the $744,449 full recourse promissory
note dated as of the Effective Date made payable to the order of the Company by
each of the Former Stockholders as of the Effective Date.
"SUCCESSOR FORMER STOCKHOLDER" has the meaning set forth in
Section 2.11.
"TAX" (OR "TAXES") means (i) any net income, alternative or add-on
minimum, gross income, gross receipts, sales, use, ad valorem, value added,
transfer, franchise, profits, license, withholding on amounts paid by the
Company, payroll, employment, excise, production, severance, stamp, occupation,
premium, property, environmental or windfall profit tax, custom, duty or other
tax, governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest and/or any penalty, addition to tax or additional
amount imposed by any taxing authority, (ii) any liability of the Company for
the payment of any amounts of the type described in clause (i) as a result of
being a member of an affiliated or consolidated group or arrangement whereby
liability of the Company for the payment of such amounts was determined or taken
into account with reference to the liability of any other person for any period
and (iii) liability of the Company with respect to the payment of any amounts of
the type described in clause (i) or (ii) as a result of any express or implied
obligation to indemnify any other person.
"TAX RETURN" means all returns, declarations, reports, estimates,
information returns and statements required to be filed by or with respect to
the Company in respect of any Taxes, including, without limitation, (i) any
consolidated federal income Tax return in which the Company is included and
(ii) any state, local or foreign income Tax returns filed on a consolidated,
combined or unitary basis (for purposes of determining tax liability) in which
the Company is included.
"TRADENAME LICENSE AGREEMENT" means the License Agreement between
Buyer, the Company and X, substantially in the form attached hereto as EXHIBIT
E.
"TRANSACTION DOCUMENTS" mean the collective reference to this
Agreement, the Contingent Consideration Letter of Credit, the Contingent
Consideration Escrow Agreement, the Employment Agreements, the Indemnification
Escrow Agreement, the Tradename License Agreement and all other documents to be
executed by any of the Company, Seller, Seller Representative or the Former
Stockholders, on the one hand, or Buyer, on the other, in connection with the
consummation of the transactions contemplated in this Agreement.
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"TRANSFERRED ASSETS" means the assets of the Company described on
EXHIBIT F hereto.
"TROPHY ACQUISITION COSTS" has the meaning set forth in
Section 2.9(d).
"TROPHY BREAKUP AMOUNT" has the meaning set forth in Section 2.8(c).
"TROPHY BUDGET" has the meaning set forth in Section 2.9(b)(i).
"TROPHY BUDGET ADVANCE" has the meaning set forth in Section
2.9(b)(ii).
"TROPHY LOOKBACK LEASE TURNOVER" means a number equal to the quotient
obtained when (i) the number of square feet with respect to which leases are
entered into or lease renewals are executed with respect to Project Trophy
during the Final Trophy Measurement Period, IS DIVIDED BY (ii) a number equal to
THREE (3).
"TROPHY MANAGEMENT AGREEMENT" has the meaning set forth in Section
2.9(b).
"VOTING DEBT" has the meaning set forth in Section 3.1(b).
"WORKING CAPITAL" means the sum of all cash and trade accounts
receivable of the Company and the amounts owed under the Stockholders Demand
Note and the Seller Demand Note, minus the sum of all trade accounts payable of
the Company, each as determined in accordance with GAAP applied on a basis
consistent with the Company's audited balance sheet as of December 31, 1997.
Notwithstanding the foregoing, for purposes of calculating Working Capital,
(a) any Accounts Receivable that (i) fail to comply with the representations and
warranties set forth in Section 3.1(w) or (ii) are Disallowed Receivables shall
not be considered trade accounts receivable, (b) any amount of the Company's
cash which would be described as "restricted cash" on a balance sheet prepared
in accordance with GAAP applied on a basis consistent with the Balance Sheet
shall be included in "cash" and the offsetting liability with respect to such
restricted cash balance shall be included in "trade accounts payable" for
purposes of the calculation of Working Capital, (c) the amount of any
Extraordinary Payments or Company Transaction Costs not paid at or before the
Closing (whether or not payable on or after the Effective Date) shall be
considered trade accounts payable, (d) the amount of any Extraordinary Payments,
Cash Bonuses or Company Transaction Costs paid at the Closing shall not be
considered for purposes of the calculation of Working Capital, (e) the amount of
any Acquisition Costs which have been incurred at or prior to the Closing and
have not been paid at the Closing shall be included in trade accounts payable
for purposes of the calculation of Working Capital and (f) the amount of all
accrued and payable bonuses, accrued and unpaid overtime compensation and
related tax expenses shall be included in trade accounts payable for purposes of
the calculation of Working Capital.
"WORKING CAPITAL STATEMENT" has the meaning set forth in
Section 2.5(b).
1.2 REFERENCES AND TITLES. All references in this Agreement to Exhibits,
Schedules, Articles, Sections, subsections, and other subdivisions refer to the
corresponding Exhibits,
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Schedules, Articles, Sections, subsections, and other subdivisions of this
Agreement unless expressly provided otherwise. Titles appearing at the
beginning of any Articles, Sections, subsections, or other subdivisions of
this Agreement are for convenience only, do not constitute any part of such
Articles, Sections, subsections or other subdivisions, and shall be
disregarded in construing the language contained therein. The words "THIS
AGREEMENT," "HEREIN," "HEREBY," "HEREUNDER," and "HEREOF," and words of
similar import, refer to this Agreement as a whole and not to any particular
subdivision unless expressly so limited. The words "THIS SECTION," "THIS
SUBSECTION," and words of similar import, refer only to the Sections or
subsections hereof in which such words occur. The word "INCLUDING" (in its
various forms) means "INCLUDING WITHOUT LIMITATION." Pronouns in masculine,
feminine, or neuter genders shall be construed to state and include any other
gender and words, terms, and titles (including terms defined herein) in the
singular form shall be construed to include the plural and vice versa, unless
the context otherwise expressly requires. Unless the context otherwise
requires, all defined terms contained herein shall include the singular and
plural and the conjunctive and disjunctive forms of such defined terms.
ARTICLE 2
PURCHASE AND SALE OF SHARES
2.1 PURCHASE AND SALE. Upon the terms and subject to the conditions set
forth in this Agreement, at the Closing, Seller shall sell to Buyer (or Buyer's
designee), and Buyer (or Buyer's designee) shall purchase from Seller, the
Shares, free and clear of all Liens.
2.2 PURCHASE PRICE. (a) The aggregate purchase price payable by Buyer to
Seller in consideration for the sale of the Shares (the "Purchase Price") shall
be (i) an amount equal to $23,097,792 (the "Cash Purchase Price"), (ii) the
right to receive the Contingent Consideration if the conditions set forth in
Section 2.8 are satisfied, and (iii) the right to receive the Additional
Consideration if the conditions set forth in Section 2.9 are satisfied;
provided, however, that the Cash Purchase Price shall be adjusted (x) at Closing
to reflect any Reductions, as described in Section 2.4, (y) after the Closing to
reflect the Adjustment, as described in Section 2.7 and (z) after the Closing to
reflect, to the extent appropriate, any NOL Savings Amount paid by Buyer to
Seller pursuant to Section 2.13(b).
2.3 INDEMNIFICATION HOLDBACK AND CONTINGENT CONSIDERATION LETTER OF
CREDIT. At the Closing, Buyer shall deposit (a) an amount of cash equal to the
Indemnification Holdback Amount with the Escrow Agent to be held in escrow in
accordance with the terms hereof and the Indemnification Escrow Agreement, and
(b) the Contingent Consideration Letter of Credit with the Escrow Agent to be
held in escrow in accordance with the terms hereof and the Contingent
Consideration Escrow Agreement.
2.4 REDUCTIONS TO THE PURCHASE PRICE. The Cash Purchase Price shall be
reduced by the amount of the Reductions. The Company, Seller and the Former
Stockholders hereby represent and warrant to Buyer that SCHEDULE 2.4 hereto
correctly sets forth (i) the amount of the Reductions, which amount includes
(A) the payments required to be made in order for the Debt
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to be repaid in full and retired as of the Effective Date, (B) the amount of
any Extraordinary Payments required to be made, and (C) the amount of any
Company Transaction Costs required to be made; (ii) the name of the persons
to whom such payments are to be made; and (iii) wiring or mailing
instructions for the recipients of such payments. At the Closing, an amount
of the Purchase Price equal to the sum of the Reductions shall be applied to
the payment and retirement in full of the Debt and the payment of any
Extraordinary Payments and Company Transaction Costs identified in SCHEDULE
2.4. Seller and the Former Stockholders shall indemnify Buyer pursuant to
the provisions of Article 8 for any liability incurred by the Company or
Buyer for any Reductions not set forth in SCHEDULE 2.4.
2.5 WORKING CAPITAL ADJUSTMENT. (a) Attached to this Agreement as
SCHEDULE 2.5 is (i) an estimated balance sheet for the Company as of 11:59 p.m.
February 28, 1998, but giving effect to the payments that are to be made
pursuant to Section 2.4 (the "Closing Balance Sheet"), and (ii) a good faith
estimate of Working Capital as of 11:59 p.m. February 28, 1998 based on the
Closing Balance Sheet (the "Estimated Working Capital"). The Company, Seller
and the Former Stockholders hereby represent and warrant to Buyer that the
Closing Balance Sheet has been prepared by the Company in a manner consistent
with the preparation of the Balance Sheet and that the Estimated Working Capital
has been calculated in accordance with this Agreement.
(b No later than 90 days after the Effective Date, the Company shall
cause to be prepared and delivered to Seller and the Former Stockholders (i) a
balance sheet for the Company as of 11:59 p.m. on the date immediately prior to
the Effective Date (but giving effect to the payments that have been made
pursuant to Section 2.4), which shall be audited by Ernst & Young LLP, together
with the related audit report of such firm (the "Final Balance Sheet") and
(ii) a statement of Working Capital as determined from the Final Balance Sheet
(the "Working Capital Statement"). The Final Balance Sheet shall be prepared in
accordance with GAAP applied in a manner consistent with the preparation of the
Company's audited balance sheet as of December 31, 1997, except as otherwise
contemplated by this Agreement, and shall fairly present the financial position
of the Company as of 11:59 p.m. on the date immediately prior to the Effective
Date (but giving effect to the payments that have been made pursuant to
Section 2.4); provided, however, that the Final Balance Sheet shall include
(A) all Extraordinary Payments arising out of, based upon or that will arise
from the transactions contemplated by this Agreement, and (B) any Company
Transaction Costs which have not been paid at the time the Final Balance Sheet
is prepared. If within fifteen days following delivery of the Working Capital
Statement to Seller and the Former Stockholders, the Seller Representative has
not given the Company written notice of an objection to the Working Capital
Statement (such notice must contain a statement describing the basis of such
objection), then the Working Capital reflected on the Working Capital Statement
shall be deemed final and conclusive and shall be the "Final Working Capital."
If the Seller Representative gives such written notice of objection within such
fifteen day period and Buyer and the Seller Representative are unable to resolve
the dispute within the five-day period following such notice of objection, then
the issues in dispute will be submitted for resolution to a "big six" accounting
firm to be selected jointly by the Seller Representative and Buyer within the
following fifteen days or, if they fail to agree, such accounting firm shall be
Price Waterhouse (Los Angeles) (it being understood that Price Waterhouse (Los
Angeles) was chosen because of representations made that neither Buyer and
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its Affiliates nor Seller, the Former Stockholders and their Affiliates have a
material relationship with such office, and if any such parties prior to the
calculation of the Final Working Capital develop a material relationship with
such office, the party having such relationship shall promptly notify the other
party of such relationship and the parties will select another office of Price
Waterhouse or another "big six" accounting firm with which none of such parties
has a material relationship to serve as the accountants) (the "Referee"). The
Referee shall determine the Final Working Capital within thirty days after the
dispute is submitted to it. If issues in dispute are submitted to the Referee
for resolution, (1) each party will furnish to the Referee such work papers and
other documents and information relating to the disputed issues as the Referee
may request and are available to that party (or its independent public
accountants) and will be afforded the opportunity to present to the Referee any
material relating to the determination of Final Working Capital and to discuss
such determination with the Referee; (2) the determination by the Referee of
Final Working Capital, as set forth in a written notice delivered to both
parties by the Referee, will be binding and conclusive on the parties; and (3)
Seller and the Company will each bear one-half of the fees and expenses of the
Referee for such determination; provided, however, that if the difference
between the Final Adjustment and the Final Adjustment that would have resulted
from the use of the proposed calculations by one of the parties hereto (the
"Erroneous Party") is more than twice as great as the difference between the
Final Adjustment and the Final Adjustment that would have resulted from the use
of the other party's proposed calculations, the Erroneous Party shall pay all of
the fees and expenses of the Referee.
2.6 PAYMENTS BY BUYER AT CLOSING. At the Closing, subject to the
satisfaction of the other terms and conditions of this Agreement, Buyer shall:
(a) pay or cause to be paid to Seller cash, via wire transfer of
immediately available funds to an account designated by the Seller
Representative, in an amount equal to the Cash Purchase Price, as adjusted in
accordance with the provisions of Sections 2.4, MINUS the Indemnification
Holdback Amount and MINUS the Cash Bonus Amount; and
(b) wire transfer such amounts required to repay in full any Debt and
to make any Extraordinary Payments and Company Transaction Costs in accordance
with SCHEDULE 2.4.
2.7 POST-CLOSING PAYMENT. If the Final Working Capital exceeds
$2,597,792, then the Cash Purchase Price payable by Buyer will be increased by
an amount equal to the amount by which Final Working Capital exceeds $2,597,792.
If the Final Working Capital is less than $2,597,792, then the Cash Purchase
Price payable by Buyer will be decreased by an amount equal to the amount by
which $2,597,792 exceeds Final Working Capital. Any adjustment to the Cash
Purchase Price payable by Buyer pursuant to this Section 2.7 is referred to as
the "Adjustment." If the Cash Purchase Price as adjusted pursuant to the
Adjustment is greater than the Cash Purchase Price paid by the Buyer at Closing,
the Buyer shall pay such excess to Seller in cash. If the Cash Purchase Price
as adjusted pursuant to the Adjustment is less than the Cash Purchase Price paid
by Buyer at Closing, Seller shall pay such excess to the Buyer in cash. Any
such amount shall be paid by the Buyer or Seller, as the case may be, no later
than 15 days following the date of the determination of Final Working Capital,
in immediately available funds by wire transfer to such bank account as Buyer or
Seller, as applicable, shall specify.
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2.8 CONTINGENT CONSIDERATION.
(a) If the Company enters into a management agreement with J.P.
Morgan Investment Management, Inc., or one of its Affiliates, with respect to
Project Rains (the "Rains Management Agreement"), such agreement contains terms
and conditions substantially the same as those described in Schedule 2.8(a), the
other terms and conditions of such agreement are reasonable given market
conditions at the time such agreement is entered into, performance by the
Company of fee generating services under such agreement begins on or prior to
the first anniversary of the Effective Date, and Buyer and Seller jointly agree
that the budgeted EBITDA from property management, leasing and tenant
improvement fees under the Rains Management Agreement for the Rains Measurement
Period is at least $400,000, Buyer shall promptly (but in no event later than
fifteen days after the Company notifies Buyer that the Company has entered into
the Rains Management Agreement) pay to the Seller an amount equal to the lesser
of (i) $1,000,000 or (ii) the excess of the Contingent Consideration Amount over
the aggregate amount of Contingent Consideration theretofore paid pursuant to
Sections 2.8(b) or 2.8(c). Notwithstanding any other term or provision set
forth in this Agreement, in no event shall the aggregate amount of Contingent
Consideration which Buyer is required to pay to Seller pursuant to this
Agreement exceed the Contingent Consideration Amount.
(b) Promptly following the Initial Contingent Consideration
Determination Date, Buyer shall pay to the Seller an amount equal to the lesser
of (i) the excess of the Contingent Consideration Amount over the amount of
Contingent Consideration theretofore paid pursuant to Section 2.8(a), if any, or
(ii) the Aggregate Projects NOI generated through the end of the Initial
Contingent Consideration Quarter. Promptly following the end of each subsequent
calendar quarter that commences on or prior to the sixth anniversary of the
Effective Date, Buyer shall pay to the Seller an amount equal to the Aggregate
Projects NOI for such quarter (prorated to the sixth anniversary of the
Effective Date if such quarter extends past the sixth anniversary of the
Effective Date); provided, that, notwithstanding any other term or provision set
forth in this Agreement, in no event shall the aggregate amount of Contingent
Consideration which Buyer is required to pay to Seller pursuant to this
Agreement exceed the Contingent Consideration Amount.
(c) Notwithstanding the terms and conditions set forth in Sections
2.8(a) or 2.8(b), if a management agreement is entered to with respect to either
Project Trophy or Project Sapphire and performance by the Company of fee
generating services under such agreement commences on or prior to the second
anniversary of the Effective Date, Buyer shall promptly pay to the Seller an
amount equal to the Contingent Consideration Amount MINUS the sum of any amounts
previously paid by the Buyer to the Seller pursuant to Sections 2.8(a) or
2.8(b); provided, however, that no Contingent Consideration shall be payable
under this Section 2.8(c) unless (i) any such management agreement contemplates
that the Company will manage (A) with respect to Project Trophy, no less than
2,800,000 square feet or (B) with respect to Project Sapphire, no less than
5,000,000 square feet, and (ii) such management agreement either (X) has a
stated term of five (5) years or more, provides for a management fee (which
management fee is reasonable given market conditions at the time such agreement
is entered into) and is non-cancelable by the other party thereto except upon
the occurrence of a breach of such agreement
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by the Company or upon payment of a Market Termination Fee, or (Y) has a
stated term of less than five (5) years but provides for a management fee of
not less than 1.25% of gross revenues from such Project. If the Company does
not enter into a management agreement with respect to Project Trophy, but the
Company subsequently receives any amount (the "Trophy Breakup Amount") from
the owner of Project Trophy in consideration for services the Company rendered
to such owner with respect to Project Trophy, Buyer shall promptly (but in no
event later than 15 days after the Company receives the Trophy Breakup Amount)
pay to the Seller an amount equal to the lesser of (i) the Trophy Breakup
Amount, less any expenses incurred in the generation of the Trophy Breakup
Amount, or (ii) the excess of the Contingent Consideration Amount over the
aggregate amount of Contingent Consideration theretofore paid pursuant to
Sections 2.8(a), 2.8(b) or 2.8(c). Notwithstanding any other term or
provision set forth in this Agreement, in no event shall the aggregate amount
of Contingent Consideration which Buyer is required to pay to Seller pursuant
to this Agreement exceed the Contingent Consideration Amount.
(d) At the time Buyer makes any payment of Contingent Consideration
to Seller pursuant to Sections 2.8(b) or 2.8(c), Buyer shall also pay to the
Seller simple interest on the amount of Contingent Consideration so paid, which
interest shall have accrued at a rate equal to 7.5% per annum from the Effective
Date to the earlier of (i) date of payment of such Contingent Consideration, or
(ii) the third anniversary of the Effective Date.
(e) If any portion of the Contingent Consideration Amount is paid
under the terms of this Section 2.8, Buyer may from time to time cause a
substitute letter of credit to be issued by Issuer for the benefit of Seller and
the Escrow Agent in an amount equal to the Contingent Consideration Amount MINUS
the aggregate amount of Contingent Consideration previously paid by Buyer
pursuant to this Section 2.8, provided, however, that, unless otherwise agreed
in writing by Buyer and the Seller Representative, the terms and conditions of
such substitute letter of credit shall be the same in all material respects to
the terms and conditions of the Contingent Consideration Letter of Credit other
than the face amount thereof. If Buyer so elects to obtain a substitute letter
of credit, Buyer shall deposit the substitute letter of credit with the Escrow
Agent to be held in escrow in accordance with the Contingent Consideration
Escrow Agreement and Buyer and the Seller Representative shall, effective upon
such deposit, instruct the Escrow Agent to release the Contingent Consideration
Letter of Credit to Buyer for cancellation and, thereafter, such substitute
letter of credit shall be deemed the "Contingent Consideration Letter of Credit"
for all purposes under this Agreement and the Contingent Consideration Escrow
Agreement. Immediately following the date that Buyer, pursuant to this Section
2.8, has paid to the Seller an amount which, when added to the aggregate amount
of Contingent Consideration previously paid by Buyer pursuant to this
Section 2.8, equals the Contingent Consideration Amount, Buyer and the Seller
Representative shall each instruct the Escrow Agent to release the Contingent
Consideration Letter of Credit to Buyer for cancellation.
2.9 ADDITIONAL CONSIDERATION. If the entire Contingent Consideration
Amount has been paid or is payable to Seller pursuant to Section 2.8, Buyer
shall pay to the Seller additional amounts (the "Additional Consideration") upon
the following terms and conditions:
(a) ALPHABET REDEVELOPMENT.
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(i) Promptly following the end of each calendar quarter which
is subsequent to the Final Contingent Consideration Quarter and which
commences on or prior to the sixth anniversary of the Effective Date, Buyer
shall pay to the Seller an amount equal to 30% of the EBITDA to the Company
generated during such calendar quarter by leasing, tenant improvement and
development fees with respect to Alphabet Redevelopment (prorated to the
sixth anniversary of the Effective Date if such quarter extends past the
sixth anniversary of the Effective Date).
(ii) If the Company enters into a management agreement with
respect to Alphabet Redevelopment (the "AR Management Agreement") and the
redevelopment of Alphabet Redevelopment is completed on or prior to the
sixth anniversary of the Effective Date:
(A) Immediately following the AR Post-Development
Measurement Date, Buyer and the Seller Representative shall jointly
determine a budgeted EBITDA from the property management fees under AR
Management Agreement (the "AR Post-Development Budget") for the AR
Post-Development Measurement Period.
(B) Promptly following the determination of the AR Post-
Development Budget (but in no event later than 15 days after
determination of the AR Post-Development Budget) Buyer shall pay to
the Seller an amount (the "AR Post-Development Budget Advance") equal
to the product obtained when the amount of the AR Post-Development
Budget is multiplied by a number equal to THREE AND SIX TENTHS (3.6)
(I.E., 80% of 4.5).
(C) At the end of the AR Post-Development Measurement
Period, Buyer and the Seller Representative will determine the actual
EBITDA from property management fees under the AR Management Agreement
for the AR Post-Development Measurement Period (the "Actual AR Post-
Development EBITDA"). If the amount of the Actual AR Post-Development
EBITDA Product exceeds the amount of the AR Post-Development Budget
Advance, Buyer shall promptly (but in no event later than 15 days
after the determination of the Actual AR Post-Development EBITDA) pay
the amount of such excess to the Seller. If the amount of the AR
Post-Development Budget Advance exceeds the amount of the Actual AR
Post-Development EBITDA Product, Seller and the Former Stockholders
shall promptly (but in no event later than 15 days after the
determination of the Actual AR Post-Development EBITDA) pay the amount
of such excess to the Company.
(iii) If the Company enters into an AR Management Agreement
on or prior to the sixth anniversary of the Effective Date, then (A)
immediately following the sixth anniversary of the Effective Date or (B)
prior to the sixth anniversary of the Effective Date if the Seller
Representative so elects, Buyer and the Seller Representative will
determine the actual EBITDA from property management fees under the AR
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Management Agreement for the AR Pre-Development Measurement Period (the
"Actual AR Pre-Development EBITDA"). Buyer shall promptly, but in no event
later than 15 days after determination of the Actual AR Pre-Development
EBITDA, pay to the Seller Representative, on behalf of Seller, an amount
equal to the product obtained when the Actual AR Pre-Development EBITDA is
multiplied by a number equal to FOUR AND ONE-HALF (4.5). Notwithstanding
any other term or provision set forth in this Agreement, if the Seller
Representative has elected to determine the Actual AR Pre-Development
EBITDA and receive the payment described in the immediately preceding
sentence prior to the sixth anniversary of the Effective Date under Clause
(B) above, then notwithstanding the fact that redevelopment of the Alphabet
Redevelopment may subsequently be completed on or prior to the sixth
anniversary of the Effective Date, neither the Seller Representative nor
Seller or either of the Former Stockholders shall be entitled to the
payment of any additional amount under this Section 2.9(a).
(b) PROJECT TROPHY. If the Company enters into a management
agreement with respect to Project Trophy (the "Trophy Management Agreement") and
performance by the Company of fee generating services under such agreement
begins on or prior to the second anniversary of the Effective Date:
(i) Immediately following the Initial Trophy Measurement Date,
Buyer and the Seller Representative shall jointly determine a budgeted
EBITDA from property management, leasing and tenant improvement fees under
the Trophy Management Agreement (the "Trophy Budget") for the Initial
Trophy Measurement Period.
(ii) Promptly following the determination of the Trophy
Budget (but in no event later than 15 days after determination of the
Trophy Budget), Buyer shall pay to the Seller an amount (the "Trophy Budget
Advance") equal to the product obtained when the amount of the Trophy
Budget is multiplied by a number equal to THREE AND SIX TENTHS (3.6) (I.E.,
80% of 4.5); provided, that if the Contingent Consideration Amount has been
paid or is payable pursuant to the terms of Section 2.8(c), but all of the
Contingent Consideration Amount has not been earned in accordance with
Section 2.8(b), then the Trophy Budget Advance shall be decreased by an
amount equal to the excess of the Contingent Consideration Amount over the
amount earned in accordance with Section 2.8(b) (unless such excess has
previously been deducted pursuant to Section 2.9(c)(ii)), and such reduced
amount shall be deemed the amount of the Trophy Budget Advance.
(iii) At the end of the Initial Trophy Measurement Period,
Buyer and the Seller Representative will determine Initial Trophy EBITDA.
If the amount of the Initial Trophy EBITDA Product exceeds the amount of
the Trophy Budget Advance, Buyer shall promptly (but in no event later than
15 days after determination of the Initial Trophy EBITDA) pay the amount of
such excess to the Seller. If the amount of the Trophy Budget Advance
exceeds the amount of the Initial Trophy EBITDA Product, Seller and the
Former Stockholders shall promptly (but in no event later than 15 days
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after determination of the Actual Trophy EBITDA) pay the amount of such
excess to the Company.
(iv) Immediately following the Final Trophy Measurement
Date, Buyer and the Seller Representative will determine the Trophy
Lookback Lease Turnover. If the Trophy Lookback Lease Turnover is greater
than the Initial Trophy Measurement Period Lease Turnover, Buyer and the
Seller Representative will calculate the Final Trophy LTI EBITDA Product
and Buyer shall promptly (but in no event later than 15 days after
determination of the Trophy Lookback Lease Turnover) pay to the Seller an
amount equal to the amount by which the Final Trophy LTI EBITDA Product
exceeds the Initial Trophy LTI EBITDA Product.
(c) PROJECT SAPPHIRE. If the Company enters into a management
agreement with respect to Project Sapphire (the "Sapphire Management
Agreement") and performance by the Company of the generating services under such
agreement begins on or prior to the second anniversary of the Effective Date:
(i) Immediately following the Initial Sapphire Measurement
Date, Buyer and the Seller Representative shall jointly determine a
budgeted EBITDA from property management, leasing and tenant improvement
fees under the Sapphire Management Agreement (the "Sapphire Budget") for
the Initial Sapphire Measurement Period.
(ii) Promptly following the determination of the Sapphire
Budget (but in no event later than 15 days after determination of the
Sapphire Budget), Buyer shall pay to the Seller an amount (the "Sapphire
Budget Advance") equal to the product obtained when the amount of the
Sapphire Budget is multiplied by a number equal to THREE AND SIX TENTHS
(3.6) (I.E., 80% of 4.5); provided, that if the Contingent Consideration
Amount has been paid or is payable pursuant to the terms of Section 2.8(c),
but all of the Contingent Consideration Amount has not been earned in
accordance with Section 2.8(b), then the Sapphire Budget Advance shall be
decreased by an amount equal to the excess of the Contingent Consideration
Amount over the amount earned in accordance with Section 2.8(b) (unless
such excess has previously been deducted pursuant to Section 2.9(b)(ii))
and such reduced amount shall be deemed the amount of the Sapphire Budget
Advance.
(iii) At the end of the Initial Sapphire Measurement Period,
Buyer and the Seller Representative will determine the Initial Sapphire
EBITDA. If the amount of the Initial Sapphire EBITDA Product exceeds the
amount of the Sapphire Budget Advance, Buyer shall promptly (but in no
event later than 15 days after determination of the Initial Sapphire
EBITDA) pay the amount of such excess to the Seller. If the amount of the
Sapphire Budget Advance exceeds the amount of the Initial Sapphire EBITDA
Product, Seller and the Former Stockholders shall promptly (but in no event
later than 15 days after the determination of the Initial Sapphire EBITDA)
pay the amount of such excess to the Company.
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(iv) Immediately following the Final Sapphire Measurement
Date, Buyer and the Seller Representative will determine the Sapphire
Lookback Lease Turnover. If the Sapphire Lookback Lease Turnover is
greater than the Initial Sapphire Measurement Period Lease Turnover, Buyer
and the Seller Representative will calculate the Final Sapphire LTI EBITDA
Product and Buyer shall promptly (but in no event later than 15 days after
determination of the Sapphire Lookback Lease Turnover) pay to the Seller an
amount equal to the amount by which the Final Sapphire LTI EBITDA Product
exceeds the Initial Sapphire LTI EBITDA Product.
(d) ACQUISITION COSTS. (i) The Company hereby covenants and agrees
that, if the aggregate amount of acquisition fees and due diligence fees from
time to time received by the Company after the Closing with respect to Project
Trophy exceeds the aggregate amount of any out-of-pocket expenses (including
travel, consultants, etc.) theretofore incurred by the Company after the Closing
with respect to the pursuit or acquisition of the Trophy Management Agreement
and which the Company has not deducted from the Trophy Breakup Amount in making
a payment to Seller in accordance with clause (i) of the penultimate sentence of
Section 2.8(c) (the "Trophy Acquisition Costs"), the Company shall promptly pay
to Seller the amount by which the aggregate amount of such acquisition fees and
due diligence fees theretofore received after Closing exceeds the amount of
Trophy Acquisition Costs theretofore incurred after the Closing. Seller and
each of the Selling Stockholders hereby covenant and agree that, notwithstanding
any other term or provision set forth in this Agreement, if from time to time
the aggregate amount of any Trophy Acquisition Costs theretofore incurred after
the Closing exceeds the aggregate amount of the acquisition fees and due
diligence fees theretofore received by the Company after the Closing with
respect to Project Trophy, (A) such excess of the Trophy Acquisition Costs over
the amount of such fees will be deducted from any Additional Consideration which
would otherwise be payable by Buyer to the Seller as set forth in this Section
2.9, and (B) to the extent that the amount of such excess exceeds the amount, if
any, of the Additional Consideration payable by Buyer, the amount of such excess
will be promptly paid by Seller and the Former Stockholders to the Company.
(ii) The Company hereby covenants and agrees that, if the
aggregate amount of acquisition fees and due diligence fees from time to time
received by the Company after the Closing with respect to Project Sapphire
exceeds the aggregate amount of any out-of-pocket expenses (including travel,
consultants, etc.) incurred by the Company after the Closing with respect to the
pursuit or acquisition of the Sapphire Management Agreement (the "Sapphire
Acquisition Costs"), the Company shall promptly pay to Seller the amount by
which the aggregate amount of such acquisition fees and due diligence fees
theretofore received after Closing exceeds the amount of Trophy Acquisition
Costs theretofore incurred after the Closing. Seller and each of the Selling
Stockholders hereby covenant and agree that, notwithstanding any other term or
provision set forth in this Agreement, if from time to time the aggregate amount
of any Sapphire Acquisition Costs theretofore incurred after the Closing exceeds
the aggregate amount of the acquisition fees and due diligence fees theretofore
received by the Company with respect to Project Sapphire, (A) the excess of such
Sapphire Acquisition Costs over the amount of such fees will be deducted from
any Additional Consideration which would otherwise be payable by Buyer to the
Seller as set forth in this Section 2.9, and (B) to the extent that the
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amount of such excess exceeds the amount, if any, of the Additional
Consideration payable by Buyer, the amount of such excess will be promptly
paid by Seller and the Former Stockholders to the Company.
2.10 DETERMINATIONS REGARDING CONTINGENT CONSIDERATION AND ADDITIONAL
CONSIDERATION. From and after the Closing, Buyer and the Seller Representative
shall work together in good faith to jointly determine all matters required to
be determined under Sections 2.8 and 2.9, including the amounts of any payments
required to be made, the amounts of NOI or EBITDA generated by any Project
during any time period and any budgeted amounts required to be determined. If
either of the Seller Representative or Buyer (the "Delivering Party") proposes
that any such determination be made, the Notifying Party shall give the other
party (the "Receiving Party") written notice of a proposed determination. If,
within 15 days following delivery of any such notice, the Receiving Party has
not given the Delivering Party written notice of an objection to such
determination (such notice must contain a statement describing the basis for
such objection) then the determination proposed by the Delivering Party shall be
binding on both parties. If the Receiving Party gives such written notice of
objection within such fifteen (15) day period and the Buyer and the Seller
Representative are unable to resolve any such dispute within fifteen (15) days
from receipt of any written notice of objection, the issues in dispute will be
submitted for resolution to a "big six" accounting firm to be selected jointly
by the Seller Representative and Buyer within the following fifteen days or, if
they fail to agree, such accounting firm shall be the Referee. Such accounting
firm shall resolve any such dispute within thirty (30) days after such dispute
is submitted to it. If issues in dispute are submitted to such accounting firm
for resolution under this Section 2.10, (a) each party will furnish to such
accounting firm such work papers and other documents and information relating to
the disputed issues as such accounting firm may request and are available to
that party (or its independent public accountants) and will be afforded the
opportunity to present to such accounting firm any material relating to such
accounting firm's determination and to discuss such determination with such
accounting firm; (b) any such determination by such accounting firm, as set
forth in a written notice delivered to both parties by such accounting firm,
will be binding and conclusive on the parties; and (c) Seller and Buyer will
each bear one-half of the fees and expenses of such accounting firm for such
determination.
2.11 APPOINTMENT OF SELLER REPRESENTATIVE. By execution and delivery of
this Agreement, each Former Stockholder and Seller hereby irrevocably
constitutes and appoints X as the true and lawful agent and attorney-in-fact
(the "Seller Representative") of such Former Stockholder and Seller with full
power of substitution to act in the name, place and stead of Seller and such
Former Stockholder with respect to (a) the power to execute each of the Escrow
Agreements and any amendments thereto as the Seller Representative shall deem
necessary or appropriate in his sole discretion, (b) the delivery of written
instructions to the Escrow Agent to release any portion of the Indemnification
Holdback Amount or the Contingent Consideration Letter of Credit, as applicable,
(c) the performance of the obligations and rights of such Former Stockholder and
Seller under each of the Escrow Agreements including, without limitation, the
power to do or refrain from doing all such further acts and things, and to
execute, deliver and receive all such documents, waivers, extensions and
amendments as such Seller Representative shall deem necessary or appropriate in
his sole discretion in connection with the operation of
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each of the Escrow Agreements and (d) the receipt, on behalf of Seller, of any
payments by Buyer pursuant to Section 2.7, 2.8 or 2.9 (and any such actions
shall be binding on Seller and each Former Stockholder). Buyer, the Company
and any other person may conclusively and absolutely rely, without inquiry,
upon any action of the Seller Representative as the action of Seller and each
Former Stockholder in all matters referred to in this Section 2.11, and Seller
and each such Former Stockholder hereby confirm all that the Seller
Representative shall do or cause to be done by virtue of his appointment as
Seller Representative. All actions taken by the Seller Representative in such
capacity are acknowledged by the parties hereto to be taken by him solely as
agent and attorney-in-fact for Seller and each Former Stockholder. By
execution of this Agreement, X has accepted his appointment as the Seller
Representative and in consideration for X's agreement to act as the Seller
Representative, Seller and each Former Stockholder hereby agrees to indemnify
and hold X harmless from and against all damages, losses, liabilities,
penalties, costs and expenses (including court costs and attorneys' fees and
expenses, if any) incurred by him in connection with his performance as the
Seller Representative. Seller and each Former Stockholder covenants and
agrees that he will not voluntarily revoke the power of attorney conferred in
this Section 2.11. If any Former Stockholder dies or becomes incapacitated,
disabled or incompetent (such deceased, incapacitated, disabled or incompetent
Former Stockholder being an "Incapacitated Former Stockholder") and, as a
result, the power of attorney conferred by this Section 2.11 is revoked by
operation of law, it shall not be a breach under this Agreement if the heirs,
beneficiaries, estate, administrator, executor, guardian, conservator or legal
representative of such Incapacitated Former Stockholder (each a "Successor
Former Stockholder") confirms the appointment of the Seller Representative as
agent and attorney-in-fact for such Successor Former Stockholder. If at any
time X dies or resigns from his position as the Seller Representative, then
Seller shall designate a successor to X as soon as practicable.
2.12 WITHHOLDING OF CASH BONUS AMOUNT. The Board of Directors of the
Company has determined to pay to the Company's Employees cash bonuses (the "Cash
Bonuses") in an aggregate amount equal to $1,761,200. Seller has agreed to
provide the funds necessary to pay such bonuses. Notwithstanding any other
provision in this Agreement to the contrary, Seller and the Company hereby agree
with Buyer that a portion of the Purchase Price which would otherwise be
delivered to Seller at Closing equal to $1,761,200 (the "Cash Bonus Amount")
shall be withheld by the Buyer and paid to the Company for the purpose of
permitting the Company to fund the Cash Bonuses. The Company agrees with Seller
and Buyer that such amount (subject to applicable withholding) shall be paid to
the employees of the Company at or promptly following the Closing in such
individual amounts as have been approved by the Company's Board of Directors and
disclosed to Buyer. By its execution and delivery of this agreement, Seller (in
its capacity as the sole stockholder of the Company) hereby consents to the
payment of the Cash Bonuses by the Company to its employees at or promptly
following Closing, and agrees with Buyer and the Company that Seller would not
withdraw, revoke, rescind or alter such consent in any way.
2.13 REPAYMENT OF NOL BENEFIT.
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(a) If Buyer or any affiliated, consolidated, combined, unitary or
similar group of which the Buyer is a member receives a tax savings by utilizing
the net operating loss ("NOL") of the Company created by the compensation
deduction taken by the Company in the approximate amount of $5,000,000 relating
to bonus payments made by the Former Stockholders on behalf of the Company to
certain employees of the Company in compensation for services rendered to the
Company (the "Closing Bonuses") (including the Cash Bonuses), then Buyer shall
pay to Seller the NOL Savings Amount. For the purposes of this Section 2.13,
Buyer or any affiliated, consolidated, combined, unitary or similar group of
which the Buyer is a member shall be deemed to have received a tax savings from
the utilization of the NOL if, upon the filing of a Federal, state or local tax
return for a taxable year ending after the Effective Date (the "NOL Return"),
all or a portion of the NOL (the "NOL Offset Amount") is used to offset the
taxable income of such person (an "NOL Offset"), and an amount equal to the NOL
Offset Amount is not includible in gross income by such person.
(b) In the event that Buyer or any affiliated, consolidated,
combined, unitary or similar group of which the Buyer is a member is deemed
under Section 2.13(a) to receive a tax savings by reason of an NOL Offset, Buyer
shall pay the Seller, within thirty (30) days after filing an NOL Return an
amount (the "NOL Savings Amount") equal to the product obtained when (i) fifty
percent (50%) of the excess of (A) the NOL Offset Amount over (B) the amount of
all reasonable administrative costs and out-of-pocket expenses incurred by Buyer
or the Company in connection with obtaining such tax benefit (the "NOL Costs")
is multiplied by (ii) the highest marginal corporate combined federal, state or
local income tax rate (limited to the jurisdiction(s) in which such NOL Offset
is utilized) applicable to corporations taxable under Subchapter C of the Code
on the date the NOL Return is filed. To the extent there is substantial
authority for such position, the parties agree that any such payment shall be
deemed an adjustment to the Purchase Price.
(c) The Company shall report on its income tax return for the period
ending on the Effective Date the taxable gain resulting from the Company's sale
to the Former Stockholders of the Transferred Assets listed on Part II of
EXHIBIT F immediately prior to Closing (the "Preclosing Sales Income"). In the
event of an audit or other proceeding which results in a Final Determination
that increases the amount of the Preclosing Sales Income (the "Adjusted
Preclosing Sales Income") and the Company is unable to utilize a portion of the
NOL to offset the amount of such increase, the Former Stockholders shall pay to
Buyer an amount equal to (i) the difference between (A) the Adjusted Preclosing
Sales Income minus (B) the Preclosing Sales Income; multiplied by (ii) the
highest marginal corporate combined federal, state or local income tax rate
applicable to corporations taxable under Subchapter C of the Code on the
Effective Date. Buyer shall not be obligated to make any payment hereunder to
the extent the NOL is utilized to offset Preclosing Sales Income or any income
or gain not reported on the Company's income tax returns for any taxable period
ending on or before Closing.
(d) In the event of an audit or other proceeding which results in a
Final Determination that disallows all or any portion of an NOL Offset, Seller
shall pay to Buyer an amount (the "NOL Repayment Amount") bearing the same
proportion to the NOL Savings Amount previously paid by Buyer to Seller pursuant
to Section 2.13(b) with respect to the such
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NOL Offset as the amount of such disallowance bears to the NOL Offset Amount,
plus interest and penalties assessed with respect to the NOL Repayment Amount
against the Buyer or any affiliated, consolidated, combined, unitary or
similar group of which the Buyer is a member by a tax authority which is
attributable to any tax assessed as a result of the disallowance of the NOL
Offset effected by the Final Determination. To the extent there is
substantial authority for such position, the parties agree that any such
payment shall be deemed an adjustment to the Purchase Price.
(e) Buyer agrees to cause the Company to declare a compensation
deduction in the amount of the Closing Bonuses on the tax return filed by the
Company for the tax year ending on the Effective Date, unless Buyer determines
by using reasonable business judgment that such deduction is not in the best
interests of Buyer or its stockholders. Buyer agrees to use its reasonable
efforts to utilize the NOL to offset future taxable income of the Company and to
conduct the business of the Company in a manner intended to generate income to
utilize such NOL, unless in the reasonable business judgement of Buyer such use
of the NOL or conduct of the Company's business would not be in the best
interests of Buyer or its stockholders. The parties agree that the Company will
elect to forego the right to carryback the NOL to any taxable period before
Closing.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES REGARDING THE COMPANY. The Company
hereby represents and warrants to Buyer as follows (with the understanding that
Buyer is relying on such representations and warranties in entering into and
performing this Agreement).
(a) ORGANIZATION, GOOD STANDING, ETC. The Company is a corporation,
validly existing and in good standing under the laws of its jurisdiction of
incorporation, has all requisite corporate power and authority to own, lease and
operate its properties and to carry on the Business as now being conducted and
is duly qualified and in good standing to do business in each state listed on
Schedule 3.1(a), which states represent every jurisdiction in which the nature
of the Business or the ownership or leasing of its properties makes such
qualification necessary. The Company has delivered to Buyer or its
representatives true and complete copies of the Articles of Incorporation and
Bylaws of the Company, as in effect at the Effective Date. The Company is not
in violation of any provisions of its Articles of Incorporation or Bylaws.
(b) CAPITAL STRUCTURE. The authorized capital stock of the
Company consists of 100,000 shares of Company Common Stock, par value $1.00.
As of the Effective Date, there are 2,250 shares of Company Common Stock
issued and outstanding, and no shares of Company Common Stock are held by the
Company in its treasury. No shares of capital stock of the Company are
reserved for issuance for any purpose. All the issued and outstanding shares
of capital stock of the Company are duly authorized, validly issued, fully
paid and nonassessable and have not been issued in violation of any
preemptive or similar rights. There are no bonds, debentures, notes or other
indebtedness issued or outstanding having the right to vote ("Voting Debt")
on any matters on which holders of Company Common Stock may
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vote. There are no options, warrants, calls, rights, commitments, or
agreements of any character to which the Company is a party or by which it is
bound obligating the Company to issue, deliver, or sell, or cause to be,
issued, delivered or sold, additional shares of capital stock or any Voting
Debt of the Company or obligating the Company to grant, extend, or enter into
any such option, warrant, call, right, commitment, or agreement. There are
no outstanding contractual obligations of the Company to repurchase, redeem,
or otherwise acquire any shares of Company Common Stock or other capital
stock of the Company, except as set forth in the Buy/Sell Agreement described
in Section 4.7 SCHEDULE 3.1(b) identifies the record and beneficial owner,
if different, of the issued and outstanding shares of Company Common Stock.
Upon Buyer's acquisition of the Shares at the Closing pursuant to the terms
and conditions of this Agreement, Buyer will acquire 100% of the issued and
outstanding capital stock of the Company and all securities convertible into,
exercisable for or exchangeable into capital stock of the Company.
(c) AUTHORITY. The Company has all requisite corporate power and
authority to enter into this Agreement and any other Transaction Documents to
which it is a party and to consummate the transactions contemplated hereby or
thereby. The execution and delivery of this Agreement and the other Transaction
Documents to which the Company is a party and the consummation by the Company of
the transactions contemplated hereby or thereby have been duly authorized by all
necessary corporate action on the part of the Company. The Transaction
Documents to which the Company is a party have been, or upon execution and
delivery will be, duly executed and delivered and constitute, or upon execution
and delivery will constitute, the valid and binding obligations of the Company,
enforceable against it in accordance with their respective terms, subject as to
enforceability, to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally and to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity).
(d) NO CONFLICT; REQUIRED FILINGS AND CONSENTS. The execution and
delivery of this Agreement and the other Transaction Documents to which the
Company is a party do not and the performance by the Company of the transactions
contemplated hereby or thereby will not, subject to obtaining the consents,
approvals, authorizations, and permits and making the filings described in this
Section 3.1(d) or as otherwise described on SCHEDULE 3.1(d), (i) violate,
conflict with, or result in any breach of any provision of the Company's
Articles of Incorporation or Bylaws, (ii) violate, conflict with, or result in a
violation or breach of, or constitute a default (with or without due notice or
lapse of time or both) under, or give any party the right to terminate or
accelerate (whether as a result of a change of control of the Company or
otherwise as a result of this Agreement) any obligation, or result in the loss
of any benefit or give any person the right to require any security to be
repurchased, or give rise to the creation of any Lien upon any of the assets of
the Company under, any of the terms, conditions, or provisions of any loan or
credit agreement, note, bond, mortgage, indenture, deed of trust or any Material
Contract to which the Company is a party or by which the Company or any of its
assets is bound, or (iii) violate any order, writ, judgment, injunction, decree,
statute, law, rule, or regulation, of any Governmental Entity binding upon the
Company or by which or to which any of the assets of the Company is bound or
subject except, with respect to clauses (i), (ii) or (iii), such violations,
conflicts, breaches or defaults as would not, individually or in the aggregate,
have a Material
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Adverse Effect. No Consent of, or registration, declaration, or filing with,
any Governmental Entity is required by or with respect to the Company in
connection with the execution and delivery of this Agreement and any other
Transaction Documents by the Company or the consummation of the transactions
contemplated hereby or thereby, except for applicable requirements, if any,
of the Securities Act and the Exchange Act and state securities or blue sky
laws and except for such Consents, registrations, declarations or filings the
failure of which to obtain or make would not, individually or in the
aggregate, have a Material Adverse Effect.
(e) FINANCIAL STATEMENTS.
(i) The Company has delivered to Buyer copies of (A0 the audited
balance sheets of the Company as of December 31, 1997 and August 31, 1997,
together with the audited statements of income and cash flows of the Company for
the years then ended, and the notes thereto, accompanied by the reports thereon
of Arthur Andersen LLP, independent public accountants (the "Audited Financial
Statements"), and (B0 the unaudited balance sheet of the Company as of
January 31, 1998, (the "Balance Sheet"), together with the related unaudited
statements of income and cash flows for the one-month period then ended (the
"Unaudited Financial Statements" and collectively with the Audited Financial
Statements, as the "Financial Statements"). The Audited Financial Statements,
including the notes thereto, were prepared in accordance with GAAP applied on a
consistent basis throughout the periods covered thereby (except to the extent
disclosed therein or required by changes in GAAP) and fairly present in all
material respects the financial position of the Company at the dates thereof and
the results of the operations of the Company for the respective periods
indicated. Except as disclosed on SCHEDULE 3.1(e)(i) hereto, the Unaudited
Financial Statements were prepared on a basis consistent with the preparation of
the Audited Financial Statements and fairly present in all material respects the
financial position of the Company as of the date thereof and the results of
operations of the Company for the period indicated.
(ii) Except as disclosed in SCHEDULE 3.1(e)(ii), there is no
liability or obligation of any kind, whether accrued, absolute, fixed,
contingent, or otherwise, which is material to the Business that is not
reflected or reserved against in the Balance Sheet (or referred to in the
footnotes to the Financial Statements), other than (A0 liabilities incurred in
the ordinary course of business since January 31, 1998 (the "Balance Sheet
Date"), (B0 any such liability which would not be required to be presented in
financial statements or the notes thereto prepared in conformity with GAAP
applied in the preparation of the Financial Statements in a manner consistent
with past practice, or (C) expenses incurred in connection with the sale of the
Shares by Seller to Buyer.
(f) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
SCHEDULE 3.1(f), since the Balance Sheet Date, the Company has conducted its
business only in the ordinary course consistent with past practice. Since the
Balance Sheet Date, except as disclosed in SCHEDULE 3.1(f), there has not been
(A) any event, circumstance, or fact (whether or not covered by insurance),
individually or in the aggregate, that has resulted in a Material Adverse
Effect; (B) any event, circumstance, or fact (whether or not covered by
insurance), individually or in the aggregate, that materially impairs the
operation of the physical assets of the
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Company; (C) any material change by the Company in its accounting methods,
principles or practices; (D) any entry by the Company into any commitment or
transaction material to the Company, except in the ordinary course of
business and consistent with past practice or except in connection with the
negotiation and execution and delivery of this Agreement and the other
Transaction Documents; (E) any declaration, setting aside or payment of any
dividend or distribution in respect of any capital stock of the Company or
any redemption, purchase or other acquisition of any of the Company's
securities; (F) other than pursuant to the Plans or as required by law, any
increase in, amendment to, or establishment of any bonus, insurance,
severance, deferred compensation, pension, retirement, profit sharing, stock
option, stock purchase or other employee benefit plan; (G) any general
increase in compensation, bonus or other benefits payable to the Employees,
except for increases occurring in the ordinary course of business in
accordance with its customary practice; (H) any bonus paid to the Employees
except for bonuses accrued on the Balance Sheet; (I) any incurrence of Debt
or assumption or guarantee of Debt by the Company, or the grant of any Lien
on the material assets of the Company to secure Debt; (J) any sale or
transfer of any material assets of the Company other than in the ordinary
course of business and consistent with past practice; or (K) any loan,
advance or capital contribution to or investment in any person by the Company
(excluding any loan, advance or capital contribution to, or investment in,
the Company).
(g) COMPLIANCE WITH APPLICABLE LAWS.
(i) The Business has been conducted in compliance in all
material respects with Applicable Laws. No investigation or review by any
Governmental Entity with respect to the Company is pending or, to the Knowledge
of the Company, Seller and the Former Stockholders, threatened.
(ii) SCHEDULE 3.1(g) is a true and complete list of all Licenses
issued to the Company by any Governmental Entity and held by it as of the
Effective Date. The Licenses constitute all the licenses, permits, and
authorizations required for the operation of the Business, and each of the
Licenses is in full force and effect. The Company is in material compliance
with, and has conducted the Business so as to comply in all material respects
with, the terms of such Licenses. There are no proceedings pending against the
Company or, to the Knowledge of the Company, Seller or the Former Stockholders,
threatened which reasonably may be expected to result in the revocation,
material adverse modification, non-renewal, or suspension of any of the
Licenses, the denial of any pending applications for any Licenses, the issuance
against the Company of any cease and desist order, or the imposition of any
administrative actions, including the proposed assessment of fines and
penalties, by any Governmental Entity with respect to any Licenses, or which
reasonably may be expected to affect the Company's ability to operate the
Business after the Closing.
(h) ABSENCE OF LITIGATION. Except as set forth on SCHEDULE 3.1(h),
there is no claim, action, suit, inquiry, judicial, or administrative
proceeding, grievance, or arbitration pending or, to the Knowledge of the
Company, Seller or the Former Stockholders, threatened against the Company, the
Business or any of the assets of the Company by or before any arbitrator or
Governmental Entity, nor are there any investigations relating to the Company,
the
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Business or any of its assets pending or, to the Knowledge of the Company,
Seller or the Former Stockholders, threatened by or before any arbitrator or
Governmental Entity. Except as set forth in SCHEDULE 3.1(h), there is no
judgment, decree, injunction, order, determination, award, finding or letter of
deficiency of any Governmental Entity or arbitrator, or settlement agreement,
outstanding against the Business, the Company or any of the Company's assets.
There is no action, suit, inquiry, judicial, or administrative proceeding
pending or, to the Knowledge of the Company, Seller or the Former Stockholders,
threatened against Seller, any Former Stockholder or the Company relating to the
transactions contemplated by this Agreement and the other Transaction Documents.
(i) INSURANCE. SCHEDULE 3.1(i) sets forth a complete and accurate
list of all title, fire, general liability, malpractice liability, theft, and
other forms of insurance and the deductible for each policy and all fidelity
bonds which are held by or applicable to the Company or the Business as of the
date hereof and which have been held by or applicable to the Company or the
Business during each of the past five calendar years. No event has occurred,
including the failure by the Company to give any notice or information or the
delivery of any inaccurate or erroneous notice or information, which limits or
impairs the rights of the Company under any such insurance policies in such a
manner as has had or could have a Material Adverse Effect. Excluding insurance
policies that have expired and been replaced in the ordinary course of business,
no insurance policy of the Company has been canceled within the last two years
prior to the date hereof.
(j) OWNED REAL PROPERTY. The Company has no, and has never had any,
Owned Real Property.
(k) LEASED REAL PROPERTY. SCHEDULE 3.1(k) sets forth the address and
use of all the leasehold interests relating to the Company or the Business as
now conducted. Each lease described on SCHEDULE 3.1(k) is a valid and binding
obligation of the Company and is in full force and effect without amendment
other than as described on SCHEDULE 3.1(k). Except as otherwise disclosed on
SCHEDULE 3.1(k), the Company is not, and to the Knowledge of the Company, Seller
and the Former Stockholders, no other party is, in default under any lease
described in SCHEDULE 3.1(k) except for such defaults as would not, individually
or in the aggregate, have a Material Adverse Effect. All leasehold interests
listed in SCHEDULE 3.1(k) (including the improvements thereon) are available for
immediate use in the conduct of the Business as currently conducted.
(l) PERSONAL PROPERTY. SCHEDULE 3.1(l) contains a description of the
items of Personal Property which comprise all items of Personal Property which
have a value in excess of $5,000 used or held for use in connection with the
Business or which permit the conduct of the Business as now conducted. All such
Personal Property is located at the locations listed on SCHEDULE 3.1(l). Except
as set forth on SCHEDULE 3.1(l), the Company has good title to, or a valid
leasehold or license interest in, all Personal Property and none of the Personal
Property is subject to any Lien or other encumbrances, except for Permitted
Encumbrances. The Company is not, and to the Knowledge of the Company, Seller
and the Former Stockholders, no other party is, in default under any of the
leases, licenses and other Contracts relating to the Personal Property
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except for such defaults as would not, individually or in the aggregate, have
a Material Adverse Effect. The Company has no obligations to pay rent or
other payment amounts under a lease of personal property which is required to
be classified as a capital lease or liability on the face of a balance sheet
prepared in accordance with GAAP. Except as otherwise disclosed in SCHEDULE
3.1(l), the Personal Property is in good operating condition and repair
(ordinary wear and tear excepted) and is available for immediate use in the
conduct of the Business as currently conducted.
(m) LIENS. All of the assets of the Company are free and clear of
all liens, pledges, voting agreements, voting trusts, proxy agreements, claims,
security interests, restrictions, mortgages, deeds of trust, tenancies, and
other possessory interests, conditional sale or other title retention
agreements, assessments, easements, rights of way, covenants, restrictions,
rights of first refusal, defects in title, encroachments, and other burdens,
options or encumbrances of any kind (collectively, "Liens") except the Liens set
forth on SCHEDULE 3.1(m). At the Closing, all of the assets of the Company,
including without limitation any leasehold interests, shall be free and clear of
all Liens, except Permitted Encumbrances.
(n) ENVIRONMENTAL MATTERS. Except as set forth on SCHEDULE 3.1(n):
(i) The operations of the Company substantially comply, and at
all times have substantially complied, in all material respects with all
Environmental Laws;
(ii) No judicial or administrative proceedings are pending or,
to the Knowledge of the Company, Seller and the Former Stockholders,
threatened against the Company alleging the violation of any Environmental
Laws and no written notice from any Governmental Entity or any private or
public person has been received by the Company claiming any violation of
any Environmental Laws in connection with any real property owned, managed
or leased by the Company, or requiring any environmental response actions
on or in connection with any real property owned, managed or leased by the
Company that are necessary to comply with any Environmental Laws and that
have not been complied with or otherwise resolved to the satisfaction of
the party giving such notice;
(iii) All material permits, registrations, licenses and
authorizations required to be obtained or filed by the Company under any
Environmental Laws in order for the Company to conduct its current
operations ("Permits"), including those activities relating to the
generation, use, storage, treatment, disposal, release, or remediation of
Hazardous Substances (as such term is defined in Section 3.1(n)(iv)
hereof), have been duly obtained or filed, and the Company is and has at
all times complied in all material respects with the terms and conditions
of all such Permits required to be performed by the Company;
(iv) All Hazardous Substances used or generated by the Company
on, in, or under any of the Company's owned, managed, or leased real
property are, and have at all times been, generated, stored, used, treated,
disposed of, and released by the Company in such manner as not to result in
any material Environmental Costs or
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Liabilities to the Company. To the Knowledge of the Company, Seller and
the Former Stockholders, all Hazardous Substances used or generated by
other persons on, in, or under any of the Company's owned, managed, or
leased real property are, and have at all times been, generated, stored,
used, treated, disposed of, and released by other persons in such manner
as not to result in any material Environmental Costs or Liabilities to the
Company. "Hazardous Substances" means (A) any hazardous materials,
hazardous wastes, hazardous substances, toxic wastes, and toxic substances
as those or similar terms are defined under any Environmental Laws; (B) any
asbestos or any material which contains any hydrated mineral silicate,
including chrysolite, amosite, crocidolite, tremolite, anthophylite and/or
actinolite, whether friable or non-friable; (C) PCBs, or PCB-containing
materials, or fluids; (D) radon; (E) any other hazardous, radioactive,
toxic or noxious substance, material, pollutant, contaminant, constituent,
or solid, liquid or gaseous waste; (F) any petroleum, petroleum
hydrocarbons, petroleum products, crude oil and any fractions or
derivatives thereof, any oil or gas exploration or production waste, and
any natural gas, synthetic gas and any mixtures thereof; (G) any substance
that, whether by its nature or its use, is subject to regulation under any
Environmental Laws or with respect to which any Environmental Laws or
Governmental Entity requires environmental investigation, monitoring or
remediation; and (H) any underground storage tanks, dikes, or impoundments
as defined under any Environmental Laws. "Environmental Costs or
Liabilities" means any losses, liabilities, obligations, damages, fines,
penalties, judgments, settlements, actions, claims, costs and expenses
(including, without limitation, reasonable fees, disbursements and expenses
of legal counsel, experts, engineers and consultants, and the costs of
investigation or feasibility studies and performance of remedial or removal
actions and cleanup activities) arising from, under or in connection with
(1) any violation of any Environmental Laws, (2) order of, or contract of
the Company with, any Governmental Entity or (3) any exposure of any person
or property to Hazardous Substances;
(v) To the Knowledge of the Company, Seller and the Former
Stockholders, there is not now, on, in or under any property currently
owned, managed or leased by the Company any Hazardous Substances that are
in a condition or location that violates any Environmental Law or that
could reasonably be expected to (A) require remediation under any
Environmental Laws or (B) give rise to a claim (1) for damages or
compensation by any affected person or (2) to any Environmental Costs or
Liabilities; and
(vi) The Company has not received and, to the Knowledge of the
Company, Seller and the Former Stockholders, does not have reason to
believe it will receive, any notification from any source advising the
Company that: (A) it is a potentially responsible party under CERCLA or
any other Environmental Laws; (B) any real property currently or previously
owned, managed, or leased by it is identified or proposed for listing as a
federal National Priorities List ("NPL") (or state-equivalent) site or a
Comprehensive Environmental Response, Compensation and Liability
Information System ("CERCLIS") list (or state-equivalent) site; and (C) any
facility to which it has ever transported or otherwise arranged for the
disposal of Hazardous Substances is
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identified or proposed for listing as an NPL (or state-equivalent) site
or CERCLIS (or state-equivalent) site.
(o) TAXES. Except as set forth on SCHEDULE 3.1(o):
(i) All Tax Returns required to be filed by or with respect to
the Company and any affiliated, consolidated, combined, unitary or similar
group of which the Company is or was a member, have been duly and timely
filed (taking into account all valid extensions of filing dates), and all
such Tax Returns are true, correct and complete in all material respects.
The Company and any affiliated, consolidated, combined, unitary or similar
group of which the Company is or was a member, has duly and timely paid (or
there has been paid on its behalf) all Taxes that are due, except such
Taxes the failure of which to pay would not have a Material Adverse Effect.
With respect to any period for which Taxes are not yet due with respect to
the Company and any affiliated, consolidated, combined, unitary or similar
group of which the Company is or was a member, the Company has made due and
sufficient current accruals for such Taxes in accordance with GAAP in the
Audited Financial Statements. The Company has withheld and paid all Taxes
required by all Applicable Laws to be withheld or paid in connection with
any amounts paid or owing to any employee, creditor, independent
contractor, stockholder or other third party, except for such Taxes the
failure of which to withhold or pay would not, individually or in the
aggregate, have a Material Adverse Effect.
(ii) There are no outstanding agreements, waivers, or
arrangements extending the statutory period of limitation applicable to any
claim for, or the period for the collection or assessment of, Taxes due
from or with respect to the Company or any affiliated, consolidated,
combined, unitary or similar group of which the Company is or was a member,
for any taxable period. No audit or other proceeding by any court,
governmental or regulatory authority, or similar person is pending in
regard to any material Taxes due from or with respect to the Company or any
affiliated, consolidated, combined, unitary or similar group of which the
Company is or was a member, other than normal and routine audits by
nonfederal governmental authorities. All material deficiencies of Taxes
assessed by any applicable taxing authority have been paid, fully settled
or adequately provided for in the Balance Sheet. The Company has not
received written notice that any assessment of material Taxes is proposed
against the Company or any its assets.
(iii) No consent to the application of section 341(f)(2) of
the Code (or any predecessor provision) has been made or filed by or with
respect to the Company or any of its assets. The Company has not agreed to
make any material adjustment pursuant to section 481(a) of the Code (or any
predecessor provision) by reason of any change in any accounting method,
and there is no application pending with any taxing authority requesting
permission for any changes in any accounting method of the Company which
will or would reasonably cause the Company to include any material
adjustment in taxable income for any taxable period (or portion thereof)
ending after the Effective Date.
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(iv) The Company is not a party to, bound by, or subject to any
obligation under, any Tax sharing agreement, Tax allocation agreement or
similar contract, agreement or arrangement.
(v) The Company has not executed or entered into with the IRS,
or any taxing authority, a closing agreement pursuant to section 7121 of
the Code or any similar provision of state, local, foreign or other income
tax law, which will require any increase in taxable income or alternative
minimum taxable income, or any reduction in tax credits for, the Company
for any taxable period ending after the Effective Date.
(vi) There are no requests for rulings from any taxing authority
for information with respect to Taxes of the Company and, to the Knowledge
of the Company, Seller and the Former Stockholders, no material
reassessments (for property or ad valorem Tax purposes) of any assets or
any property owned or leased by the Company have been proposed.
(vii) None of the property of the Company is subject to a
safe-harbor lease (pursuant to section 168(f)(8) of the Internal Revenue
Code of 1954, as in effect after the Economic Recovery Tax Act of 1981, and
before the Tax Reform Act of 1986) or is "tax-exempt use property" (within
the meaning of section 168(h) of the Code) or "tax-exempt bond financed
property" (within the meaning of section 186(g)(5) of the Code).
(p) CERTAIN AGREEMENTS.
(i) SCHEDULE 3.1(p)(i) hereto lists each (A) employment or
consulting Contract which is not terminable by the Company without
liability or penalty on 30 days or less notice, (B) Contract under which
any party thereto remains obligated to provide goods or services having a
value, or to make payments aggregating, in excess of $50,000 per year,
(C) other Contract that is material to the Company or the conduct of the
Business, (D) Contracts set forth on SCHEDULE 3.1(k) (relating to leasehold
interests) and (E) Contracts set forth on SCHEDULE 3.1(u) (relating to
Contracts with Affiliates), in any such case, to which the Company is a
party or to which the Company or its assets is bound (such Contracts listed
or required to be listed, the "Material Contracts"). Each Material
Contract is a valid and binding obligation of the Company and is in full
force and effect without amendment. The Company and, to the Knowledge of
the Company, Seller and the Former Stockholders, each other party to the
Material Contracts, has performed in all material respects the obligations
required to be performed by it under the Material Contracts and is not
(with or without lapse of time or the giving of notice, or both) in breach
or default thereunder except for such breaches or defaults as would not,
individually or in the aggregate, have a Material Adverse Effect. SCHEDULE
3.1(p)(i) identifies, as to each Material Contract listed thereon,
(1) whether the consent of the other party thereto is required, (2) whether
notice must be provided to any party thereto (and the length of such
notice) and (3) whether any payments are required (and the amount of such
payments), in each case in order for such Material Contract to continue in
full force
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and effect upon the consummation of the transactions contemplated hereby or
by the other Transaction Documents, and (4) whether such Material Contract
can be canceled by the other party without liability to such other party
due to the consummation of the transactions contemplated hereby or by the
other Transaction Documents. A complete and accurate copy of each written
Material Contract and a description of each oral Material Contract set
forth in SCHEDULE 3.1(p)(i) has been provided to Buyer prior to the
Effective Date.
(ii) Except as disclosed in SCHEDULE 3.1(p)(ii), the Company is
not a party to any oral or written agreement, plan or arrangement with any
employee, consultant or independent contractor of the Company (A) the
benefits of which are contingent, or the terms of which are materially
altered, upon, or result from, the occurrence of a transaction involving
the Company of the nature of any of the transactions contemplated by this
Agreement or the other Transaction Documents, (B) providing severance
benefits longer than 45 days or other benefits after the termination of
employment or other contractual relationship regardless of the reason for
such termination and regardless of whether such termination is before or
after a change of control, (C) under which any person may receive payments
subject to the tax imposed by section 4999 of the Code or (D) any of the
benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the other Transaction Documents or the
value of any of the benefits of which will be calculated on the basis of
any of the transactions contemplated by this Agreement or the other
Transaction Documents.
(iii) The Company has made available to Buyer (A) complete
and accurate copies of all loan or credit agreements, notes, bonds,
mortgages, indentures and other agreements and instruments pursuant to
which any Debt of the Company is outstanding or may be incurred and
(B) accurate information regarding the respective principal amounts
currently outstanding thereunder.
(q) ERISA COMPLIANCE; LABOR.
(i) SCHEDULE 3.1(q)(i) provides a description of each of the
following which is sponsored, maintained or contributed to by the Company
for the benefit of the Employees, Former Employees, directors of the
Company, former directors of the Company, or any agents, consultants, or
similar representatives providing services to or for the Company, or has
been so sponsored, maintained or contributed to within six years prior to
the Effective Date for the benefit of such individuals:
(A) each "employee benefit plan," as such term is defined
in section 3(3) of ERISA (including, but not limited to, employee
benefit plans, such as foreign plans, which are not subject to the
provisions of ERISA (each, a "Plan"); and
(B) each personnel policy, stock option plan, stock
purchase plan, stock appreciation rights plan, phantom stock plan,
collective bargaining
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agreement, bonus plan or arrangement, incentive award plan or
arrangement, vacation policy, severance pay plan, policy or agreement,
deferred compensation agreement or arrangement, executive compensation
or supplemental income arrangement, consulting agreement, employment
agreement and each other employee benefit plan, agreement,
arrangement, program, practice or understanding which is not
described in Section 3.1(q)(i)(A) ("Benefit Program or Agreement").
(ii) True, correct and complete copies of each of the Plans,
related trusts, insurance or group annuity contracts and each other funding
or financing arrangement relating to any Plan, including all amendments
thereto, have been furnished to Buyer. There has also been furnished to
Buyer, with respect to each Plan required to file such report and
description, the most recent report on Form 5500 and the summary plan
description. True, correct and complete copies or descriptions of all
Benefit Programs and Agreements have also been furnished to Buyer. A
schedule of employer expenses with respect to each Plan, Benefit Program
and Agreement for the current plan year and past plan year has been
furnished to Buyer along with any administration agreement associated with
any Plan. Buyer has also been furnished a recent actuarial report or
valuation for each Plan subject to Title IV of ERISA. Additionally, the
most recent determination letter from the Internal Revenue Service for each
of the Plans intended to be qualified under section 401 of the Code, and
any outstanding determination letter application for such plans, has been
furnished.
(iii) Except as otherwise set forth on SCHEDULE 3.1(q)(iii),
(A) The Company has substantially performed all
obligations, whether arising by operation of law or by contract,
required to be performed by it in connection with the Plans and the
Benefit Programs and Agreements, and, to the Knowledge of the Company,
Seller and the Former Stockholders, there have been no defaults or
violations by any other party to the Plans or the Benefit Programs or
Agreements, except any defaults or violations which would not have a
Material Adverse Effect;
(B) All reports and disclosures relating to the Plans
required to be filed with or furnished to governmental agencies, Plan
participants or Plan beneficiaries have been filed or furnished in
accordance with applicable law in a timely manner, except where the
failure to file or furnish such reports would not have a Material
Adverse Effect, and each Plan and each Benefit Program and Agreement
has been administered in substantial compliance with its governing
documents;
(C) Each of the Plans intended to be qualified under
section 401 of the Code satisfies the requirements of such section and
has received a current favorable determination letter from the
Internal Revenue Service regarding such qualified status. Such Plan,
since receipt of the most recent favorable
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determination letter, has been amended, but to the Knowledge of the
Company, Seller and the Former Stockholders, has not been operated
or amended in a way which would adversely affect such qualified
status;
(D) Each Plan, Benefit Program and Agreement has been
administered in compliance with its terms, the applicable provisions
of ERISA, the Code and all other Applicable Laws and the terms of all
applicable collective bargaining agreements;
(E) There are no actions, suits or claims pending (other
than routine claims for benefits) or, to the Knowledge of the Company,
Seller or the Former Stockholders, threatened against, or with respect
to, any of the Plans, Benefit Programs or Agreements or their assets;
(F) All contributions required to be made to the Plans
pursuant to their terms and provisions have been made timely;
(G) As to any Plan subject to Title IV of ERISA, there has
been no event or condition which presents the risk of Plan
termination, no accumulated funding deficiency, whether or not waived,
within the meaning of section 302 of ERISA or section 412 of the Code
has been incurred, no reportable event within the meaning of section
4043 of ERISA (for which the disclosure requirements of Regulation
section 4043.1 et seq., promulgated by the Pension Benefit Guaranty
Corporation ("PBGC") have not been waived) has occurred, no notice of
intent to terminate the Plan has been given under section 4041 of
ERISA, no proceeding has been instituted under section 4042 of ERISA
to terminate the Plan, no liability to the PBGC has been incurred, and
the assets of the Plan equal or exceed the actuarial present value of
the benefit liabilities, within the meaning of section 4041 of ERISA,
under the Plan, based upon reasonable actuarial assumptions and the
asset valuation principles established by the PBGC;
(H) As to any Plan intended to be qualified under section
401 of the Code, there has been no termination or partial termination
of the Plan within the meaning of section 411(d)(3) of the Code;
(I) No act, omission or transaction has occurred which
would result in imposition on the Company of (1) breach of fiduciary
duty liability damages under section 409 of ERISA, (2) a civil penalty
assessed pursuant to subsections (c), (i) or (l) of section 502 of
ERISA or (3) a tax imposed pursuant to Chapter 43 of Subtitle D of the
Code;
(J) There is no matter pending or, to the Knowledge of the
Company, Seller and the Former Stockholders, threatened (other than
routine qualification determination filings) with respect to any of
the Plans before the Internal Revenue Service, the Department of Labor
or the PBGC;
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(K) Each trust funding a Plan, which trust is intended to
be exempt from federal income taxation pursuant to section 501(c)(9)
of the Code, satisfies the requirements of such section and has
received a favorable determination letter from the Internal Revenue
Service regarding such exempt status and has not, since receipt of the
most recent favorable determination letter, been amended or operated
in a way which would adversely affect such exempt status;
(L) With respect to any employee benefit plan, within the
meaning of section 3(3) of ERISA, which is not listed in SCHEDULE
3.1(q)(i) but which is sponsored, maintained or contributed to, or has
been sponsored, maintained or contributed to within six years prior to
the Effective Date, by any corporation, trade, business or entity
under common control with the Company, within the meaning of section
414(b), (c) or (m) of the Code or section 4001 of ERISA ("Commonly
Controlled Entity"), (1) no withdrawal liability, within the meaning
of section 4201 of ERISA, has been incurred, which withdrawal
liability has not been satisfied, (2) no liability to the PBGC has
been incurred by any Commonly Controlled Entity, which liability has
not been satisfied, (3) no accumulated funding deficiency, whether or
not waived, within the meaning of section 302 of ERISA or section 412
of the Code has been incurred, and (4) all contributions (including
installments) to such plan required by section 302 of ERISA and
section 412 of the Code have been timely made; and
(M) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not
(1) require the Company to make a larger contribution to, or pay
greater benefits under, any Plan, Benefit Program or Agreement than it
otherwise would be required to make or (2) create or give rise to any
additional vested rights or service credits under any Plan, Benefit
Program, or Agreement.
(iv) Except as otherwise set forth in SCHEDULE 3.1(q)(iv), the
Company is not a party to any agreement, nor has it established any policy
or practice, requiring it to make a payment or provide any other form of
compensation or benefit to any person performing services for the Company
upon termination of such services which would not be payable or provided in
the absence of the consummation of the transactions contemplated by this
Agreement.
(v) In connection with the consummation of the transaction
contemplated by this Agreement, no payments have or will be made under the
Plans, Benefit Programs and Agreements which, in the aggregate, would
result in imposition of the sanctions imposed under sections 280G and 4999
of the Code.
(vi) Except as otherwise set forth in SCHEDULE 3.1(q)(vi), the
Company is not a party to or is bound by any severance agreement.
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(vii) Each Plan which is an "employee welfare benefit plan",
as such term is defined in section 3(1) of ERISA, may be unilaterally
amended or terminated in its entirety without liability except as to
benefits accrued thereunder prior to such amendment or termination.
(viii) Except as otherwise set forth in SCHEDULE 3.1(q)(viii),
no Plan, Benefit Program or Agreement provides retiree medical or retiree
life insurance benefits to any person and the Company is not contractually
or otherwise obligated (whether or not in writing) to provide any person
with life insurance or medical benefits upon retirement or termination of
employment, other than as required by the provisions of section 601 through
608 of ERISA and section 4980B of the Code.
(ix) SCHEDULE 3.1(q)(ix) lists each multi-employer plan within
the meaning of section 3(37) of ERISA in which the Company is a
participating employer. There is no dollar amount of withdrawal liability
which would be owed by the Company to such Plan if the Company ceased
contributing to such Plan immediately after consummation of the transaction
contemplated by this Agreement, except for such liabilities which would
not, individually or in the aggregate, have a Material Adverse Effect.
(x) Except as otherwise set forth in SCHEDULE 3.1(q)(x), no
Plan, Benefit Program or Agreement provides that payments pursuant to such
Plan, Benefit Program or Agreement may be made in securities of the Company
or a Commonly Controlled Entity, nor does any trust maintained pursuant to
any Plan, Benefit Program or Agreement hold any securities of the Company
or a Commonly Controlled Entity.
(xi) Except as otherwise set forth in SCHEDULE 3.1(q)(xi), the
Company is not a party to any collective bargaining agreement. The Company
has not agreed to recognize any union or other collective bargaining
representative, nor has any union or other collective bargaining
representative been certified as the exclusive bargaining representative of
any of the Employees. To the Knowledge of the Company, Seller and the
Former Stockholders no union organizational campaign or representation
petition is currently threatened with respect to any of the Employees.
There is no labor strike or labor dispute, slowdown, work stoppage or
lockout pending or, to the Knowledge of the Company, Seller and the Former
Stockholders, threatened against or affecting the Company, and the Company
has not experienced any labor strike, slowdown, work stoppage or lockout
since January 1, 1995. The Company (A) is, and has always been since
January 1, 1995, in substantial compliance with all Applicable Laws
regarding labor and employment practices, including, without limitation,
Applicable Laws relating to terms and conditions of employment, equal
employment opportunity, employee compensation, employee benefits,
affirmative action, wages and hours, plant closing and mass layoff,
occupational safety and health, immigration, workers' compensation,
disability, unemployment compensation, whistle blower laws or other
employment or labor relations laws, (B) is not engaged, nor has it since
January 1, 1995, engaged, in any unfair labor practices, and has no, and
has not had since January 1, 1995, any, unfair labor
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practice charges or complaints before the National Labor Relations Board
pending or, to the Knowledge of the Company, Seller and the Former
Stockholders, threatened against it, (C) has no, and has not had since
January 1, 1995, any, grievances, arbitrations, or other proceedings
arising or asserted to arise under any collective bargaining agreement,
pending or, to the Knowledge of the Company, Seller and the Former
Stockholders threatened, against it and (D) has no, and has not had since
January 1, 1995, any, charges, complaints, or proceedings before the
Equal Employment Opportunity Commission, Department of Labor or any
other Governmental Entity responsible for regulating labor or employment
practices, pending, or, to the Knowledge of the Company, Seller and the
Former Stockholders, threatened against it.
(xii) SCHEDULE 3.1(q)(xii) contains a true and complete list
of all persons employed by the Company, including the respective dates of
hire of each, any employment agreements to which such persons are parties,
a description of material compensation arrangements (other than employee
benefit plans set forth in SCHEDULE 3.1(q)(i)) and a list of other terms of
any and all material agreements affecting such persons.
(r) INTELLECTUAL PROPERTY. SCHEDULE 3.1(r) is a
true and complete list of all Intellectual Property. True and complete copies
of all documents representing such Intellectual Property and all license
agreements or Contracts pertaining to any such Intellectual Property have
previously been provided to Buyer. Except as disclosed in SCHEDULE 3.1(r):
(i) the Company has good title, free and clear of all Liens, to
each item of Intellectual Property;
(ii) For each United States and foreign patent, patent
application, design patent, design patent application, utility model and
industrial model listed in SCHEDULE 3.1(r) as owned by the Company, all
maintenance fees, renewal fees or other fees required to be paid to avoid
abandonment have been timely paid, and any applicable working requirements
have been timely met;
(iii) For each United States and foreign registered
trademark, registered service mark and registered trade name listed in
SCHEDULE 3.1(r) as owned by Company, all appropriate affidavits and
associated fees necessary to show continued use, and all renewals and
associated fees, have been timely filed with the appropriate administrative
or governmental office;
(iv) Each United States and foreign patent application and
design patent application, and each United States and foreign application
for registration of a trademark, service mark, trade name or copyright
listed in SCHEDULE 3.1(r) as owned by Company, remains pending and has not
been abandoned;
(v) To the Knowledge of the Company, Seller and the Former
Stockholders, each license agreement or Contract under which Company has
any license,
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right or interest in the Intellectual Property is a valid, binding and
enforceable agreement which remains in full force and;
(vi) To the Knowledge of the Company, Seller and each of the
Former Stockholders, no product used, sold or manufactured by Company, nor
the conduct of the Business by Company as it is currently conducted,
infringes on or otherwise violates the patent, design patent, trademark,
service mark, trade name, copyright, industrial model, utility model, trade
secret or other intellectual property rights of any third party;
(vii) No third party is challenging or, to the Knowledge of
Company, Seller and the Former Stockholders, infringing or otherwise
violating any of the Intellectual Property owned by Company;
(viii) No third party is challenging or, to the Knowledge of
Company, Seller and the Former Stockholders, infringing or otherwise
violating the Intellectual Property under which the Company has any right,
license, or interest;
(ix) To the Knowledge of Company, Seller and the Former
Stockholders, there are no restrictions that would materially impair the
use of any United States or foreign trademark, service mark or trade name
listed in Schedule 3.1(r) by Buyer or the transfer of any United States or
foreign trademark, service mark or trade name listed in SCHEDULE 3.1(r) to
Buyer; and
(x) The Company has taken commercially reasonable precautions
to maintain the confidentiality of any Know-how relating to the Business,
except for such Know-how the failure of which to keep confidential would
not, individually or in the aggregate, have a Material Adverse Effect.
(s) ASSETS. Except as set forth on SCHEDULE 3.1(s), the Company owns
or has the enforceable right to use all of the assets (real, personal, or mixed,
tangible or intangible) and properties which are used or held for use in the
operation of the Business as presently conducted by the Company.
(t) CUSTOMERS AND SALES. SCHEDULE 3.1(t) contains a true, correct
and complete list of all of the Company's customers during the period from
January 1, 1995, through December 31, 1997, which have paid fees or otherwise
generated revenues for the Company in excess of One Hundred Thousand Dollars
($100,000) in the aggregate (the "Significant Customers"). Except as indicated
in SCHEDULE 3.1(t), the Company has received no notice that, and neither the
Company, nor Seller, nor either of the Former Stockholders has any Knowledge
that, any of the Significant Customers intends to cease doing business with the
Company or materially decrease the amount of its purchases from the Company
prior to or after the Closing.
(u) AFFILIATE RELATIONSHIPS. Except as set forth on SCHEDULE 3.1(u),
there are no, and for the last twenty-four months there have been no,
transactions, contracts or other arrangements involving the Company in which any
stockholder, officer, director, employee or
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other Affiliate of the Company has or has had a financial interest, including
indebtedness to the Company.
(v) NO DISPOSITIONS. Except as set forth on SCHEDULE 3.1(v), since
the Balance Sheet Date, there has not occurred any sale, lease, transfer,
assignment, abandonment or other disposition of any of the assets of the Company
other than any disposition of (i) obsolete property, (ii) property in connection
with the acquisition of replacement property of equal value, or (iii) assets
having, in the aggregate, a value of less than $15,000 in the aggregate disposed
of in the ordinary course of business and consistent with past practices.
(w) ACCOUNTS RECEIVABLE. The Accounts Receivable of the Company are
valid and genuine, have arisen solely out of bona fide sales and deliveries of
goods, performance of services or other business transactions in the ordinary
course of business consistent with past practice, and are not subject to valid
defenses, set-offs or counterclaims. The allowances for collection losses
associated with such Accounts Receivable in the Financial Statements have been
determined in accordance with GAAP consistent with past practice. There are no
discounts, trade promotions or other marketing arrangements that affect the
collectibility or value of any Accounts Receivable of the Company other than
those set forth on SCHEDULE 3.1(w).
(x) DISCLOSURE. To the Knowledge of the Company, Seller and the
Former Stockholders, no representation or warranty by the Company, Seller or any
Former Stockholder contained in this Agreement or in any exhibit, schedule,
written statement, certificate or other document delivered or to be delivered by
the Company, Seller or any Former Stockholder pursuant to this Agreement or in
connection with the consummation of 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 necessary, in light of the circumstances
under which it was or will be made, in order to make the statements herein or
therein not misleading.
3.2 REPRESENTATIONS AND WARRANTIES OF THE FORMER STOCKHOLDERS. Each
Former Stockholder, severally as to himself and itself and not jointly,
represents and warrants to Buyer as follows (with the understanding that Buyer
is relying on such representations and warranties in entering into and
performing this Agreement):
(a) AUTHORITY. Such Former Stockholder has full legal capacity
to execute and deliver this Agreement and the other Transaction Documents to
which such Former Stockholder is a party and to perform the obligations of such
Former Stockholder hereunder and thereunder. This Agreement and such
Transaction Documents and the consummation by such Former Stockholder of the
transactions contemplated hereby or thereby have been, or upon execution and
delivery will be, duly and validly executed and delivered by such Former
Stockholder and constitute a valid and binding obligation of such Former
Stockholder, enforceable against such Former Stockholder in accordance with
their respective terms, subject, as to enforceability, to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally and to general principles of
equity (regardless of whether enforcement is sought in a proceeding at law or in
equity).
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(b) NO CONFLICT; REQUIRED FILINGS AND CONSENTS. The execution and
delivery of this Agreement and the other Transaction Documents to which it is a
party by such Former Stockholder do not, and the performance by such Former
Stockholder of the transactions contemplated hereby or thereby will not, subject
to obtaining the consents, approvals, authorizations, and permits and making the
filings described in this Section 3.2(b) or otherwise described on
SCHEDULE 3.2(b), (i) violate, conflict with, or result in a violation or breach
of, or constitute a default (with or without due notice or lapse of time or
both) under, or give any party the right to terminate or accelerate any
obligation, or give rise to the creation of any Lien upon the Shares under, any
of the terms, conditions, or provisions of any agreement or other instrument or
obligation to which such Former Stockholder is a party or by which it may be
bound, or (ii) violate any order, writ, judgment, injunction, decree, statute,
law, rule, or regulation of any Governmental Entity binding upon the such Former
Stockholder except for such violations, conflicts, breaches, or defaults as
would not, individually or in the aggregate, have a material adverse effect on
the ability of such Former Stockholder to enter into this Agreement and
consummate the transactions contemplated in this Agreement and in the other
Transaction Documents. No Consent of or registration, declaration, or filing
with any Governmental Entity is required by or with respect to such Former
Stockholder in connection with the execution and delivery of any Transaction
Documents by such Former Stockholder or the consummation of the transactions
contemplated hereby or thereby, except for applicable requirements, if any, of
the Securities Act and the Exchange Act and state securities or blue sky laws.
(c) HSR ACT. X hereby represents and warrants to Buyer that (i) that
he is the "ultimate parent entity" of the Company for purposes of the HSR Act
and regulations thereunder at 16 C.F.R. Section 801.1(a)(3) and (ii) he is not a
person who has total assets of $10,000,000 or more within the meaning of the
size-of-person test set forth in the HSR Act at 15 USC. Section 18(a) and
regulations thereunder at 16 C.F.R. Section 801.11. X hereby acknowledges that
Buyer is relying upon the representation and warranty set forth in this
Section 3.2(d) in making the representations and warranties of Buyer set forth
in Section 3.3(c), and X hereby consents to such reliance.
3.3 REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and
warrants to Seller and each Former Stockholder as follows (with the
understanding that Seller and the Former Stockholders are relying on such
representations and warranties in entering into and performing this Agreement):
(a) ORGANIZATION, STANDING AND POWER. Buyer is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to own, lease, and
operate its properties and to carry on its business as now being conducted.
(b) AUTHORITY. Buyer has all requisite corporate power and authority
to enter into this Agreement and the other Transaction Documents to which it is
a party and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the other Transaction Documents by
Buyer and the consummation by Buyer of the transactions contemplated hereby or
thereby have been duly authorized by all necessary
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action on the part of Buyer. This Agreement and the other Transaction
Documents to which Buyer is a party have been, or upon execution and delivery
will be, duly executed and delivered and constitute, or upon execution and
delivery will constitute, the valid and binding obligations of Buyer,
enforceable against Buyer in accordance with their respective terms, subject,
as to enforceability, to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting creditors'
rights and remedies generally and to general principles of equity (regardless
of whether enforcement is sought in a proceeding at law or in equity).
(c) NO CONFLICT; REQUIRED FILINGS AND CONSENTS. The execution and
delivery of this Agreement and the other Transaction Documents to which Buyer is
a party do not, and the performance by Buyer of the transactions contemplated
hereby or thereby will not, subject to obtaining the consents, approvals,
authorizations, and permits and making the filings described in this Section or
otherwise described on SCHEDULE 3.3(c), (i) violate, conflict with, or result in
any breach of any provisions of Buyer's Articles of Incorporation or Bylaws,
(ii) violate, conflict with, or result in a violation or breach of, or
constitute a default (with or without due notice or lapse of time or both)
under, any of the terms, conditions, or provisions of any material loan or
credit agreement, note, bond, mortgage, indenture, or deed of trust, or any
license, lease, agreement, or other instrument or obligation to which Buyer is a
party or by which it or any of its assets is bound or subject, or (iii) violate
any order, writ, judgment, injunction, decree, statute, law, rule or regulation,
of any Governmental Entity binding upon Buyer or by which or to which any of its
assets is bound or subject except for such violations, conflicts, breaches or
defaults as would not, individually or in the aggregate, have a material adverse
effect on the Buyer's ability to enter into this Agreement and to consummate the
transactions contemplated in this Agreement and the in the other Transaction
Documents. No Consent of, or registration, declaration or filing with, any
Governmental Entity is required by or with respect to Buyer in connection with
the execution and delivery of this Agreement or any Transaction Documents by
Buyer or the consummation by it of the transactions contemplated hereby or
thereby, except for applicable requirements, if any, of the Securities Act and
the Exchange Act and state securities or blue sky laws and except for such
Consents, registrations, declarations or filings the failure of which to obtain
or make would not, individually or in the aggregate, have a material adverse
effect on the ability of Buyer to enter into this Agreement and to consummate
the transactions contemplated in this Agreement and in the other Transaction
Documents; provided, however, that representation made by Buyer in this Section
3.3(c), 3.4(d) is made in reliance upon, and is subject to the accuracy of, the
representation and warranty made to Buyer by X in Section 3.2(c).
(d) LITIGATION. There is no claim, action, suit, inquiry, grievance,
arbitration, judicial or administrative proceeding pending or, to the Knowledge
of Buyer, threatened against Buyer relating to the transactions contemplated by
this Agreement or any other Transaction Documents.
(e) INVESTMENT INTENT. The Shares to be acquired by Buyer are being
acquired for Buyer's own account, for investment and with no intention of
distributing or reselling such Shares or any part thereof or interest therein in
any transaction which would be a violation of the securities laws of the United
States of America or any state or any foreign country or jurisdiction.
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(f) FORM 8-K. No event required to be reported by Buyer under Item 1
(Changes in Control of Registrant) of Exchange Act Form 8-K has occurred and
Buyer has no reason to believe that any such event will occur within 30 days
after the Effective Date.
3.4 REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents and
warrants to Buyer as follows (with the understanding that Buyer is relying on
such representations and warranties in entering into and performing this
Agreement):
(a) OWNER OF SHARES. As of the Effective Date, Seller is the holder
of record and owns beneficially all of the Shares, free and clear of all Liens.
At the Closing, Buyer will receive good and valid title to the Shares owned by
Seller, free and clear of all Liens.
(b) ORGANIZATION, STANDING AND POWER. Seller is a limited liability
company duly organized, validly existing, and in good standing under the laws of
the State of Delaware and has all requisite corporate power and authority to
own, lease, and operate its properties and to carry on its business as now being
conducted.
(c) AUTHORITY. Seller has all requisite power and authority to enter
into this Agreement and the other Transaction Documents to which it is a party
and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the other Transaction Documents by
Seller and the consummation by Seller of the transactions contemplated hereby or
thereby have been duly authorized by all necessary action on the part of Seller.
This Agreement and the other Transaction Documents to which Seller is a party
have been, or upon execution and delivery will be, duly executed and delivered
and constitute, or upon execution and delivery will constitute, the valid and
binding obligations of Seller, enforceable against Seller in accordance with
their respective terms, subject, as to enforceability, to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally and to general principles of
equity (regardless of whether enforcement is sought in a proceeding at law or in
equity).
(d) NO CONFLICT; REQUIRED FILINGS AND CONSENTS. The execution and
delivery of this Agreement and the other Transaction Documents to which Seller
is a party do not, and the performance by Seller of the transactions
contemplated hereby or thereby will not, subject to obtaining the consents,
approvals, authorizations, and permits and making the filings described in this
Section 3.4(d) or on SCHEDULE 3.4(d), (i) violate, conflict with, or result in
any breach of any provisions of Seller's Limited Liability Company Agreement,
(ii) violate, conflict with, or result in a violation or breach of, or
constitute a default (with or without due notice or lapse of time or both)
under, any of the terms, conditions, or provisions of any material loan or
credit agreement, note, bond, mortgage, indenture, or deed of trust, or any
license, lease, agreement, or other instrument or obligation to which Seller is
a party or by which it or any of its assets is bound or subject, or (iii)
violate any order, writ, judgment, injunction, decree, statute, law, rule or
regulation, of any Governmental Entity binding upon Seller or by which or to
which any of its assets is bound or subject except for such violations,
conflicts, breaches or defaults as would not, individually or in the aggregate,
have a material adverse effect on Seller's ability to enter into this
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Agreement and to consummate the transactions contemplated in this Agreement
and in the other Transaction Documents. No Consent of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Seller in connection with the execution and delivery of this
Agreement or any Transaction Documents by Seller or the consummation by it of
the transactions contemplated hereby or thereby, except for applicable
requirements, if any, of the Securities Act and the Exchange Act and state
securities or blue sky laws and except for such Consents, registrations,
declarations or filings the failure of which to obtain or make would not,
individually or in the aggregate, have a material adverse effect on the
ability of Seller to enter into this Agreement and to consummate the
transactions contemplated in this Agreement and in the other Transaction
Documents.
(e) LITIGATION. Except as set forth on SCHEDULE 3.4(e), there is no
claim, action, suit, inquiry, grievance, arbitration, judicial or administrative
proceeding pending or, to the Knowledge of Seller, threatened against Seller
relating to the transactions contemplated by this Agreement or any other
Transaction Documents.
ARTICLE 4
COVENANTS OF
THE COMPANY, SELLER AND THE FORMER STOCKHOLDERS
The Company, Seller and the Former Stockholders, jointly and severally,
covenant and agree with Buyer as follows:
4.1 TRANSFERRED ASSETS. (a) At or prior to the Closing, the Company
shall, and Seller and the Former Stockholders shall cause the Company to, sell
to Seller the Transferred Assets listed in Part I of EXHIBIT F in exchange for a
purchase price equal to the amount set forth in Part I of EXHIBIT F. Such
purchase price shall be paid by the execution and delivery of the Seller Demand
Note.
(b) At or prior to the Closing, the Company shall, and Seller and the
Former Stockholders shall cause the Company to, sell to the Former Stockholders
the Transferred Assets listed in Part II of EXHIBIT F in exchange for a purchase
price equal to the amount set forth in Part II of EXHIBIT F. Such purchase
price shall be paid by the execution and delivery of the Stockholders Demand
Note.
(c) The Seller and the Former Stockholders will promptly reimburse
the Company for any out-of-pocket costs payable by the Company as a result of
the transfer of the Transferred Assets to the Former Stockholders.
4.2 MERGER OR LIQUIDATION OF COMPANY. At such time as Buyer determines to
merge the Company into another entity or to liquidate the Company, Buyer agrees
to use reasonable efforts to cause to be assigned to the successor-in-interest
of the Company any rights which the Company might have to receive benefits under
(a) insurance policies and (b) agreements by others to indemnify the Company,
including, but not limited to, rights to receive indemnification from owners of
real properties managed or leased by the Company.
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Buyer has agreed to the foregoing at the request of Seller and Former
Stockholders in view of the fact that the receipt by the Company or its
successors of payments from insurance companies or other indemnitors may
reduce the damages for which Seller and the Former Stockholders are obligated
to indemnify the Buyer Indemnified Parties pursuant to Article 8 of this
Agreement.
4.3 PAYMENT OF BUYER INDEMNIFIED SAVINGS COSTS. Seller and each of the
Former Stockholders hereby jointly and severally hereby covenant and agree with
Buyer that, from and after the Closing, Seller and the Former Stockholders shall
assume, and hereby undertake to pay, discharge and perform all obligations and
liabilities arising out of the Buyer Indemnified Savings Matters which accrue
after the Closing. Seller and each of the Former Stockholders jointly and
severally hereby covenant and agree with the Company and Buyer that, from and
after the Closing, promptly following delivery by the Company or Buyer of a
written request to pay any charge, cost or expense relating to any Buyer
Indemnified Savings Matters, Seller and the Former Stockholders shall promptly
(but in any event no later than fifteen (15) Business Days from receipt of such
request) pay the amount of such charge, cost or expense to the Company or,
Buyer.
4.4 BOARD OF DIRECTORS. At the Closing, the Company, Seller and the
Former Stockholders shall deliver to Buyer letters from each director of the
Company pursuant to which such directors shall resign from their positions on
the Company's board of directors. The Company, Seller and each Former
Stockholder covenant and agree with Buyer to cause to be elected to the
Company's board of directors such nominees as the Buyer shall designate,
effective immediately upon consummation of the Purchase.
4.5 CHARTER AMENDMENT. Upon the terms and subject to the conditions set
forth herein, prior to the Closing the Company, Seller and each of the Former
Stockholders shall take all actions necessary to amend and restate the Company's
Articles of Incorporation by filing with the California Secretary of State an
Amended and Restated Articles of Incorporation in the form of EXHIBIT G hereto
(the "Charter Amendment"), executed by a duly authorized officer of the Company.
By his execution and delivery of this Agreement, Seller hereby consents (in its
capacity as a stockholder of the Company) to the approval of the Charter
Amendment and to the execution and filing of the Charter Amendment with the
California Secretary of State, and agrees that Seller will not withdraw, revoke,
rescind or alter such consent in any way without the prior written consent of
Buyer.
4.6 BYLAW AMENDMENT. Upon the terms and subject to the conditions set
forth herein, prior to the Closing the Company, Seller and each of the Former
Stockholders shall take all actions necessary to amend the Company's Bylaws by
causing an amendment to the Company's Bylaws in the form of EXHIBIT H hereto
(the "Bylaw Amendment") to be adopted by the Company and to be inserted into and
kept with the Bylaws of the Company by a duly authorized officer of the Company.
By his execution and delivery of this Agreement, Seller hereby consents (in its
capacity as a stockholder of the Company) to the approval of the Bylaw
Amendment, and agrees that Seller will not withdraw, revoke, rescind or alter
such consent in any way without the prior written consent of Buyer.
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4.7 CONTINGENT CONSIDERATION ESCROW AGREEMENT. Subject to the terms and
conditions hereof, at the Closing the Seller Representative shall enter into a
Contingent Consideration Escrow Agreement with Buyer and the Escrow Agent
substantially in the form attached hereto as EXHIBIT B.
4.8 EMPLOYMENT AGREEMENTS. Subject to the terms and conditions hereof, at
the Closing each of the Former Stockholders and Robert N. Ruth shall enter into
an Employment Agreement with Buyer in the forms previously agreed upon.
4.9 INDEMNIFICATION ESCROW AGREEMENT. Subject to the terms and conditions
hereof, at the Closing the Seller Representative shall enter into an
Indemnification Escrow Agreement with Buyer and the Escrow Agent substantially
in the form attached hereto as EXHIBIT C.
4.10 TRADENAME LICENSE AGREEMENT. Subject to the terms and conditions
hereof, X shall enter into a Trade Name License Agreement with Buyer and the
Company substantially in the form attached hereto as EXHIBIT E.
ARTICLE 5
COVENANTS OF BUYER
5.1 INSURANCE. Buyer will cause the Company to continue to maintain all
of its existing liability and crime insurance coverage, or Buyer will maintain
comparable insurance with prior acts endorsements for a period of at least one
(1) year after the Effective Date; provided, however, that if any such Company
insurance is replaced with insurance currently maintained by Buyer, such
insurance shall be deemed comparable notwithstanding the reduction of policy
limits from $2 million to $1,500,000.
5.2 INDEMNIFICATION OF OFFICERS AND DIRECTORS. From and after the
Closing, Buyer shall, in accordance with and to the extent set forth in the
provisions of the Charter Amendment and the Bylaw Amendment, cause the Company
and its successors and assigns to indemnify the officers, directors, employees
and agents of the Company for damages they might sustain by reason of the fact
that they served as officers, directors, employees or agents of the Company
prior to the Closing. From and after the Closing, Buyer will (a) indemnify the
Company's directors, officers, employees and agents for any damages they might
sustain by reason of the fact that they serve as a director, officer, employee
or agent of Buyer or its subsidiaries, and (b) cover the Company's directors,
officers, employees and agents under director and officer liability insurance
policies, all to the same extent that Buyer provides such indemnification and
insurance coverage to the other officers, directors, employees or agents of
Buyer and its subsidiaries.
5.3 CONTINGENT CONSIDERATION LETTER OF CREDIT. Subject to the terms and
conditions hereof, Buyer shall request Issuer to issue in favor of the Seller
Representative and the Escrow Agent the Contingent Consideration Letter of
Credit substantially in the form attached hereto as EXHIBIT D.
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5.4 CONTINGENT CONSIDERATION ESCROW AGREEMENT. Subject to the terms and
conditions hereof, Buyer shall enter into the Contingent Consideration Escrow
Agreement with the Seller Representative and the Escrow Agent substantially in
the form attached hereto as EXHIBIT B.
5.5 EMPLOYMENT AGREEMENTS. Subject to the terms and conditions hereof,
Buyer shall enter into an Employment Agreement with each of the Former
Stockholders and Robert Ruth, substantially in the forms previously agreed upon.
5.6 INDEMNIFICATION ESCROW AGREEMENT. Subject to the terms and conditions
hereof, Buyer shall enter into an Indemnification Escrow Agreement with the
Seller Representative and the Escrow Agent substantially in the form attached
hereto as EXHIBIT C.
5.7 TRADENAME LICENSE AGREEMENT. Subject to the terms and conditions
hereof, Buyer shall enter into a Tradename License Agreement with X,
substantially in the form attached hereto as EXHIBIT E.
5.8 INSPECTION RIGHTS. After the Closing and until all payments of
Additional Consideration shall have been made, Buyer shall permit Seller, Former
Stockholders and their respective representatives, upon reasonable notice and
during reasonable business hours, (a) to examine the books and records of the
Company and its successors and assigns, such examination to be at the expense of
Seller and Former Stockholders, (b) to discuss business affairs and finances of
the Company with the officers of the Company, and (c) to inspect the facilities
of the Company.
5.9 TAX RETURNS. Prior to the filing of any Tax return of the Company
which covers any period ending or prior to the Closing, Buyer shall provide
Seller and the Former Stockholders with a copy of such Tax return and shall give
Seller and the Former Stockholders the opportunity to discuss with Buyer any
elections and positions taken by the Company in any such Tax returns which could
reasonably be expected to have an effect on Seller or Former Stockholders.
5.10 EMPLOYEES. All employees of the Company who are retained after the
Closing will receive credit for past service with the Company with respect to
the ability to participate in Buyer's 401(k) plan and the ability to receive
time off for vacation (as opposed to vacation pay). While such employees remain
employees of the Company or the Company's successor, such employees will be
provided with medical benefits under the new medical insurance policy acquired
by the Company for the period ending December 31, 1998, and with other employee
benefits consistent with the benefits generally provided by Buyer to its
employees, subject to the terms and conditions upon which Buyer provides such
benefits to its employees.
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ARTICLE 6
MUTUAL COVENANTS
6.1 GOVERNMENTAL CONSENTS. Promptly following the execution of this
Agreement, the parties shall proceed to prepare and file with the appropriate
Governmental Entities such requests, reports, or notifications as may be
required in connection with this Agreement and shall diligently and
expeditiously prosecute, and shall cooperate fully with each other in the
prosecution of, such matters. Without limiting the foregoing, promptly
following the execution of this Agreement, the parties shall make all necessary
filings and, thereafter, make any other required submissions with respect to the
transactions contemplated hereby under the Securities Act and the rules and
regulations thereunder and any other applicable federal or state securities
laws.
6.2 BROKERS OR FINDERS. Except for the previously disclosed fee payable
to J.P. Morgan Securities Inc., which fee shall be paid in accordance with the
provisions of Section 9.7, the Company, Seller and each Former Stockholder
represent and warrant to Buyer that no agent, broker, investment banker, or
other person engaged by the Company, Seller or such Former Stockholder,
respectively, is or will be entitled to any broker's or finder's fee or any
other commission or similar fee payable by Buyer or the Company in connection
with any of the transactions contemplated by this Agreement. Buyer represents
and warrants to the Company, Seller and each Former Stockholder that Buyer has
not engaged any broker, investment banker or other person that will be entitled
to any broker's or finder's fee or any other commission or similar fee from the
Company or any Former Stockholder in connection with any of the transactions
contemplated by this Agreement.
6.3 ADDITIONAL AGREEMENTS. Subject to the terms and conditions of this
Agreement, each of the Company, Seller, the Former Stockholders and Buyer will
use its commercially reasonable efforts to do, or cause to be taken all action
and 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. If at any time after the Effective
Date, any further action is necessary to comply with this Agreement, the parties
to this Agreement or their duly authorized representatives shall use reasonable
efforts to take all such action. Without limiting the generality of the
foregoing, if, after the Effective Date, Buyer seeks indemnification or recovery
from one or more other parties to a Contract or otherwise seeks to enforce such
Contract and, in order to obtain such indemnification, recovery or enforcement,
it is necessary for Seller or a Former Stockholder to participate in any
enforcement proceeding or otherwise provide assistance to Buyer, then, at the
request, upon reasonable prior notice, during normal business hours and without
unreasonable interruption of such person's business activities, and at the sole
expense of Buyer, Seller and each Former Stockholder shall take such action as
Buyer may reasonably request in connection with Buyer's efforts to obtain such
indemnification, recovery or enforcement.
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ARTICLE 7
CLOSING
7.1 CLOSING. The Closing will take place immediately following the
execution and delivery of this Agreement at the offices of Allen, Matkins, Leck,
Gamble & Mallory LLP, in Los Angeles, California, or at such other place and/or
time as the parties may agree, and shall be deemed to have occurred as of the
opening of business on the Effective Date. For purposes of this Agreement, each
and every event referred to in this Article 7 that is to occur at the Closing
shall be deemed to have occurred contemporaneously.
7.2 ACTIONS TO OCCUR AT CLOSING.
(a) At the Closing, Buyer shall deliver to Seller, the Company or the
Former Stockholders (or to the Escrow Agent or the recipients of any amounts
required to pay any Debt, Extraordinary Payments or Company Transaction Costs as
indicated) the following:
(i) PURCHASE PRICE. An amount equal to the Cash Purchase
Price, as adjusted in accordance with the provisions of Sections 2.4, minus
the Indemnification Holdback Amount and minus the Cash Bonus Amount to
Seller by wire transfer of immediately available funds;
(ii) REDUCTIONS. Any amounts payable for any Debt,
Extraordinary Payments or Company Transaction Costs by wire transfer of
immediately available funds or, if requested by Seller with respect to
certain Extraordinary Payments, by delivery of a check to the persons
designated by Company prior to the Closing;
(iii) CONTINGENT CONSIDERATION LETTER OF CREDIT. Contingent
Consideration Letter of Credit to the Escrow Agent;
(iv) ESCROW AGREEMENTS. A counterpart of each of the
Indemnification Escrow Agreement and the Contingent Consideration Escrow
Agreement executed by Buyer;
(v) DEPOSIT OF INDEMNIFICATION HOLDBACK AMOUNT. Deposit an
amount of cash equal to the Indemnification Holdback Amount with the Escrow
Agent;
(vi) EMPLOYMENT AGREEMENTS. A counterpart of each of the
Employment Agreements executed by Buyer;
(vii) TRADENAME LICENSE AGREEMENT. A counterpart of the
Tradename License Agreement executed by Buyer;
(viii) LEGAL OPINION. The opinion of counsel to the Buyer in
substantially the form attached as EXHIBIT I hereto; and
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(ix) CASH BONUS AMOUNT. An amount equal to the Cash Bonus
Amount to the Company by wire transfer of immediately available funds.
(b) At the Closing, the Company, Seller and the Former Stockholders
shall deliver to Buyer (or the recipients of any amounts required to pay any
Company Transaction Costs, as indicated) the following:
(i) SHARE CERTIFICATES. Certificates representing the Shares,
duly endorsed by Seller in blank or accompanied by stock powers duly
endorsed in blank, and otherwise in proper form for transfer;
(ii) LEGAL OPINION. The opinion of counsel to the Company in
substantially the form attached as EXHIBIT J hereto.
(iii) CONSENTS; ACKNOWLEDGMENTS. The original of each
consent or approval of each person that is a party to a Material Contract
(including evidence of the payment of any required payment) and whose
consent or approval shall be required in order to permit the consummation
of the transactions contemplated hereby or to prevent a breach of such
Contract or the creation of a right to terminate such Contract, and such
consent or approval shall be in form and substance reasonably satisfactory
to Buyer;
(iv) ESCROW AGREEMENTS. A counterpart of each of the
Indemnification Escrow Agreement and the Contingent Consideration Escrow
Agreement executed by the Seller Representative;
(v) EMPLOYMENT AGREEMENTS. A counterpart of each of the
Employment Agreements executed by each of the Former Stockholders and
Robert Ruth, respectively, as applicable; and
(vi) TRADENAME LICENSE AGREEMENT. A counterpart of the
Tradename License Agreement executed by X and the Company.
(vii) REDUCTIONS. Receipts reasonably acceptable to Buyer,
from the recipients of the Company Transaction Costs.
(c) At the Closing, Buyer shall receive from Seller a non-foreign
affidavit within the meaning of section 1445(b)(2) of the Code.
ARTICLE 8
INDEMNIFICATION
8.1 INDEMNIFICATION OF BUYER. (a) Subject to the provisions of this
Article 8 and Section 9.2 below, the Company, Seller and each Former
Stockholder, jointly and severally, agree to indemnify and hold harmless the
Buyer Indemnified Parties from and against any and all Buyer Indemnified Costs.
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(b) Subject to the provisions of this Article 8 and Section 9.2
below, each Former Stockholder severally agrees to indemnify and hold harmless
each of the Buyer Indemnified Parties from and against any and all Buyer
Indemnified Former Stockholder Costs.
(c) Subject to the provisions of this Article 8 and Section 9.2
below, the Company, Seller and each Former Stockholder, jointly and severally,
agree to indemnify and hold harmless each of the Buyer Indemnified Parties from
and against any and all Buyer Indemnified Seller Costs.
8.2 INDEMNIFICATION OF SELLER. Subject to the provisions of this
Article 8 and Section 9.2 below, Buyer agrees to indemnify and hold harmless
each of the Seller Indemnified Parties from and against any and all Seller
Indemnified Costs.
8.3 DEFENSE OF THIRD-PARTY CLAIMS. An Indemnified Party shall give prompt
written notice to any person who is obligated to provide indemnification
hereunder (an "Indemnifying Party") of the commencement or assertion of any
action, proceeding, demand, or claim by a third party (collectively, a "third-
party action") in respect of which such Indemnified Party shall seek
indemnification hereunder. Any failure so to notify an Indemnifying Party shall
not relieve such Indemnifying Party from any liability that it, he, or she may
have to such Indemnified Party under this Article 8 unless the failure to give
such notice materially and adversely prejudices such Indemnifying Party. The
Indemnifying Party shall have the right to assume control of the defense of,
settle, or otherwise dispose of such third-party action on such terms as it
deems appropriate; provided, however, that:
(a) The Indemnified Party shall be entitled, at its own expense, to
participate in the defense of such third-party action (provided, however, that
the Indemnifying Parties shall pay the legal fees of the Indemnified Party if
(i) the employment of separate counsel shall have been authorized in writing by
all Indemnifying Parties in connection with the defense of such third-party
action, (ii) the Indemnifying Parties shall not have employed counsel reasonably
satisfactory to the Indemnified Party to have charge of such third-party action,
or (iii) the Indemnified Party's counsel shall have advised the Indemnified
Party in writing, with a copy delivered to the Indemnifying Party, that there is
a material conflict of interest that could violate applicable standards of
professional conduct to have common counsel);
(b) The Indemnifying Party shall obtain the prior written approval of
the Indemnified Party before entering into or making any settlement, compromise,
admission, or acknowledgment of the validity of such third-party action or any
liability in respect thereof if, pursuant to or as a result of such settlement,
compromise, admission, or acknowledgment, injunctive or other equitable relief
would be imposed against the Indemnified Party or if, in the opinion of the
Indemnified Party, such settlement, compromise, admission, or acknowledgment
could have a material adverse effect on its business;
(c) No Indemnifying Party shall consent to the entry of any judgment
or enter into any settlement that does not include as an unconditional term
thereof the giving by each claimant or plaintiff to each Indemnified Party of a
release from all liability in respect of such third-party action; and
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(d) The Indemnifying Party shall not be entitled to control (but
shall be entitled to participate at its own expense in the defense of), and the
Indemnified Party shall be entitled to have sole control over, the defense or
settlement, compromise, admission, or acknowledgment of any third-party action
(i) as to which the Indemnifying Party fails to assume the defense within a
reasonable length of time; or (ii) to the extent the third-party action seeks an
order, injunction, or other equitable relief against the Indemnified Party
which, if successful, would materially and adversely affect the business,
operations, assets, or financial condition of the Indemnified Party; provided,
however, that the Indemnified Party shall make no settlement, compromise,
admission, or acknowledgment that would give rise to liability on the part of
any Indemnifying Party without the prior written consent of such Indemnifying
Party.
The parties hereto shall extend reasonable cooperation in connection with the
defense of any third-party action pursuant to this Article 8 and, in connection
therewith, shall furnish such records, information, and testimony and attend
such conferences, discovery proceedings, hearings, trials, and appeals as may be
reasonably requested.
8.4 DIRECT CLAIMS. In any case in which an Indemnified Party seeks
indemnification hereunder which is not subject to Section 8.3 because no third-
party action is involved, the Indemnified Party shall notify the Indemnifying
Party in writing of any Indemnified Costs which such Indemnified Party claims
are subject to indemnification under the terms hereof. Subject to the
limitations set forth in Sections 8.6(c) and 9.2, the failure of the Indemnified
Party to exercise promptness in such notification shall not amount to a waiver
of such claim unless the resulting delay materially prejudices the position of
the Indemnifying Party with respect to such claim. Any Indemnifying Party shall
promptly (but in no event later than 15 days after the date on which the
Indemnifying Party receives notice from the Indemnified Party of a claim for
indemnification under the terms hereof) pay, reimburse, repay or otherwise
discharge any Indemnified Costs of the Indemnified Party.
8.5 ESCROW. On the Effective Date, Buyer, the Seller Representative and
the Escrow Agent will enter into the Indemnification Escrow Agreement in
accordance with which Buyer shall, at Closing, deposit the Indemnification
Holdback Amount with the Escrow Agent.
8.6 LIMITATIONS. Subject to Section 9.2 hereof, the following provisions
of this Section 8.6 shall be applicable after the time of the Closing:
(a) MINIMUM LOSS. No Indemnifying Party shall be required to
indemnify an Indemnified Party for Indemnified Representation Costs unless and
until the aggregate amount of such Indemnified Representation Costs for which
the Indemnified Party is otherwise entitled to indemnification pursuant to this
Article 8 exceeds $100,000 (the "Minimum Loss"). After the Minimum Loss is
exceeded, the Indemnified Party shall be entitled to be paid the entire amount
of its Indemnified Representation Costs in excess of (but not including) the
Minimum Loss, subject to the limitations on recovery and recourse set forth in
this Section 8.6 and subject to the exception contained in Section 9.2.
(b) DETERMINATION OF BREACH. For purposes of determining (i) whether
an Indemnifying Party shall be required to indemnify an Indemnified Party under
this Article 8 or
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(ii) the aggregate amount of Minimum Loss suffered by an Indemnified Party,
each representation and warranty contained in this Agreement for which
indemnification can be or is sought hereunder shall be read (including for
purposes of determining whether a breach of such representation or warranty
has occurred) without regard to materiality (including Material Adverse
Effect) qualifications that may be contained therein.
(c) LIMITATION AS TO TIME. No Indemnifying Party shall be liable for
any Indemnified Representation Costs pursuant to this Article 8 unless a written
claim for indemnification in accordance with Section 8.3 or 8.4 is given by the
Indemnified Party to the Indemnifying Party with respect thereto on or before
June 30, 1999, except that this time limitation shall not apply to any
(i) claims for amounts not set forth on SCHEDULE 2.4; (ii) claims for breaches
of the representations and warranties contained in Section 3.1(b) (relating to
capital structure) and Section 3.4(a) (relating to ownership of the Shares),
which representations and warranties shall survive indefinitely; (iii) claims
for breaches of representations and warranties contained in Section 3.1(o)
(relating to taxes), which representations and warranties shall survive until
the expiration of the applicable statute of limitations; or (iv) claims for
breaches of the representations and warranties contained in Section 3.1(n)
(relating to environmental matters), which representations and warranties shall
survive until the fifth anniversary of the Effective Date.
(d) NO CONTRIBUTION. Seller and Former Stockholders, and not the
Company (which will be released as of the Closing of its obligations under
Section 8.1), shall be liable for any Buyer Indemnified Costs and Buyer
Indemnified Seller Costs sustained by any Buyer Indemnified Parties, subject to
the terms, limitations and conditions of this Article 8. In that event, Seller
and Former Stockholders shall not be entitled to contribution or any other
payments from the Company for any Buyer Indemnified Costs or Buyer Indemnified
Seller Costs that Seller or the Former Stockholders are obligated to pay. In
addition, effective as of the Closing, Seller and the Former Stockholders hereby
waive and release any and all rights that they may have under this Agreement or
any other Transaction Document to assert claims of contribution against the
Company; provided, however, that nothing set forth in this Section 8.6(d) shall
constitute a waiver or release of Seller or the Former Stockholders' right to
enforce the obligations of the Buyer and the Company under Section 5.2
(e) LIABILITY CAP. Without limiting any of the foregoing provisions
of this Section 8.6, the parties hereto agree that Seller and the Former
Stockholders shall not be required to indemnify a Buyer Indemnified Party for
Buyer Indemnified Representations Costs to the extent, and only to the extent,
that the amount of such Buyer Indemnified Representation Costs, when added to
the aggregate amount of Buyer Indemnified Representation Costs previously paid
by Seller and the Former Stockholders, exceeds, with respect to any Buyer
Indemnified Representation Costs for which a written claim for indemnification
in accordance with Section 8.3 or 8.4 is given by a Buyer Indemnified Party (a)
on or before the first anniversary of the Effective Date, $7,100,000, and (b)
after the first anniversary of the Effective Date and prior to June 30, 1999, an
amount equal to $6,000,000 minus the First Year Excess Paid Claims Amount;
provided, however that in no event shall the Former Stockholders be required to
indemnify one or more Buyer Indemnified Parties for Buyer Indemnified
Representative Costs to the extent
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such Buyer Indemnified Representative Costs exceed, in the aggregate,
$7,100,000. "First Year Excess Paid Claims Amount" means the excess, if any,
of (i) the aggregate amounts of claims for indemnification made prior to the
first anniversary of the Effective Date and paid as of the date on which the
liability cap is determined pursuant to this Section 8.6(e), over (ii)
$1,100,000. Notwithstanding the first sentence of this Section 8.6(e), the
liability cap described in this Section 8.6(e) shall not apply to any (i)
claims for fraud pursuant to Section 9.2 (which shall have no cap); (ii)
claims for amounts not set forth on SCHEDULE 2.4 (which shall have no cap);
(iii) claims for breaches of the representations and warranties contained in
Section 3.1(b) (relating to capital structure), Section 3.4(a) (relating to
ownership of Shares), Section 3.1(o) (relating to taxes) and in Section
3.1(n) (relating to environmental matters), which, however, shall have a cap
in the aggregate equal to the sum of the Cash Purchase Price plus all amounts
paid or payable pursuant to Section 2.8 less all amounts of Buyer Indemnified
Costs previously paid.
(f) MINIMUM CLAIMS. Notwithstanding anything to the contrary stated
herein, if any third-party action or direct claim results in any damages,
losses, liabilities, charges, penalties, costs and expenses (including court
costs and attorney's fees and expenses incurred in investigating and preparing
for any litigation or proceeding) all of which with respect to such claim do not
in the aggregate exceed $2,000, such damages, losses, liabilities, charges,
penalties, costs and expenses shall not be deemed to be Indemnified
Representation Costs.
(g) OTHER INDEMNIFIED COSTS. The provisions of this Section 8.6
shall only be applied to Indemnified Representation Costs and shall not be
applicable to any other Indemnified Costs.
8.7 CLAIMS AGAINST ESCROW. With respect to any claim by a Buyer
Indemnified Party against Seller or any Former Stockholder for Buyer Indemnified
Costs payable under this Article 8, the Buyer Indemnified Party shall first seek
payment only out of the Indemnification Holdback Amount for all amounts due to
the Buyer Indemnified Party from Seller or such Former Stockholder with respect
to such claim; provided, however, that if the amount held pursuant to the
Indemnification Escrow Agreement has been reduced to zero, the Buyer Indemnified
Party shall be entitled, subject to the terms and conditions set forth in this
Agreement, to seek payment from Seller or such Former Stockholder directly for
all amounts remaining due or thereafter becoming due to the Buyer Indemnified
Party from such Seller or Former Stockholder under this Article 8 (but, with
respect to Buyer Indemnified Representation Costs, subject to the limitations
set forth in Section 8.6(e)) and for claims contemplated in Section 9.2.
8.8 INSTRUCTIONS TO ESCROW AGENT. The Seller Representative hereby
covenants and agrees that at any time Seller or the Former Stockholders are
obligated to indemnify a Buyer Indemnified Party for Buyer Indemnified Costs
under this Article 8 and such Buyer Indemnified Costs are to be paid pursuant to
the terms of the Indemnification Escrow Agreement, if requested by Buyer, the
Seller Representative will promptly (but in no event later than one Business Day
following receipt of Buyer's request) execute and deliver to the Escrow Agent
written instructions to release to the Buyer Indemnified Party such portion of
the Indemnification
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Holdback Amount as is necessary to indemnify the Buyer Indemnified Party for
such Buyer Indemnified Costs.
8.9 INSURANCE. The Company or Buyer, as the case may be, will use
reasonable efforts to pursue, or appoint the Seller Representative to act as its
agent to pursue, remedies under any insurance policy for the benefit of Buyer or
the Company for Buyer Indemnified Costs.
8.10 TAX INDEMNIFICATION. (a) If an Indemnified Party receives a tax
savings by reason of having incurred an Indemnified Cost for which such
Indemnified Party shall have received a payment (an "Indemnity Payment") from an
Indemnifying Party in reimbursement for such Indemnified Cost, then such
Indemnified Party shall pay to such Indemnifying Party an amount equal to the
amount of such tax savings. For the purposes of this Section 8.10, an
Indemnified Party shall be deemed to have received a tax savings with respect to
an Indemnified Cost if, upon the filing of a Federal, state or local income tax
return for a taxable year ending on or after the Effective Date (the "Indemnity
Return"), an amount attributable to an Indemnified Cost (the "Indemnified Cost
Deduction") is deductible by the Indemnified Party or any affiliated,
consolidated, combined, unitary or similar group of which the Indemnified Party
is or was a member for any taxable period, and an amount attributable to the
Indemnity Payment is not includible in gross income by the Indemnified Party or
such other person. If the Indemnity Payment is includible in gross income by
the Indemnified Party or if the Indemnifying Party claims as a deductible
expense or loss an amount attributable to the Indemnity Payment, the Indemnified
Party shall be deemed to have not received a tax savings with respect to an
Indemnified Cost. To the extent there is substantial authority for such
position, the parties agree that any Indemnity Payment shall be deemed an
adjustment to the Purchase Price and will not be includable in gross income of
the Indemnified Party. Buyer, Seller and the Former Stockholders shall act in
good faith to coordinate their tax return filing positions with respect to
Indemnity Payments for the periods that include an Indemnity Payment.
(b) In the event that an Indemnified Party is deemed under Section
8.10(a) to receive a tax savings by reason of an Indemnified Cost, such
Indemnified Party shall pay the Indemnifying Party, within thirty (30) days
after the filing of an Indemnity Return, a sum equal to the product obtained
when the Indemnified Cost Deduction is multiplied by the highest marginal
corporate combined federal, state or local income tax rate (limited to the
jurisdiction in which an Indemnified Cost Deduction is available) applicable to
corporations taxable under Subchapter C of the Code on the date the Indemnity
Return is filed (the "Indemnification Tax Savings Amount").
(c) In the event that an Indemnified Party may receive a tax savings
by reason of an Indemnified Cost, such Indemnified Party shall adopt in good
faith a reasonable tax return filing position so as to report the Indemnified
Cost Deduction on such returns. The Indemnified Party shall have the sole
responsibility for the preparation of its tax returns and reporting thereon such
Indemnified Cost Deduction.
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(d) There shall be an adjustment to any Indemnification Tax
Savings Amount calculated under Section 8.10(a) hereof in the event of an
audit or other proceeding which results in a Final Determination that
increases or decreases the amount of the Indemnified Cost Deduction reported
on the Indemnity Tax Return by the Indemnified Party. The Indemnified Party
shall promptly inform the Indemnifying Party of any such audit or proceeding
and shall attempt in good faith to sustain the tax savings at issue. Upon
receiving a written notice of a Final Determination in respect of an
Indemnified Cost Deduction, the Indemnified Party shall redetermine the
Indemnification Tax Savings Amount attributable to the Indemnified Cost
Deduction under the tax savings calculation of Section 8.10(b), taking into
account the Final Determination (the "Restated Indemnification Tax Savings
Amount"). If the Restated Indemnification Tax Savings Amount is greater than
the Indemnification Tax Savings Amount, the Indemnified Party shall pay the
Indemnifying Party a sum equal to the difference between such amounts within
thirty (30) days after receiving written notice of the Final Determination.
If the Restated Indemnification Tax Savings Amount is less than the
Indemnification Tax Savings Amount, the Indemnifying Party shall pay the
Indemnified Party, within thirty (30) days of receiving written notice from
the Indemnified Party of the Final Determination, an amount equal to the sum
of (i) the difference between such amounts, plus (ii) any interest and
penalties assessed against the Indemnified Party by a tax authority which is
attributable to any tax assessed as a result of a reduction in the
Indemnified Cost Deduction effected by the Final Determination.
ARTICLE 9
GENERAL PROVISIONS
9.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES, AND COVENANTS. Regardless
of any investigation at any time made by or on behalf of any party hereto or
of any information any party may have in respect thereof, each of the
representations and warranties made in this Agreement or any other
Transaction Document shall survive the Closing. The representations and
warranties set forth in this Agreement shall terminate on June 30, 1999,
except that this limitation shall not apply to (i) claims for amounts not set
forth on SCHEDULE 2.4, which shall survive indefinitely; (ii) claims for
breaches of the representations and warranties contained in Section 3.1(b)
(relating to capital structure) and Section 3.4(a) (relating to ownership of
the Shares), which representations and warranties shall survive indefinitely;
(iii) claims for breaches of representations and warranties contained in
Section 3.1(o) (relating to taxes), which representations and warranties
shall survive until the expiration of the applicable statute of limitations;
or (iv) claims for breaches of the representations and warranties contained
in Section 3.1(n) (relating to environmental matters), which representations
and warranties shall survive until the fifth anniversary of the Effective
Date. Following the date of termination of a representation or warranty, no
claim can be brought with respect to a breach of such representation or
warranty, but no such termination shall affect any claim for a breach of a
representation or warranty that was asserted in writing pursuant to Section
8.3 or Section 8.4 hereof before the date of termination. To the extent that
such are performable after the Closing and unless otherwise explicitly set
forth in this Agreement, each of the covenants and agreements contained in
this Agreement and each other Transaction Document shall survive the Closing
indefinitely.
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9.2 NO WAIVER RELATING TO CLAIMS FOR FRAUD. The liability of any party
under Article 8 shall be in addition to, and not exclusive of, any other
liability that such party may have at law or equity based on such party's
fraudulent acts or omissions. None of the provisions set forth in this
Agreement, including but not limited to the provisions set forth in Sections
8.6, shall be deemed a waiver by any party to this Agreement of any right or
remedy which such party may have at law or equity based on any other party's
fraudulent acts or omissions, nor shall any such provisions limit, or be
deemed to limit, (a) the amounts of recovery sought or awarded in any such
claim for fraud or (b) the time period during which a claim for fraud may be
brought; provided, that with respect to such rights and remedies at law or
equity, the parties further acknowledge and agree that none of the provisions
of this Section 9.2, nor any reference to this Section 9.2 throughout this
Agreement, shall be deemed a waiver of any defenses which may be available in
respect of actions or claims for fraud, including but not limited to,
defenses of statutes of limitations or limitations of damages.
Notwithstanding the foregoing, except with respect to fraudulent acts or
omissions committed by or with the Knowledge of either of the Former
Stockholders or Robert Ruth, any claim by Buyer for fraudulent acts or
omissions must be made on or before June 30, 1999, and the liability of the
Former Stockholders shall be limited in accordance with the first sentence of
Section 8.6(e).
9.3 AMENDMENT AND MODIFICATION. This Agreement may not be amended
except by an instrument in writing signed by each of the Buyer, the Company,
Seller and the Former Stockholders.
9.4 WAIVER OF COMPLIANCE. Any failure of Buyer on the one hand, or the
Company, Seller or a Former Stockholder, on the other hand, to comply with
any obligation, covenant, agreement, or condition contained herein may be
waived only if set forth in an instrument in writing signed by the party or
parties to be bound by such waiver, but such waiver or failure to insist upon
strict compliance with such obligation, covenant, agreement, or condition
shall not operate as a waiver of, or estoppel with respect to, any other
failure.
9.5 SPECIFIC PERFORMANCE. The parties recognize that in the event
Buyer, the Company, Seller or a Former Stockholder should refuse to perform
under the provisions of this Agreement, monetary damages alone will not be
adequate. Each party hereto shall therefore be entitled, in addition to any
other remedies which may be available, including money damages, to obtain
specific performance of the terms of this Agreement. In the event of any
action to enforce this Agreement specifically, each party hereby waives the
defense that there is an adequate remedy at law.
9.6 SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal, or incapable of being enforced by any rule of applicable
law, or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated herein are not affected in
any manner materially adverse to any party. Upon such determination that any
term or other provision is invalid, illegal, or incapable of being enforced,
the parties hereto shall negotiate in good faith to modify this Agreement so
as to effect the original intent of the parties as closely as
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possible in a mutually acceptable manner in order that the transactions
contemplated herein are consummated as originally contemplated to the fullest
extent possible.
9.7 EXPENSES AND OBLIGATIONS. Except as otherwise expressly provided
in this Agreement or as provided by law, if the Closing does not occur, all
costs and expenses incurred by the parties hereto in connection with the
consummation of the transactions contemplated hereby shall be borne solely
and entirely by the party which has incurred such expenses. If the Closing
does occur, then, except as so provided in this Agreement, all costs and
expenses incurred by the Company, Seller, the Former Stockholders and Buyer
in connection with such consummation shall be borne solely and entirely by
the Company, Seller, the Former Stockholders and Buyer, respectively.
Notwithstanding the foregoing, (a) the fees payable to the Escrow Agent shall
be borne as provided in the Escrow Agreements, (b) the Company Transaction
Costs (including the brokerage fee payable to J.P. Morgan Securities Inc.)
shall be paid by the Seller and the Former Stockholders as described in
Section 2.4 and (c) all sales, documentary or stamp taxes arising out of the
transactions contemplated by this Agreement shall be paid one-half by Buyer
and one-half by the Seller and the Former Stockholders; provided, however,
that, in the event of a dispute between the parties in connection with this
Agreement and the transactions contemplated hereby, each of the parties
hereto hereby agrees that the prevailing party shall be entitled to
reimbursement by the other party of reasonable legal fees and expenses
incurred in connection with any action or proceeding.
9.8 PARTIES IN INTEREST. This Agreement shall be binding upon and,
except as provided below, inure solely to the benefit of each party hereto
and their successors and assigns, and nothing in this Agreement, except as
set forth below, express or implied, is intended to confer upon any other
person (other than the Indemnified Parties as provided in Article 8) any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
9.9 NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed given if delivered personally or mailed by
registered or certified mail (return receipt requested) to the parties at the
following addresses (or at such other address for a party as shall be
specified by like notice):
(a) If to Buyer, to:
Trammell Crow Company
2001 Ross Avenue, Suite 3400
Dallas, TX 75201
Attention: General Counsel
Facsimile: (214) 863-3125
Telephone: (214) 863-3000
with copies to:
Trammell Crow Company
5801 S. Eastern Avenue
Los Angeles, CA
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Attention: Area President
Facsimile: (213) 726-7705
Telephone: (213) 955-6611
Vinson & Elkins LLP
2001 Ross Avenue, Suite 3700
Dallas, TX 75201
Attention: J. Christopher Kirk
Facsimile: (214) 220-7716
Telephone: (214) 220-7700
(b) If to the Company, to:
Tooley & Company, Inc.
11150 Santa Monica Blvd., #200
Los Angeles, CA 90025
Attention: William L. Tooley
Facsimile: (310) 473-4936
Telephone: (310) 473-9505
with copies to:
Allen, Matkins, Leck, Gamble & Mallory LLP
515 South Figueroa Street, 7th Floor
Los Angeles, CA 90071
Attention: Brian Leck
Facsimile: (213) 620-8816
Telephone: (213) 955-5532
(c) If to the Former Stockholders, to:
William L. Tooley
16878 West Sunset Blvd.
Pacific Palisades, CA 90272
Facsimile: (310) 230-1697
Telephone: (310) 230-0770
with copies to:
Allen, Matkins, Leck, Gamble & Mallory LLP
515 South Figueroa Street, 7th Floor
Los Angeles, CA 90071
Attention: Brian Leck
Facsimile: (213) 620-8816
Telephone: (213) 955-5532
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Craig Ruth
5 Outrider Road
Rolling Hills, CA 90274
Facsimile: (310) 541-7205
Telephone: (310) 541-4144
with copies to:
Allen, Matkins, Leck, Gamble & Mallory LLP
515 South Figueroa Street, 7th Floor
Los Angeles, CA 90071
Attention: Brian Leck
Facsimile: (213) 620-8816
Telephone: (213) 955-5532
(d) If to Seller, to:
BCB Holdings, LLC
c/o Tooley & Co., Inc.
11150 Santa Monica Blvd., #200
Los Angeles, CA 90025
Attention: William L. Tooley
Facsimile: (310) 473-4936
Telephone: (310) 473-9505
with copies to:
Allen, Matkins, Leck, Gamble & Mallory LLP
515 South Figueroa Street, 7th Floor
Los Angeles, CA 90071
Attention: Brian Leck
Facsimile: (213) 620-8816
Telephone: (213) 955-5532
Any of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of
delivery, if hand delivered, on the date of receipt, if telecopied, three
Business Days after the date of mailing, if mailed by registered or certified
mail, return receipt requested, and one Business Day after the date of
sending, if sent by Federal Express or other recognized overnight courier.
9.10 COUNTERPARTS. This Agreement may be executed and delivered
(including by facsimile transmission) 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
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each of the parties and delivered to the other parties, it being understood
that all parties need not sign the same counterpart.
9.11 ENTIRE AGREEMENT. This Agreement (which term shall be deemed to
include the Exhibits and Schedules and the other certificates, documents and
instruments delivered hereunder) constitutes the entire agreement of the
parties hereto and supersedes all prior agreements, letters of intent and
understandings, both written and oral, among the parties with respect to the
subject matter hereof. There are no representations or warranties,
agreements, or covenants other than those expressly set forth in this
Agreement.
9.12 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT
TO ANY CONFLICTS OF LAW PROVISIONS.
9.13 PUBLIC ANNOUNCEMENTS. The Company, Seller and the Former
Stockholders, on the one hand, and Buyer, on the other, shall not issue any
press release or otherwise making any public statements with respect to this
Agreement or the transactions contemplated hereby without the prior written
consent of the other, except for statements required by law or by any listing
agreements with any national securities exchange or the National Association
of Securities Dealers, Inc., or made in disclosures filed pursuant to the
Securities Act of 1933 or the Securities Exchange Act of 1934, in which case
such party shall use its best efforts to give the other parties at least two
days prior written notice and, if circumstances permit, give the other party
the opportunity to comment thereon.
9.14 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests, or obligations hereunder shall be assigned by any of the parties
hereto, whether by operation of law or otherwise; provided, however, that
upon notice to Seller and the Former Stockholders and without releasing Buyer
from any of its obligations or liabilities hereunder, (a) Buyer may assign or
delegate any or all of its rights or obligations under this Agreement to any
Affiliate thereof and (b) nothing in this Agreement shall limit Buyer's
ability to make a collateral assignment of its rights under this Agreement to
any institutional lender that provides funds to Buyer or Buyer's designee
without the consent of Seller, the Former Stockholders or the Company. The
Company, Seller and the Former Stockholders shall execute an acknowledgment
of such collateral assignments in such forms as Buyer's lenders may from time
to time reasonably request; provided, however, that unless written notice is
given to the Company, Seller and the Former Stockholders that any such
collateral assignment has been foreclosed upon, the Company, Seller and the
Former Stockholders shall be entitled to deal exclusively with Buyer as to
any matters arising under this Agreement or any of the other agreements
delivered pursuant hereto. In the event of such an assignment, the
provisions of this Agreement shall inure to the benefit of and be binding on
Buyer's assigns. Any attempted assignment in violation of this Section 9.14
shall be null and void.
9.15 HEADINGS. The headings of this Agreement are for convenience of
reference only and are not part of the substance of this Agreement.
[Remainder of page intentionally left blank]
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[SIGNATURE PAGE TO THE STOCK PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the Company, the Former Stockholders, Seller and Buyer
have caused this Agreement to be signed, all as of the date first written above.
THE COMPANY:
TOOLEY & COMPANY, INC.
By: /s/ Craig Ruth
------------------------------------
Name: Craig Ruth
----------------------------------
Title: President
---------------------------------
FORMER STOCKHOLDERS:
/s/ William L. Tooley
----------------------------------------
William L. Tooley
/s/ Craig Ruth
----------------------------------------
Craig Ruth
BUYER:
TRAMMELL CROW COMPANY
By: /s/ Asuka Nakaraha
------------------------------------
Name: Asuka Nakaraha
----------------------------------
Title: Executive Vice President
---------------------------------
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[SIGNATURE PAGE TO THE STOCK PURCHASE AGREEMENT]
SELLER:
BCB HOLDINGS, LLC
By: /s/ William L. Tooley
------------------------------------
Name: William L. Tooley
----------------------------------
Title: Member
---------------------------------
S-2
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Asuka Nakahara and William P. Leiser the true and lawful
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, to sign on his behalf, as a director or
officer, or both, as the case may be, of Trammell Crow Company, a Delaware
corporation (the "Corporation"), the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1997, and to sign any or all amendments to
such Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney or attorneys-in-fact, each of them
with or without the others, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney or
attorneys-in-fact or any of them or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
/s/ J. MCDONALD WILLIAMS
----------------------------------
J. McDonald Williams
Dated: March 31, 1998
<PAGE>
EXHIBIT 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Asuka Nakahara and William P. Leiser the true and lawful
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, to sign on his behalf, as a director or
officer, or both, as the case may be, of Trammell Crow Company, a Delaware
corporation (the "Corporation"), the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1997, and to sign any or all amendments to
such Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney or attorneys-in-fact, each of them
with or without the others, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney or
attorneys-in-fact or any of them or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
/s/ WILLIAM F. CONCANNON
----------------------------------
William F. Concannon
Dated: March 31, 1998
<PAGE>
EXHIBIT 24.3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Asuka Nakahara and William P. Leiser the true and lawful
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, to sign on his behalf, as a director or
officer, or both, as the case may be, of Trammell Crow Company, a Delaware
corporation (the "Corporation"), the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1997, and to sign any or all amendments to
such Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney or attorneys-in-fact, each of them
with or without the others, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney or
attorneys-in-fact or any of them or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
/s/ JAMES D. CARREKER
----------------------------------
James D. Carreker
Dated: March 31, 1998
<PAGE>
EXHIBIT 24.4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Asuka Nakahara and William P. Leiser the true and lawful
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, to sign on his behalf, as a director or
officer, or both, as the case may be, of Trammell Crow Company, a Delaware
corporation (the "Corporation"), the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1997, and to sign any or all amendments to
such Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney or attorneys-in-fact, each of them
with or without the others, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney or
attorneys-in-fact or any of them or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
/s/ JAMES R. ERWIN
----------------------------------
James R. Erwin
Dated: March 31, 1998
<PAGE>
EXHIBIT 24.5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Asuka Nakahara and William P. Leiser the true and lawful
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, to sign on his behalf, as a director or
officer, or both, as the case may be, of Trammell Crow Company, a Delaware
corporation (the "Corporation"), the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1997, and to sign any or all amendments to
such Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney or attorneys-in-fact, each of them
with or without the others, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney or
attorneys-in-fact or any of them or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
/s/ JEFFREY M. HELLER
----------------------------------
Jeffrey M. Heller
Dated: March 31, 1998
<PAGE>
EXHIBIT 24.6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Asuka Nakahara and William P. Leiser the true and lawful
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, to sign on his behalf, as a director or
officer, or both, as the case may be, of Trammell Crow Company, a Delaware
corporation (the "Corporation"), the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1997, and to sign any or all amendments to
such Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney or attorneys-in-fact, each of them
with or without the others, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney or
attorneys-in-fact or any of them or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
/s/ ROWLAND T. MORIARITY
----------------------------------
Rowland T. Moriarity
Dated: March 31, 1998
<PAGE>
EXHIBIT 24.7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Asuka Nakahara and William P. Leiser the true and lawful
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, to sign on his behalf, as a director or
officer, or both, as the case may be, of Trammell Crow Company, a Delaware
corporation (the "Corporation"), the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1997, and to sign any or all amendments to
such Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney or attorneys-in-fact, each of them
with or without the others, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney or
attorneys-in-fact or any of them or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
/s/ ROBERT E. SULENTIC
----------------------------------
Robert E. Sulentic
Dated: March 31, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF TRAMMELL CROW COMPANY FOR THE YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 96,747
<SECURITIES> 0
<RECEIVABLES> 45,564
<ALLOWANCES> (955)
<INVENTORY> 0
<CURRENT-ASSETS> 258,878<F1>
<PP&E> 19,875
<DEPRECIATION> (13,566)
<TOTAL-ASSETS> 326,236
<CURRENT-LIABILITIES> 158,942<F2>
<BONDS> 0
0
0
<COMMON> 339
<OTHER-SE> 136,733
<TOTAL-LIABILITY-AND-EQUITY> 326,236
<SALES> 0
<TOTAL-REVENUES> 313,639
<CGS> 0
<TOTAL-COSTS> 325,511
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,515
<INCOME-PRETAX> (17,387)
<INCOME-TAX> (3,367)
<INCOME-CONTINUING> (14,020)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,020)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
<FN>
<F1>INCLUDES REAL ESTATE HELD FOR SALE OF $98,567
<F2>INCLUDES NOTES PAYABLE ON REAL ESTATE HELD FOR SALE OF $76,623
</FN>
</TABLE>
