<PAGE> 1
REGISTRATION NO. 001-12211
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10/A-2
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------------
ECHELON INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
FLORIDA 59-2554218
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
ONE PROGRESS PLAZA 33701
SUITE 2400 (ZIP CODE)
ST. PETERSBURG, FLORIDA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(813) 824-6767
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
- --------------------------------------- -------------------------------
<S> <C>
Common Stock, par value $.01 per share New York Stock Exchange
Series A Junior Participating Preferred New York Stock Exchange
Stock Purchase Rights
</TABLE>
------------------------
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
ITEM 1. BUSINESS.
The information required by this item is contained under the sections
"Business," "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in the Echelon Financial
Statements of the Information Statement dated November , 1996 included herewith
as Exhibit 2.1 (the "Information Statement") and such sections and financial
statements are incorporated herein by reference.
ITEM 2. FINANCIAL INFORMATION.
The information required by this item is contained under the sections
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of the Information Statement and such
sections are incorporated herein by reference.
ITEM 3. PROPERTIES.
The information required by this item is contained under the sections
"Business -- The Real Estate Business -- Commercial Real Estate Ownership and
Management" and "Business -- The Real Estate Business -- Other Owned Real
Estate; Multi-Family Residential and Commercial Real Estate Development" of the
Information Statement and such sections are incorporated herein by reference.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is contained under the sections
"Management and Executive Compensation -- Management Ownership of Securities"
and "Management and Executive Compensation -- Security Ownership of Certain
Beneficial Owners" of the Information Statement and such sections are
incorporated herein by reference.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The information required by this item is contained under the sections
"Management and Executive Compensation -- Board of Directors" and "Management
and Executive Compensation -- Executive Officers" of the Information Statement
and such sections are incorporated herein by reference.
ITEM 6. EXECUTIVE COMPENSATION.
The information required by this item is contained under the section
"Management and Executive Compensation" of the Information Statement and such
section is incorporated herein by reference.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is contained under the sections
"Relationship Between Florida Progress and Echelon After the Distribution" and
"Management and Executive Compensation -- Certain Relationships and Related
Transactions" of the Information Statement and such sections are incorporated
herein by reference.
ITEM 8. LEGAL PROCEEDINGS.
The information required by this item is contained under the section
"Business -- Legal Proceedings" of the Information Statement and such section is
incorporated herein by reference.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED
STOCKHOLDER MATTERS.
The information required by this item is contained under the sections "The
Distribution -- Listing and Trading of Echelon Common Stock," "Dividend Policy",
"Management and Executive Compensation --
<PAGE> 3
Management Ownership of Securities" and "Description of Capital Stock" of the
Information Statement and such sections are incorporated herein by reference.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The information required by this item is contained under the section
"Description of Capital Stock" of the Information Statement and such section is
incorporated herein by reference.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The information required by this item is contained under the section
"Description of Capital Stock -- Provisions of Echelon Articles of Incorporation
and By-laws Affecting Changes in Control -- Indemnification and Limitation of
Liability for Directors and Officers" of the Information Statement and such
section is incorporated herein by reference.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is identified in the "Index to
Financial Statements" and is contained in (i) the Echelon Financial Statements
in the Information Statement and such index and financial statements are
incorporated herein by reference, and (ii) Schedule II -- "Valuation and
Qualifying Accounts", Schedule III -- "Real Estate and Accumulated
Depreciation", and Schedule IV -- "Mortgage Loans and Real Estate" to this
Registration Statement.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL MATTERS.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
The information required by this items in contained in (i) the "Index to
Financial Statements" on page F-1 of the Information Statement to this
Registration Statement and such index is incorporated herein by reference, and
(ii) Schedule II -- "Valuation and Qualifying Accounts", Schedule III -- "Real
Estate and Accumulated Depreciation", and Schedule IV -- "Mortgage Loans and
Real Estate" to this Registration Statement.
<PAGE> 4
(b) Exhibits
The following documents are filed as exhibits hereto:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
2.1 Information Statement dated as of November , 1996
3.1 Form of Amended and Restated Articles of Incorporation of Echelon International
Corporation*
3.2 Form of Amended and Restated By-laws of Echelon International Corporation*
4.1 Specimen Common Share certificate*
4.2 Form of Rights Agreement between Echelon International Corporation and The First
National Bank of Boston, as Rights Agent*
4.3 Form of Articles of Amendment of Articles of Incorporation Providing for Series A
Junior Participating Preferred Stock of Echelon International Corporation (attached
as Exhibit A to the Rights Agreement filed as Exhibit 4.2 hereto)*
4.4 Form of Right Certificate (attached as Exhibit B to the Rights Agreement filed as
Exhibit 4.2 hereto)*
4.5 Loan Agreement dated as of November 5, 1996 by and among Echelon International
Corporation as Borrower, Salomon Brothers Realty Corp. as Lender and LaSalle
National Bank as Collateral Agent*
4.6 Promissory Note in the amount of $105,000,000 dated November 5, 1996 by Echelon
International Corporation as Maker to Salomon Brothers Realty Corp. as Holder*
4.7 Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing
dated November 5, 1996 by Echelon International Corporation as Mortgagor to Salomon
Brothers Realty Corp. as Mortgagee*
4.8 Pledge and Security Agreement by Echelon International Corporation as Obligor in
favor of Salomon Brothers Realty Corp. as Secured Party*
4.9 Assignment of Contracts, Licenses, Permits, Agreements, Warranties and Approvals
dated as of November 5, 1996 by Echelon International Corporation as Borrower to
Salomon Brothers Realty Corp. as Lender*
4.10 Assignment of Rents and Leases executed as of November 5, 1996 by Echelon
International Corporation as Borrower to Salomon Brothers Realty Corp. as Lender*
4.11 Assignment of Participation Interest dated as of November 5, 1996 by Echelon
International Corporation as Borrower to Salomon Brothers Realty Corp. as Lender*
4.12 Collateral Assignment of Mortgage and Other Documents effective November 5, 1996 by
Echelon International Corporation as Assignor to Salomon Brothers Realty Corp. as
Lender (Assignee)*
10.1 Form of Distribution Agreement between Florida Progress Corporation and Echelon
International Corporation
10.2 Form of Tax Sharing Agreement between Florida Progress Corporation and Echelon
International Corporation*
10.3 Form of Employee Benefits Allocation Agreement between Florida Progress Corporation
and Echelon International Corporation*
10.4 Form of Transition Services Agreement between Florida Progress Corporation and
Echelon International Corporation*
10.5 Form of Note issued by Echelon International Corporation to Progress Capital
Holdings, Inc.
10.6 Consulting Agreement by and between Talquin Development Company and Mission
Development Company dated as of July 30, 1996*
10.7 Echelon International Corporation 1996 Employee Stock Purchase Plan*
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
10.8 Echelon International Corporation Long Term Incentive Plan*
10.9 Echelon International Corporation Non-Employee Directors' Stock Plan*
10.10 Echelon International Corporation 1996 Stock Option Plan*
10.11 Form of Employment Agreement to be entered into by and between Echelon International
Corporation and Darryl A. LeClair*
10.12 Form of Employment Agreement to be entered into by and between Echelon International
Corporation and Larry J. Newsome*
10.13 Form of Employment Agreement to be entered into by and between Echelon International
Corporation and Thomas D. Wilson*
10.14 Form of Employment Agreement to be entered into by and between Echelon International
Corporation and Raymond F. Higgins*
10.15 Form of Employment Agreement to be entered into by and between Echelon International
Corporation and James R. Hobbs*
10.16 Form of Indemnification Agreement to be entered into by and between Echelon
International Corporation and each of its directors*
27 Financial Data Schedule of Echelon International Corporation
99.1 Chairman's letter to Stockholders of Florida Progress Corporation*
</TABLE>
- ---------------
* Previously filed
<PAGE> 6
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
ECHELON INTERNATIONAL CORPORATION
By: /s/ DARRYL A. LECLAIR
--------------------------------------
NAME: DARRYL A. LECLAIR
TITLE: PRESIDENT
Date: November 18, 1996
<PAGE> 7
INDEPENDENT AUDITORS' REPORT
The Stockholder of
Echelon International Corporation:
Under date of October 24, 1996, except as to the last three paragraphs of Note
5, which are as of November 5, 1996, we reported on the consolidated balance
sheets of Echelon International Corporation and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of operations and deficit
and cash flows for each of the years in the three-year period ended December 31,
1995, which are included in the Form 10 included in the Information Statement.
In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedules in the Form 10. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
St. Petersburg, Florida
October 24, 1996
S-1
<PAGE> 8
ECHELON INTERNATIONAL CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND FROM END OF
OF PERIOD EXPENSES RESERVES OTHER(A) PERIOD
---------- ---------- ---------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Allowance for losses on loans and
leases................................. $ 33.7 $5.0 $ (6.7) $0.0 $ 32.0
Allowance for losses on real estate....... 16.8 1.2(b) (18.0)(c) 0.0 0.0
Allowance for doubtful accounts........... 0.9 0.1 0.0 0.0 1.0
YEAR ENDED DECEMBER 31, 1994:
Allowance for losses on loans and
leases................................. $ 24.5 $9.9 $ (0.7) $0.0 $ 33.7
Allowance for losses on real estate....... 16.1 0.7 0.0 0.0 16.8
Allowance for doubtful accounts........... 0.6 0.3 0.0 0.0 0.9
YEAR ENDED DECEMBER 31, 1993:
Allowance for losses on loans and
leases................................. $ 22.9 $5.9 $ (4.3) $0.0 $ 24.5
Allowance for losses on real estate....... 14.8 0.6 0.0 0.7 16.1
Allowance for doubtful accounts........... 0.6 0.0 0.0 0.0 0.6
</TABLE>
- ---------------
(a) Represents a balance sheet transfer from investment in unconsolidated
affiliates.
(b) Reconciliation of 1995 provision for losses charged to operations:
<TABLE>
<S> <C>
Amount credited to allowance account.............. $1.2
Amount charged directly to asset account.......... 0.8
----
Total provision charged to operations... $2.0
====
</TABLE>
(c) Reserve was eliminated through the writedown of assets due to impairment.
S-2
<PAGE> 9
ECHELON INTERNATIONAL CORPORATION
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
GROSS CARRYING VALUE
INITIAL COST COSTS AT DECEMBER 31, 1995
-------------------- CAPITALIZED IMPAIRMENT --------------------
BUILDINGS & SUBSEQUENT TO WRITEDOWN BUILDINGS &
REAL ESTATE PROPERTY LAND IMPROVEMENTS ACQUISITION (A) LAND IMPROVEMENTS
- ------------------------------------------------------- ----- ------------ ------------- ---------- ----- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
FOR SALE AND UNDER DEVELOPMENT
St. Petersburg, Florida:
9th Street Property.................................. $ 5.4 $0.0 $ 0.0 $ 0.0 $ 5.4 $ 0.0
4th Street Property.................................. 2.5 0.0 1.0 (1.9) 1.6 0.0
Carillon............................................. 23.7 0.0 17.4 0.0 41.1 0.0
Lakeland, Florida:
Riverside Ranch...................................... 1.2 0.6 0.1 0.0 1.2 0.7
Gainesville, Florida:
Progress Center Land................................. 0.6 0.0 2.9 (2.5) 1.0 0.0
Miscellaneous.......................................... 1.0 0.0 0.8 (0.9) 0.9 0.0
----- ---- ------ ------ ----- ------
Sub-total.............................................. 34.4 0.6 22.2 (5.3) 51.2 0.7
----- ---- ------ ------ ----- ------
INCOME PRODUCING
OFFICE AND INDUSTRIAL BUILDINGS
St. Petersburg, Florida:
Barnett Tower........................................ 3.6 0.0 53.5 0.0 3.6 53.5
McNulty Station...................................... 1.5 0.5 9.9 (0.3) 2.0 9.6
Bayboro Properties................................... 2.8 0.9 0.8 (0.3) 2.6 1.6
3rd & 3rd............................................ 0.3 0.0 2.3 0.0 0.8 1.8
100 Carillon......................................... 1.5 0.0 6.3 0.0 1.5 6.3
Tampa, Florida:
7th Avenue........................................... 1.4 0.0 4.1 (0.9) 1.4 3.2
5th Avenue........................................... 0.1 0.0 0.1 0.0 0.1 0.1
Progress Packaging................................... 0.4 1.2 0.0 0.0 0.4 1.2
Tallahassee, Florida:
Highpoint Center..................................... 0.8 0.0 13.3 0.0 0.8 13.3
Gainesville, Florida:
Progress Center...................................... 0.3 0.0 11.2 (1.2) 0.3 10.0
Miscellaneous.......................................... 0.0 0.3 1.5 (0.9) 0.0 0.9
----- ---- ------ ------ ----- ------
Sub-total.............................................. 12.7 2.9 103.0 (3.6) 13.5 101.5
----- ---- ------ ------ ----- ------
DOCKAGE AND MARINE SERVICES
St. Petersburg, Florida:
Harborage of Bayboro................................. 1.7 4.4 9.7 (9.1) 1.7 5.0
----- ---- ------ ------ ----- ------
GRAND TOTAL............................................ $48.8 $7.9 $ 134.9 $(18.0) $66.4 $107.2
===== ==== ====== ====== ===== ======
<CAPTION>
GROSS
CARRYING
VALUE
AT
DECEMBER
31, 1995
-------- ACCUMULATED CONSTRUCTION YEAR
REAL ESTATE PROPERTY TOTAL DEPRECIATION YEAR ACQUIRED
- ------------------------------------------------------- ------ ----------- ------------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
FOR SALE AND UNDER DEVELOPMENT
St. Petersburg, Florida:
9th Street Property.................................. $ 5.4 $ 0.0 n/a 1991
4th Street Property.................................. 1.6 0.0 n/a 1993
Carillon............................................. 41.1 0.0 n/a 1990
Lakeland, Florida:
Riverside Ranch...................................... 1.9 (0.7) 1984 1984
Gainesville, Florida:
Progress Center Land................................. 1.0 0.0 n/a 1984
Miscellaneous.......................................... 0.9 0.0 n/a n/a
------ ------
Sub-total.............................................. 51.9 (0.7)
------ ------
INCOME PRODUCING
OFFICE AND INDUSTRIAL BUILDINGS
St. Petersburg, Florida:
Barnett Tower........................................ 57.1 (7.1) 1990 1986
McNulty Station...................................... 11.6 (3.0) 1984 - 1988 1983 - 1985
Bayboro Properties................................... 4.2 (1.7) n/a 1984 - 1985
3rd & 3rd............................................ 2.6 (0.6) 1984 1993
100 Carillon......................................... 7.8 (1.2) 1987 1994
Tampa, Florida:
7th Avenue........................................... 4.6 (1.0) 1986 1986
5th Avenue........................................... 0.2 0.0 1979 1985
Progress Packaging................................... 1.6 (0.3) 1993 1993
Tallahassee, Florida:
Highpoint Center..................................... 14.1 (3.1) 1990 1995
Gainesville, Florida:
Progress Center...................................... 10.3 (3.0) 1984 - 1988 1984
Miscellaneous.......................................... 0.9 (0.5) n/a n/a
------ ------
Sub-total.............................................. 115.0 (21.5)
------ ------
DOCKAGE AND MARINE SERVICES
St. Petersburg, Florida:
Harborage of Bayboro................................. 6.7 (4.0) 1984 - 1988 1984
------ ------
GRAND TOTAL............................................ $173.6 $ (26.2)
====== ======
</TABLE>
- ---------------
(A) See "Notes to Schedule III -- Real Estate and Accumulated Depreciation."
S-3
<PAGE> 10
ECHELON INTERNATIONAL CORPORATION
NOTES TO SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1995
(A) Impairment writedown is based on management's estimate of fair market
value of assets determined to be impaired at December 31, 1995.
(B) The aggregate cost for Federal income tax purposes is $144.1 million.
(C) Reconciliation:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
REAL ESTATE
Balance at beginning of period........................... $158.3 $156.3 $171.8
Acquisitions and improvements.......................... 17.0 7.8 3.7
Cost of real estate sold............................... (1.7) (5.8) (19.2)
------ ------ ------
Balance at end of period................................. $173.6 $158.3 $156.3
====== ====== ======
ACCUMULATED DEPRECIATION
Balance at beginning of period........................... $ 19.4 $ 15.2 $ 12.6
------ ------ ------
Additions:
Depreciation........................................ 4.8 3.6 4.1
Other............................................... 3.1 1.7 1.7
------ ------ ------
7.9 5.3 5.8
Deductions:
Accumulated depreciation of real estate sold........ (1.1) (1.1) (3.2)
------ ------ ------
Balance at end of period................................. $ 26.2 $ 19.4 $ 15.2
====== ====== ======
</TABLE>
S-4
<PAGE> 11
ECHELON INTERNATIONAL CORPORATION
SCHEDULE IV -- MORTGAGE LOANS ON REAL ESTATE
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
FINAL FACE CARRYING
MATURITY PRIOR AMOUNT OF AMOUNT OF
DESCRIPTION INTEREST RATE DATE PERIODIC PAYMENT TERMS LIENS MORTGAGES MORTGAGES
- --------------------------- ------------- ---------- ----------------------------------- ----- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
First Mortgage Loans --
Office Buildings:
Madison Building......... Prime + .75% Nov. 1998 Varying amounts with $3.1 balloon $0.0 $ 3.6 $ 3.4
Continuum Building....... Prime + 1.5% Dec. 1998 Varying amounts with $8.2 balloon 0.0 11.0 9.2
Plaza Del Rio............ Prime + 1.5% Feb. 1997 Level amount with $5.3 balloon 0.0 5.5 5.3
Vine Street -- Olympia... Prime + .75% July 2001 $5.3 balloon 0.0 5.3 5.3
Vine Street -- Capital
View I................. Prime + .75% Oct. 1998 $5.8 balloon 0.0 5.8 5.8
Vine Street -- Capital
View II................ Prime + .75% Dec. 1999 $5.0 balloon 0.0 5.0 5.0
Vine Street -- Town
Square VI.............. Prime + .75% May 2001 $4.5 balloon 0.0 4.5 4.5
Vine Street -- Tacoma.... Prime + .75% Aug. 1996 $12.3 balloon(D) 0.0 12.3 12.3
---- ------ ------
0.0 53.0 50.8
---- ------ ------
First Mortgage Loans -- Industrial
Marquardt................ Prime + 2% Dec. 1998 $23.5 balloon 0.0 35.0 23.5
MacDill.................. Prime + 2% April 1997 Level amount with $0.4 balloon 0.0 0.5 0.4
First Mortgage Loans -- Life Care
South Port............... 11% April 2000 Varying amounts with $16.7 balloon 0.0 25.0 23.5
South Port
Supplemental........... 11% April 2000 Varying amounts with $2.1 balloon 0.0 2.5 2.4
Lake Port................ 11% April 2000 Varying amounts with $9.2 balloon 0.0 11.0 10.3
---- ------ ------
0.0 38.5 36.2
---- ------ ------
$0.0 $ 127.0 $ 110.8
====== ====== ======
</TABLE>
(A) At December 31, 1995 there were no loans subject to delinquent principal or
interest.
(B) Reconciliation of the carrying amount of mortgage loans to total carrying
amount of mortgages:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Beginning balance............................................ $122.5 $152.3 $143.6
New mortgage loans........................................... 0.0 0.0 38.2
Collections of principal..................................... (11.6) (29.8) (29.5)
------ ------ ------
Ending balance............................................... $110.9 $122.5 $152.3
====== ====== ======
</TABLE>
Total amount of mortgages extended as of December 31, 1995 is $28.8
million.
(C) The aggregate cost for federal income tax purposes is $110.5 million.
(D) Paid off in August 1996.
S-5
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
2.1 Information Statement dated as of November , 1996
3.1 Form of Amended and Restated Articles of Incorporation of Echelon International
Corporation*
3.2 Form of Amended and Restated By-laws of Echelon International Corporation*
4.1 Specimen Common Share certificate*
4.2 Form of Rights Agreement between Echelon International Corporation and The First
National Bank of Boston, as Rights Agent*
4.3 Form of Articles of Amendment of Articles of Incorporation Providing for Series A
Junior Participating Preferred Stock of Echelon International Corporation (attached
as Exhibit A to the Rights Agreement filed as Exhibit 4.2 hereto)*
4.4 Form of Right Certificate (attached as Exhibit B to the Rights Agreement filed as
Exhibit 4.2 hereto)*
4.5 Loan Agreement dated as of November 5, 1996 by and among Echelon International
Corporation as Borrower, Salomon Brothers Realty Corp. as Lender and LaSalle
National Bank as Collateral Agent*
4.6 Promissory Note in the amount of $105,000,000 dated November 5, 1996 by Echelon
International Corporation as Maker to Salomon Brothers Realty Corp. as Holder*
4.7 Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing
dated November 5, 1996 by Echelon International Corporation as Mortgagor to Salomon
Brothers Realty Corp. as Mortgagee*
4.8 Pledge and Security Agreement by Echelon International Corporation as Obligor in
favor of Salomon Brothers Realty Corp. as Secured Party*
4.9 Assignment of Contracts, Licenses, Permits, Agreements, Warranties and Approvals
dated as of November 5, 1996 by Echelon International Corporation as Borrower to
Salomon Brothers Realty Corp. as Lender*
4.10 Assignment of Rents and Leases executed as of November 5, 1996 by Echelon
International Corporation as Borrower to Salomon Brothers Realty Corp. as Lender*
4.11 Assignment of Participation Interest dated as of November 5, 1996 by Echelon
International Corporation as Borrower to Salomon Brothers Realty Corp. as Lender*
4.12 Collateral Assignment of Mortgage and Other Documents effective November 5, 1996 by
Echelon International Corporation as Assignor to Salomon Brothers Realty Corp. as
Lender (Assignee)*
10.1 Form of Distribution Agreement between Florida Progress Corporation and Echelon
International Corporation
10.2 Form of Tax Sharing Agreement between Florida Progress Corporation and Echelon
International Corporation*
10.3 Form of Employee Benefits Allocation Agreement between Florida Progress Corporation
and Echelon International Corporation*
10.4 Form of Transition Services Agreement between Florida Progress Corporation and
Echelon International Corporation*
10.5 Form of Note issued by Echelon International Corporation to Progress Capital
Holdings, Inc.
10.6 Consulting Agreement by and between Talquin Development Company and Mission
Development Company dated as of July 30, 1996*
10.7 Echelon International Corporation 1996 Employee Stock Purchase Plan*
</TABLE>
<PAGE> 13
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
10.8 Echelon International Corporation Long Term Incentive Plan*
10.9 Echelon International Corporation Non-Employee Directors' Stock Plan*
10.10 Echelon International Corporation 1996 Stock Option Plan*
10.11 Form of Employment Agreement to be entered into by and between Echelon International
Corporation and Darryl A. LeClair*
10.12 Form of Employment Agreement to be entered into by and between Echelon International
Corporation and Larry J. Newsome*
10.13 Form of Employment Agreement to be entered into by and between Echelon International
Corporation and Thomas D. Wilson*
10.14 Form of Employment Agreement to be entered into by and between Echelon International
Corporation and Raymond F. Higgins*
10.15 Form of Employment Agreement to be entered into by and between Echelon International
Corporation and James R. Hobbs*
10.16 Form of Indemnification Agreement to be entered into by and between Echelon
International Corporation and each of its directors*
27 Financial Data Schedule of Echelon International Corporation
99.1 Chairman's letter to Stockholders of Florida Progress Corporation*
</TABLE>
- ---------------
* Previously filed
<PAGE> 1
Information contained herein is subject to completion or amendment. A
Registration Statement on Form 10 relating to these securities has been
filed with the Securities and Exchange Commission. This preliminary
Information Statement shall not constitute an offer to sell or the
solicitation of an offer to buy any securities.
SUBJECT TO COMPLETION OR AMENDMENT, DATED NOVEMBER 18, 1996
INFORMATION STATEMENT
---------------------
ECHELON INTERNATIONAL CORPORATION
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
---------------------
This Information Statement is being furnished in connection with the
distribution (the "Distribution") to holders of common stock, without par value
(the "Florida Progress Common Stock"), of Florida Progress Corporation ("Florida
Progress") of all outstanding shares of common stock, par value $.01 per share
(the "Echelon Common Stock"), of Echelon International Corporation ("Echelon").
Shares of Echelon Common Stock will be distributed to holders of Florida
Progress Common Stock of record as of the close of business on ,
1996 (the "Record Date"). Each such holder will receive one share of Echelon
Common Stock for every 15 shares of Florida Progress Common Stock held on the
Record Date. Share certificates representing shares of Echelon will be mailed on
, 1996 or as promptly as practicable thereafter. No consideration
will be paid by Florida Progress's stockholders for shares of Echelon Common
Stock. There is no current trading market for Echelon Common Stock, although a
"when-issued" market is expected to develop prior to the Distribution. The
Echelon Common Stock has been accepted for listing on the New York Stock
Exchange ("NYSE"), subject to notice of issuance, under the symbol "EIN." See
"The Distribution -- Listing and Trading of Echelon Common Stock."
---------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
RECIPIENTS OF ECHELON COMMON STOCK, SEE "RISK
FACTORS" BEGINNING ON PAGE
9.
NO STOCKHOLDER APPROVAL OF THE DISTRIBUTION IS REQUIRED OR SOUGHT.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO
SEND US A PROXY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT.
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
---------------------
Stockholders of Florida Progress with inquiries related to the Distribution
should contact The First National Bank of Boston, telephone (617) 575-3100, the
Distribution Agent for the Distribution.
The date of this Information Statement is November , 1996.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INFORMATION STATEMENT SUMMARY......................................................... 1
SUMMARY FINANCIAL DATA................................................................ 7
SUMMARY PRO FORMA DATA................................................................ 8
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS............................. 9
RISK FACTORS.......................................................................... 9
THE DISTRIBUTION...................................................................... 19
RELATIONSHIP BETWEEN FLORIDA PROGRESS AND ECHELON AFTER THE DISTRIBUTION.............. 23
DIVIDEND POLICY....................................................................... 26
CAPITALIZATION........................................................................ 27
SELECTED FINANCIAL DATA............................................................... 28
PRO FORMA FINANCIAL DATA.............................................................. 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 32
BUSINESS.............................................................................. 37
MANAGEMENT AND EXECUTIVE COMPENSATION................................................. 53
DESCRIPTION OF CAPITAL STOCK.......................................................... 61
AVAILABLE INFORMATION................................................................. 67
REPORTS OF ECHELON.................................................................... 67
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
</TABLE>
i
<PAGE> 3
INFORMATION STATEMENT SUMMARY
The following is a summary of certain information contained in this
Information Statement. This summary is included for convenience only and should
not be considered complete. This summary is qualified in its entirety by the
more detailed information and financial statements contained elsewhere in this
Information Statement. Certain capitalized terms used but not expressly defined
in this summary are defined elsewhere in this Information Statement. This
Information Statement contains forward-looking statements which involve risks
and uncertainties. The actual results of Echelon and the degree to which Echelon
is able to implement its business plan, maximize the value of its assets, grow
its business and achieve profitability may differ significantly from the
proposed implementation and contemplated actions discussed in the forward-
looking statements. In particular, Echelon may not be able to collect loan and
lease receivables, to maintain occupancy levels at existing properties or
collect rent payments on existing assets, to identify and develop new properties
or to sell existing properties, loans or other assets in the manner or at the
times contemplated by the business plan and business described herein. Factors
that might cause such differences include, but are not limited to, those
discussed in "Risk Factors."
THE DISTRIBUTION
Distributing Company....... Florida Progress Corporation, a Florida
corporation.
Distributed Company........ Echelon International Corporation, a Florida
corporation. Echelon, formerly known as PLC Leasing
Corporation, is the successor to Progress Credit
Corporation ("PCC") and two of PCC's subsidiaries,
Talquin Development Company and Progress Leasing
Corporation.
Business of Distributed
Company.................. Echelon is a real estate and financial services
company with operations in two business segments:
(i) development, ownership and management of
commercial and multi-family residential real estate
(the "Real Estate Business") and (ii)
collateralized financing of commercial real estate
and aircraft and leasing of aircraft and other
assets (the "Lending and Leasing Business"). The
Real Estate Business and the Lending and Leasing
Business are referred to collectively as the
"Echelon Business". Echelon's strategy subsequent
to the Distribution will be to focus on expanding
the Real Estate Business as follows:
- Residential Real Estate Development. Echelon
initially plans to develop, own and operate
apartment complexes on company-owned land in the
St. Petersburg area, and eventually on land to be
acquired elsewhere in Florida and the
southeastern United States. Echelon owns 137
acres of multi-family residential zoned
developable land within the Gateway area between
Tampa, St. Petersburg and Clearwater, including
land in Carillon Park, a 432-acre commercial,
office and multi-family residential park. The
Carillon Park land, together with Echelon's 4th
and 9th Street properties, account for a
substantial portion of all the land currently
zoned for apartment development in that area.
Echelon believes the favorable market
demographics, as well as limited housing supply
and growing local employment base, suggest that
apartment development in the Gateway area is
warranted and could support 500 to 600 units
annually for the next five years. See
"Business -- Other Owned Real Estate;
Multi-Family Residential and Commercial Real
Estate Development."
- Commercial Real Estate Development. Echelon
intends to take advantage of the commercial real
estate market in the Gateway area,
<PAGE> 4
where occupancy levels are averaging over 95%,
by developing a portion of the 134 acres it
holds within Carillon Park for commercial use.
In particular, Echelon's plans include office
building development within Carillon Park and
elsewhere, subject to market conditions and
other relevant factors. Almost all
infrastructure at Carillon Park is already in
place, including roads, sewers, utilities and
related improvements. Financing for further
development, while not yet obtained, is expected
from a variety of sources, including internally
generated funds from the collection of loans and
asset sales, operating cash flow and from
existing cash, which, as of the Distribution, is
expected to approximate $60 million (see
"Pre-Distribution Recapitalization and Related
Transactions" below), and, most importantly,
from project-based financings. There can be no
assurance, however, that necessary funds will be
obtained when needed in the future. See "Risk
Factors -- Need for and Access to Capital",
"Business -- Other Owned Real Estate;
Multi-Family Residential and Commercial Real
Estate Development."
- Low Income Housing Development. As part of
Echelon's real estate development plan, Echelon
has invested in, and intends to invest further
in, develop and operate, affordable housing
projects, including projects entitled to the
benefits of federal low-income housing tax
credits. Structured properly and as presently
available under federal law, these housing tax
credit projects generate dollar-for-dollar tax
credits over a 10-year period and can be applied
to Echelon's expected future United States
federal income tax liability. See "Business --
Other Owned Real Estate; Multi-Family Residential
and Commercial Real Estate Development."
- Real Estate Property Management. Echelon
currently manages its owned office buildings.
After the Distribution, Echelon intends to expand
its real estate management services business by
offering to manage office buildings for third
parties, managing Echelon's new apartment
developments (see above) and managing low-income
housing tax credit projects for its own account
and for third parties. See
"Business -- Commercial Real Estate Ownership and
Management."
With regard to the Lending and Leasing Business,
Echelon's strategies subsequent to the Distribution
are as follows:
- Real Estate and Aircraft Loans. Echelon does not
anticipate originating any new financings of
commercial real estate or aircraft unless such
financings facilitate a sale of an existing
asset. Echelon's strategy is to collect
outstanding loan balances as soon as practicable,
to take the steps necessary to maximize the value
of each asset, and, ultimately, to withdraw from
the business of commercial real estate lending
and aircraft lending as existing loans mature and
are repaid or otherwise liquidated. See
"Business -- Collateralized Commercial Real
Estate Loan Portfolio" and "-- Collateralized
Financing and Leasing of Aircraft/Equipment."
- Aircraft and Other Leases. Echelon plans to hold
its leveraged lease assets to maturity or until
the termination value of the leveraged lease
assets equals their market values and to hold its
other lease assets through expiration in
accordance with their respective terms. Echelon
2
<PAGE> 5
will then either sell or hold and re-lease
pursuant to operating leases the underlying
aircraft or other assets, depending upon which
option is determined to provide the highest
risk-adjusted return. See
"Business -- Collateralized Financing and Leasing
of Aircraft/Equipment."
For a more complete discussion of Echelon's assets
and strategy, see "Business."
Shares to be Distributed... The Distribution will be made to holders of record
on the Record Date of issued and outstanding shares
of Florida Progress Common Stock. Based on the
97,005,268 shares of Florida Progress Common Stock
outstanding as of November , 1996, the
Distribution would consist of 6,467,018 shares of
Echelon Common Stock. Each holder of Florida
Progress Common Stock will receive as a dividend
one share of Echelon Common Stock for every 15
shares of Florida Progress Common Stock held on the
Record Date.
The Board of Directors of Echelon has adopted a
stockholder rights agreement (the "Echelon Rights
Agreement"). Certificates evidencing shares of
Echelon Common Stock issued in the Distribution
will therefore represent the same number of Echelon
Rights (as defined below) issued under the Echelon
Rights Agreement. See "Description of Echelon
Capital Stock -- Echelon Rights Agreement." Unless
the context otherwise requires, references herein
to the Echelon Common Stock include the related
Echelon Rights.
Florida Progress stockholders will not have to make
any payment or surrender or exchange shares of
Florida Progress Common Stock in order to receive
their pro rata share of the Distribution. No vote
of holders of Florida Progress Common Stock is
required or sought in connection with the
Distribution.
For a more complete discussion of the Distribution,
see "The Distribution."
Fractional Share
Interests.................. Fractional shares of Echelon Common Stock will not
be distributed. Fractional shares of Echelon Common
Stock will be aggregated and sold in the public
market by the Distribution Agent, and the aggregate
net cash proceeds will be distributed ratably to
those stockholders otherwise entitled to such
fractional interests. See "The
Distribution -- Manner of Effecting the
Distribution."
Record Date................ The Record Date is , 1996. In order to
be entitled to receive shares of Echelon Common
Stock in the Distribution, holders of shares of
Florida Progress Common Stock must be such as of
the close of business on the Record Date.
Distribution Date.......... The "Distribution Date" is presently expected to be
on or about , 1996.
Distribution Agent......... The First National Bank of Boston will be the
Distribution Agent (the "Distribution Agent") for
the Distribution.
United States Federal
Income Tax Consequences of
the Distribution......... Florida Progress has received a ruling from the
Internal Revenue Service ("IRS") to the effect that
the Distribution will be tax-free for United States
federal income tax purposes, except to the extent
that cash is
3
<PAGE> 6
received for fractional shares of Echelon Common
Stock. Florida Progress stockholders will apportion
their tax bases in Florida Progress Common Stock
held immediately before the Distribution between
such Florida Progress Common Stock and the Echelon
Common Stock received in the Distribution, based on
the relative fair market values of the Florida
Progress Common Stock and the Echelon Common Stock
as of the Distribution Date. Florida Progress will
provide appropriate information to each holder of
record of Florida Progress Common Stock as of the
Record Date concerning the basis allocation. See
"The Distribution -- United States Federal Income
Tax Consequences of the Distribution."
Stock Exchange Listing..... There is not currently a public market for the
Echelon Common Stock. The Echelon Common Stock has
been accepted for listing on the NYSE, subject to
notice of issuance, under the symbol "EIN", and
trading is expected to commence on a "when-issued"
basis prior to the Distribution. On the first NYSE
trading day following the Distribution Date,
"when-issued" trading in respect of the Echelon
Common Stock will end and "regular-way" trading
will begin. See "The Distribution -- Listing and
Trading of Echelon Common Stock."
Limited Relationships
Between Florida Progress
and Echelon After the
Distribution............. After the Distribution, neither Florida Progress
nor Echelon will have any ownership interest in the
other. Each of Florida Progress and Echelon will be
an independent public company. Prior to the
Distribution, Florida Progress and Echelon will
enter into certain agreements governing their
relationships subsequent to the Distribution and
providing for the allocation of tax, employee
benefits and certain other liabilities and
obligations arising from periods prior to the
Distribution. Prior to the Distribution, in
connection with the repayment of certain
indebtedness owed by Echelon to Progress Capital
Holdings, Inc. ("PCH"), the former direct parent
corporation of Echelon and a direct, wholly owned
subsidiary of Florida Progress, Echelon will issue
a note to PCH (the "PCH Note"). In the ordinary
course of their respective businesses, Echelon and
Florida Progress and its affiliates are parties to
lease agreements pursuant to which Echelon leases
certain of its premises to Florida Progress and its
affiliates. These lease agreements will continue
after the Distribution. See "Relationship Between
Florida Progress and Echelon After the
Distribution" and "Management and Executive
Compensation -- Certain Relationships and Related
Transactions."
Dividend Policies.......... The payment and level of cash dividends by Echelon
after the Distribution will be subject to the
discretion of the Echelon Board of Directors.
Echelon currently intends to retain all future
earnings for the development of its business and
does not anticipate paying any cash dividends for
the foreseeable future. See "Dividend Policy."
Pre-Distribution
Recapitalization and
Related Financing
Transactions............. Effective as of September 30, 1996, Florida
Progress contributed $140 million to the equity of
Echelon, which was used by Echelon to repay
advances from Florida Progress. After giving effect
to such recapitalization, as of September 30, 1996,
Echelon remained obligated to repay
4
<PAGE> 7
$101.1 million of advances from Florida Progress.
In addition to the contribution by Florida Progress
of $140 million to the equity of Echelon, Florida
Progress will contribute an additional amount of
approximately $18 million to the equity of Echelon
prior to the Distribution to provide cash for the
payment of expenses incurred in evaluating and
implementing the Distribution and to provide
additional liquidity. Echelon expects that
immediately prior to the Distribution, Echelon's
obligation to Florida Progress will have been
reduced to approximately $36 million, reflecting
(i) the receipt of $105 million in secured
financing from Salomon Brothers Realty Corp. on
November 5, 1996 (the "Loan") and the repayment of
$43 million of such advances using a portion of the
such Loan, and (ii) the repayment of approximately
$22 million of such advances with proceeds
generated from operations, from maturities and
collections on loans, from planned sales of assets
and from the additional capital contribution from
Florida Progress. The remaining indebtedness of
approximately $36 million will be evidenced by the
PCH Note. See "Management's Discussion and Analysis
of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Antitakeover Provisions.... The Amended and Restated Articles of Incorporation
(the "Articles of Incorporation") and Amended and
Restated By-laws (the "By-laws") of Echelon contain
provisions that may have the effect of discouraging
an acquisition of control of Echelon not approved
by its Board of Directors. Such provisions may also
have the effect of discouraging third parties from
making proposals involving an acquisition or change
of control of Echelon, although such proposals, if
made, might be considered desirable by a majority
of the stockholders of Echelon. Such provisions
could further have the effect of making it more
difficult for third parties to cause the
replacement of the Board of Directors of Echelon.
These provisions have been designed to enable
Echelon to develop its businesses and foster its
long-term growth without disruptions caused by the
threat of a takeover not deemed by its Board of
Directors to be in the best interests of Echelon
and its stockholders. Certain provisions of the
distribution agreement to be entered into between
Florida Progress and Echelon (the "Distribution
Agreement") may also have the effect of
discouraging third parties from making proposals
involving an acquisition or change of control of
Florida Progress or Echelon. See "Description of
Echelon Capital Stock" and "Relationship Between
Florida Progress and Echelon After the
Distribution -- Distribution Agreement."
The Board of Directors of Echelon has adopted a
stockholder rights agreement. A stockholder rights
agreement is designed to protect stockholders in
the event of an unsolicited offer and other
takeover tactics which, in the opinion of the Board
of Directors, could impair its ability to represent
stockholder interests. The provisions of a
stockholder rights agreement may render an
unsolicited takeover of Echelon more difficult or
less likely to occur or might prevent such a
takeover, even though such a takeover may offer
Echelon's stockholders the opportunity to sell
their stock at a price above the prevailing market
price and may be favored by a majority of the
stockholders of Echelon. However, the Echelon
Rights would not prevent a merger or business
combination approved by the Board of Directors,
since prior to a person becoming an "Acquiring
Person" (as defined below) such Echelon Rights may
be redeemed. See "Description of Capital
Stock -- Echelon Rights Agreement."
5
<PAGE> 8
Echelon is subject to provisions of Florida
corporate law which may restrict certain business
combination transactions. See "Description of
Echelon Capital Stock -- Florida Business
Corporation Act."
See also "Description of Echelon Capital
Stock -- Provisions of Echelon Articles of
Incorporation and By-laws Affecting Change in
Control."
Echelon is also subject to contractual restrictions
limiting to 25% the portion of its voting
securities that may be owned by persons who are not
citizens of the United States or resident aliens of
the United States. See "Relationship Between
Florida Progress and Echelon After the
Distribution -- Distribution Agreement."
Risk Factors............... Stockholders should carefully consider the matters
discussed under the section entitled "Risk Factors"
in this Information Statement.
* * *
This Information Statement is being furnished by Florida Progress solely to
provide information to stockholders of Florida Progress who will receive Echelon
Common Stock in the Distribution. It is not, and is not to be construed as, an
inducement or encouragement to buy or sell any securities of Florida Progress or
Echelon. The information contained in this Information Statement is believed by
Florida Progress and Echelon to be accurate with respect to Florida Progress and
Echelon, respectively, as of the date set forth on its cover. Changes may occur
after that date, and neither Florida Progress nor Echelon will update the
information except in the normal course of their respective public disclosure
practices.
6
<PAGE> 9
SUMMARY FINANCIAL DATA
The following table summarizes certain selected consolidated financial data
of Echelon which have been derived from the Consolidated Financial Statements of
Echelon for the five years ended December 31, 1995, and the nine months ended
September 30, 1996 and 1995. Results for the interim periods may not be
indicative of results for the full year. Historical consolidated financial
information is not expected to be indicative of Echelon's future performance as
an independent company. The information set forth below should be read in
conjunction with the information set forth under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Echelon's
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Information Statement. The following information is qualified in its
entirety by the information and financial statements appearing elsewhere in this
Information Statement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------- ----------- ------ ------ ------ ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenue.............................. $ 48.6 $ 33.7 $ 47.6 $ 48.8 $ 66.5 $ 42.4 $ 94.4
Loss before income taxes............. (35.2)(1) (7.8) (9.9) (9.2) (5.7) (22.5) (1.3)
Net loss(2).......................... $ (21.7)(1) $ (3.9) $ (5.0) $ (5.0) $ (5.0) $ (13.1) $ (0.7)
======= ======= ======= ======= ======= ======= =======
Net loss per common share(3)......... $ (3.34) $ (0.60) $(0.77) $(0.77) $(0.77) $ (2.02) $ (0.11)
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA:
Assets:
Lending and leasing................ $ 347.0 $ 424.6 $400.3 $478.8 $552.6 $ 598.1 $ 670.3
Real estate........................ 136.9 142.5 154.2 144.6 148.9 187.1 166.8
------- ------- ------- ------- ------- ------- -------
Total assets................ $ 483.9 $ 567.1 $554.5 $623.4 $701.5 $ 785.2 $ 837.1
======= ======= ======= ======= ======= ======= =======
Deferred income taxes................ $ 162.9 $ 192.4 $182.3 $224.3 $244.9 $ 268.3 $ 291.3
======= ======= ======= ======= ======= ======= =======
Capitalization:
Advances from Florida Progress..... $ 101.1 $ 265.4 $250.0 $283.8 $321.2 $ 341.4 $ 404.8
Debt............................... 20.4 24.7 33.2 32.7 32.5 29.4 34.7
Common equity...................... 179.1 62.9 60.8 69.0 77.2 84.7 129.3
------- ------- ------- ------- ------- ------- -------
Total capitalization........ $ 300.6 $ 353.0 $344.0 $385.5 $430.9 $ 455.5 $ 568.8
======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Reflects $30.1 million pre-tax write-down of assets which management has
determined will be disposed.
(2) The similarity of net loss for the years ended December 31, 1995, 1994 and
1993 reflects the orderly withdrawal strategy pursuant to which Echelon was
being operated during such years. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Overview."
(3) Net loss per common share is based upon 6,467,018 outstanding common shares.
7
<PAGE> 10
SUMMARY PRO FORMA DATA
The following summary pro forma financial data have been derived from and
should be read in conjunction with the unaudited Pro Forma Consolidated Results
of Operations for the nine months ended September 30, 1996 and the year ended
December 31, 1995 and Pro Forma Consolidated Balance Sheet at September 30,
1996, which present the consolidated results of operations and consolidated
financial position of Echelon assuming that the transactions contemplated by the
Distribution and the related refinancing transactions described in the Notes to
the Pro Forma Financial Data had been completed as of January 1, 1995 for
purposes of the Pro Forma Consolidated Results of Operations, and at September
30, 1996 for purposes of the Pro Forma Consolidated Balance Sheet. These pro
forma consolidated financial data should be read in conjunction with the audited
consolidated financial statements and footnotes for the three year period ended
December 31, 1995. The pro forma consolidated financial data are presented for
informational purposes only and may not necessarily reflect the future results
of operations or financial position of Echelon or what the results of operations
or financial position would have been had Echelon's business been operated as a
separate, independent company during the periods shown. See "Pro Forma Financial
Data."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
1996 DECEMBER 31, 1995
----------------- -----------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
SUMMARY OF OPERATIONS:(1)
Revenue........................................................... $ 48.6 $ 47.6
Loss before income taxes.......................................... (32.7) (5.2)
Net loss.......................................................... $ (20.2) $ (2.1)
======= ======
Net loss per common share(2)...................................... $ (3.11) $ (0.32)
======= ======
BALANCE SHEET DATA:(3)
Assets:
Lending and leasing............................................. $ 347.0
Real estate..................................................... 192.9
-------
Total assets............................................. $ 539.9
=======
Deferred income taxes............................................. $ 162.9
=======
Capitalization:
Note payable to PCH............................................. $ 36.0
Long-term debt.................................................. 125.4
-------
Total debt............................................... 161.4
Common equity................................................... 197.1
-------
Total capitalization..................................... $ 358.5
=======
</TABLE>
- ---------------
(1) The summary of operations data reflect additional general and administrative
expenses which would have been incurred by Echelon as a separate,
independent company and refinancing of advances from Florida Progress. See
"Pro Forma Consolidated Results of Operations" and the Notes thereto.
(2) Pro forma net loss per common share is computed based on 6,467,018 shares of
Echelon being distributed in the Distribution.
(3) The balance sheet data reflect the refinancing of advances from Florida
Progress and an $18 million equity contribution by Florida Progress. See
"Pro Forma Consolidated Balance Sheet" and the Notes thereto.
8
<PAGE> 11
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein regarding matters that are not
historical facts are forward-looking statements, including (i) certain
statements contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," such as those statements concerning
Echelon's strategies, generally, Echelon's expected sources of funds, and
Echelon's expected uses of funds, including its expected capital expenditures,
and (ii) certain statements contained in "Business," such as those statements
concerning Echelon's strategy (a) with respect to its office properties, to hold
its existing portfolio of properties with a focus on generating favorable growth
in operating income through leasing to high quality tenants and controlling
operating expenses, (b) with respect to its industrial and other properties, to
increase cash flow as market conditions improve and to determine and implement
the optimum operation, sale or development option for each property, (c) with
respect to its real estate management business, to expand such business, (d)
with respect to its other owned real estate and commercial and residential real
estate development activities, to develop commercial and residential real estate
projects on its currently owned properties and, eventually, on properties to be
acquired and, in addition, to sell certain properties to third parties, (e) with
respect to its collateralized commercial real estate loan portfolio, to collect
outstanding loan balances upon repayment at maturity or upon foreclosure and
sale of the collateral, (f) with respect to its leasing business, to hold the
leveraged leases to maturity or until the termination values of the assets equal
their respective market values and to re-lease or sell the assets underlying the
various leases to maximize returns, (g) with respect to its aircraft lending
business, to negotiate a sale or refinancing of its loans or to foreclose and
sell the collateral, and (h) to deploy the proceeds generated by the ultimate
disposition of certain assets to the Real Estate Business and to repayment of
the PCH Note. Because such statements involve risks and uncertainties, actual
strategies and the timing and expected results thereof may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause such differences include, but are not limited to, those discussed
herein under "Risk Factors."
RISK FACTORS
ABSENCE OF PRIOR TRADING MARKET FOR THE ECHELON COMMON STOCK; CHANGES IN TRADING
PRICES
Prior to the date hereof, there has not been any established trading market
for Echelon Common Stock. There can be no assurance as to the prices at which
Echelon Common Stock will trade before, on or after the Distribution Date.
Unless and until Echelon Common Stock is fully distributed and an orderly market
develops in Echelon Common Stock, the price at which such stock trades may
fluctuate significantly and may be lower or higher than the price that would be
expected for a fully distributed issue. Prices for Echelon Common Stock will be
determined in the marketplace and may be influenced by many factors, including
(i) the depth and liquidity of the market for Echelon Common Stock, (ii)
developments affecting the businesses of Echelon generally, (iii) investor
perception of Echelon, and (iv) general economic and market conditions. See "The
Distribution--Listing and Trading of Echelon Common Stock."
NEED FOR AND ACCESS TO CAPITAL
Echelon's anticipated increase in its level of real estate development
activities will require a significant amount of capital. Accordingly, the extent
of Echelon's real estate development will depend upon the amount of funds
generated through operating activities, maturity and collection of loans,
planned asset sales and project-based financings. There can be no assurance that
operating activities, maturity and collection of loans, planned asset sales and
project-based financings will generate net proceeds for Echelon in amounts and
at times necessary to enable Echelon to repay its debt obligations or as
otherwise contemplated by Echelon's business plan.
Echelon has historically relied on Florida Progress for various financial
and administrative services, and funding for the Echelon Business has
historically come, in part, from PCH, a direct, wholly owned subsidiary of
Florida Progress that finances the activities of Florida Progress's diversified
operations. PCH has historically funded Echelon through the issuance of
commercial paper and medium-term notes. Except as contemplated
9
<PAGE> 12
by certain of the agreements described below, after the Distribution, Florida
Progress will not provide such financial and administrative support services.
Although Echelon has recently received proceeds totalling $105 million pursuant
to the Loan, which is secured by Echelon's owned real estate and collateralized
real estate loans, to the extent that Echelon may need additional funding to
finance its operations and capital expenditures, no assurance can be given that
Echelon will be able to access the capital markets or otherwise obtain necessary
financing in the future, or that any such financing can be obtained in a timely
and commercially acceptable manner. For these reasons, Echelon may have to defer
or otherwise limit certain development projects, which could adversely affect
Echelon's efforts to implement its strategy and its business generally.
The terms of the Loan provide, among other things, that if the
loan-to-value of collateral ratio exceeds 75%, then Echelon will be required to
deposit the cash flow from the assets pledged as collateral into a collection
account to be disbursed monthly to pay scheduled Loan payments, property
expenses, and other items and to fund certain reserves. Cash balances remaining
in such account would then be released to Echelon. Under the terms of the Loan,
the lender has the right to give notice if it determines the loan-to-value of
collateral ratio exceeds 75% and Echelon has certain rights to contest that
determination. If the loan-to-value of collateral ratio exceeds 80%, then
remaining cash balances in such account which would otherwise have been released
to Echelon will be applied monthly to reduce the principal amount of the Loan
until the ratio is less than 80%. The imposition of such a requirement could
have a material adverse impact on Echelon's ability to successfully implement
its business plan because the items comprising the collateral represent
Echelon's key sources of operating cash flow. The lender has not yet received
final appraisals of all the collateral. However, at the time the Loan was
funded, the parties believed the loan-to-value of collateral ratio was less than
75%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources".
Echelon is and will be subject to the risks normally associated with debt
financing, including the risk that Echelon's cash flow will be insufficient to
meet required payments of principal and interest, the risk that existing
indebtedness on its properties (which in most cases will not have been fully
amortized at maturity) will not be able to be refinanced or that the terms of
such refinancing will not be as favorable as the terms of the existing
indebtedness. There can be no assurance that Echelon will be able to refinance
any indebtedness Echelon may incur or otherwise be able to obtain funds by
selling assets or raising equity to make required payments on maturing
indebtedness. If Echelon is unable to refinance its indebtedness on acceptable
terms, Echelon may be forced to dispose of assets upon disadvantageous terms,
which could result in losses to Echelon and acceleration of tax liabilities. If
Echelon disposes of an asset that is part of the collateral for the Loan, then
principal payments in addition to the mandatory monthly principal payments under
such Loan may be due. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".
Moreover, a substantial portion of Echelon's assets are illiquid, and in the
event Echelon were required to sell certain of its assets in the near term or on
an accelerated basis, there can be no assurance that Echelon would be able to
consummate such sales, and any such sales could be consummated at values
substantially below those at which the assets are carried on Echelon's books.
If prevailing interest rates or other factors result in higher interest
rates at a time when Echelon must refinance its indebtedness, Echelon's interest
expense would increase, which would adversely affect Echelon's results of
operations and cash flow. Further, if a property or properties are mortgaged to
secure payment of indebtedness and Echelon is unable to meet mortgage payments,
the property or properties could be foreclosed upon by or otherwise transferred
to the mortgagee with a consequent loss of income and asset value to Echelon. In
addition, even with respect to non-recourse indebtedness, a lender may have the
right to recover deficiencies from Echelon in certain circumstances, including
fraud and environmental liabilities.
NEW OPERATING STRATEGY; RELIANCE ON KEY OFFICERS
Beginning September 30, 1991, Florida Progress operated the Echelon
Business pursuant to a strategy of orderly withdrawal pursuant to which Florida
Progress's goal was for Echelon to withdraw from its several businesses by
disposing of assets in an orderly manner without incurring the significant
losses which could result from a more accelerated liquidation of the portfolio.
See "The Distribution -- Reasons for the
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Distribution". Echelon's current strategies are intended to achieve growth and
profitability, and therefore represent a significant departure from the strategy
which had guided the operation of the Echelon Business prior to the
Distribution. Echelon has had limited experience executing its new strategies
and in operating certain of its proposed businesses, including low-income
housing developments and investing in low-income housing tax credits. There can
be no assurance that management will be able to implement such strategies or, if
implemented, that such strategies will enable Echelon to maximize the value of
its assets, grow its business and achieve profitability.
The successful implementation of these strategies by Echelon will depend in
a large part on certain key officers, including, Mr. Darryl LeClair, President
and Chief Executive Officer, and Mr. Larry Newsome, Senior Vice President and
Chief Financial Officer, Secretary and Treasurer, who have managed Echelon's
businesses and participated in the development of Echelon's business plan. Due
to the unique experience of these key officers and their knowledge of Echelon's
assets, such individuals could not be easily replaced, and the loss of such key
officers as a team or the loss of certain individual members of such team could
have a material adverse effect on Echelon. Echelon has not obtained any key-man
life insurance policies. See "Management and Executive Compensation--Executive
Officers."
CERTAIN ANTITAKEOVER PROVISIONS
The Articles of Incorporation and By-laws of Echelon contain provisions
that may have the effect of discouraging an acquisition of control of Echelon
not approved by its Board of Directors. Such provisions may also have the effect
of discouraging third parties from making proposals involving an acquisition or
change of control of Echelon, although such proposals, if made, might be
considered desirable by a majority of the stockholders of Echelon. Such
provisions could further have the effect of making it more difficult for third
parties to cause the replacement of the Board of Directors of Echelon. These
provisions have been designed to enable Echelon to develop its businesses and
foster its long-term growth without disruptions caused by the threat of a
takeover not deemed by its Board of Directors to be in the best interests of
Echelon and its stockholders. Certain provisions of the Distribution Agreement
may also have the effect of discouraging third parties from making proposals
involving an acquisition or change of control of Florida Progress or Echelon.
See "Description of Capital Stock" and "Relationship Between Florida Progress
and Echelon After the Distribution -- Distribution Agreement."
The Board of Directors of Echelon has adopted a stockholder rights
agreement. A stockholder rights agreement is designed to protect stockholders in
the event of an unsolicited offer and other takeover tactics which, in the
opinion of the Board of Directors, could impair its ability to represent
stockholder interests. The provisions of a stockholder rights agreement may
render an unsolicited takeover of Echelon more difficult or less likely to occur
or might prevent such a takeover, even though such a takeover may offer
Echelon's stockholders the opportunity to sell their stock at a price above the
prevailing market price and may be favored by a majority of the stockholders of
Echelon. See "Description of Capital Stock -- Echelon Rights Agreement."
Echelon is subject to provisions of Florida corporate law which may
restrict certain business combination transactions. See "Description of Capital
Stock -- Florida Business Corporation Act."
Echelon is also subject to contractual restrictions limiting to 25% the
portion of its voting securities that may be owned by persons who are not
citizens of the United States or resident aliens of the United States. See
"Relationship Between Florida Progress and Echelon After the
Distribution -- Distribution Agreement."
POTENTIAL TAXATION
Florida Progress has received a ruling from the Internal Revenue Service
(the "IRS") to the effect that, among other things, the Distribution will
qualify as a tax-free spinoff under Section 355 of the Internal Revenue Code of
1986, as amended (the "Internal Revenue Code").
The IRS ruling is based on certain factual representations and assumptions
made by Florida Progress which include representations and assumptions relating
to Echelon's business plan, the active conduct of a
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trade or business, certain asset transfers occurring prior to the Distribution,
and the lack of a plan or intent to liquidate, merge or sell assets other than
in the ordinary course of business. If such factual representations and
assumptions were incorrect in a material respect, such ruling could become
invalid. Florida Progress is not aware of any facts or circumstances which would
cause such representations and assumptions to be incorrect. Each of Florida
Progress and Echelon has agreed to certain restrictions on its future actions to
provide further assurances that Section 355 of the Internal Revenue Code will
apply to the Distribution. See "Relationship Between Florida Progress and
Echelon After the Distribution."
If the Distribution were not to qualify under Section 355 of the Internal
Revenue Code, then, in general, a corporate tax (which would be very
substantial) would be payable by the consolidated group, of which Florida
Progress is the common parent. In addition, under the consolidated return rules,
each member of the consolidated group (including Echelon) is jointly and
severally liable for such tax liability. Pursuant to the tax sharing agreement
to be entered into between Florida Progress and Echelon (the "Tax Sharing
Agreement") and the Distribution Agreement, Florida Progress and Echelon will
agree that if the Distribution were not to qualify under Section 355 of the
Internal Revenue Code due to the failure by one party to comply with the terms
of the IRS ruling letter, then such party would bear the entire cost of any
resulting tax liability to the consolidated Florida Progress group. If the
Distribution were not to qualify under Section 355 of the Internal Revenue Code
for a reason other than the failure of a party to comply with the terms of such
ruling letter, then any resulting tax liability would be borne by Florida
Progress. If the Distribution occurred and it were not to qualify under Section
355 of the Internal Revenue Code, the resulting tax liability would have a
material adverse effect on the financial position, results of operations and
cash flows of Echelon, and could have a material adverse effect on the financial
position, results of operations and cash flows of Florida Progress. See "The
Distribution--United States Federal Income Tax Consequences of the
Distribution."
RISKS ASSOCIATED WITH THE REAL ESTATE BUSINESS AND COLLATERALIZED REAL ESTATE
LENDING
General Real Estate Investment Risks. As a real estate development and
management company, Echelon is and will be subject to certain risks incident
generally to the ownership, development and management of real property. These
risks include the cyclical nature of real estate markets, governmental
regulations, shortages of materials, strikes, increases in the costs of labor
and materials, and competition from other real estate owners. In particular, a
commercial property's revenues and value may be adversely affected by a number
of factors, including construction costs, the national, state and local economic
climate and real estate conditions (such as oversupply of or reduced demand for
space and changes in market rental rates); the perceptions of prospective
tenants of the safety, convenience and attractiveness of the properties; the
ability of the owner to provide adequate management, maintenance and insurance;
the ability to collect on a timely basis all rent from tenants; the expense of
periodically renovating, repairing and reletting spaces; and increasing
operating costs including real estate taxes and utilities which may not be
passed through to tenants. Certain significant expenditures associated with
investments in real estate (such as mortgage payments, real estate taxes,
insurance and maintenance costs) are generally not reduced when circumstances
cause a reduction in rental revenues from the property. If a property were
mortgaged to secure the payment of indebtedness and if Echelon were unable to
meet its mortgage payments, a loss could be sustained as a result of foreclosure
on the property or the exercise of other remedies by the mortgagee. In addition,
real estate values and income from properties are also affected by such factors
as compliance with laws, including tax and environmental laws, zoning
regulations, interest rate levels and the availability of financing. While
Echelon believes that its existing real estate portfolio of land and buildings,
together with its business strategy, will allow it to manage such risks
effectively, no assurance can be given as to the effect such matters might have
on its business, financial condition or results of operations.
General Risks of Collateralized Commercial Real Estate Lending
Business. The factors listed under "General Real Estate Investment Risks" may
also adversely affect a borrower's ability to meet its obligations to Echelon
with respect to loans extended pursuant to Echelon's commercial real estate
lending business. Where Echelon's commercial real estate loans are not
personally guaranteed by the borrowers, Echelon relies solely on the value of
the underlying property for its security. In such cases, the borrower's ability
to make
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payments due under a loan and the amount Echelon may realize upon default,
including upon a bankruptcy of such borrower, are dependent in part upon the
economic performance of the property underlying the loan.
Dependence on Florida Real Estate Market Conditions. Currently, all of
Echelon's owned real estate properties are located in the State of Florida,
primarily in the Tampa Bay area, including St. Petersburg and Tampa, and
approximately 80% of Echelon's commercial rental space (measured by square
footage) is located in this area. Due to this lack of geographical
diversification, Echelon is dependent upon the continued demand for office,
industrial and other commercial space in the Tampa Bay area. Echelon may be
adversely affected in the event the demand for office space in St. Petersburg or
Tampa declines or the St. Petersburg or Tampa economy experiences a downturn.
Like other real estate markets, the Florida commercial real estate market has
experienced periodic economic fluctuations.
Regulatory Approvals for Development Projects. Before Echelon can develop
a property, it must obtain a variety of approvals from local and state
governments with respect to such matters as zoning, subdivision, architectural
design and environmental issues. Because of the discretionary nature of these
approvals and concerns which may be raised by various government officials and
public interest groups during both the approval and the development process,
Echelon's ability to develop properties and realize income from its projects
could be delayed, reduced or prevented.
General Risks of Acquisition, Development and Construction
Activities. Echelon intends to develop its existing properties and, eventually,
to acquire and develop additional properties, in each case to the extent that
they can be acquired and/or developed on acceptable terms and meet Echelon's
investment and development criteria. General investment risks associated with
any real estate investment include the risk that the investment will fail to
perform as expected or that estimates of the cost of development or of
improvements to bring an acquired property up to standards established for the
intended market position may prove inaccurate. Specific risks associated with
Echelon's development and construction activities include the risks that Echelon
may abandon development opportunities after expending resources to determine
feasibility; construction costs of a project may exceed original estimates;
occupancy rates and rents at a newly developed property may not be sufficient to
make the property profitable; and construction and lease-up may not be completed
on schedule, resulting in increased debt service expense and construction costs.
In addition, new development activities, regardless of whether or not they are
ultimately successful, typically require a substantial portion of management's
time and attention.
Tenant Defaults. A significant portion of Echelon's revenue is and is
expected in the future to be derived from rental income from real property.
Consequently, Echelon's cash flow and results of operations would be adversely
affected if a significant number of tenants failed to meet their lease
obligations. In the event of a default by a lessee, Echelon may experience
delays in enforcing its rights as lessor and may incur substantial costs in
protecting its investment. Additionally, as a significant number of Echelon's
tenants are in the financial services, legal and accounting businesses,
Echelon's cash flow and results of operations could be adversely affected if
these industries experienced a significant reduction in workforce. At any time,
a tenant of Echelon's properties may also seek protection under the bankruptcy
laws, which could result in rejection and termination of such tenant's lease. If
a tenant rejects its lease in a bankruptcy proceeding, Echelon's claim for
breach of the lease would (absent collateral securing the claim) be treated as a
general unsecured claim. No assurance can be given that Echelon will not
experience significant tenant defaults in the future.
Reliance on Major Tenants. For the 12-month period ended September 30,
1996, Echelon's largest tenants, Raymond James Financial Inc. ("Raymond James");
Andersen Consulting LLP ("Andersen Consulting"); Barnett Bank; Merrill Lynch,
Pierce, Fenner & Smith, Inc. ("Merrill Lynch"); KPMG Peat Marwick and Florida
Progress, accounted for approximately 54% of Echelon's total rental revenue.
Echelon could be adversely affected in the event of bankruptcy or insolvency of,
or a downturn in the business of, any of such tenants.
Borrower Defaults. In the event of a default by a borrower with respect to
Echelon's collateralized commercial real estate lending business, Echelon may
experience delays in enforcing its rights as mortgagee and may incur substantial
costs associated with protecting its investment. Echelon may be required to
acquire
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title to a property and thereafter to make substantial improvements or repairs
(and obtain financing for such matters) in order to maximize the property's
investment potential. In addition, in the event of a bankruptcy or similar
proceeding against a borrower, Echelon may not be able to realize on its
investment for an extended period of time. In such a proceeding, a court might
conclude that certain equity enhancements such as contingent interest should not
be treated as a debt of such borrower and Echelon ultimately may not be able to
recover its investment.
Low-Income Housing Tax Credit Risks. As part of Echelon's real estate
development plan, Echelon has invested in, and intends to invest further in,
develop and operate apartments entitled to the benefits of federal low-income
housing tax credits ("Housing Tax Credits"). A significant component of the
anticipated return on Housing Tax Credit projects is generally attributable to
the dollar-for-dollar tax credits which are available over a ten year period.
However, such credits are subject to recapture if the rules for qualification
for the credit are not sustained during the required minimum compliance period,
which is generally equal to the first 15 years of operations, but could be
longer. Although Echelon believes that Housing Tax Credit development projects
could significantly reduce Echelon's taxable income while creating favorable
earnings and returns, Echelon had not previously invested in Housing Tax Credits
or developed Housing Tax Credit projects, and there can be no assurance that
Echelon will be able to obtain Housing Tax Credits or to successfully identify,
acquire or develop projects entitled to the benefits of any Housing Tax Credits
which are obtained. Furthermore, the applicable regulations are highly complex,
and there can be no assurance that Echelon will be able to operate such projects
in compliance with such regulations or that credits taken in early years will
not be subject to subsequent recapture. The recapture of Housing Tax Credits
relating to any Housing Tax Credit project would adversely affect both the
returns on such project in particular and Echelon's results of operations and
cash flows generally. In addition, a bill which would have substantially limited
the future grants of federal low-income housing tax credits was recently passed
by Congress but vetoed by President Clinton. There can be no assurance that
similar legislation will not be re-introduced and passed in the future. See
"Business -- Other Owned Real Estate; Multi-Family Residential and Commercial
Real Estate Development -- Affordable Housing."
Real Estate Industry Competition. The real estate ownership, development
and management markets are generally regional, and the identity of Echelon's
competitors and the levels of competition vary in each area of activity and in
each market. While Echelon encounters significant competition in each area of
activity and in each market, Echelon believes that no one competitor is
dominant. In particular, within the Tampa Bay area in which Echelon's operations
are concentrated, there are numerous commercial properties that compete with
Echelon's properties in attracting tenants, numerous companies that compete with
Echelon in selecting land for development and properties for acquisition
(including within the affordable housing market generally and for Housing Tax
Credits in particular) and numerous companies that compete for real estate
management business. Certain of these competitors have significantly greater
financial resources than Echelon and may have greater experience than Echelon in
acquiring, developing and managing real estate. See "Business -- Competition."
Uninsured Loss. Echelon carries comprehensive liability, fire, extended
coverage insurance with respect to all of its properties and carries rental loss
insurance with respect to substantially all of its properties, in each case,
with policy specifications, insured limits and deductibles customarily carried
for similar properties. Echelon also requires borrowers in its lending business
to obtain such insurance for properties securing Echelon's mortgage loans. There
are, however, certain types of losses (such as losses arising from acts of war
or relating to pollution) that are not generally insured because they are either
uninsurable or not economically insurable. Should an uninsured loss or a loss in
excess of insured limits occur for a property owned by Echelon, Echelon could
lose its capital invested in a property, as well as the anticipated future
revenue from such property and would continue to be obligated on any mortgage
indebtedness or other obligations related to the property. Any such loss would
adversely affect the business of Echelon and its financial condition and results
of operations. In addition, an uninsured loss for a borrower in Echelon's
collateralized commercial real estate lending business could increase the risk
of default on the borrower's mortgage loan with Echelon.
Possible Environmental Liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real estate may be required to investigate
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and clean up hazardous or toxic substances or petroleum product releases at such
property and may be held liable to a governmental entity or to third parties for
damages to property or natural resources and for investigation and remediation
costs incurred by such parties in connection with the contamination. Such laws
typically impose remediation responsibility and liability without regard to
whether the owner knew of or caused the presence of the contaminations, and the
liability under such laws has been interpreted to be joint and several. The cost
of investigation, remediation or removal of such substances may be substantial
and the owner's liability therefor under such laws is generally not limited and
may exceed the value of the property or the aggregate assets of the owner. In
addition, the presence of such substances, or the failure properly to remediate
the contamination on such property, may adversely affect the owner's ability to
sell or rent such property or to borrow using such property as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances or petroleum products at a disposal or treatment facility also may be
liable for the costs of removal or remediation of a release of hazardous or
toxic substances or petroleum products at such disposal or treatment facility,
whether or not such facility is owned or operated by such person. 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.
In addition to statutory liability, the owner of a site may be subject to common
law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site. In connection with its
ownership and operation of its properties, Echelon may be liable for costs and
damages of the types described above. Statutes of limitations applicable to
liabilities arising from releases of hazardous or toxic substances or petroleum
products generally are not based on the time of disposal.
Certain federal, state, and local laws and regulations impose requirements
on the construction and operation of commercial buildings, including
requirements for pre-construction review of environmental impacts, permit
requirements for the discharge of wastewater and the operation of fossil fuel
burning equipment above a certain size, restrictions on the construction and
operation of certain commercial parking facilities, and approval requirements
for the construction and use of structures in certain tidelands and wetlands.
Failure to comply with such requirements could have a material adverse effect on
Echelon's operations of its properties or result in penalties that could have a
material adverse effect on Echelon's business, financial condition or results of
operations.
Certain federal, state and local laws, regulations and ordinances govern
the removal, encapsulation, disturbance, or release to the environment of
asbestos-containing materials ("ACMs") in the event of construction, remodeling,
renovation or demolition, of a building. Such laws generally allow for
imposition of fines for failure to comply with such requirements, may impose
liability for the release of ACMs and may provide for third parties to seek
recovery from owners or operators of real properties for personal injury
associated with ACMs. The potential for release of, or exposure to, asbestos
from ACMs is greater if ACMs are damaged and "friable." "Friable" ACMs are
generally any ACMs that can be crumbled, pulverized, or reduced to powder by
hand pressure. In connection with the ownership and operation of its properties,
Echelon may be subject to such requirements or potentially liable for such
costs.
Certain federal and state regulations also apply to the generation,
storage, transportation, and disposal of hazardous wastes. Other federal, state,
and local regulations and ordinances set forth requirements applicable to the
construction, operation, licensing, and removal of certain storage tanks and the
storage of flammable liquids. As a result of the ownership and operation of its
properties, Echelon may be subject to such requirements. Failure to comply with
such requirements could have a material adverse effect on Echelon's operations
of its properties or result in penalties that would have a material adverse
effect on Echelon's business, financial condition or results of operations.
Many of Echelon's properties are located in urban areas where current or
historic industrial uses of the areas may have caused site contamination at the
properties. Nonetheless, at this time, Echelon does not anticipate that
regulatory authorities will require remediation of such properties in any manner
that would result in a material adverse effect on Echelon's business, results of
operations or financial condition, and Echelon estimates that its proportionate
share of liability for cleaning up all sites ranges from $0.1 million to $1.0
million. See "Business -- Governmental and Environmental Regulation -- Real
Estate Industry," and see Note 11 to the Consolidated Financial Statements
included in this Information Statement.
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RISKS ASSOCIATED WITH AIRCRAFT LEASING AND LENDING
General. Aircraft leasing involves numerous risks, including risks
stemming from the obsolescence or physical deterioration of aircraft and the
possibility of defaults by lessees. In addition, fluctuations in general
business and economic conditions, the adoption of restrictive regulations and
legislation, changes in consumer demand for air travel, fluctuations in fuel
prices and other factors over which lessors of aircraft have no control could be
expected to affect adversely the supply and demand for aircraft or aircraft
leases and may cause cost increases relating to the leasing of aircraft that
cannot be offset by increased leasing revenues. The market for aircraft is
currently characterized by a relatively large supply of most types of aircraft
and relatively weak demand, which adversely affects the marketability and
near-term value of Echelon's portfolio of aircraft lease assets. Certain of the
risks and other factors affecting the aircraft leasing business, as they apply
to Echelon, are described in more detail below.
Risks of Lessee Defaults or Bankruptcy of Lessees. Due to many factors,
including the fluctuating state of the economy, uncertain traffic levels,
intense route and fare competition and the ease of entry of new airlines under
the Airline Deregulation Act of 1978, several commercial airlines in recent
years have been forced to suspend or cease operations due to financial
difficulties. These airlines have filed petitions for reorganization under the
Federal Bankruptcy Code, have merged with other airlines or have been
liquidated. Echelon believes this recent economic uncertainty in the commercial
airline industry is indicative of the periodic fluctuations in the industry's
economic performance. No assurance can be given that weakening financial
condition or bankruptcies of lessees of aircraft from Echelon would not have a
material adverse effect on Echelon's business, results of operations or
financial condition. Moreover, if aircraft are returned by bankrupt carriers,
there can be no assurance that Echelon will be able to sell or re-lease such
aircraft on favorable terms or in a timely manner.
Certain provisions of Echelon's leases may not be enforceable upon a
default by a lessee or in the event of a lessee's bankruptcy. The enforceability
of leases will be subject to certain limitations imposed by federal and
applicable state law and equitable principles. See "Business--Collateral
Financing and Leasing of Aircraft/Equipment--Bankruptcy of Lessees." In
evaluating a potential lessee of an aircraft, Echelon has considered such
factors as creditworthiness of the lessee, the aircraft's potential value and
the anticipated usage and rental value of the aircraft. However, there can be no
assurance as to the extent to which lessees will be able to perform their
financial and other obligations under their leases. Default by a lessee may
result in loss of revenue and litigation costs to Echelon which might not be
recovered from the lessee, and the aircraft may be returned without notice,
thereby interrupting receipt of lease revenues by Echelon. To the extent a
default or bankruptcy by a lessee required Echelon to sell the underlying asset,
certain tax liabilities of Echelon could be accelerated. See "Aircraft
Remarketing and Sale," below. In addition, upon default, particularly if the
lessee is in bankruptcy, Echelon may be delayed in or prevented from enforcing
certain of its rights under the lease and in re-leasing or selling the aircraft.
See "Business -- Collateralized Financing and Leasing of
Aircraft/Equipment -- Bankruptcy of Lessees."
Echelon leases three aircraft to USAir Inc. ("USAir"), a subsidiary of
USAir Group, Inc. ("USAir Group"), which reported significant operating losses
in each of the four years ended December 31, 1994 and which also reported
negative stockholders' equity at December 31, 1995, 1994 and 1993. Although for
the year ended December 31, 1995, USAir Group reported positive operating and
net income, USAir Group also reported that USAir's high cost structure makes its
financial condition, results of operations and prospects more susceptible to an
economic downturn and competitive conditions than many of its major competitors
amid the growing low-cost, low fare environment of the domestic airline
industry. While USAir Group recently reported improved interim results, if USAir
were unable to remain a viable competitor in the industry, USAir may be unable
to meet its obligations to Echelon. Any failure to pay rent by USAir could have
a material adverse effect on Echelon. In particular, should USAir default on its
leases with Echelon, or file for bankruptcy and reject its aircraft leases with
Echelon and other lessors, there could be a material decrease in the market
value of the types of aircraft leased to USAir due to the sudden increase in the
availability of these aircraft for lease or sale. In such a case, Echelon could
suffer significant losses on the ultimate disposal of the related aircraft or
upon the ultimate repossession of the aircraft by the lenders, as well as
significant acceleration of tax liabilities with the consequent adverse impact
on cash flow.
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Echelon has an interest in two aircraft and two engines leased to operators
based outside the United States and one aircraft loan to an operator based
outside the United States. These aircraft are not registered in the United
States and it is not possible to file liens thereon with the Federal Aviation
Administration (the "FAA"). Further, in the event of a lessee default or
bankruptcy, repossession and claims will be subjected to laws other than those
of the United States.
Citizenship. Under the Federal Aviation Act, as amended (the "FAA Act"),
the operation of an aircraft not registered with the FAA in the United States is
generally unlawful. Subject to certain limited exceptions, an aircraft may not
be registered under the FAA Act unless it is owned by a "citizen of the United
States" or a "resident alien" of the United States. If Echelon were to cease
being a "citizen of the United States" or a "resident alien" of the United
States, Echelon could be subject to claims based upon the breach of covenants
and representations concerning its status as a citizen of the United States
included in the contracts underlying its leveraged, direct finance and operating
leases. Because Florida Progress will continue to guarantee certain of these
covenants after the Distribution, the Distribution Agreement will require that
the Echelon Chairman, the Echelon President and two-thirds of the Echelon Board
of Directors be United States citizens or resident aliens within the meaning of
the FAA Act for as long as any of such covenants are guaranteed by Florida
Progress.
Leasing Industry Competition. The aircraft leasing industry is highly
competitive, offering users alternatives to the purchase of nearly every type of
aircraft. Competitive conditions vary considerably depending upon the type of
aircraft to be leased and the nature of the prospective lessee. As Echelon's
aircraft leases mature, Echelon will be subject to such competition to the
extent it attempts to re-lease such aircraft. In attempting to obtain
commitments to re-lease aircraft to specific lessees, Echelon may be expected to
compete, directly or indirectly, with aircraft manufacturers, airlines and other
operators, equipment managers, leasing companies, financial institutions and
numerous other parties engaged in leasing, managing, marketing or remarketing
aircraft. Many of these competitors have significantly greater financial
resources than Echelon and may have greater experience than Echelon in managing,
leasing, operating and selling aircraft. Such competitors may offer to lease
aircraft at rates lower than those which Echelon can reasonably offer and may
provide certain benefits, such as maintenance, crews, support services and
trade-in privileges, which Echelon generally cannot provide. In addition, to the
extent troubled airlines seek to re-negotiate the terms of the leases relating
to their aircraft, certain of Echelon's competitors with greater resources may
be able to bring more leverage to bear in avoiding re-negotiation or may be able
to enter into such negotiations and achieve relatively more favorable terms than
Echelon would be able to do.
Airline Industry Conditions and Competition. Conditions and competition in
the airline industry may weaken the creditworthiness of lessees on Echelon's
aircraft leases and result in losses to Echelon due to, among other things,
lease payment defaults or a reduction of the residual value of the leased
aircraft due to inadequate cash flow to meet lessee's maintenance and other
operating obligations under the Echelon leases. The airline industry is highly
competitive and susceptible to price discounting. Airline profit levels are
highly sensitive to, and have been severely impacted by, adverse changes in fuel
costs, average yield (fare levels) and passenger demand. The emergence in recent
years of several new carriers, typically with low cost structures, has further
increased the competitive pressures on the major airlines in the United States.
In some cases, the new entrants have initiated or triggered price discounting.
Although the domestic airline industry has generally abandoned deeply discounted
pricing structures, and fare levels have generally increased from 1993 levels,
significant industry-wide discounts could be reimplemented at any time, and, in
some markets, have been reimplemented, and the introduction of broadly
available, deeply discounted fares by a major airline in the United States would
result in lower yields for the entire industry and could have a material adverse
effect on operating results for lessees of aircraft from Echelon and,
consequently, on Echelon.
Insurance. The lessees of Echelon's aircraft are responsible for the
maintenance of public liability, property damage and all-risk aircraft hull
insurance on the aircraft to the extent described in the leases with respect to
such aircraft. The failure of any lessee to adequately insure the aircraft, or
the retention of self-insurance amounts, will affect the proceeds which could be
obtained upon an event of loss involving the aircraft and, thus, may affect the
proceeds available to Echelon. The lessees of Echelon's aircraft maintain
casualty insurance in such amounts and covering such risks as Echelon has deemed
advisable. However, there
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is no assurance that sufficient coverage will continue to be available, that
casualties occurring to Echelon's aircraft will be insured or that, if insured,
the insurance proceeds will be sufficient to cover the loss.
Section 504 of the FAA Act provides that no lessor of any civil aircraft
under a bona fide lease of 30 days or more will be liable by reason of his
interest as lessor or owner of the aircraft so leased for any injury to or death
of persons, or damage to or loss of property, on the surface of the earth caused
by such aircraft or by the ascent, descent or flight of such aircraft or by the
dropping or falling of an object therefrom, unless such aircraft is in the
actual possession or control of the lessor. Although it is expected that the
provisions of Section 504 will protect Echelon from liability for injury, death,
damage or loss caused by an aircraft or the operation thereof, there are certain
circumstances under which the protections of Section 504 may not apply. For
example, at least one court has held that Section 504 does not preempt state law
which may apply to hold the lessor or owner of an aircraft liable for injuries
suffered inside the aircraft while in flight. Because there is little case law
interpreting Section 504, there can be no assurance that its provisions will
fully protect Echelon from all liabilities in connection with any injury, death,
damage or loss which may be caused by an aircraft. In addition, Section 504 does
not preempt state law with respect to liability for third-party injuries arising
from a lessor's or owner's own negligence.
Regulatory Matters. The maintenance and operation of aircraft are strictly
regulated by the FAA, which oversees such matters as aircraft certification,
inspection and safety, certification of personnel and record keeping. In the
last several years, the FAA has issued a number of administrative directives and
other regulations relating to, among other things, collision avoidance systems,
airborne windshear avoidance systems, noise abatement and increased inspection
requirements, which will require lessees or Echelon to incur additional
expenditures for compliance. See "Business -- Governmental and Environmental
Regulation -- Aircraft Leasing Industry." If a lessee fails to comply with FAA
requirements, the cost of complying with these requirements could have a
substantial adverse effect on Echelon. In addition, future changes in government
laws or regulations, including laws and regulations governing aviation safety,
environmental protection (particularly noise compliance requirements) and fuel
conservation, may increase the costs of operating or maintaining the aircraft
owned by Echelon and may adversely affect the residual values of the aircraft.
See "Business -- Governmental and Environmental Regulation -- Aircraft Leasing
Industry."
Maintenance. The lessees are responsible for the maintenance, service,
repair and overhaul of the leased aircraft, but only to the extent described in
the leases. The failure of any lessee (or any sublessee) to adequately maintain,
service, repair or overhaul an aircraft may adversely affect the value of such
aircraft and thus adversely affect Echelon. Notwithstanding compliance by any
lessee (or any sublessee) with its obligations under any aircraft lease to
adequately maintain, service, repair or overhaul the aircraft subject to such
lease, the value of the aircraft may deteriorate and may adversely affect the
residual value of the aircraft to Echelon.
Repossession. The leases generally do not contain any general geographic
restriction on the lessee's (or any sublessee's) ability to operate the
aircraft. The lessees are also generally permitted, upon compliance with the
leases, to register the aircraft in foreign jurisdictions and to sublease the
aircraft. While Echelon's rights and remedies in the event of a default under
the leases include the right to terminate the leases and repossess the aircraft
leased thereunder, it may be difficult, expensive and time-consuming to obtain
possession of the aircraft, particularly when an aircraft located outside the
United States has been registered in a foreign jurisdiction or is subleased to a
foreign operator. Any such exercise of the right to repossess the aircraft may
be subject to the limitations and requirements of applicable law, including the
need to obtain consents or approvals for deregistration or reexport of the
aircraft, which may be subject to delays and to political risk. When a
defaulting sublessee or other permitted transferee is the subject of a
bankruptcy, insolvency or similar event, such as protective administration,
additional limitations may apply.
Furthermore, certain jurisdictions may accord higher priority to certain
other liens or other third-party rights over the aircraft. These factors could
limit the benefits of the security interest in the aircraft.
Aircraft Remarketing and Sale. On termination of a lease and return or
repossession of an aircraft to or by Echelon, Echelon would need to remarket the
aircraft to realize its full investment. The remarketing of aircraft may be
through a lease or sale. The terms and conditions of any such transaction cannot
be
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determined until such time as the transaction is consummated. Whether an
investment in any aircraft initially subject to a leveraged or direct finance
lease will ultimately prove to have been profitable may depend upon the terms on
which such aircraft will be re-leased or sold. No assurance can be given that as
aircraft come off lease, Echelon will be able to re-lease or sell such aircraft
on commercially acceptable terms or in a timely manner. Furthermore, in the
event of a lessee default or bankruptcy requiring Echelon to sell the aircraft
prior to expected maturity of the lease, Echelon would accelerate the incurrence
of tax liabilities, which could be significant, even if the aircraft is sold for
less than its long-term value.
THE DISTRIBUTION
INTRODUCTION
On July 1, 1996, the Board of Directors of Florida Progress approved in
principle a plan to distribute all the issued and outstanding Echelon Common
Stock to all holders of outstanding Florida Progress Common Stock. On November
, 1996, the Florida Progress Board of Directors formally approved the
Distribution and declared a dividend payable to each holder of record at the
close of business on the Record Date of one share of Echelon Common Stock for
every 15 shares of Florida Progress Common Stock held by such holder on the
Record Date.
On April 11, 1996, Florida Progress received a ruling from the IRS that the
receipt by Florida Progress stockholders of the Echelon Common Stock in the
Distribution will be generally tax-free to such stockholders and Florida
Progress for United States federal income tax purposes. On or before the
Distribution Date, Florida Progress will deliver all of the outstanding shares
of Echelon Common Stock to the Distribution Agent for transfer and distribution
to the holders of record of Florida Progress Common Stock on the Record Date.
The Distribution will be made on or about December , 1996.
Questions relating to the Distribution prior to the Distribution Date or
relating to transfers of Echelon Common Stock after the Distribution Date should
be directed to: The First National Bank of Boston, telephone (617) 575-3100.
REASONS FOR THE DISTRIBUTION
In 1991, after a severe downturn in the airline and real estate industries,
Florida Progress reviewed the results of its lending and leasing and real estate
businesses and assessed the long-term prospects of such businesses and
determined that these businesses were not a strategic fit for Florida Progress.
In part, this was due to the increasing capital needs of the lending and leasing
and real estate businesses and to the competition for capital between such
businesses and the other businesses within the consolidated Florida Progress
group. In light of the competing capital needs, management of Florida Progress
was also concerned that if Florida Progress did not begin to withdraw from such
businesses, the cost of capital could increase for other operations of the
Florida Progress group. Consequently, in September 1991, Florida Progress
announced its plan to withdraw in an orderly manner from the lending and leasing
and real estate businesses. As a result of Florida Progress's orderly withdrawal
strategy, between September 30, 1991 and December 31, 1995, Echelon decreased
its portfolio by approximately $583 million, or 51% of the September 30, 1991
portfolio. Although Florida Progress's orderly withdrawal strategy had resulted
in a substantial reduction in the size of the portfolio, the continued weakness
in the airline industry and commercial real estate market had slowed Florida
Progress's efforts. As a result, Florida Progress continued to examine other
business options that could accelerate the process.
After a careful review of available options, on July 1, 1996 the Florida
Progress Board of Directors approved in principle a plan to spin-off the Echelon
Business as a separate public company to Florida Progress stockholders as the
best alternative available for Florida Progress and its stockholders. The Board
of Directors of Florida Progress believes that the separation of Echelon from
Florida Progress will provide each of Florida Progress and Echelon with greater
managerial, operational and financial flexibility to respond to changing market
conditions in their different business environments.
The discussion of the reasons for the Distribution set forth herein
includes forward-looking statements that are based upon numerous assumptions
with respect to the ability of Echelon's management to maximize
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the value of its assets, grow the business and achieve profitability and with
respect to other factors which may be beyond the control of Echelon's
management. Many of such factors are discussed above under the caption "Risk
Factors."
Strategic and Management Considerations. The Distribution represents an
acceleration of Florida Progress's existing strategy to withdraw from the
lending and leasing and real estate businesses, and is designed to separate
distinct businesses that operate under different market and competitive
conditions. The Distribution will allow the management of each of Florida
Progress and Echelon to focus more intensively on its own businesses and provide
each company flexibility to grow in a manner best suited for its businesses and
markets. The Distribution should be beneficial to each of Florida Progress and
Echelon, because it will enable the management of each to design and advance
corporate policies and strategies that are based primarily on its own business
characteristics and to concentrate its financial resources wholly on its own
operations. The Distribution will also permit Echelon to design incentive
compensation programs that relate more directly to its own business
characteristics and performance.
Future Growth. The Distribution will also provide Echelon management with
the opportunity to pursue a business plan designed to maximize the value of
Echelon's assets, to grow the businesses comprising the Real Estate Business and
to achieve profitability. To facilitate its corporate objectives of growth and
profitability, Echelon is expected to employ three distinct strategies. First
and foremost, Echelon will pursue real estate development opportunities for its
existing undeveloped real estate assets, including office, commercial and
multi-family residential development of the 134 remaining acres owned by Echelon
within Carillon Park. Second, with regard to its existing portfolio of aircraft
assets, commercial real estate loans and income-producing real property, Echelon
will attempt to maximize long-term values and cash flow through active
management, selected asset sales and opportunistic capital redeployment. Third,
concurrent with the management of its existing portfolio, Echelon will pursue
several additional businesses with attractive growth potential. Echelon expects
that these businesses, which include real estate management services and Housing
Tax Credit and other affordable housing development projects, will provide an
additional basis for Echelon's future growth and profitability. See "Business."
Given the different priorities and strategies of Florida Progress, pursuing such
opportunities was not practicable for Echelon prior to the Distribution.
Investor Understanding and Flexibility. Debt and equity investors should
be able to evaluate better the financial performance of each of Florida Progress
and Echelon and their respective strategies, thereby enhancing the likelihood
that each will achieve appropriate market recognition and valuation. The
Distribution will also provide investors with additional flexibility by allowing
them to make separate investment decisions regarding Florida Progress and
Echelon.
MANNER OF EFFECTING THE DISTRIBUTION
The Distribution will be made on the Distribution Date to stockholders of
record of Florida Progress at the close of business on the Record Date. Prior to
the Distribution Date, Florida Progress will deliver all of the issued and
outstanding shares of Echelon Common Stock to the Distribution Agent for
distribution. The Distribution Agent will mail, on or about the Distribution
Date, certificates representing the shares of Echelon Common Stock to Florida
Progress stockholders of record on the Record Date. Florida Progress
stockholders will not be required to pay for shares of Echelon Common Stock
received in the Distribution, or to surrender or exchange shares of Florida
Progress Common Stock in order to receive shares of Echelon Common Stock. No
vote of Florida Progress stockholders is required or sought in connection with
the Distribution.
No certificates or scrip representing fractional shares of Echelon Common
Stock will be issued to Florida Progress stockholders as part of the
Distribution. In lieu of receiving fractional shares of Echelon Common Stock,
each holder of Florida Progress Common Stock who would otherwise be entitled to
receive a fractional share will receive cash for such fractional interests. The
Distribution Agent will, as soon as practicable after the Distribution Date,
aggregate and sell all such fractional interests on the NYSE at then prevailing
market prices and distribute the aggregate proceeds (net of brokerage fees)
ratably to Florida Progress stockholders otherwise entitled to such fractional
interests. See "United States Federal Income Tax Consequences of the
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Distribution" below for a discussion of the United States federal income tax
treatment of fractional share interests.
IN ORDER TO BE ENTITLED TO RECEIVE SHARES OF ECHELON COMMON STOCK IN THE
DISTRIBUTION, FLORIDA PROGRESS STOCKHOLDERS MUST BE STOCKHOLDERS AT THE CLOSE OF
BUSINESS ON THE RECORD DATE, , 1996.
The Board of Directors of Echelon has adopted a stockholder rights
agreement. Certificates evidencing shares of Echelon Common Stock issued in the
Distribution will therefore represent the same number of Echelon Rights issued
under the Echelon Rights Agreement. See "Description of Capital Stock -- Echelon
Rights Agreement." Unless the context otherwise requires, references herein to
the Echelon Common Stock include the related Echelon Rights.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
Florida Progress has received a ruling letter from the IRS to the effect
that, among other things, the Distribution will qualify as a tax-free spinoff
under Section 355 of the Internal Revenue Code. Under Section 355 of the
Internal Revenue Code, in general:
1. Holders of Florida Progress Common Stock will not recognize any income,
gain or loss as a result of the Distribution except that holders of Florida
Progress Common Stock that receive cash in lieu of fractional shares of Echelon
Common Stock will recognize gain or loss equal to the difference between such
cash and the tax basis allocated to such fractional shares. Any such gain or
loss will constitute capital gain or loss if such fractional shares would have
been held as a capital asset on the Distribution Date.
2. Holders of Florida Progress Common Stock will apportion the tax basis of
their Florida Progress Common Stock between such Florida Progress Common Stock
and any Echelon Common Stock (including fractional shares of Echelon Common
Stock) received by such holder in the Distribution in proportion to the relative
fair market values of such stock on the Distribution Date. Florida Progress will
provide appropriate information to each holder of record of Florida Progress
Common Stock as of the Record Date concerning the basis allocation.
3. The holding period for the Echelon Common Stock received in the
Distribution by holders of Florida Progress Common Stock will include the period
during which such holder held the Florida Progress Common Stock with respect to
which the Distribution was made, provided that such Florida Progress Common
Stock is held as a capital asset by such holder on the Distribution Date.
4. The Distribution will not be treated as a taxable disposition of Echelon
by Florida Progress.
Current Treasury regulations require each holder of Florida Progress Common
Stock who receives Echelon Common Stock pursuant to the Distribution to attach
to his or her United States federal income tax return for the year in which the
Distribution occurs a detailed statement setting forth such data as may be
appropriate in order to show the applicability of Section 355 of the Internal
Revenue Code to the Distribution. Florida Progress will convey the appropriate
information to each holder of record of Florida Progress Common Stock as of the
Record Date.
The IRS ruling is based on certain factual representations and assumptions
made by Florida Progress which include representations and assumptions relating
to Echelon's business plan, the active conduct of a trade or business, certain
asset transfers occurring prior to the Distribution, and the lack of a plan or
intent to liquidate, merge or sell assets other than in the ordinary course of
business. If such factual representations and assumptions were incorrect in a
material respect, such ruling could become invalid. Florida Progress is not
aware of any facts or circumstances which would cause such representations and
assumptions to be incorrect. Each of Florida Progress and Echelon has agreed to
certain restrictions on its future actions to provide further assurances that
Section 355 of the Internal Revenue Code will apply to the Distribution. See
"Relationship Between Florida Progress and Echelon After the Distribution."
If the Distribution were not to qualify under Section 355 of the Internal
Revenue Code, then, in general, a corporate tax (which, as noted above, would be
very substantial) would be payable by the consolidated
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group, of which Florida Progress is the common parent, based upon the difference
between (x) the fair market value of the Echelon Common Stock and (y) the
adjusted basis of Florida Progress in such Echelon Common Stock. In addition,
under the consolidated return rules, each member of the consolidated group
(including Echelon) is jointly and severally liable for such tax liability.
Pursuant to the Tax Sharing and Distribution Agreements, Florida Progress and
Echelon will agree that if the Distribution were not to qualify under Section
355 of the Internal Revenue Code due to the failure by one party to comply with
the terms of the IRS ruling letter, then such party would bear the entire cost
of any resulting tax liability to the consolidated Florida Progress group. If
the Distribution were not to qualify under Section 355 of the Internal Revenue
Code for a reason other than the failure of a party to comply with the terms of
such ruling letter, then any resulting tax liability would be borne by Florida
Progress. If the Distribution occurred and it were not to qualify under Section
355 of the Internal Revenue Code, the amount of the resulting tax liability
would depend upon the market value and tax basis of Echelon as of the
Distribution Date. Any such tax liability would have a material adverse effect
on the financial position, results of operations and cash flows of Echelon, and
could have a material adverse effect on the financial position, results of
operations and cash flows of Florida Progress.
Furthermore, if the Distribution were not to qualify as a tax-free spinoff,
each Florida Progress stockholder receiving shares of Echelon Common Stock in
the Distribution would be treated as if such stockholder had received a taxable
distribution in an amount equal to the fair market value of Echelon Common Stock
received, which would result in (y) a dividend to the extent of such
stockholder's pro rata share of Florida Progress's current and accumulated
earnings and profits and (z) a reduction in such stockholder's basis in Florida
Progress Common Stock to the extent the amount received exceeds such
stockholder's share of earnings and profits and a capital gain to the extent the
amount received exceeds the stockholder's basis provided that such Florida
Progress Common Stock is held as a capital asset by such holder on the
Distribution Date.
Florida Progress has also sought and received favorable rulings from the
IRS as to the United States federal income tax consequences of certain
restructurings which were or are to be effected by Florida Progress prior to the
Distribution.
The foregoing summary of the anticipated material United States federal
income tax consequences of the Distribution is for general information only and
does not purport to cover all United States federal income tax consequences that
might apply to every stockholder. FLORIDA PROGRESS STOCKHOLDERS SHOULD CONSULT
THEIR OWN ADVISERS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE DISTRIBUTION,
INCLUDING THE APPLICATION AND EFFECT OF APPLICABLE FOREIGN, STATE AND LOCAL TAX
LAWS.
LISTING AND TRADING OF ECHELON COMMON STOCK
Prior to the date hereof, there has not been any established trading market
for Echelon Common Stock. The Echelon Common Stock has been accepted for listing
on the NYSE, subject to notice of issuance, under the symbol "EIN", and trading
is expected to commence on a "when-issued" basis at least two days prior to the
Record Date. On the first NYSE trading day following the Distribution Date,
"when-issued" trading in respect of the Echelon Common Stock will end and
"regular-way" trading will begin.
There can be no assurance as to the prices at which the Echelon Common
Stock will trade before, on or after the Distribution Date. Unless and until the
Echelon Common Stock is fully distributed and an orderly market develops in the
Echelon Common Stock, the price at which such stock trades may fluctuate
significantly and may be lower or higher than the price that would be expected
for a fully distributed issue. Prices for the Echelon Common Stock will be
determined in the marketplace and may be influenced by many factors, including
(i) the depth and liquidity of the market for Echelon Common Stock, (ii)
developments affecting the businesses of Echelon generally, (iii) investor
perception of Echelon, and (iv) general economic and market conditions.
Shares of Echelon Common Stock distributed to Florida Progress stockholders
will be freely transferable, except for shares of Echelon Common Stock received
by persons who may be deemed to be "affiliates" of Echelon under the Securities
Act of 1933, as amended (the "Securities Act"). Persons who may be deemed to be
affiliates of Echelon after the Distribution generally include individuals or
entities that control, are
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controlled by, or are under common control with Echelon and may include certain
officers and directors of Echelon, as well as principal stockholders of Echelon.
Persons who are affiliates of Echelon will be permitted to sell their shares of
Echelon Common Stock only pursuant to an effective registration statement under
the Securities Act or an exemption from the registration requirements of the
Securities Act, such as the exemption afforded by Section 4(1) of the Securities
Act or Rule 144 thereunder.
RELATIONSHIP BETWEEN FLORIDA PROGRESS AND
ECHELON AFTER THE DISTRIBUTION
Echelon is a wholly owned subsidiary of Florida Progress, and the results
of operations of Echelon have been included in Florida Progress's consolidated
financial results. After the Distribution, Florida Progress will not have any
ownership interest in Echelon, and Echelon will be an independent public
company. Furthermore, all contractual relationships existing prior to the
Distribution between Florida Progress and Echelon will be terminated except for
the contractual agreements described below and certain commercial relationships
entered into in the ordinary course of business.
Prior to the Distribution, Florida Progress and Echelon will enter into
certain agreements, described below, governing their relationship subsequent to
the Distribution and providing for the allocation of tax, employee benefits and
certain other liabilities and obligations arising from periods prior to the
Distribution. Copies of the forms of such agreements have been filed as exhibits
to the Registration Statement of Echelon in respect of the registration of the
Echelon Common Stock under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). In addition, promptly after the declaration of the dividend of
Echelon Common Stock by the Board of Directors of Florida Progress, Florida
Progress will file a Current Report on Form 8-K in connection with the
Distribution, and the Distribution and Tax Sharing Agreements will be filed as
exhibits to such Report.
The following description summarizes certain terms of such agreements, but
is qualified by reference to the texts of such agreements, which are
incorporated herein by reference.
DISTRIBUTION AGREEMENT
Florida Progress and Echelon will enter into the Distribution Agreement
providing for, among other things, certain corporate transactions required to
effect the Distribution and other arrangements between Florida Progress and
Echelon subsequent to the Distribution. In particular, the Distribution
Agreement defines the assets and liabilities which are being allocated to and
assumed by Echelon. The Distribution Agreement also defines what constitutes the
"Echelon Business."
Pursuant to the Distribution Agreement, Florida Progress is obligated to
transfer or cause to be transferred all right, title and interest in the assets
comprising the Echelon Business to Echelon, and Echelon is obligated to transfer
or cause to be transferred all its right, title and interest in the assets
comprising the Florida Progress business to Florida Progress. All assets are
being transferred without any representation or warranty, "as is-where is," and
the relevant transferee bears the risk that any necessary consent to transfer is
not obtained. Each party also agrees to exercise its respective commercially
reasonable efforts promptly to obtain any necessary consents and approvals and
to take such actions as may be reasonably necessary or desirable to carry out
the purposes of the Distribution Agreement and the other agreements summarized
below.
The Distribution Agreement provides for, among other things, assumptions of
liabilities and cross indemnities designed to allocate generally, effective as
of the Distribution Date, financial responsibility for the liabilities arising
out of or in connection with (i) the businesses currently conducted by the
Echelon Group, including any environmental liabilities arising out of or
relating to any of Echelon's properties, to Echelon and (ii) all other
liabilities to Florida Progress. For a discussion of such businesses, see
"Business." The Distribution Agreement provides for the settlement or payment of
inter-company receivables, payables and loans in accordance with specified
procedures. No party will have any liability to any other party for inaccurate
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forecasts or arising out of any pre-Distribution arrangement, course of dealing
or understanding (other than the Distribution Agreement or the other agreements
as described below) unless such arrangement, course of dealing or understanding
is specifically set forth on a schedule to the Distribution Agreement.
The Distribution Agreement also provides for certain transactions between
Florida Progress and Echelon with respect to prior indebtedness of the companies
comprising the Echelon Group to members of the Florida Progress group. In
particular, prior to the Distribution Date, Echelon will be required to repay
certain indebtedness owed to Florida Progress and to deliver a note (as
described in greater detail below, under "PCH Note") to PCH in repayment of
intercompany indebtedness.
Under the Distribution Agreement, Echelon agrees that for so long as
Florida Progress or any of its subsidiaries is a guarantor of or obligor for any
Echelon liability, Echelon will not take certain actions, or fail to take
certain actions, which would result in a breach by Echelon of any of the
obligations so guaranteed. Specifically, Echelon agrees to be and remain a
"citizen of the United States" for purposes of the FAA Act and the Shipping Act
of 1916, as amended, for as long as Florida Progress is a guarantor of any of
the covenants Echelon made in its leasing contracts concerning its status as a
citizen of the United States for purposes of such Acts. Echelon also agrees not
to permit the imposition of liens on any asset if the imposition thereof would
constitute a breach under any obligation guaranteed. In addition, Echelon agrees
to take all commercially reasonable efforts to cause such guarantees to be
cancelled, discharged or otherwise terminated as promptly as practicable after
the Distribution.
The Distribution Agreement provides that neither Florida Progress nor
Echelon will take any action that would jeopardize the intended tax consequences
of the Distribution. Each of Florida Progress and Echelon agrees, among other
matters, to maintain its status as a company engaged in the active conduct of a
trade or business, as defined in Section 355(b) of the Internal Revenue Code,
until the second anniversary of the Distribution Date. Neither Florida Progress
nor Echelon expects this limitation to inhibit its financing or other activities
or its ability to respond to unanticipated developments. As part of the request
for a ruling that the Distribution will be tax free for United States federal
income tax purposes, each of Florida Progress and Echelon has represented to the
Internal Revenue Service that, subject to certain exceptions, it has no plan or
intent to liquidate, merge or sell all or substantially all of its assets.
Therefore, the acquisition of control of Florida Progress or Echelon shortly
after the Distribution may cause the ruling to be called into question. As a
result, any such acquisition of control of Florida Progress or Echelon may be
more difficult or less likely to occur because of the potential substantial
damages that could result upon a breach of such provisions of the Distribution
Agreement.
Under the Distribution Agreement, each of Florida Progress and Echelon
agrees to provide to the other party, subject to certain conditions, access to
certain corporate records and information and to provide certain services on
such terms as are set forth in a Transition Services Agreement between such
parties.
The Distribution Agreement also provides that, except as otherwise set
forth therein or in any other agreement, all costs and expenses incurred on or
prior to the Distribution Date in connection with the Distribution will be
charged to and paid by Florida Progress. Except as set forth in the Distribution
Agreement or any related agreement, each party shall bear its own costs and
expenses incurred after the Distribution Date.
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TAX SHARING AGREEMENT
Florida Progress and Echelon will enter into a Tax Sharing Agreement to the
effect that Florida Progress and Echelon will each pay its respective share of
the consolidated tax liability for the tax years that Echelon and its
subsidiaries are included in Florida Progress's consolidated United States
federal income tax return, as well as most state and local taxes attributable to
periods prior to the Distribution Date. In general, Florida Progress and Echelon
will pay all taxes attributable to their respective groups after the
Distribution. However, pursuant to the Tax Sharing Agreement and Distribution
Agreement, Florida Progress and Echelon will agree that if the Distribution were
not to qualify under Section 355 of the Internal Revenue Code due to the failure
by one party to comply with the terms of the IRS ruling letter, then such party
would bear the entire cost of any resulting tax liability to the consolidated
Florida Progress group. If the Distribution were not to qualify under Section
355 of the Internal Revenue Code for a reason other than the failure of a party
to comply with the terms of such ruling letter, then any resulting tax liability
would be borne by Florida Progress.
The Tax Sharing Agreement will not be binding on the IRS or any other
taxing authority. Moreover, notwithstanding the provisions of the Tax Sharing
Agreement, Echelon will remain, as a legal matter, jointly and severally liable
for the entire consolidated United States federal tax liability for the years
that Echelon and its subsidiaries are included in Florida Progress's
consolidated United States federal income tax return as well as the entire
consolidated Florida tax liability for the years that Echelon and its
subsidiaries are included in Florida Progress's consolidated Florida income tax
return. See "Risk Factors -- Potential Taxation" and "The Distribution -- United
States Federal Income Tax Consequences of the Distribution."
EMPLOYEE BENEFITS ALLOCATION AGREEMENT
Florida Progress and Echelon will enter into an Employee Benefits
Allocation Agreement (the "Employee Benefits Agreement"), which allocates and
assigns responsibility for certain employee benefits matters in respect of
Florida Progress and Echelon on and after the effective time of the Distribution
Date.
With respect to defined benefit plans, the Employee Benefits Agreement
provides that no assets or liabilities with respect to Echelon employees and
their beneficiaries shall be transferred from the Florida Progress Retirement
Plan to any plan or arrangement established or maintained by Echelon for the
benefit of its employees.
With respect to defined contribution plans, the Employee Benefits Agreement
provides that active participation of Echelon employees in the Florida Progress
Savings Plan shall cease immediately after the Distribution Date, although such
employees will have the ability to maintain their existing investments and/or
transfer between funds maintained by Florida Progress.
With respect to welfare plans, the Employee Benefits Agreement provides
that, from and after the Distribution Date Echelon shall sponsor its welfare
plans solely for the benefit of its employees and its employees shall not
continue to participate in the Florida Progress welfare plans.
The Employee Benefits Agreement also provides that Florida Progress will
generally retain all employee benefit litigation liabilities that are asserted
prior to the Distribution Date (but not such liabilities that relate to the
participation of Echelon employees in their retirement plans or savings plans),
and that Florida Progress and Echelon will retain the workers' compensation
liabilities of their respective pre-Distribution employees.
TRANSITION SERVICES AGREEMENT
Florida Progress and Echelon will enter into a Transition Services
Agreement pursuant to which the respective parties have agreed to certain basic
terms governing the provision by one party to another of specified transitional,
administrative or other support services.
PCH NOTE
Immediately prior to the Distribution, in connection with the
recapitalization of Echelon by Florida Progress, Echelon will issue a note to
PCH (the "PCH Note"). The principal amount of the PCH Note will equal the amount
of the advances from Florida Progress which will not have been repaid by
Echelon, which amount is expected to be approximately $36 million. Such
principal amount will mature four years after issuance, with required principal
payments due upon disposition by Echelon of certain non-strategic operating
25
<PAGE> 28
and direct finance leasing interests and other assets. Interest on the PCH Note
will reflect a market rate, and the PCH Note will be secured by the
non-strategic-assets described above. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Cash Flow from Financing Activities."
OTHER
Florida Progress and its affiliates will continue to occupy or utilize
certain premises leased from Echelon. Such leases are on terms which reflect
market rates and conditions and have been entered into by the parties in the
ordinary course of their respective businesses. See "Business -- The Real Estate
Business -- Commercial Real Estate Ownership and Management" and "Management and
Executive Compensation -- Certain Relationships and Related Transactions."
DIVIDEND POLICY
The payment and level of cash dividends by Echelon after the Distribution
will be subject to the discretion of the Board of Directors of Echelon. Echelon
currently intends to retain all future earnings for the development of its
business and does not anticipate paying any cash dividends for the foreseeable
future.
26
<PAGE> 29
CAPITALIZATION
The following table sets forth, as of September 30, 1996, the
capitalization of Echelon and the capitalization of Echelon as adjusted to
reflect the issuance of the PCH Note, the recent receipt of $105 million in
third-party secured financing, the repayment of outstanding advances from
Florida Progress and an equity contribution by Florida Progress. The information
set forth below does not necessarily reflect the capitalization of Echelon in
the future or as it would have been had the Distribution occurred on September
30, 1996.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
HISTORICAL PRO FORMA
---------- ---------
(IN MILLIONS)
<S> <C> <C>
Advances from Florida Progress (excluding PCH Note)............. $101.1(a) $ 0.0
Long-term debt, including current portion --
PCH Note...................................................... 0.0(b) 36.0
Third-party financing......................................... 0.0(c) 105.0
Other indebtedness............................................ 20.4 20.4
------ ------
Total debt............................................. 121.5 161.4
Preferred stock................................................. 0.0(d) 0.0
Common stockholder's equity..................................... 179.1(e) 197.1
------ ------
Total capitalization................................... $300.6 $ 358.5
====== ======
</TABLE>
- ---------------
(a) Reflects repayment of $22.1 million of such advances with proceeds generated
from operations, from maturity and collection of loans, from planned sales
of assets and from an additional capital contribution to be made by Florida
Progress, repayment of $43 million of such advances using a portion of the
$105 million Loan which Echelon recently obtained and the issuance of the
PCH Note.
(b) Reflects the PCH Note to be issued in settlement of certain advances from
Florida Progress. See "Relationship Between Florida Progress and Echelon
After the Distribution -- PCH Note," and Note 1 to the Consolidated
Financial Statements included elsewhere in this Information Statement.
(c) Reflects the Loan. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
(d) Echelon is authorized to issue 10,000,000 shares of preferred stock. At
September 30, 1996 there were no shares outstanding.
(e) Reflects equity contribution in the expected amount of $18 million by
Florida Progress to Echelon prior to the Distribution. Of such amount,
approximately $10 million will be used to provide additional liquidity and
approximately $8 million will be used to pay expenses, including legal,
accounting and financial advisory fees and expenses, incurred in evaluating
and implementing the Distribution.
27
<PAGE> 30
SELECTED FINANCIAL DATA
The following consolidated financial data are qualified in its entirety by
the financial statements of Echelon and other information contained elsewhere in
this Information Statement. The financial data as of December 31, 1995 and 1994,
and for the years ended December 31, 1995, 1994 and 1993, have been derived from
the audited financial statements of Echelon contained elsewhere in this
Information Statement. The financial data as of September 30, 1996 and 1995, and
December 31, 1992 and 1991, and for the nine months ended September 30, 1996 and
1995, and for the years ended December 31, 1992 and 1991, are unaudited. Results
for the interim periods are not necessarily indicative of results for the full
year. Historical consolidated financial information is not expected to be
indicative of Echelon's future performance as an independent company. The
following financial data should be read in conjunction with the information set
forth under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Echelon's Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Information Statement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------- ----------- ------ ------ ------ ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenue.............................. $ 48.6 $ 33.7 $ 47.6 $ 48.8 $ 66.5 $ 42.4 $ 94.4
Loss before income taxes............. (35.2)(1) (7.8) (9.9) (9.2) (5.7) (22.5) (1.3)
Net loss(2).......................... $ (21.7)(1) $ (3.9) $ (5.0) $ (5.0) $ (5.0) $ (13.1) $ (0.7)
======= ======= ======= ======= ======= ======= =======
Net loss per common share(3)......... $ (3.34) $ (0.60) $(0.77) $(0.77) $(0.77) $ (2.02) $ (0.11)
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA:
Assets:
Lending and leasing................ $ 347.0 $ 424.6 $400.3 $478.8 $552.6 $ 598.1 $ 670.3
Real estate........................ 136.9 142.5 154.2 144.6 148.9 187.1 166.8
------- ------- ------- ------- ------- ------- -------
Total assets................ $ 483.9 $ 567.1 $554.5 $623.4 $701.5 $ 785.2 $ 837.1
======= ======= ======= ======= ======= ======= =======
Deferred income taxes................ $ 162.9 $ 192.4 $182.3 $224.3 $244.9 $ 268.3 $ 291.3
======= ======= ======= ======= ======= ======= =======
Capitalization:
Advances from Florida Progress..... $ 101.1 $ 265.4 $250.0 $283.8 $321.2 $ 341.4 $ 404.8
Debt............................... 20.4 24.7 33.2 32.7 32.5 29.4 34.7
Common equity...................... 179.1 62.9 60.8 69.0 77.2 84.7 129.3
------- ------- ------- ------- ------- ------- -------
Total capitalization........ $ 300.6 $ 353.0 $344.0 $385.5 $430.9 $ 455.5 $ 568.8
======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Reflects $30.1 million pre-tax write-down of assets which management has
determined will be disposed.
(2) The similarity of net loss for the years ended December 31, 1995, 1994 and
1993 reflects the orderly withdrawal strategy pursuant to which Echelon was
being operated during such years. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Overview."
(3) Net loss per common share is based upon 6,467,018 outstanding common shares.
28
<PAGE> 31
PRO FORMA FINANCIAL DATA
The unaudited Pro Forma Consolidated Results of Operations for the nine
months ended September 30, 1996 and the year ended December 31, 1995 and the Pro
Forma Consolidated Balance Sheet at September 30, 1996 present the consolidated
results of operations and consolidated financial position of Echelon assuming
that the transactions contemplated by the Distribution and the related
refinancing transactions described in the Notes hereto had been completed as of
January 1, 1995 for purposes of the Pro Forma Consolidated Results of
Operations, and at September 30, 1996 for purposes of the Pro Forma Consolidated
Balance Sheet. The following unaudited pro forma financial data and notes
thereto do not include certain information and footnotes required by generally
accepted accounting principles for complete financial statements. However, in
the opinion of management, all adjustments considered necessary for a fair
presentation have been included.
The following pro forma consolidated financial data should be read in
conjunction with the audited Consolidated Financial Statements and Notes thereto
for the three year period ended December 31, 1995, included elsewhere in this
Information Statement. The accounting principles used in preparing the pro forma
financial data are the same as those described in such audited statements. The
pro forma consolidated financial data are presented for informational purposes
only and may not necessarily reflect the future results of operations or
financial position of Echelon or what the results of operations or financial
position would have been if Echelon's business had been operated as a separate,
independent company during the periods shown.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996 YEAR ENDED DECEMBER 31, 1995
----------------------------------- -----------------------------------
PRO PRO
HISTORICAL ADJUSTMENTS FORMA HISTORICAL ADJUSTMENTS FORMA
---------- ----------- ------ ---------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
SALES AND REVENUES:
Real estate operations --
Rental income................. $ 8.9 $ 0.0 $ 8.9 $ 10.1 $ 0.0 $ 10.1
Sale of development
properties................. 18.2 0.0 18.2 0.9 0.0 0.9
Marina and other revenues..... 5.5 0.0 5.5 7.2 0.0 7.2
Lending and leasing
operations --
Interest income............... 11.8 0.0 11.8 21.7 0.0 21.7
Earned income on finance
leases..................... 2.1 0.0 2.1 4.8 0.0 4.8
Other......................... 2.1 0.0 2.1 2.9 0.0 2.9
------ ------ ----- ------- ----- -----
48.6 0.0 48.6 47.6 0.0 47.6
------ ------ ----- ------- ----- -----
OPERATING EXPENSES:
Cost of operations.............. 8.6 0.8(a) 9.4 10.5 1.0(a) 11.5
Cost of development property
sold.......................... 18.5 0.0 18.5 0.8 0.0 0.8
Depreciation.................... 4.3 0.0 4.3 6.4 0.0 6.4
Provision for lease, loan and
real estate losses............ 33.9 0.0 33.9 7.0 0.0 7.0
Interest expense................ 15.6 (4.4)(b) 11.2 22.0 (7.2)(b) 14.8
Marketing and administrative.... 4.2 1.1(a) 5.3 5.2 1.5(a) 6.7
Other, net...................... (1.3) 0.0 (1.3) 5.6 0.0 5.6
------ ------ ----- ------- ----- -----
83.8 (2.5) 81.3 57.5 (4.7) 52.8
------ ------ ----- ------- ----- -----
LOSS BEFORE INCOME
TAXES......................... (35.2) 2.5 (32.7) (9.9) 4.7 (5.2)
Income tax benefit.............. (13.5) 1.0(c) (12.5) (4.9) 1.8(c) (3.1)
------ ------ ----- ------- ----- -----
NET LOSS........................ $(21.7) $ 1.5 $(20.2) $ (5.0) $ 2.9 $ (2.1)
====== ====== ===== ======= ===== =====
NET LOSS PER COMMON SHARE....... $(3.34) $(3.11)(d) $(0.77) $(0.32)(d)
====== ===== ======= =====
</TABLE>
See the Notes hereto set forth on page 31.
29
<PAGE> 32
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
LEASES, LOANS, PROPERTY AND OTHER INVESTMENTS:
Leases and loans receivable, net.......................... $235.1 $ 0.0 $ 235.1
Property, net of depreciation............................. 132.9 0.0 132.9
Investments in unconsolidated affiliates.................. 32.9 0.0 32.9
------ ------ ------
400.9 0.0 400.9
------ ------ ------
ASSETS HELD FOR SALE........................................ 32.8 0.0 32.8
------ ------ ------
CURRENT ASSETS:
Cash and equivalents...................................... 0.2 56.0(a)(b) 56.2
Accounts receivable, net.................................. 1.4 0.0 1.4
Current portion of leases and loans receivable............ 42.5 0.0 42.5
Inventories............................................... 3.2 0.0 3.2
Miscellaneous............................................. 0.4 0.0 0.4
------ ------ ------
47.7 56.0 103.7
------ ------ ------
OTHER NON-CURRENT ASSETS.................................... 2.5 0.0 2.5
------ ------ ------
Total assets......................................... $483.9 $ 56.0 $ 539.9
====== ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and other liabilities.................... $ 14.4 $ 0.0 $ 14.4
Income taxes payable...................................... 3.8 0.0 3.8
Current portion of long-term debt......................... 2.5 0.0 2.5
------ ------ ------
Total current liabilities............................ 20.7 0.0 20.7
DUE TO FLORIDA PROGRESS AND AFFILIATES...................... 103.0 (103.0)(a) 0.0
NOTE PAYABLE TO PCH......................................... 0.0 36.0(a) 36.0
LONG-TERM DEBT.............................................. 17.9 105.0(a) 122.9
DEFERRED INCOME TAXES....................................... 162.9 0.0 162.9
OTHER LIABILITIES........................................... 0.3 0.0 0.3
------ ------ ------
Total liabilities.................................... 304.8 38.0 342.8
------ ------ ------
STOCKHOLDER'S EQUITY:
Preferred stock........................................... 0.0 0.0 0.0
Common Stock.............................................. 0.1 0.0 0.1
Additional paid in capital................................ 251.2 18.0(b) 269.2
Retained deficit.......................................... (72.2) 0.0 (72.2)
------ ------ ------
179.1 18.0 197.1
------ ------ ------
$483.9 $ 56.0 $ 539.9
====== ====== ======
</TABLE>
See the Notes hereto set forth on page 31.
30
<PAGE> 33
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) The pro forma adjustments to the accompanying unaudited consolidated
statement of operations for the nine months ended September 30, 1996 and the
audited consolidated statement of operations for the twelve months ended
December 31, 1995 are described below:
(a) To record additional general and administrative expenses which
would have been incurred by Echelon as a separate publicly-held company,
based on estimates by the management of Echelon.
(b) To record additional interest expense related to the incurrence of
the $105 million Loan and the issuance of the PCH Note in the amount of
approximately $36 million (both at an assumed interest rate of 9.0%), after
eliminating interest expense related to intercompany advances included in
historical financial statements. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
(c) To record the estimated income tax benefit associated with pro
forma adjustments (a-b) at an assumed combined federal and state income tax
rate of 38.575%.
(d) Pro forma net loss per common share is computed based on 6,467,018
shares of Echelon being distributed in the Distribution.
(2) The pro forma adjustments to the accompanying unaudited consolidated
balance sheet at September 30, 1996 are described below:
(a) To record the incurrence of the $105 million Loan, a portion of
which was used to repay advances from Florida Progress and to provide cash
for operations of Echelon after the Distribution.
(b) To record an $18 million equity contribution from Florida
Progress. Of such amount, approximately $10 million will be used to provide
additional liquidity and approximately $8 million will be used to pay
expenses, including legal, accounting and financial advisory fees and
expenses, incurred in evaluating and implementing the Distribution.
31
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of financial condition and results of
operations is prepared as if Echelon were a separate entity for all periods
discussed. This discussion should be read in conjunction with Echelon's
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Information Statement.
OVERVIEW
In September 1991, Florida Progress announced its plan to withdraw from the
lending and leasing and real estate businesses. As a result of Florida
Progress's orderly withdrawal strategy, between September 30, 1991 and December
31, 1995, Echelon decreased its portfolio by approximately $583 million, or 51%
of the September 30, 1991 portfolio. Although Florida Progress's orderly
withdrawal strategy had resulted in a substantial reduction in the size of the
portfolio, the continued weakness in the airline industry and commercial real
estate market had slowed Florida Progress's efforts. After a careful review of
available options, the Florida Progress Board of Directors concluded that the
Distribution was the best alternative available for Florida Progress and its
stockholders. In contrast to the orderly withdrawal strategy pursued by Echelon
while under the control of Florida Progress, upon the Distribution, Echelon will
be able to pursue a business plan designed to: (1) grow the Real Estate Business
and accelerate the disposal of certain non-strategic assets, (2) maximize the
value of the remaining assets, and (3) achieve profitability.
The similarity of Echelon's results for each of the three years ended
December 31, 1995, 1994 and 1993 reflects the orderly withdrawal strategy
pursuant to which Echelon was being operated. In particular, during such period,
one of the goals of Florida Progress was to dispose of certain Echelon assets
without incurring significant losses. Accordingly, Echelon conducted its
operations, selected assets for sale, determined the timing of such asset sales,
and recognized and recorded provisions for losses in a manner which, subject to
applicable accounting rules, was as consistent as possible with such orderly
withdrawal strategy and the desire to avoid significant losses in any given
period.
Effective as of September 30, 1996, Florida Progress contributed $140
million to the equity of Echelon, which was used by Echelon to repay advances
from Florida Progress. After giving effect to such recapitalization, as of
September 30, 1996, Echelon remained obligated to repay $101.1 million of
advances from Florida Progress. In addition to the contribution by Florida
Progress of $140 million to the equity of Echelon, Florida Progress will
contribute an additional amount of approximately $18 million to the equity of
Echelon prior to the Distribution. Of such amount, approximately $10 million
will be used to provide additional liquidity and approximately $8 million will
be used to pay expenses, including legal, accounting and financial advisory fees
and expenses, incurred in evaluating and implementing the Distribution. Echelon
expects that immediately prior to the Distribution, Echelon's obligation to
Florida Progress will have been reduced to approximately $36 million, reflecting
the repayment of $43 million of such advances using a portion of the $105
million Loan which Echelon recently obtained and the repayment of approximately
$22 million of such advances with proceeds generated from operations, from
maturities and collections on loans, from planned sales of assets and from the
additional capital contribution.
Due to the foregoing items and Echelon's intention to abandon the orderly
withdrawal strategy which had previously guided the conduct of its business in
favor of a more growth-oriented business plan, the results of operations
discussed below are not expected to be indicative of future results.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
For the nine months ended September 30, 1996, Echelon reported a loss
before income taxes of $35.2 million, a $27.4 million decline from the $7.8
million loss before income taxes reported for the same period in the prior year.
Revenues. Sales and revenues for the nine months ended September 30, 1996
increased $14.9 million over the same period in 1995, primarily due to two sales
totaling 55 acres of land in Carillon Park for $18.2
32
<PAGE> 35
million. Rental income for the nine months ended September 30, 1996 increased by
$1.3 million over the same nine month period in 1995 due primarily to the
acquisition of a 67% interest in an office building in which Echelon had
previously held a 33% interest. Interest income for the nine months ended
September 30, 1996 declined by $3.6 million compared to the same nine month
period in 1995 due to loan payoffs and sales.
Expenses. Operating expenses for the nine months ended September 30, 1996
increased by $42.3 million over the same period in 1995, primarily due to the
$30.1 million provision Echelon recorded in 1996 in anticipation of the
Distribution to cover losses expected to be incurred on the accelerated sale of
certain non-strategic assets. The $17.7 million increase in cost of development
properties sold reflected the cost of the 55 acres sold as described above.
Operating expenses also reflected an increase of $1.2 million in costs of
operations attributable to the previously mentioned acquisition of a 67%
interest in an office building in which Echelon had previously held a 33%
interest. Other, net decreased $5.5 million due primarily to the settlement of a
liability at less than its carrying value.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
For the year ended December 31, 1995, Echelon reported a $9.9 million loss
before income taxes, a $0.7 million increase in losses over the $9.2 million
loss reported for the prior year.
Revenues. Rental income for the year ended December 31, 1995 increased
$1.8 million over the year ended December 31, 1994, primarily as a result of the
acquisition by Echelon of the remaining 50% interest in an office building in
1995 and the subsequent inclusion in its results of 100% of the rental revenues
generated thereby. Marina and other revenues increased $1.7 million due
primarily to a more favorable market for boat sales. Revenues from sales of
development properties decreased $4.1 million in 1995, as fewer properties were
sold compared to 1994. Earned income on finance leases in 1995 was essentially
unchanged over 1994 despite the sale in 1995 of two aircraft leveraged leases
and the termination of a third aircraft leveraged lease upon receipt of
insurance proceeds in 1995.
Expenses. The $1.2 million increase in depreciation for the year ended
December 31, 1995 over the year ended December 31, 1994 and the $1.5 million
increase in cost of operations were due primarily to the effects of Echelon's
acquisition of the remaining 50% interest in an office building in 1995, as
discussed above. The cost of development properties sold decreased by $4.0
million due to the decrease in sales of properties in 1995 as discussed above.
Marketing and other administrative expenses increased $1.1 million due to an
increase in professional fees in connection with the liquidation of a number of
leveraged lease assets. The $4.2 million increase in other, net primarily
reflected costs associated with the sale and termination of leveraged leases in
1995 as discussed above. The $1.1 million decrease in interest expense primarily
reflected the reduction of debt to Florida Progress that resulted from the use
of cash proceeds generated through the sale of assets. In 1995, Echelon recorded
an additional provision for losses of $7.0 million compared to $10.6 million in
1994 based on estimated future losses from the continued orderly liquidation of
assets.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
For the year ended December 31, 1994, Echelon reported a $9.2 million loss
before income taxes, a $3.5 million increase in losses over the $5.7 million
loss reported for the prior year.
Revenues. Rental income for the year ended December 31, 1994 declined $1.6
million compared to the year ended December 31, 1993, reflecting the loss of
rental revenues from an apartment project which was sold in 1993. Revenues from
sales of development properties declined to $5.0 million for the year ended
December 31, 1994 from $17.5 million for the year ended December 31, 1993 due to
the reduction in inventory of saleable projects as the liquidation of real
estate assets continued. In 1994, Echelon sold three industrial buildings and
approximately 706 acres of undeveloped land for an aggregate of $5.0 million,
whereas in 1993, an apartment project and approximately 1,290 acres of
undeveloped land were sold for an aggregate of $17.5 million.
33
<PAGE> 36
Earned income on finance leases declined to $4.4 million for the year ended
December 31, 1994 from $7.7 million for the year ended December 31, 1993 as a
result of four equipment leveraged leases having been sold in 1993.
Expenses. Cost of operations decreased by $1.0 million for the year ended
December 31, 1994 compared to the prior year, reflecting the absence of costs
associated with an apartment project which was sold in 1993. The $13.7 million
decline in the cost of development properties sold in 1994 compared to 1993 is
due primarily to the larger volume of property sales in 1993, as discussed
above. Other, net in 1994 decreased $1.9 million due to equipment leveraged
lease sales mentioned above. In 1994, Echelon recorded an additional provision
for losses of $10.6 million compared to $6.6 million in 1993 based on estimated
future losses from the continued orderly liquidation of assets. The $2.3 million
decrease in interest expense in 1994 compared to 1993 primarily reflects the
reduction of debt to Florida Progress that resulted from the use of the cash
proceeds generated through the sale of assets.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
Historically, Echelon's sources of liquidity have been derived from the
proceeds of asset sales and the maturity and collection of Echelon's loan
portfolio, operating cash flow and advances from Florida Progress.
Prospectively, the sources of funds are expected to come from the continued
maturity and collection of Echelon's loan portfolio and proceeds from the sale
of certain non-strategic assets, operating cash flow and, with respect to
Echelon's future real estate development, from project-based financings.
On November 5, 1996, Echelon obtained a three-year secured loan from
Salomon Brothers Realty Corp. in the principal amount of $105 million. The
proceeds of the Loan were used to repay $43 million of advances from Florida
Progress and to create a cash balance for working capital and other investments.
The Loan is non-recourse to Echelon (except for certain cases of actual fraud
and other wrongful acts and except in certain events with respect to a $6
million tax lien on a real estate loan portfolio property), and is secured by
five of Echelon's commercial real estate properties (Barnett Tower, McNulty
Station, 100 Carillon, Highpoint Center and Progress Center), substantially all
of Echelon's real estate loan portfolio and certain additional collateral,
including the Harborage of Bayboro and the 7th Avenue property. See
"Business -- Commercial Real Estate Ownership and Management."
If the loan-to-value of collateral ratio exceeds 75%, then Echelon will be
required to deposit the cash flow from the assets pledged as collateral into a
collection account to be disbursed monthly to pay scheduled Loan payments,
property expenses and other items and to fund certain reserves. Cash balances
remaining in such account would then be released to Echelon. Under the terms of
the Loan, the lender has the right to give notice if it determines the
loan-to-value of collateral ratio exceeds 75%, and Echelon has certain rights to
contest that determination. If the loan-to-value of collateral ratio exceeds
80%, then the remaining cash balances in such account which would otherwise have
been released to Echelon will be applied monthly to reduce the principal amount
of the Loan until the ratio is less than 80%. The imposition of such a
requirement could have a material adverse impact on Echelon's ability to
successfully implement its business plan because the items comprising the
collateral represent Echelon's key sources of operating cash flow. The
preliminary appraisals suggested that the loan-to-value of collateral ratio was
less than 75% (using the lower end of the estimated range of values for the
several items of collateral). The lender has not yet received final appraisals
of all the collateral. Final appraisals are expected before year-end.
The Loan requires mandatory monthly principal payments based on an
amortization schedule of 25 years (or, in the case of the real estate loan
portfolio, the scheduled principal payments actually received, if greater),
provided, however, that the scheduled amortization is accelerated to 18 years if
the loan-to-value of collateral ratio is greater than 75%. Additional principal
payments may be due upon the sale or other transfer of individual items of
collateral or upon the prepayment at a discount of any real estate loan
comprising collateral. Under the Loan, monthly payments of interest at the rate
of LIBOR plus 2.95% per annum are due on the unpaid principal balance.
34
<PAGE> 37
In addition, the loan agreement governing the Loan contains covenants that
require Echelon to maintain a ratio of debt to total capitalization of not
greater than 60% and to maintain certain levels of liquidity during each year of
the Loan. Based on Echelon's current and expected sources of liquidity (as
described above), Echelon expects that it will have sufficient resources to
comply with the covenants and maintain such debt to capitalization ratio and
liquidity levels during each year of the Loan. If Echelon fails to pay any
amount due on the Loan after it becomes due, fails to repay outstanding
principal at the stated maturity of the Loan, becomes bankrupt or insolvent,
fails to comply with any covenants in the loan agreement or a change of control
of Echelon occurs (each an "Event of Default"), then the lender may accelerate
the maturity of the Loan and during the continuance of an Event of Default,
overdue amounts will bear interest at 5.0% above the rate otherwise applicable.
Cash Flow Used in and Provided from Operating Activities
Cash flow used in operating activities was $12.3 million for the nine
months ended September 30, 1996 compared to $16.2 million of cash flow provided
from operating activities for the nine months ended September 30, 1995. In each
case, the primary factor contributing to the level of cash used was the timing
of tax payments relating to asset sales.
Cash flow used in operating activities was $22.9 million, $19.7 million,
and $22.1 million for 1995, 1994, and 1993, respectively. The primary use of
cash in each of these years was largely related to previously deferred tax
liabilities becoming due and payable as a result of leveraged lease sales.
Prospectively, Echelon currently plans to hold its leveraged lease assets to
maturity or until their termination values equal their market values, which
would spread the remaining deferred tax payments over a longer term. Net cash
flow from operations in the future is generally expected to be reinvested in the
Real Estate Business.
Cash Flow From Investing Activities
For the nine months ended September 30, 1996 and 1995, Echelon had net cash
flow from investing activities of $32.5 million and $46.2 million, respectively.
Proceeds from the sale or collection of leases and loans contributed $23.6
million and $47.5 million of the net cash flow for the first nine months of 1996
and 1995, respectively. Proceeds from the sale of real estate properties
contributed $17.6 million and $0.7 million of the net cash flow for the nine
months of 1996 and 1995, respectively.
Echelon's net cash flow from investing activities for 1995, 1994, and 1993
was $69.7 million, $69.0 million, and $71.0 million, respectively. In each case,
the foregoing cash flows reflected the $74.0 million, $65.5 million, and $79.2
million, respectively, in proceeds received from the sale or collection of
leases and loans. Upon the maturity and collection of Echelon's loan portfolio,
Echelon expects investing activities to become a net use of funds as Echelon
attempts to build the Real Estate Business.
Capital expenditures for 1995, 1994, and 1993, which are reported as real
estate property additions, were $4.1 million, $1.3 million, and $1.2 million,
respectively, and were primarily for office tenant construction improvements and
land development infrastructure improvements such as roads, water, and sewer
construction. In 1997, capital expenditures and investments are expected to be
approximately $29.3 million, comprised of approximately $6.2 million for tenant
improvements and land development, approximately $13.9 million for new apartment
development, and approximately $9.2 million for passive investments in Housing
Tax Credits. These expenditures are expected to be funded through project-based
financings and from existing cash, which, as of the Distribution, is expected to
approximate $60 million.
Cash Flow from Financing Activities
In connection with the Distribution, Echelon has obtained third-party
secured financing of $105 million, and the material terms of such Loan are
described above. Proceeds of the Loan were used to repay $43 million of advances
from Florida Progress and to create a cash balance for working capital and other
investments.
At the Distribution, Echelon will be obligated under the PCH Note. The PCH
Note will be secured by certain non-strategic assets that will be sold as soon
as practicable. The entire principal amount of the PCH
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<PAGE> 38
Note is due four years from the Distribution Date, provided that prepayments are
required from the proceeds from the sales of such assets. Echelon expects that
proceeds from the sale of the assets securing the PCH Note will be sufficient to
repay the PCH Note.
Echelon expects to use land Echelon currently owns which is not encumbered
by debt to help procure financing for new apartment developments on such land.
By using the land as equity, Echelon expects to be able to obtain non-recourse
construction financing upon favorable terms.
Dividend payments to Florida Progress were $3.2 million, $3.2 million, and
$2.5 million in 1995, 1994, and 1993, respectively. Echelon does not currently
intend to pay dividends for the foreseeable future.
Cash and Cash Equivalents
At the Distribution, Echelon expects to have approximately $60 million in
cash and cash equivalents that will be available for operations.
Off-Balance Sheet Risk
Through a previous partnership, Echelon remains contingently liable for
first mortgage bonds issued to residents of the life care communities owned by
such partnership. The contingent liability reduces over time as those who were
residents at the time of the sale of Echelon's partnership interest discontinue
their residency. If the current owners fail to perform their obligations and if
the partnership assets, consisting primarily of land and buildings, were
worthless, Echelon could be liable for an additional $32.2 million as of
December 31, 1995. Echelon considers the incurrence of this liability to be
remote based on asset values and the indemnification agreement from the current
owners to Echelon.
IMPACT OF INFLATION
Echelon believes that inflation will not have a materially adverse effect
on its business or financial condition.
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<PAGE> 39
BUSINESS
GENERAL
Echelon is a real estate and financial services company with operations in
two business segments: (i) the Real Estate Business and (ii) the Lending and
Leasing Business. Echelon's principal executive offices are located at One
Progress Plaza, Suite 2400, St. Petersburg, Florida, 33701, telephone (813)
824-6767.
THE REAL ESTATE BUSINESS
COMMERCIAL REAL ESTATE OWNERSHIP AND MANAGEMENT
General
Echelon owns and manages a portfolio of income producing commercial real
estate properties located in Florida. The majority of these properties are
located in the Tampa Bay area including Tampa, St. Petersburg and the Gateway
area in between Tampa, St. Petersburg and Clearwater. With over two million
residents, Tampa Bay ranks among the top 25 metropolitan areas in the United
States in terms of population. The employment base of the Tampa Bay area ranks
second to Miami in Florida's employment markets. According to the Commerce
Department's Bureau of Economic Analysis, Tampa is expected to add at least
300,000 new jobs over the course of the next decade. Echelon believes these
demographics will support Echelon's business plan to maximize the value of its
assets, grow its Real Estate Business and achieve profitability.
Echelon's owned assets include 11 major commercial real estate properties,
consisting of five office buildings and six industrial sites and other
properties. The following table summarizes Echelon's owned commercial real
estate:
Summary of Owned Commercial Real Estate Portfolio
<TABLE>
<CAPTION>
% OF
RENTABLE
PERCENTAGE SQ. FT.
RENTABLE LEASED LEASED
PROJECT SQUARE AS OF MAJOR BY MAJOR
NAME DESCRIPTION LOCATION FEET(2) SEPTEMBER 30, 1996 TENANTS TENANTS
- ----------- -------------------------------- ------------------- ------------- ------------------ ------------------ --------
<S> <C> <C> <C> <C> <C> <C>
OFFICE
Barnett
Tower..... 26-story Class A office tower St. Petersburg, FL 294,096 92% Florida Progress 21%
Barnett Bank 14.2%
KPMG Peat Marwick 10.5%
Merrill Lynch 7.3%
Raymond James 5.8%
Carlton Fields Law 5.4%
Firm
McNulty
Station... 5 multi-tenant, Class A office St. Petersburg, FL 90,978 95% Andersen 77.4%
buildings, historic renovation Consulting 7.6%
AmSouth Bank 3.8%
First Union
3rd &
3rd....... 3-story Class C office building St. Petersburg, FL 32,607 100% Florida Power(1) 100%
100
Carillon... 3-story, multi-tenant Class A St. Petersburg, FL 79,013 100% Raymond James 83.2%
suburban office building located
in Carillon Park
Highpoint
Center.... 15-story, multi-tenant Class A Tallahassee, FL 79,670 95% Katz Kutter Law 46.2%
office building near the state Firm 21.5%
capitol building Huey Guilday Law
Firm
INDUSTRIAL
AND OTHER
Progress
Center.... 2 multi-tenant, Class A Gainesville, FL 87,630 43% University of 14.7%
office/research buildings Florida 12.8%
located in research park Pharmos
Corporation
Bayboro
Property... Property adjacent to Harborage St. Petersburg, FL 104,152 100% Florida Power 100%
of Bayboro, including land
leased to Florida Power
7th
Avenue.... Class A, Industrial warehouse Tampa, FL 187,500 54% All Points 54.0%
5th
Avenue.... Industrial warehouse Tampa, FL 16,482 100% Finer Scrap Metal 100%
Progress
Packaging... Industrial warehouse Tampa, FL 121,860 46% Sports & 29.5%
Recreation
Harborage
of
Bayboro... Full service marina includes wet St. Petersburg, FL 235 wet slips 100% n/a n/a
slips and high & dry boat 425 dry slips
storage, boat sales, marine
repair & service, parts sales,
and marine supply store
</TABLE>
- ---------------
(1) Lease scheduled to expire March 31, 1997; thereafter lease will be on
month-to-month basis.
(2) Unless otherwise indicated.
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<PAGE> 40
Office Buildings
A significant component of Echelon's total investment in real estate is
represented by its portfolio of commercial office buildings. Three of Echelon's
five office buildings, Barnett Tower, McNulty Station and 3rd & 3rd, are located
in downtown St. Petersburg. Downtown St. Petersburg is home to more than 1,400
businesses which together employ approximately 25,000 workers. St. Petersburg is
also home to the Tampa Bay Devil Rays, major league baseball's newest expansion
team, which will begin playing baseball in downtown St. Petersburg in 1998.
Barnett Tower is a 26-story, 294,096 square foot Class A office building in
the center of St. Petersburg and accounts for 28% of Echelon's more than
1,000,000 square feet of owned commercial real estate. Completed in 1990, it is
the newest office building in downtown St. Petersburg and is home to several of
the area's most prominent firms, including Florida Progress. Seventy-two percent
of the building is currently occupied by six tenants (including their
affiliates): Barnett Bank; Merrill Lynch; KPMG Peat Marwick; Raymond James &
Associates, Inc.; Carlton, Fields, Ward, Emmanuel, Smith & Cutler, P.A. and
Florida Progress. These principal tenants have leases with remaining terms of at
least seven years. As of September 30, 1996 the property was approximately 92%
occupied.
McNulty Station is a complex of five office buildings ranging in size from
two to five stories, totaling 90,978 square feet, and is located across the
street from the Barnett Tower. McNulty Station was originally a train station
and was part of an historic renovation completed in 1985. The buildings are all
Class A buildings leased to such tenants as Andersen Consulting, AmSouth
Bancorporation and First Union Bank Corporation. Echelon recently acquired the
fifth building located on the site in conjunction with the expansion of Andersen
Consulting, which leases 77% of the McNulty Station properties under a lease
scheduled to expire in August 2001. As of June 30, 1996, McNulty Station was 95%
leased.
The 3rd & 3rd building is a three-story, 32,607 square foot office building
located two blocks south of Barnett Tower. Florida Power Corporation currently
occupies the entire building, but will be vacating the building in March 1997.
Echelon is currently seeking new tenants for the property.
Echelon's other office property in the St. Petersburg area is 100 Carillon.
100 Carillon, located in the Gateway area of Tampa Bay, is a three-story, 79,013
square foot office building housed within the 432-acre Carillon multi-use
development site (the "Carillon Park"). Raymond James, a regional securities
brokerage firm with headquarters in a neighboring building, with its affiliates
occupies 83% of the building with leases scheduled to expire in the second half
of 1997. Echelon has been notified by Raymond James of its current intent to
extend its lease for a five-year term. The property is a Class A multi-tenant
building which, as of September 30, 1996, was 100% leased. Raymond James is also
planning to construct an additional building within Carillon Park, with
anticipated completion by mid-1998.
As of April 1996, the office market in downtown St. Petersburg had a
vacancy rate of 22% (according to the Maddux Report of April 1996). Based on
historical absorption rates, the current supply of vacant office space will
hinder increases in market rental rates. This pressure on rental rates also
affects suburban office markets, such as the Gateway area where 100 Carillon is
located. Even though the Gateway area and the directly competing Westshore
(South Tampa) area have occupancy rates exceeding 95% (according to the Maddux
Report of June 1996), Echelon's business plan does not expect significant
increases in rental rates until demand for office space in the downtown St.
Petersburg and Tampa areas increases and existing vacancies in such areas are
absorbed.
Other Florida office properties owned by Echelon include the Highpoint
Center, a 15-story, 79,670 square foot Class A office building located in
downtown Tallahassee that was approximately 95% leased as of September 30, 1996.
The property is situated two blocks from the state capitol building and houses
several law firms with significant state business activities. The law firms
constituting the building's two main tenants occupy 68% of the building with
lease expirations of December 2002 and November 1999, respectively. Except for
the state capitol building, Highpoint Center, which was built in 1990, is the
tallest building in downtown Tallahassee.
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<PAGE> 41
Echelon intends to hold its existing portfolio of office properties with a
focus on generating growth in operating cash and net income through leasing to
high quality tenants and controlling operating expenses.
Industrial and Other Properties
Although its industrial properties do not represent a significant part of
Echelon's investment in commercial real estate, these properties are generally
located in locations with some potential for growth. Echelon's industrial
properties include Progress Center, the Bayboro Property, the 7th Avenue
property, the 5th Avenue Property and Progress Packaging.
Progress Center, located near Gainesville, Florida, is a 87,630 square foot
office research facility. The facility includes two buildings, each of which is
comprised of approximately 25% office space and 75% laboratory space. The
property is part of a 200-acre research park ("Progress Park") owned by Echelon
and affiliated with nearby University of Florida. The property is approximately
43% leased, including 12,911 square feet which is occupied by university
affiliated tenants. The two major tenants occupy approximately 27% of the
facility. The property is designed to provide a vital link between University of
Florida researchers and private industry to transfer new technologies from the
laboratory to the market place.
Echelon's Bayboro Property is a 104,152 square foot tract of land in St.
Petersburg, a portion of which is leased to Florida Power. Florida Power leases
the land to house some of its "peaking" operations, a system of gas powered
backup generators used to produce power during periods of peak electrical
demand. The system includes several turbine engines to power the generators. The
lease to Florida Power can be cancelled upon written notice from Florida Power.
The property includes a former power plant facility which Echelon is renovating
for commercial office use. Most of the land comprising the Bayboro Property was
acquired for its development potential. The Bayboro area is close to downtown
St. Petersburg and is located within a redevelopment zone.
Echelon has several properties located in various areas of Tampa. The 7th
Avenue property, constructed in 1987, is a 187,500 square foot
warehouse/distribution facility located on the east side of Tampa. The property
is approximately 54% leased. The facility is one of the largest warehouse
properties in a predominantly industrial neighborhood. The 5th Avenue property,
located near the 7th Avenue property, is a 16,482 square foot industrial
building and is 100% leased to a single tenant who has a purchase option which
is expected to be exercised upon completion of environmental clean-up work by
Echelon. Progress Packaging is a 121,860 square foot industrial warehouse
located in West Tampa that is approximately 46% leased.
Echelon's strategy for its industrial properties is to increase cash flow
as market conditions improve and to determine and implement the optimum
operation, sale or development option for each property, as developing cash flow
allows.
Echelon also owns and operates a marina, the Harborage of Bayboro,
employing approximately 40 people and located in the Bayboro Harbor area near
downtown St. Petersburg. This full service marina offers 235 wet slips and 425
high and dry slips, each of which, as of September 30, 1996, were 100% leased.
In addition to the leasing of the slips, the marina provides such services as
new and used boat sales, marine repair and service, parts sales, and a marine
supply store. The wet slips consist of a floating concrete dock system
specifically designed for this harbor location. The system is popular for its
stability, durability and aesthetic qualities and is designed to withstand a
12-foot tidal surge. The dock system is the largest floating dock system on
Florida's west coast. The high and dry slips are an out-of-water rack storage
system for small to medium sized boats. The submerged land under the wet slips
is leased from the City of St. Petersburg. Although the lease will expire in
2013, Echelon expects to bid for the right to enter into a new lease at that
time.
Real Estate Management
Echelon currently manages its owned office buildings. After the
Distribution, Echelon intends to expand its real estate management services
business by offering to manage office buildings for third-parties, managing
Echelon's new apartment developments and managing Housing Tax Credit projects
built for its own account and for third parties. Echelon expects that these
activities will facilitate its management team's participation in
39
<PAGE> 42
the marketplace, thereby serving to obtain additional knowledge and
opportunities. Echelon currently utilizes the services of TRS Commercial Real
Estate Services, Inc. ("TRS"), a realty service company, to assist in the
management of its office buildings and the sale of certain of its real estate
assets. After the Distribution, Echelon intends that the current employees of
TRS will become employees of Echelon and join Echelon's current real estate
services employees in managing all the real estate assets of Echelon.
OTHER OWNED REAL ESTATE; MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE
DEVELOPMENT
Overview
Another significant portion of Echelon's real estate holdings is
represented by several large parcels of undeveloped land in the St. Petersburg
area. Substantial infrastructure investment has already gone into certain of
these properties, including Carillon Park. Echelon's strategy is to accelerate
the development of both residential and commercial projects on these sites. The
following table summarizes Echelon's investment in undeveloped land:
Summary of Undeveloped Owned Commercial Real Estate
<TABLE>
<CAPTION>
DEVELOPMENT POTENTIAL
-------------------------
APPROXIMATE
ACRES FOR NUMBER OF
SALE OR APARTMENT
PROJECT NAME DESCRIPTION LOCATION ZONING DEVELOPMENT UNITS
- ----------------- ---------------------------- -------------------- ------------------------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Carillon Park.... Class A, suburban office and St. Petersburg, FL Phase I 38 N/A
residential park in Gateway Zoned business park, DRI in
area place
Phase II 96 1,170
Zoned multi-family residential
and business park; area wide
DRI in place
4th Street....... 15 undeveloped acres St. Petersburg, FL Zoned residential office park 15 225
(Multi-family)
9th Street....... 72 undeveloped acres St. Petersburg, FL Zoned multi-family residential 72 965
(Multi-family)
Progress Park.... Research park consisting of Gainesville, FL Zoned office 150 N/A
150 acres with industrial/commercial
infrastructure in place
Royal Oaks....... 35 undeveloped acres Tallahassee, FL Zoned multi-family residential 35 N/A
adjacent to 131 single
family lots previously
developed and sold
Riverside 2,000-acre operating ranch Lakeland, FL Zoned agricultural 2,000 N/A
Ranch..........
----- -----
TOTAL.......... 2,406 2,360
</TABLE>
Carillon Park is a 432-acre office park located in the Gateway area of
Tampa Bay and is among the largest tracts of property in the metropolitan Tampa
Bay area with all necessary zoning and other development approvals in place.
Going forward, Echelon believes that the 134 acres within Carillon Park which
are owned by Echelon and held for sale or development will play a central role
in Echelon's business plan. Carillon Park is bordered by a triangle of major
roads serving both Pinellas and Hillsborough counties. Carillon Park's central
location (equidistant from downtown St. Petersburg, downtown Tampa and downtown
Clearwater) provides quick access to residential neighborhoods and Tampa
International Airport. Echelon estimates that Carillon Park has a potential
development capacity of over 6,000,000 square feet of office space, 750 hotel
rooms, over 1,000 multi-family residential units, and a variety of supporting
retail services. The Carillon Park master plan contemplates a child care center,
fitness stations, jogging and walking paths and other amenities which are
intended to help commercial tenants attract and retain the highest quality
employees and to maximize on-the-job productivity.
Although new office construction generally has many hurdles to overcome,
including the building of infrastructure, development rights in Carillon Park
have become vested pursuant to Development of Regional Impact orders. Carillon
Park's development plan includes stormwater retention areas, underground
utilities including fiber optic capability and zoning approvals which allow for
a broad spectrum of uses. For purposes of implementing such plan, development of
the land is divided into two phases.
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<PAGE> 43
Phase I has the infrastructure in place and is already the location of
offices of companies such as Raymond James, AllState, Xerox and Public Service
Credit Union Service Centers. Phase I will have 38 acres remaining to be sold
after the completion of the pending sale of 15 additional acres to Raymond
James. Construction of infrastructure for Phase II is currently underway with
completion scheduled for December, 1996.
Ninety-six of the original 155 acres of Phase II remain to be sold. Of the
original 155 acres for sale in Phase II, 90 acres were zoned for office
buildings and retail and 65 acres were zoned for residential apartments. Of the
90 acres for office buildings, almost 16 acres have been sold and of the
remaining 74 acres, Franklin Templeton Inc. has recently purchased 28 acres.
This leaves a balance of approximately 46 acres for office building development
to be sold in Phase II. Of the 65 acres for apartments, 15 acres have been sold
leaving approximately 50 acres with the potential for development of
approximately 1,170 apartment units. Echelon intends to develop some of the
Carillon Park properties for its own account and, as and when market conditions
warrant, to market land to third parties.
Financing for further development of Carillon Park, while not yet obtained,
is expected from a variety of sources, including internally generated funds from
the collection of loans and asset sales and from operating cash flow, from
existing cash, which, as of the Distribution, is expected to approximate $60
million, and, most importantly, from project-based financings. There can be no
assurance, however, that necessary funds will be obtained when needed in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources", above.
Echelon's 9th Street site, which is also located in the Gateway area of
Tampa Bay, has a total of 72 acres with apartment development potential of
approximately 965 units. The 9th Street site is currently in the initial stage
of its development, with the basic infrastructure to be completed in December
1996 so that the site will be ready for apartment development thereafter.
Echelon's 15-acre 4th Street site has potential for the development of
approximately 225 apartment units. Echelon currently intends to use the 4th
Street site for the development of affordable housing apartments qualifying for
Housing Tax Credits. Echelon has submitted an application to the Florida Housing
Finance Agency to be awarded Housing Tax Credits, and has received preliminary
notice of being awarded the credits necessary to proceed with development of
approximately 108 Housing Tax Credit apartment units on the 4th Street site. See
"Affordable Housing," below.
Progress Park has approximately 150 developable acres near Gainesville,
Florida. The rural setting and lack of substantial economic base complicate the
development and marketing of this property. However, given the park's highway
access and proximity to nearby Interstate 75, as well as its proximity to the
University of Florida, Echelon believes that opportunities for developing the
park may come from two areas: (i) research-related office and laboratory
buildings similar to existing facilities and (ii) back office operational
centers and distribution facilities. Echelon currently intends to subdivide the
property and to add additional curb cuts along the highway frontage to increase
the property's marketability.
Other Echelon properties include undeveloped land in the Royal Oaks
subdivision of Tallahassee and a fully operational 2,000-acre ranch property
located near Lakeland, Florida. Although no agreements currently exist relating
to the sale of such properties, Echelon intends to sell these properties as
promptly as practicable, and to apply the entire net proceeds received to prepay
a portion of the PCH Note (which, at the Distribution, is expected to equal $36
million).
Apartments
Echelon believes that its most attractive opportunities for growth and
profitability are the development, ownership and operation of rental apartment
units in the Tampa Bay area and, ultimately, in other selected locations in the
southeastern United States. Echelon plans to begin developing apartments on its
owned land in St. Petersburg, including the Carillon Park, 4th Street and 9th
Street properties, and eventually on land to be acquired elsewhere in Florida
and in the southeastern United States. Echelon has previously, by itself or
through a joint venture, developed, owned and operated approximately 2,200
apartment units. Echelon marketed and sold projects representing approximately
1,700 of these units for a price in excess of $84 million,
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<PAGE> 44
which corresponded to an average capitalization rate (which is a rate of return
calculated by dividing net income by the sales price of a property) of
approximately 7.25%. The 334-unit Promenade at Carillon, Echelon's first
apartment project in Carillon Park, cost $17.5 million to build and was sold
prior to completion in October 1994 for a sale price of $20.65 million. In 1990,
Echelon sold its interest in a 192-unit apartment complex for a pre-tax gain of
approximately $500,000. In addition to these owned apartments, Echelon
constructed a 71 unit affordable apartment complex known as 701 Mirror Lake in
downtown St. Petersburg.
Although real estate development has inherent business risks, general
market demographics as well as independent marketing studies sponsored by
Echelon suggest that apartment development in the Gateway area is warranted and
could support 500 to 600 units annually for the next five years. In particular,
there are currently over 3,000 employees based within Carillon Park, and
thousands of additional employees are based in offices in the immediate
vicinity, including the approximately 1,000 persons employed at the nearby
offices of MCI Communications Corp. and the approximately 2,000 persons employed
at The Home Shopping Network, Inc. directly across from Carillon Park. In
addition, based on announced relocations or expansions, Echelon believes that
within two years, an additional 2,500 employees are expected to be working in or
around Carillon Park. Echelon also believes that the current population of over
two million people in the Tampa Bay metropolitan region and projected population
and employment growth rates in such region, the relatively limited supply of
land in the greater Tampa Bay metropolitan area that is currently zoned for
residential apartment development and the current high occupancy rates of
existing developments in the area collectively support Echelon's strategy to
build on its past successful apartment development efforts.
Affordable Housing
As part of Echelon's strategy to focus on real estate development, Echelon
intends to invest in, develop and operate, affordable housing projects,
including projects entitled to the benefits of Housing Tax Credits. Housing Tax
Credit projects are affordable housing projects which meet certain requirements
with respect to maximum limits on tenant income, gross rent restrictions, and
certain other requirements of state tax credit authorities and the Internal
Revenue Service. Structured properly, these projects allow investors in Housing
Tax Credit properties to record dollar-for-dollar tax credits over a 10-year
period against their United States federal income tax liability. Echelon
believes that Housing Tax Credit investments are appropriate investments not
only because of the significant demand for affordable and low-income housing and
attractive risk and return outlook, but also because Echelon expects that its
lease portfolio will create a large base of taxable income for United States
federal income tax purposes over the next 10 to 15 years which is expected to
create a significant cash outflow from Echelon over that period. Echelon
believes that investments in Housing Tax Credits could significantly reduce such
cash outflow while creating favorable earnings and returns for Echelon.
Because Echelon had not previously invested in Housing Tax Credit projects,
Echelon intends to further its knowledge of these projects by its passive
investments in Housing Tax Credit projects through limited partnerships
controlled by third parties. Echelon's eventual strategy is to develop, own and
operate Housing Tax Credit apartment projects utilizing its owned land, within
the limits of Echelon's tax base. Echelon also plans eventually to develop and
operate Housing Tax Credit properties for other investors as part of its real
estate management services business.
Commercial Real Estate Development
In addition to residential development, Echelon plans to take advantage of
the commercial real estate market in the Gateway area, where occupancy levels
are averaging over 95% (according to the Maddux Report of June 1996) by
developing its holdings within Carillon Park. Although regional office vacancies
exist, Echelon believes the current high occupancy levels and the lack of
available commercial space in the Gateway area will support future construction.
In particular, Echelon's plans include constructing office buildings in Carillon
Park, subject to market and other conditions, and Echelon believes that
utilization of a five acre tract of land from the land inventory in Carillon
Park for such construction will enhance the value of the remaining acreage.
Echelon also believes that an office project will provide a source of
prospective tenants for the apartments expected to be developed within Carillon
Park.
To the extent market and other conditions warrant, Echelon's long-term
plans include potential further office building development within Carillon Park
and elsewhere.
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<PAGE> 45
THE LENDING AND LEASING BUSINESS
COLLATERALIZED COMMERCIAL REAL ESTATE LOAN PORTFOLIO
Echelon manages a portfolio of commercial real estate loans secured by
properties located throughout the United States summarized in the chart below.
The aggregate loan balance, as of September 30, 1996, was $97.2 million. Of this
total, four borrowers, representing six loan transactions, accounted for
approximately 82% of the loan balance, or $79.6 million. The largest single
geographic concentration of loans is in the State of Florida. Echelon's real
estate loan portfolio consists of loans secured by a diverse group of
properties, including single tenant and multi-tenant office buildings, life care
facilities, and industrial properties, as summarized in the following table:
Summary of Real Estate Loan Portfolio
<TABLE>
<CAPTION>
MATURITY DATE INTEREST BALANCE AT
COLLATERAL MATURITY AFTER RATE 9/30/96
BORROWER/PROJECT LOCATION COLLATERAL DESCRIPTION DATE EXTENSIONS(4) BASIS (MILLIONS) AMORTIZATION
- ---------------------- ----------------- ---------------------- --------- ------------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Madison Building(1) Tampa, FL Multi-tenant, Class C Nov-98 N/A Floating $ 3.3 30-year
office building
Continuum Building(2) Austin, TX Single tenant (The Dec-98 N/A Floating 9.0 20-year
Continuum Company,
Inc.), Class A office
building attached
parking garage
Marquardt Van Nuys, CA Industrial office Dec-96 N/A Floating 23.5 None
complex on 54 acres
Plaza Del Rio Bradenton, FL Multi-tenant, Class B Feb-97 N/A Floating 5.3 30-year
office building
Vine Street -- Olympia Olympia, WA Single tenant (State Jan-97 July-01 Floating 5.3 None
(Black Lake Place) of Washington), Class
A office building
Vine Street -- Capitol Olympia, WA Single tenant (State Oct-98 N/A Floating 5.8 None
View I of Washington), Class
A office building
Vine Street -- Capitol Olympia, WA Single tenant (State Dec-99 N/A Floating 5.0 None
View II of Washington), Class
A office building
Vine Street -- Town Olympia, WA Single tenant (State Nov-96 May-01 Floating 4.5 None
Square VI of Washington), Class
A office building
Life Care Port Charlotte & 440-unit Independent Apr-00 N/A Fixed 35.5 Yes,
Leesburg, FL Living Facility Varied(3)
("ILF") with 120 bed
nursing home and
140-unit Assisted
Living Facility
("ALF") located in
Port Charlotte,
Florida and a 400-unit
ILF with 40 bed
nursing home and a
20-unit ALF located in
Leesburg, Florida
-----
Total $ 97.2
========
</TABLE>
- ---------------
(1) Echelon's balance represents an 80% interest in this loan.
(2) Echelon's balance represents a 50% interest in this loan.
(3) Depending on excess cash flow relative to net operating income (as defined
in the loan documents) the borrowers may be required to pay additional
principal payments.
(4) The maturity date of certain loans may be extended upon satisfaction by the
borrowers of certain conditions.
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<PAGE> 46
Certain loans have extension options which allow the borrower, at its
option and subject to prior notification and payment of a fee to Echelon, to
extend the maturity of the loans pursuant to the loan agreement. Echelon has
attempted to encourage its borrowers to refinance or repay loans without
extension. The final maturities of the loans comprising Echelon's real estate
loan portfolio, including all applicable extension options, range from 1996 to
2001.
As is indicated in the preceding table, most of the loans bear interest at
a floating rate. The floating interest rates are at premiums to the prime rate
ranging from 0.75% to 2.0%.
Echelon's largest borrower is the Johnson Ezell Company ("Johnson Ezell")
with three loans totaling $35.5 million as of September 30, 1996. These three
loans are cross-collateralized with cross-default features under one mortgage.
The terms of the loans also include a participation feature, whereby Echelon
receives a variable percentage of the projects' excess cash flow (defined as net
cash flow after scheduled principal payments) that would be applied against the
outstanding loan balance. Johnson Ezell operates life care campuses for the
elderly. Life care campuses, also known as continuing care facilities, consist
of independent living facilities ("ILF"), assisted care living facilities
("ACLF"), and skilled nursing facilities ("SNF"). Johnson Ezell's campuses in
Port Charlotte, Florida, consisting of 440 ILF units, 140 ACLF units and a
120-bed SNF, and Leesburg, Florida, consisting of 400 ILF units, 20 ACLF units,
a 40-bed SNF, and miscellaneous commercial property provide the collateral for
Echelon's loans to Johnson Ezell. In addition, Echelon's loans to Johnson Ezell
are secured by certain personal guarantees.
As is indicated in the preceding table, Echelon has four loans aggregating
$20.6 million as of September 30, 1996 to the two Vine Street partnerships. Each
of such partnerships has as its managing general partner Brent McKinley, a local
real estate developer. Each loan is a stand-alone facility, and each loan is
secured by an office building located in the State of Washington. The several
buildings securing such loans range in size from 43,000 to 76,000 square feet.
The loans are split between two Vine Street partnerships: Vine Street Investors
("VSI") and Vine Street Associates ("VSA"). Each partnership guarantees the
other partnership's loans. VSI is the borrower of the Olympia Building and
Capital View I and II loans, while VSA provides the guarantees. VSA is the
borrower of the Town Square VI loan, while VSI provides the guarantee. The
guarantees are secured with second liens and assignment of leases on the other
partnership's security. All four buildings are leased to the State of
Washington. A comparison of lease terms to loan maturities is as follows:
<TABLE>
<CAPTION>
MAXIMUM
CURRENT ORIGINAL CURRENT EXTENDED MAXIMUM
LOAN LEASE LEASE LOAN LEASE
PROJECT LOANS MATURITY TERM MATURITY MATURITY MATURITY
--------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Capital View I............................... 10/30/98 5 years 5/31/99 10/30/98 5/31/04
Capital View II.............................. 12/31/99 5 years 6/30/00 12/31/99 6/20/05
Town View Square VI.......................... 11/30/96 10 years 11/30/96 5/31/01 11/30/01
Olympia Building............................. 1/31/97 5 years 4/30/97 7/31/01 4/30/02
</TABLE>
Extension options under the Vine Street loans are contingent upon the borrower
receiving lease extensions of no less than five years.
As of September 30, 1996, Echelon had a $23.5 million loan to the Marquardt
Company ("Marquardt"). Marquardt is owned by Ferranti PLC ("Ferranti"), which is
operating under receivership in the United Kingdom. The Ferranti receiver,
Arthur Andersen & Co., is in the process of liquidating Ferranti's assets,
including Marquardt. Echelon's loan is secured by a 54-acre industrial complex
located in California adjacent to the Van Nuys airport. Situated on the property
are several industrial buildings which are predominantly vacant, with the
exception of 173,764 square feet building on 16 acres of land leased to Kaiser
Marquardt for the manufacturing and testing of aerospace engines. In addition,
Echelon has been assigned Marquardt's lease with Kaiser Marquardt. Currently,
this lease generates $2.4 million in rental income, which is sufficient to
service the interest payments on Echelon's loan. Echelon estimates that the
potential fair market value of the industrial complex exceeds the outstanding
loan balance. Echelon has extended the maturity on this loan several times
through forbearance and does not expect full payment until the infrastructure
has been completed and the parcel has been subdivided. Ferranti recently
received initial indication of approval from
44
<PAGE> 47
Los Angeles County to subdivide the property to enhance its marketability. It is
anticipated that the implementation of the subdivision plan could take two years
to complete. In addition, the California Department of Environmental Protection
has received the environmental closure plan that the borrower has submitted and
Echelon is awaiting its approval.
As of September 30, 1996, Echelon had a $9.0 million loan to a partnership
made up of several officers of The Continuum Company, Inc., the Continuum
Building's sole tenant. The $9.0 million loan represents Echelon's portion of a
joint credit shared with Bank Midwest of Kansas City, Missouri, with each lender
equally secured. The loan is secured by a first mortgage on a 199,472 gross
square foot office building located in Austin, Texas. The borrower has provided
additional collateral in the form of an assignment of the lease to the lenders.
As of September 30, 1996, Echelon had a $5.3 million loan to Plaza Del Rio
Corp. The loan is secured by a first mortgage on a 76,587 square foot office
building located in Bradenton, Florida. The borrower's interest in the property
is a leasehold interest subject to a subordinated, long-term ground lease with
an expiration date of October 2083. Currently, the property is 100% leased to
eight tenants. The principals of the borrower have personally guaranteed a
portion of the principal balance. The original maturity of the loan has been
extended to October 1996, with four one-month options available to the borrower
to February 1997 upon payment of an extension fee, in order for borrower to
refinance the property.
As of September 30, 1996, Echelon had an 80% participation in a $4.1
million loan to Madison Building, Inc. The loan is secured by a first mortgage
on a 94,680 square foot Class-C office building located in downtown Tampa. The
borrower has provided additional collateral in the form of $250,000 in
marketable securities. The borrower's interest in the property is a leasehold
interest subject to a subordinated, long-term ground lease with an expiration
date of 2062. Currently, the building is less than 61% occupied and does not
generate enough cash flow to cover debt service. Although, in the past, the
borrower has had sufficient resources to cover previous shortfalls, there can be
no assurance that the borrower will be able to continue to make payments.
Echelon has commenced discussions with the borrower and expressed its desire to
be paid off, paid down or adequately secured by additional collateral or
principal payments. If Echelon is forced to foreclose, proceeds from the sale of
the building are expected to be substantially less than the principal amount of
the loan.
Echelon does not anticipate originating any new financings of commercial
real estate unless such financing facilitates a sale of an existing asset.
Echelon's strategy is to collect outstanding loan balances as soon as
practicable, to take the steps necessary to maximize the value of each asset,
and, ultimately, to withdraw from the business of commercial real estate
financing as existing loans mature and are repaid. In the event that certain
borrowers are unable to repay or refinance their loans at final maturity,
Echelon anticipates either negotiating an extension of the maturity of the loan
or taking the necessary legal steps to foreclose on the underlying collateral
and then liquidating the underlying property. Echelon's strategy is to redeploy
capital from its real estate loan portfolio to its Real Estate Business.
45
<PAGE> 48
COLLATERALIZED FINANCING AND LEASING OF AIRCRAFT/EQUIPMENT
General
Echelon owns and manages a portfolio of leveraged, direct finance and
operating leases of aircraft and other equipment and a number of collateralized
loans secured by aircraft.
Echelon's portfolio of leveraged leases represent transactions in which
Echelon acts as the equity investor and owner participant. In a typical aircraft
leveraged lease transaction, an airline, which may be unable either to allocate
capital to the purchase of a large commercial aircraft or to utilize effectively
the tax benefits related to the ownership thereof, and an aircraft manufacturer
enter into a transaction in which a third party (called an "owner participant"
or "equity participant") purchases the aircraft, typically through a special
purpose trust (an "owner trust"), from the manufacturer and then leases that
aircraft to the airline or to an affiliate of the manufacturer which then
subleases the aircraft to the airline. The owner trust is the legal owner of the
aircraft. The purchase of the aircraft is generally financed by both the equity
investment by the owner participant and by non-recourse loans borrowed by the
owner trust from a bank or other lender or lenders. The rent payable to the
owner trust pursuant to the leveraged lease generally represents the amount
necessary to service the debt, plus a return on the owner participant's equity
investment. The owner participant also generally reaps certain tax benefits as
the beneficial owner of the aircraft. These leases are typically long-term (20
years or more), and at their termination the owner participant takes possession
of the plane or other asset, which generally still has a useful life of several
years (usually 10 years in the case of aircraft). Upon expiration, the lessee
generally has the right to purchase the asset for the lower of the asset's fair
market value or for some stated percentage of the asset's cost. The lessee may
also generally terminate the lease early by payment of the lease termination
value (a pre-determined pricing method which reflects, among other things, the
amount of non-recourse debt, the initial investment and certain tax
consequences).
Under the terms of these leases, the ultimate user (i.e., the lessee or
sub-lessee) of the aircraft is generally required to bear the direct operating
costs and the risk of physical loss of the aircraft; maintain the aircraft;
indemnify Echelon as lessor against any liability suffered by Echelon as the
result of any act or omission of the lessee or its agents; maintain casualty
insurance in an amount equal to the specific amount set forth in the lease; and
maintain liability insurance naming Echelon as an additional insured with a
minimum coverage which Echelon deems appropriate. In general, substantially all
obligations connected with the ownership and operation of the leased aircraft
are assumed by the lessee, and minimal obligations are imposed upon Echelon.
Default by a lessee, however, may cause Echelon to incur unanticipated expenses.
See "Governmental and Environmental Regulations" below. Moreover, the risk that
the asset will be worth less than originally anticipated, and the risk that it
will not be re-leased or sold upon expiration of the lease, is borne by Echelon
as the owner participant.
Echelon's other lease assets include operating and direct finance leases.
Under the operating leases, Echelon leases an asset to a third party in
circumstances unrelated to the financing of such asset for a term which is
generally shorter than the typical term of a leveraged lease. Direct finance
leases are generally structurally similar to the leveraged lease transactions,
except for the absence of third party debt financing by the owner trust.
46
<PAGE> 49
Leveraged Leasing
The following table summarizes Echelon's leveraged lease portfolio:
Summary of Leveraged Lease Portfolio
<TABLE>
<CAPTION>
LEASE
AIRCRAFT/ASSET LEASE TERMINATION AGE OF ASSET
TYPE/YEAR COMMENCEMENT ORIGINAL COST DATE AT LEASE
LEASE/SUB-LEASES OF DELIVERY DATE ($ IN THOUSANDS) (MO./YR.) MATURITY
- --------------------------------------- ------------------- ------------ ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
A.I. Leasing II A300-B4-203 Mar-85 40,000 Jan-07 21
(Airbus)/Philippine Air 1985
Airbus A300 Leasing, Inc./ A300-B4-605R Apr-89 53,813 May-11 22
American 1989
Air Wisconsin Bae146-300A Sep-89 22,954 Mar-10 20
1989
American Airlines, Inc. DC 9-82 Oct-84 22,900 Jan-05 20
1984
American Airlines, Inc. DC 9-82 Oct-84 22,900 Jan-05 20
1984
America West Airlines, Inc. B757-2G7ER Dec-89 48,223 Jan-18 28
1989
Delta Air Lines, Inc. B737-232 ADV Apr-84 18,165 Mar-05 20
(Stage II) 1984
Delta Air Lines, Inc. B737-232 ADV Apr-84 17,976 Mar-05 20
(Stage II) 1984
Delta Air Lines, Inc. B737-247 ADV Jul-87 18,800 Jul-02 15
(Stage II) 1987
Delta Air Lines, Inc. B737-247 ADV Jul-87 18,800 Jul-02 15
(Stage II) 1987
Delta Air Lines, Inc. B767-332 ADV Nov-87 58,650 Jan-10 22
1987
Delta Air Lines, Inc. B757-232 Feb-88 43,306 Aug-10 22
1988
USAir, Inc. B737-301 Aug-86 24,303 Jan-07 20
1986
USAir, Inc. B737-301 Aug-86 24,401 Jan-07 20
1986
USAir, Inc. B737-301 Aug-86 24,257 Jan-07 20
1986
United Technologies, Inc./ two spare engines Jul-87 9,022 Jan-08 20
Tarom
Consolidated Rail Co. 25 GE Mar-85 32,469 Jan-01 --
C-36-7 locomotives
Union Bank-Real Estate 410,000 square foot Sep-86 50,100 Dec-11 --
Monterey Park, CA building
Reading & Bates(1) oil rig -- -- -- --
</TABLE>
(1) Reading & Bates encountered financial difficulties in 1987 and restructured
the lease. Echelon anticipates that the underlying asset could be subject
to foreclosure, which would trigger a tax liability payable by Echelon of
approximately $7.9 million. The Echelon Consolidated Balance Sheet at
September 30, 1996, which is included elsewhere in this Information
Statement, reflects a reserve for such amount.
Because current disposition of the leveraged lease assets would result in
significant current income tax liabilities, Echelon plans to hold the leveraged
lease assets to maturity or until the termination value of a leveraged lease
asset equals its market value. At that time, Echelon will either sell or hold
and re-lease the underlying aircraft or other asset, depending upon which option
is determined to provide the highest return. Current market values for aircraft
are relatively low due to the excess supply for most types of aircraft relative
to current market demands. After initial lease maturity, the average age of the
leased aircraft in Echelon's portfolio will be only 20 years. Based on a
standard useful aircraft life of 30 years, Echelon will have an average of ten
years to attempt to recoup the value of the leased assets through re-leasing and
to achieve an overall favorable return on its investment in such assets.
47
<PAGE> 50
Direct Finance and Operating Leases
Echelon's portfolio includes two direct finance lease transactions. The
first is through the Progress Potomac Capital Ventures ("PPCV") joint venture
between Echelon and Potomac Capital Corporation ("Potomac") and involves two
1973 DC10-30s that are currently on lease to Continental Airlines
("Continental"). Continental reduced and/or renegotiated the rent paid to
lessors on many of its leased aircraft. As a result, PPCV agreed to revised
terms with Continental pursuant to which the rent payable was deferred for 4
months starting in 1992 and 16 months starting in 1995. Continental issued
deferred rent notes with interest rates of 10.4% and 8.0% for the 1992 and 1995
notes, respectively. The principal amount of these notes as of September 30,
1996 was $7.4 million and will be fully amortized by the maturity of the notes
in 2000. The second direct finance lease covers a 1984 B737-300 leased to
Southwest Airlines through June 1, 2004.
Echelon currently has two operating leases: a 1981 B727-200 Adv. aircraft
on lease to Air Micronesia (a subsidiary of Continental) which has a lease
expiration of December 1998, and two 1986 CFM-56 engines leased through PPCV to
America West.
Although operating leases are generally for relatively higher rental rates
than longer term direct finance or leveraged leases and the lessee enjoys
relatively greater flexibility through the shorter term, the lessor under an
operating lease may be at relatively greater risk because the asset must be
re-leased on maturity. Re-leasing any such asset could take time and could be
delayed due to future market weakness and could be impacted by potentially lower
future rental rates.
Echelon believes that to maximize the long-term values of its existing
aircraft and equipment assets, it may be necessary to hold such assets beyond
the terms of their current leases. Echelon also believes that re-deploying such
assets under operating leases represents an opportunity which could provide
acceptable returns on a risk-adjusted basis.
Aircraft Lending
The following table summarizes Echelon's aircraft loan portfolio:
Summary of Aircraft Loan Portfolio
<TABLE>
<CAPTION>
AIRCRAFT LOAN
YEAR/ BALANCE AT 9/30/96
BORROWER/LESSEE ASSET TYPE ($ MILLIONS) LEASE MATURITY LOAN MATURITY INTEREST RATE BASIS
- -------------------------------- ------------- ------------------ -------------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Pegasus/TWA..................... 1974 L1011-50 $ 9.9 Dec-99 Jun-96 Floating
Pegasus/ChallengAir............. 1973 DC10-30 26.1 Dec-97 Jun-96 Floating
Pegasus/Continental............. 1986 MD-82 10.7 Jan-03 Jan-03 Fixed
------------------
Total................... $ 46.7
==================
</TABLE>
All of Echelon's aircraft loans are to Pegasus Capital Corporation
("Pegasus"), an aircraft leasing company. Pegasus leases over 50 planes to the
airline industry worldwide through itself and its two affiliates. As indicated
by the table above, as of September 30, 1996, the three loans to Pegasus
consisted of a $9.9 million loan secured by a 1974 L1011-50 aircraft leased by
Pegasus to TWA, a $26.1 million loan secured by a 1973 DC 10-30 aircraft leased
by Pegasus to ChallengAir (a charter air company based in Brussels, Belgium) and
a $10.7 million loan secured by a 1986 MD-82 leased by Pegasus to Continental.
In October 1996, the Pegasus/Continental $10.7 million loan was repaid in full.
Echelon plans to withdraw from the aircraft lending business and is working
with Pegasus to negotiate the sale or refinancing of its loans as promptly as
practicable. If neither action proves feasible, Echelon will foreclose and
attempt to sell the assets. The proceeds from any such sale or refinancing would
be used to repay the PCH Note issued to PCH. In light of the credit quality of
Pegasus's lessees and the current low market value of the aircraft securing
Echelon's loans to Pegasus, Echelon has also created a provision in its
financial statements equal to the losses anticipated upon the sale or
refinancing of such loans or the sale of the collateral upon foreclosure. The
loans are reflected in the Consolidated Balance Sheet as of September 30, 1996
among the "Assets Held for Sale."
48
<PAGE> 51
Bankruptcy of Lessees of Aircraft
Due to many factors, including the fluctuating state of the economy,
uncertain traffic levels, intense route and fare competition and the ease of
entry of new airlines under the Airline Deregulation Act of 1978, several
commercial airlines in recent years have been forced to suspend or cease
operations due to financial difficulties. These airlines have filed petitions
for reorganization under the Federal Bankruptcy Code, have merged with other
airlines or have been liquidated. Echelon believes this recent economic
uncertainty in the commercial airline industry is indicative of the periodic
fluctuations in the industry's economic performance. No assurance can be given
that the weakening financial condition or bankruptcies of lessees of aircraft
from Echelon would not have a material adverse effect on Echelon's business,
results of operations or financial condition. Moreover, if aircraft are returned
by bankrupt carriers, there can be no assurance that Echelon will be able to
sell or re-lease such aircraft on favorable terms or in a timely manner.
In order to encourage equipment financing to the commercial airline
industry, federal bankruptcy laws traditionally have afforded special treatment
to certain lenders or lessors who have provided such financing. Section 1110 of
the Bankruptcy Code implements this policy by creating a category of aircraft
lenders and lessors whose rights to repossession upon the occurrence of a
default are substantially enhanced.
In reorganizations of airlines under chapter 11 of the Bankruptcy Code,
Section 1110 provides that the airline debtor cannot prevent a lessor, such as
Echelon, or, with respect to transactions entered into prior to October 1994, a
secured party who holds a purchase-money security interest, from taking action
in accordance with its security documents or lease to repossess the aircraft in
the event of a default, unless, within 60 days after the date of the order
granting the debtor relief under the Bankruptcy Code, the airline cures all
defaults under the lease or secured loan (other than those arising solely from
the bankruptcy, insolvency or financial condition of the debtor) and agrees to
perform all future obligations under the lease or secured loan.
Section 1110 only protects a financing party's rights in respect of
aircraft leased to an air carrier operating under an air carrier operating
certificate issued by the Secretary of Transportation for aircraft capable of
carrying ten or more individuals or 6,000 pounds of cargo. Airlines based
outside the United States are not covered by such certificates and accordingly
leases of aircraft to such parties are not entitled to Section 1110 protection
in a bankruptcy or other insolvency proceeding involving such airline. Echelon
currently has two leases to airlines based outside the United States. In the
event of a default by such foreign lessees or a foreign insolvency proceeding
involving such lessees, Echelon's legal rights, including the right of
repossession, may be subjected to legal treatment different from what is
provided in the United States. Similarly, because Section 1110 is intended to
protect parties offering financing to airline operators, it is unlikely that
leases to manufacturers would be entitled to the protections of such Section.
However, because subleases of assets by such manufacturers to airline operators
would generally be entitled to such protections, the benefits thereof could be
indirectly available to the original owner/lessor. Echelon currently has two
leases to affiliates of Airbus Industrie G.I.E. and one lease to United
Technologies, Inc., each of which is a manufacturer which has sub-leased the
relevant assets to airline operators.
When Echelon entered into lease transactions with domestic airlines,
Echelon generally received opinions of counsel that it was entitled to the
protections of Section 1110. However, there can be no assurance that, in the
event of a bankruptcy of an airline to which Echelon leased an aircraft, a court
would determine that a lease to such airline was entitled to Section 1110
protection. If an aircraft lease were not subject to Section 1110, payments
thereunder may be interrupted without the ability to repossess the aircraft or
exercise other remedies thereunder. Further, Section 1110 does not prevent a
lessee from rejecting a lease or demanding a renegotiation of the lease as a
condition to continuing to perform under the lease. In the event Echelon were to
repossess an aircraft after default by an airline, it may not be able to
re-lease such aircraft at comparable rates.
Aircraft Remarketing and Sale
On termination of a lease and return or repossession of an aircraft to or
by Echelon, Echelon would need to remarket the aircraft to realize its full
investment. The remarketing of aircraft may be through a lease or sale. The
terms and conditions of any such transaction cannot be determined until such
time as the transaction
49
<PAGE> 52
is consummated. Whether an investment in any aircraft initially subject to a
leveraged or direct finance lease will ultimately prove to have been profitable
may depend upon the terms on which such aircraft will be re-leased or sold. No
assurance can be given that as aircraft come off lease, Echelon will be able to
re-lease or sell such aircraft on commercially acceptable terms or in a timely
manner. Furthermore, in the event of a lessee default or bankruptcy requiring
Echelon to sell the aircraft prior to expected maturity of the lease, Echelon
would accelerate the incurrence of tax liabilities, which could be significant,
even if the aircraft is sold for less than its long-term value.
EMPLOYEES
At September 30, 1996, Echelon had 80 full-time employees. These employees
work in a variety of capacities, comprised of 17 in executive and corporate
functions, 29 in real estate and property management services and 34 in marina
and other operations. None of Echelon's employees are represented by labor
unions. Echelon believes that, generally, labor relations are satisfactory and
have been maintained in a normal and customary manner. From time to time,
Echelon engages third party contractors on development projects for
infrastructure management and building construction, these contractors'
employees include persons represented by various building and trade unions.
COMPETITION
Real Estate Industry
The real estate ownership, development and management markets are generally
regional, and the identity of Echelon's competitors and the levels of
competition vary in each area of activity and in each market. While Echelon
encounters significant competition in each area of activity and in each market,
Echelon believes that no one competitor is dominant. In particular, within the
Tampa Bay area in which Echelon's operations are concentrated, there are
numerous commercial properties that compete with Echelon in attracting tenants,
numerous companies that compete with Echelon in selecting land for development
and properties for acquisition (including within the affordable housing market
generally and for Housing Tax Credits in particular) and numerous companies that
compete for real estate management business. Echelon believes competition is
based largely on location, quality of products and services and financial
resources. Although certain of Echelon's competitors have significantly greater
financial resources than Echelon and may have greater experience than Echelon in
acquiring, developing and managing real estate, placing them at a competitive
advantage in this regard, Echelon believes the location and quality of its
properties places Echelon in a generally favorable competitive position.
Aircraft Leasing Industry
The aircraft leasing industry is highly competitive, offering users
alternatives to the purchase of nearly every type of aircraft. Competitive
conditions vary considerably depending upon the type of aircraft to be leased
and the nature of the prospective lessee. As Echelon's aircraft leases mature,
Echelon will be subject to such competition to the extent it attempts to
re-lease such aircraft. In attempting to obtain commitments to lease aircraft to
specific lessees, Echelon may be expected to compete, directly or indirectly,
with aircraft manufacturers, airlines and other operators, equipment managers,
leasing companies, financial institutions and numerous other parties engaged in
leasing, managing, marketing or remarketing aircraft. Many of these competitors
have significantly greater financial resources than Echelon and may have greater
experience than Echelon in managing, leasing, operating and selling aircraft.
Such competitors may offer to lease aircraft at rates lower than those which
Echelon can reasonably offer and may provide certain benefits, such as
maintenance, crews, support services and trade-in privileges, which Echelon
generally cannot provide. In addition, to the extent troubled airlines seek to
re-negotiate the terms of the leases relating to their aircraft, certain of
Echelon's competitors with greater resources may be in better bargaining
positions to avoid renegotiation or may be able to enter into such negotiations
and achieve relatively more favorable terms than Echelon would be able to do.
50
<PAGE> 53
LEGAL PROCEEDINGS
There are no material legal proceedings pending against Echelon.
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
Real Estate Industry
Echelon believes that it is in compliance in all material respects with all
material environmental laws or regulations and that the cost of continued
compliance with such laws and regulations will not have a material adverse
effect on Echelon. However, many of Echelon's properties are located in urban
areas where fill or current or historic industrial uses of the areas may have
caused site contamination at the properties. Nonetheless, at this time, Echelon
does not anticipate that regulatory authorities will require remediation of the
properties in any manner that would result in a material adverse effect on
Echelon's business, results of operations or financial condition, and Echelon
estimates that its proportionate share of liability for cleaning up all sites
ranges from $0.1 million to $1.0 million. See Note 11 to the Consolidated
Financial Statements included in this Information Statement.
Aircraft Leasing Industry
General. The ownership and operation of aircraft in the United States are
strictly regulated by the FAA, which imposes certain minimum restrictions and
economic burdens upon the use, maintenance and ownership of aircraft. The FAA
Act and FAA regulations contain strict provisions governing various aspects of
aircraft ownership and operation, including aircraft inspection and
certification, maintenance, equipment requirements, general operating and flight
rules, noise levels, certification of personnel, and record keeping in
connection with aircraft maintenance. In the last several years, the FAA has
issued a number of administrative directives and other regulations relating to,
among other things, collision avoidance systems, airborne windshear avoidance
systems, noise abatement and increased inspection requirements, which will
require lessees or Echelon to incur additional expenditures for compliance. FAA
policy has given high priority to aviation safety, and a primary objective of
FAA regulations is that an aircraft be maintained properly during its service
life. FAA regulations establish standards for repairs, periodic overhauls and
alterations and require that the owner or operator of an aircraft establish an
airworthiness inspection program to be carried out by certified mechanics
qualified to perform aircraft repairs. Each aircraft in operation is required to
have a Standard Airworthiness Certificate issued by the FAA.
Maintenance and Aircraft Aging. Echelon, as the beneficial owner of
aircraft, bears the ultimate responsibility for compliance with certain federal
regulations. However, under all of its aircraft leases, the lessee has the
primary obligation to ensure that at all times, the use, operation, maintenance
and repair of the aircraft are in compliance with all applicable governmental
rules and regulations and that Echelon is indemnified from loss by the lessee
for breach of any of these lessee responsibilities. Changes in government
regulations may increase the cost to, and other burdens on, Echelon of complying
with such regulations.
Maintenance is further regulated by the FAA which also monitors compliance.
At lease termination, the lessees are required to return the aircraft in good
operating condition. Echelon may incur unanticipated maintenance expenses if a
lessee were to default under a lease and Echelon were to take possession of the
leased aircraft without such maintenance having been performed. If the lessee
defaulting is in bankruptcy, Echelon will file a proof of claim for the required
maintenance expenses in the lessee's bankruptcy proceedings and attempt to
negotiate payment and reimbursement of a portion of these expenses. The
bankruptcy of a lessee could adversely impact Echelon's ability to recover
maintenance expense.
As a result of investigations into the causes of several incidents,
including rapid in-flight aircraft decompression and fatigue cracks in critical
parts, the aircraft manufacturers issued service bulletins and the FAA has also
issued airworthiness directives ("ADs"). These bulletins and directives provide
instructions to aircraft operators in the maintenance of aircraft and are
intended to prevent the occurrence of similar incidents. Compliance with ADs is
mandatory.
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<PAGE> 54
On March 6, 1989, the FAA ordered extensive repairs of all older commercial
aircraft which it implemented through several 1990 ADs. These ADs were issued to
ensure that the oldest portion of the nation's transport aircraft fleet remains
airworthy. The FAA is requiring that these aircraft undergo extensive structural
modifications. These modifications are required upon accumulation of 20 years'
time in service, prior to the accumulation of a designated number of
flight-cycles or prior to 1994 deadlines established by the various ADs,
whichever occurs later. Echelon has interests in three aircraft that have over
20 years' time in service. A formal program to control corrosion in all aircraft
has also been added to the FAA mandatory requirements for maintenance for each
type of aircraft. These FAA rules and proposed rules evidence the current
approach to aircraft maintenance developed by the manufacturers and supported by
the FAA in conjunction with an aircraft industry group. Echelon may be required
to pay for these FAA requirements if a lessee defaults or if necessary to
release or sell the aircraft.
There are more than 12,000 jet aircraft in the western fleets of the
principal airlines of the world. On average these aircraft are less than 13
years old. Several hundred have been in service for 20 years or more and that
number is growing. See "Summary of Leveraged Lease Asset Portfolio" above for a
table showing the lease date, manufacture and the date of lease termination of
Echelon aircraft.
Aircraft Noise. The FAA, through regulations, has categorized certain
aircraft types as Stage I, Stage II and Stage III according to the noise level
as measured at three designated points. Stage I aircraft create the highest
measured noise levels. Aircraft which exceed Stage I noise maximums are no
longer allowed to operate from civil airports in the United States.
The Aviation Safety and Capacity Act of 1990 bans the operation of Stage II
aircraft after December 31, 1999. All of Echelon's leased aircraft have Stage
III noise certification, except four B737-200s leased to Delta. A lease
extension with Delta Airlines requires the airline to install hushkits on two of
such aircraft, while Echelon plans to install hushkits on the other two aircraft
in order to qualify for Stage III noise certification. The cost of the hushkits
is currently approximately $2.5 million per aircraft.
Registration of Aircraft; United States Person. Under the FAA Act, the
operation of an aircraft not registered with the FAA in the United States is
generally unlawful. Subject to certain limited exceptions, an aircraft may not
be registered under the FAA Act unless it is owned by a "citizen of the United
States" or a "resident alien" of the United States. If Echelon were to cease
being a "citizen of the United States" or a "resident alien" of the United
States, it may be subject to claims based upon its breach of covenants and
representations concerning its status as a citizen of the United States included
in the contracts underlying its leveraged, direct finance and operating leases.
Because Florida Progress will continue to guarantee certain of these covenants
after the Distribution, the Distribution Agreement will require that the Echelon
Chairman, the Echelon President and two-thirds of the Echelon Board of Directors
be United States citizens or resident aliens within the meaning of the FAA Act
for as long as any of such covenants are guaranteed by Florida Progress.
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<PAGE> 55
MANAGEMENT AND EXECUTIVE COMPENSATION
BOARD OF DIRECTORS
Echelon has set the size of its Board of Directors at five. Echelon's
current Board has four directors and one vacancy. One of the directors is an
executive officer of Florida Progress. Echelon anticipates that a fifth director
will be named to fill the vacancy shortly after the Distribution. The Echelon
Board of Directors is divided into three classes. Directors for each class will
be elected at the annual meeting of stockholders held in the year in which the
term for such class expires and will serve thereafter for three years.
The following sets forth the names, in alphabetical order, and certain
information about the persons who are the current directors of Echelon.
W. Michael Doramus, age 46, is a director and the Chairman of the Board of
Echelon, with a term to expire at the annual meeting of stockholders to be held
in 1999. Mr. Doramus brings more than two decades of executive experience in all
phases of multi-family residential real estate operations, including project
planning, acquisition, development, financing, management and disposition. Mr.
Doramus founded Mission Development Company, Dallas, Texas, a real estate
consulting services, real estate development, systems development, technology
and market research company in January of 1996 and serves as its President. He
served as Executive Vice President and National Partner of JPI Development
Partners, Inc., Dallas, Texas from 1992 to 1995. Mr. Doramus served as President
of Rosewood Management and Acquisition Group, Inc., from 1990 to 1992. Prior to
1992, he served as President of various companies including Doramus Ventures,
Inc., from 1988 to 1989 and two Trammel Crow companies, Brentwood Properties and
Trammell Crow Advisory Services, Inc. from 1977 to 1987.
Darryl A. LeClair, age 37, is a director and the President and Chief
Executive Officer of Echelon. His term as director will expire at the annual
meeting of stockholders to be held in 1999. Prior to the Distribution, Mr.
LeClair had been employed by Florida Progress or its affiliates for more than 14
years, serving in a variety of executive positions, particularly those regarding
real estate development, management and finance and aircraft leasing and
finance. Prior to the Distribution, Mr. LeClair served in a variety of
capacities, including as Vice President of Mergers, Acquisitions and
Divestitures of Florida Progress from 1991 through 1996, and as the President of
PCC, Talquin Development Company ("Talquin") and Progress Leasing Corporation
("Progress Leasing") from 1992 to the time such companies were combined with and
into Echelon. From 1988 to 1992 he was Vice President of Talquin, heading up
operations, including the real estate group.
Thomas W. Mahr, age 38, is a director of Echelon, with a term to expire at
the annual meeting of stockholders in 1998. Mr. Mahr has more than 12 years of
experience in the aircraft leasing and finance and airline industries, including
service in the treasury and financial planning functions for regional and
national airlines and more recently in executive positions with firms focusing
solely on aircraft financing. Mr. Mahr is currently a Managing Director of the
Seabury Group, a firm specializing in aviation investment banking located in
Greenwich, Connecticut. Mr. Mahr was a Principal with Fieldstone Private Capital
Group, New York, New York from 1991 to 1996. From 1989 to 1991, he served as
Vice President of Marketing for Chrysler Capital Corporation, Greenwich,
Connecticut, responsible for all aviation investments. He served as Vice
President and Chief Financial Officer of Rocky Mountain Airways, Denver,
Colorado, from 1988 to 1989 and as Director of Finance of Texas Air Corporation,
Houston, Texas, from 1986 to 1988. From 1983 to 1985, Mr. Mahr served as Manager
of Finance for New York Air, Flushing, New York.
Joseph H. Richardson, age 47, is a director of Echelon, with a term to
expire at the annual meeting of stockholders in 1997. Mr. Richardson has been
employed by Florida Progress or its affiliates for more than 20 years. He joined
Florida Power Corporation in 1976 as Assistant Counsel, was promoted to
Corporate Counsel in 1977 and became Assistant General Counsel of Florida
Progress in 1983. In 1986 he joined Talquin as Vice President and was promoted
to President and Chief Executive Officer in 1990. While at Talquin, he also
served as Group Vice President and Senior Vice President of the Development
Group of Florida Progress. In 1993 Mr. Richardson became Senior Vice President,
Legal and Administrative Services at Florida Power and in 1995 became Senior
Vice President of Energy Distribution. In April 1996, he became
53
<PAGE> 56
a member of the Board of Directors and was promoted to President and Chief
Operating Officer of Florida Power and continues to serve as a Group Vice
President of the Utility Group of Florida Progress.
DIRECTORS' COMPENSATION
Directors who are not employees of Echelon ("Non-Employee Directors") will
receive an annual retainer fee of $15,000 to be paid quarterly, in arrears, in
the form of Echelon Common Stock and an automatic grant of options to purchase
1,000 shares of Echelon Common Stock each year in accordance with the Echelon
International Corporation Non-Employee Directors' Stock Plan (the "Directors'
Plan") approved by Echelon's stockholder prior to the Distribution. In addition,
Non-Employee Directors will receive $1,000 for each meeting of the Board of
Directors attended and $500 for each meeting of a Committee of the Board of
Directors attended. Non-Employee Directors who serve as Chairman of a Committee
of the Board of Directors will receive an additional $750 for each meeting
chaired.
In addition to the annual retainer fee and meeting fees described above, W.
Michael Doramus will receive an additional $100,000 per year as Chairman of the
Board.
COMMITTEES OF THE BOARD OF DIRECTORS
Echelon's Board of Directors has established the following standing
committees to act between regular meetings of the Board of Directors:
Audit Committee. The Audit Committee will be comprised of at least two
Non-Employee Directors. Its function includes the recommendation of the
independent auditors to be engaged by Echelon and the review of Echelon's
general policies and procedures with respect to audits and accounting and
financial controls.
Compensation Committee. The Compensation Committee is comprised of two
Non-Employee Directors, Thomas W. Mahr and Joseph H. Richardson. Its function
includes the establishment of compensation policies for the executive officers
of Echelon and administration of any stock-based compensation plans except the
Directors' Plan.
Nominating Committee. The Nominating Committee is comprised of two
Non-Employee Directors, W. Michael Doramus and Joseph H. Richardson. Its
function includes the consideration of recommendations for nominees for election
to the Board of Directors submitted by stockholders.
EXECUTIVE OFFICERS
Listed below is certain information about the persons who will be Echelon's
executive officers after the Distribution.
Darryl A. LeClair, age 37, is the President and Chief Executive Officer of
Echelon. See biographical information above under "Board of Directors."
Larry J. Newsome, age 48, is the Senior Vice President, Chief Financial
Officer, Secretary and Treasurer of Echelon. Mr. Newsome has been employed by
Florida Progress or its affiliates for more than 25 years, serving in a variety
of tax, financial and managerial positions. He served as Vice President of Tax
Administration at Florida Progress (1992-1996) and held the same position at
Florida Power Corporation, its subsidiary (1994-1996). He was the Director of
Tax Administration at Florida Progress from 1983 to 1992. Until 1993, Mr.
Newsome also served Progress Leasing as a Director from 1983 and as Assistant
Treasurer from 1984 and served PLC Leasing as a Director and Assistant Treasurer
from 1985. He joined Florida Power Corporation in 1971 and served in various
capacities including Manager and Supervisor of Tax Accounting, Senior Accountant
and Accountant.
Thomas D. Wilson, age 49, is a Vice President of Echelon. Mr. Wilson has
been employed by Florida Progress or its affiliates for more than seven years,
having served as Vice President of PCC (1989-1996), as Director and Vice
President of Progress Leasing and PLC Leasing (1991-1996) and as Vice President
of Talquin (1993-1996). He joined Florida Progress in 1989 as the Director of
Real Estate, Lending and Leasing.
54
<PAGE> 57
Raymond F. Higgins, age 45, is the Vice President of Financial Analysis,
Chief Information Officer and Assistant Secretary of Echelon. Mr. Higgins has
been employed by Florida Progress or its affiliates for more than 14 years,
having served as the Director of Financial Reporting & Planning for Florida
Power Corporation (1992-1996) and was Director of Financial Reporting & Planning
for Florida Progress from 1986 to 1992. He joined Florida Power Corporation in
1982 and held various financial positions including, Manager of Financial
Reporting, Senior Accountant and Accountant.
James R. Hobbs, Jr., C.P.A., age 44, is the Vice President and Controller
of Echelon. Mr. Hobbs has been employed by Florida Progress or its affiliates
for more than 14 years, having served as Controller and Assistant Treasurer of
PCC (1995-1996), Controller and Assistant Treasurer of Talquin (1993-1996) and
Controller and Assistant Treasurer of Progress Leasing and PLC Leasing
(1995-1996). He was Manager of Accounting for Talquin from 1987 to 1993, and
Supervisor of Accounting for Talquin Corporation from 1985 to 1987. He joined
Florida Power Corporation in 1982 and held the positions of Operational Auditor
and Senior Operational Auditor until 1985.
Michael S. Talmadge, age 37, is the Vice President of Leasing and Real
Estate Services of Echelon. Mr. Talmadge has more than 11 years of experience in
managing commercial real estate projects, the last five years in the Tampa Bay
area. He has served as the President of TRS Commercial Real Estate Services,
Inc., a leasing and property management company in Tampa, Florida since 1993. He
joined TRS Commercial Real Estate Services, Inc. as Director of Marketing in
1991. Mr. Talmadge served as a Principal for Trammell Crow Company in Denver and
Colorado Springs, Colorado from 1989 to 1991. He served as General Manager of
Phase One Development for San Diego Gas & Electric from 1988 to 1989, after
joining the company as marketing executive in 1987.
The executive officers of Echelon will resign from all positions with
Florida Progress and its subsidiaries prior to the Distribution.
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<PAGE> 58
COMPENSATION OF ECHELON'S EXECUTIVE OFFICERS
The information set forth in the following table reflects compensation
earned based on services rendered to Florida Progress and its affiliates in 1995
by Echelon's Chief Executive Officer and the other two executive officers of
Echelon whose total annual salary and bonus exceeded $100,000 (collectively the
"Named Executive Officers"). The services rendered to Florida Progress, in some
respects, were in capacities not equivalent to those to be provided to Echelon,
and the prior compensation may not be indicative of the compensation to be paid
to the Named Executive Officers of Echelon in the future.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(1) PAYOUTS
------------------------- ------------
(A) (H) (I)
NAME AND PRINCIPAL (B) (C) (D) LTIP ALL OTHER
POSITION(S) WITH ECHELON YEAR SALARY BONUS PAYOUTS COMPENSATION(2)
- --------------------------------------------- ---- -------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Darryl A. LeClair............................ 1995 $211,947 $87,500 N/A $ 6,645
President and Chief Executive Officer
Larry J. Newsome............................. 1995 $133,450 $44,000 N/A $ 2,004
Senior Vice President, Chief
Financial Officer, Secretary and Treasurer
Thomas D. Wilson............................. 1995 $ 98,055 $19,500 N/A $ 2,221
Vice President
</TABLE>
- ---------------
(1) All other annual compensation paid to the Named Executive Officers during
1995, other than salary and annual incentive compensation, does not exceed
the minimum amounts required to be reported pursuant to Securities and
Exchange Commission rules.
(2) Florida Progress matching contributions to its Savings Plan and/or its
Executive Optional Deferred Compensation Plan on behalf of the Named
Executive Officers.
The following table provides information with respect to performance shares
awarded in 1995 to the Named Executive Officers of Echelon for the 1995-1997
performance cycle of the Florida Progress Long-Term Incentive Plan ("LTIP"):
LONG-TERM INCENTIVE PLAN(1)
AWARDS IN 1995
<TABLE>
<CAPTION>
ESTIMATED PAYOUT AT
NUMBER OF PERFORMANCE END OF PERIOD(3)
PERFORMANCE PERIOD ---------------------------
NAME SHARES(2) COVERED THRESHOLD TARGET MAXIMUM
- ---------------------------------- ----------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Darryl A. LeClair................. 1,483 1995-1997 742 shares 1,483 shares 2,225 shares
Larry J. Newsome.................. 625 1995-1997 313 shares 625 shares 938 shares
</TABLE>
- ---------------
(1) The LTIP is an incentive plan to reward participants for long-term growth
and performance of Florida Progress.
(2) Performance shares awarded under the LTIP which, upon achievement of
performance criteria, would result in the payout of shares of common stock
of Florida Progress, two-thirds of which would be restricted for certain
periods of time. Payouts of shares of common stock are made for achieving
returns on equity equal to or exceeding the thresholds determined by the
Compensation Committee of the Florida Progress Board of Directors.
(3) Awards are earned upon achievement of Florida Progress and/or subsidiary
return on equity goals for the three-year performance cycle.
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<PAGE> 59
PENSION PLAN TABLE
The table below illustrates the estimated annual benefits (computed as a
straight life annuity beginning at retirement at age 65) payable under Florida
Progress Corporation's Retirement Plan and Nondiscrimination Plan for specified
final average compensation and years of service levels. Echelon does not have a
retirement plan.
ESTIMATED ANNUAL RETIREMENT BENEFITS PAYABLE UNDER
THE RETIREMENT PLAN AND NONDISCRIMINATION PLAN
<TABLE>
<CAPTION>
AVERAGE SERVICE YEARS
ANNUAL --------------------------------------------------------------------------------------
COMPENSATION 5 10 15 20 25 30 35 OR MORE
- ------------ ------- ------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
$100,000 $ 9,000 $18,000 $ 27,000 $ 36,000 $ 45,000 $ 54,000 $ 63,000
200,000 18,000 36,000 54,000 72,000 90,000 108,000 126,000
300,000 27,000 54,000 81,000 108,000 135,000 162,000 189,000
400,000 36,000 72,000 108,000 144,000 180,000 216,000 252,000
500,000 45,000 90,000 135,000 180,000 225,000 270,000 315,000
</TABLE>
Under the Retirement Plan and the Nondiscrimination Plan, the compensation
taken into account in calculating benefits is salary only. The years of credited
service that would be used in calculating benefits under the Retirement Plan and
the Nondiscrimination Plan for the Named Executive Officers in the summary
compensation table are as follows: Darryl A. LeClair, 14 years of service; Larry
J. Newsome, 25 years of service; Thomas D. Wilson, 7 years of service. The
benefits under the Retirement Plan and the Nondiscrimination Plan are subject to
offset by an amount equal to 1/7% of a participant's primary Social Security
benefit for each year of service (with a maximum offset of 40%).
EQUITY BASED COMPENSATION PLANS
Echelon has adopted the Echelon International Corporation 1996 Stock Option
Plan (the "Stock Option Plan"), the Echelon International Corporation 1996
Employee Stock Purchase Plan (the "Stock Purchase Plan"), the Echelon
International Corporation Long-Term Incentive Plan (the "Echelon LTIP") and the
Directors' Plan. The Compensation Committee will administer the Stock Option
Plan, Stock Purchase Plan and Echelon LTIP and make the determination as to the
grant of awards, options and/or rights under the respective plans. No member of
the committee may receive grants or awards under the plans. The Board of
Directors of Echelon will administer the Directors' Plan.
Stock Option Plan. A maximum of 150,000 shares of Echelon Common Stock are
reserved for issuance under the plan. Under the Stock Option Plan, incentive
stock options, nonqualified stock options or any combination thereof may be
granted to any employee of Echelon. In general, the exercise price of the
options will be determined by the committee, but such price will not be less
than the market price of Echelon Common Stock on the date the option is granted.
Options will normally vest 20% each year after issuance over a period of five
years and will expire after 10 years.
Stock Purchase Plan. An aggregate of 75,000 shares of Echelon Common Stock
are reserved for issuance under the plan. Under the Stock Purchase Plan, all
employees will be given the opportunity to purchase shares of Echelon Common
Stock two times a year at a price equal to 85% of the market price of the stock
immediately prior to the beginning of each offering period. The Stock Purchase
Plan provides for two offering periods, the months of March and September, in
each of the years 1997-2006.
Echelon LTIP. An aggregate of 950,000 shares of Echelon Common Stock are
reserved for issuance under the plan. Under the Echelon LTIP, restricted stock,
incentive stock options, nonqualified stock options and stock appreciation
rights or any combination thereof may be granted to Echelon employees. The
exercise price of the options granted under the plan will be determined in the
discretion of the committee administering the plan, which price may not be less
than the market price of Echelon Common Stock on the date the option is granted.
Options will normally vest 20% each year after issuance over a period of five
years and will expire
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<PAGE> 60
after 10 years. The committee may condition awards of restricted stock and stock
appreciations rights upon satisfaction of performance criteria or other
conditions.
Directors' Plan. An aggregate of 25,000 shares of Echelon Common Stock are
reserved for issuance under the plan. Non-Employee Directors will receive an
annual retainer fee of $15,000 paid quarterly in the form of Echelon Common
Stock. In addition to the annual retainer, each year Non-Employee Directors who
are elected or are continuing as Non-Employee Directors as of the conclusion of
Echelon's annual meeting of stockholders will receive options to purchase 1,000
shares of Echelon Common Stock. The exercise price of the options will be equal
to the market price of Echelon Common Stock on the date the option is granted.
Options will vest fully at the end of one year and will expire after five years.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of its
executive officers, including the Named Executive Officers. The initial term of
the agreement for Mr. LeClair is through December 31, 1999, and for each of
Messrs. Newsome and Wilson is through December 31, 1998. Pursuant to their
employment agreements, the annual base salaries of Messrs. LeClair, Newsome and
Wilson will be at least $280,000, $170,000 and $106,860, respectively. Under
their employment agreements, Messrs. LeClair, Newsome and Wilson are eligible
for annual incentive cash bonuses under Echelon's management incentive
compensation plan (the "MICP Bonus") based upon the annual results of Echelon's
operations and Messrs. LeClair and Newsome are eligible under the Echelon LTIP
to earn shares of Echelon Common Stock based upon the cumulative results of
Echelon's operations for the three years ending December 31, 1999 (the "LTIP
Bonus"). Pursuant to their employment agreements, Messrs. LeClair, Newsome and
Wilson have been granted 194,011, 32,335 and 12,934 shares, respectively, of
Echelon Common Stock under the Echelon LTIP. These shares are subject to a risk
of forfeiture which lapses with respect to one-quarter of the shares each
January 31st, commencing January 31, 1998. In addition, Messrs. LeClair, Newsome
and Wilson have been granted options to purchase 129,340, 2,500 and 1,000
shares, respectively, of Echelon Common Stock under the Echelon LTIP at an
exercise price equal to the closing price for Echelon's Common Stock on the NYSE
eight months after the completion of the Distribution. These options generally
have a term of ten years. One third of the options issued to Mr. LeClair and
one-fifth of the options issued to Messrs. Newsome and Wilson become exercisable
each January 31st, commencing January 31, 1998.
The employment agreements provide that Messrs. LeClair, Newsome and Wilson
are entitled to certain severance benefits in the event that their employment is
terminated by Echelon "without cause" or by such executive within one year
following a "change of control" (both as defined in the employment agreements).
In the event of termination "without cause," the executive will receive his base
salary for the remainder of the then effective employment term or 24 months (36
months for Mr. LeClair), whichever occurs first, and the MICP Bonus for the year
of termination multiplied by the number of years (and fractions thereof) in the
unexpired term of the agreement. In the event of such termination within one
year after a "change of control," Mr. LeClair will receive cash payments equal
to three times his base salary and three times his MICP Bonus, the cash value of
his LTIP Bonus for the then current three-year cycle, and a cash payment of
between $500,000 and $2,000,000 depending on the year of termination. In the
event of such termination within one year after a "change of control," Messrs.
Newsome and Wilson will each receive cash payments equal to two times their base
salary and two times their MICP Bonus; in addition, Mr. Newsome will receive a
payment equal to the cash value of his LTIP Bonus for the then current
three-year cycle. In addition, upon any such termination "without cause" or
within one year after a "change of control," all vesting, performance or similar
requirements in respect of any award under the Echelon LTIP shall be deemed to
have been fully satisfied and each executive will receive an additional cash
payment in an amount necessary to pay any federal excise taxes. Each employment
agreement is also subject to termination in the event of disability, death or
voluntary retirement by the individual or his termination "for cause." Each
employment agreement includes certain non-competition covenants applicable to
certain activities within Florida which remain in effect for two years following
any termination.
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<PAGE> 61
MANAGEMENT OWNERSHIP OF SECURITIES
All the outstanding shares of Echelon Common Stock are currently held by
Florida Progress. The following table sets forth information with respect to the
number of shares of Echelon Common Stock that are expected to be owned
beneficially immediately after the Distribution by each director and each of the
Named Executive Officers of Echelon and by all directors and executive officers
of Echelon as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME BENEFICIALLY OWNED(1) CLASS(2)
- ----------------------------------------------------------------- --------------------- ----------
<S> <C> <C>
W. Michael Doramus............................................... 0
Darryl A. LeClair................................................ 194,186(3) 2.9%
Thomas W. Mahr................................................... 0
Joseph H. Richardson............................................. 665
Larry J. Newsome................................................. 32,385(4)
Thomas D. Wilson................................................. 12,939(5)
All directors, Named Executive Officers and executive officers as
a group (9 persons), including those named above............... 274,317(6) 4.1%
</TABLE>
- ---------------
(1) As used in this table, "beneficial ownership" means the direct or indirect,
sole or shared power to vote, or to direct the voting of, a security and/or
investment power with respect to a security.
(2) Unless otherwise noted, less than 1%.
(3) The number of shares shown for Darryl A. LeClair includes 194,011 shares of
Echelon Common Stock granted under the Echelon LTIP subject to a risk of
forfeiture which lapses as to one-quarter of the shares each January 31st,
commencing January 31, 1998. Does not include 129,340 shares of Echelon
Common Stock subject to options granted under the Echelon LTIP.
(4) The number of shares shown for Larry J. Newsome includes 32,335 shares of
Echelon Common Stock granted under the Echelon LTIP subject to a risk of
forfeiture which lapses as to one-quarter of the shares each January 31st,
commencing January 31, 1998. Does not include 2,500 shares of Echelon
Common Stock subject to options granted under the Echelon LTIP.
(5) The number of shares shown for Thomas D. Wilson includes 12,934 shares of
Echelon Common Stock granted under the Echelon LTIP subject to a risk of
forfeiture which lapses as to one-quarter of the shares each January 31,
commencing January 31, 1998. Does not include 1,000 shares of Echelon
Common Stock subject to options granted under the Echelon LTIP.
(6) The number of shares shown includes 273,232 shares of Echelon Common Stock
granted to executive officers under the Echelon LTIP, subject to a risk of
forfeiture which lapses as to one-quarter of the shares each January 31st,
commencing January 31, 1998.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information concerning each person known to
Florida Progress who would be the beneficial owner of more than 5% of the
Echelon Common Stock upon completion of the Distribution if such person
continued to own beneficially on the Record Date the same number of shares of
Florida Progress Common Stock believed by Florida Progress to be owned
beneficially by such person on September 30, 1996 (and assuming no change in the
number of outstanding shares of Florida Progress Common Stock from such date to
the Record Date.) Such information has been obtained from Florida Progress's
records and a review of statements filed with the SEC pursuant to Sections 13(d)
and 13(g) of the Securities Exchange Act with respect to Florida Progress Common
Stock and received by Florida Progress prior to September 30, 1996.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME AND ADDRESS BENEFICIALLY OWNED(1) OF CLASS
- ------------------------------------------------------------------- --------------------- --------
<S> <C> <C>
Franklin Resources, Inc. .......................................... 361,978 5.6%
777 Mariners Island Blvd.
San Mateo, California 94404
</TABLE>
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<PAGE> 62
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 1996, Talquin Development Company, a former affiliate of Echelon
which has since been merged into Echelon ("Talquin"), entered into a Consulting
Agreement with Mission Development Company, a company which is wholly owned by
Mr. Doramus. Mr. Doramus will be Chairman of the Board of Echelon. Talquin
agreed to pay Mission Development Company a total of $400,000 for real estate
consulting services to be provided through March 31, 1997. The Consulting
Agreement was initially entered into when the parties were unaffiliated and, in
the view of Echelon's management, the terms of such agreement are comparable to
those which could have been obtained from other unaffiliated sources. Management
is currently negotiating an amendment to the Consulting Agreement with Mission
Development Company pursuant to which the term would be extended through the end
of 1997, the services to be provided would be expanded, and the compensation to
be paid would be increased by a total of $400,000. Management believes that the
terms of the amendment are also comparable to the terms which could be obtained
from a third party. The services rendered pursuant to the Consulting Agreement
and the compensation therefore are independent of Mr. Doramus's services as
Chairman and the compensation paid to him as a director and Chairman.
Mr. Richardson, who will continue to serve as a director of Echelon
following the Distribution, is an executive officer of both Florida Progress and
Florida Power. During 1996, Florida Progress has entered into various agreements
with Echelon including the Distribution Agreement, Tax Sharing Agreement,
Employee Benefits Allocation Agreement and Transition Services Agreement. See
"Relationship Between Florida Progress and Echelon After the Distribution."
In addition, Florida Progress and Florida Power have ongoing lease
agreements with Echelon. Such leases are on terms which reflect market rates and
conditions and have been entered into by the parties in the ordinary course of
their respective businesses. The leases are summarized in the following table:
SUMMARY OF LEASE ARRANGEMENTS
<TABLE>
<CAPTION>
APPROXIMATE
REMAINING
LOCATION RENTABLE SQUARE FEET LEASED TERM
- --------------------------------------------------- --------------------------- -----------------
<S> <C> <C>
Florida Progress
Barnett Tower...................................... 62,149 10 years
Florida Power
3rd and 3rd........................................ 32,607 4 months
Highpoint Center................................... 1,831 10 years
Bayboro (land lease only).......................... 104,152 Cancellable upon
written notice
from Florida
Power
</TABLE>
See "Business -- Commercial Real Estate Ownership and Management."
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<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The total number of shares of all classes of stock that Echelon has
authority to issue under its Articles of Incorporation is 35,000,000 shares, of
which 25,000,000 shares represent shares of Echelon Common Stock and 10,000,000
shares represent shares of Preferred Stock (the "Echelon Preferred Stock").
Based on 97,005,268 shares of Florida Progress Common Stock outstanding as of
November , 1996, and a distribution ratio of one share of Echelon Common Stock
for every 15 shares of Florida Progress Common Stock, it is anticipated that
approximately 6,467,018 shares of Echelon Common Stock will be distributed to
holders of Florida Progress Common Stock on the Distribution Date.
ECHELON COMMON STOCK
Each outstanding share of Echelon Common Stock is entitled to one vote on
all matters submitted to a vote of stockholders.
Subject to any preferential rights of any Echelon Preferred Stock created
by the Board of Directors of Echelon, each outstanding share of Echelon Common
Stock is entitled to such dividends, if any, as may be declared from time to
time by the Board of Directors of Echelon. See "Dividend Policy".
In the event of liquidation, dissolution or winding up of Echelon, holders
of Echelon Common Stock are entitled to receive on a pro rata basis any assets
remaining after provision for payment of creditors and after payment of any
liquidation preferences to holders of Echelon Preferred Stock.
ECHELON PREFERRED STOCK
The authorized Echelon Preferred Stock is available for issuance from time
to time in one or more series at the discretion of the Echelon Board of
Directors without stockholder approval. The Echelon Board of Directors has the
authority to prescribe for each series of Echelon Preferred Stock it establishes
the number of shares, the voting rights (if any) to which such shares are
entitled, the consideration for such shares, the designations, powers,
preferences and relative, participating, optional or other special rights,
dividend, redemption and sinking fund provisions (if any), and any
qualifications, limitations or restrictions of the shares in that series.
Depending upon the rights of such Preferred Stock, the issuance of Echelon
Preferred Stock could have an adverse effect on holders of Echelon Common Stock
by delaying or preventing a change in control of Echelon, making removal of the
present management of Echelon more difficult or resulting in restrictions upon
the payment of dividends and other distributions to the holders of Echelon
Common Stock.
AUTHORIZED BUT UNISSUED CAPITAL STOCK
Florida law does not require stockholder approval for any issuance of
authorized shares. However, the listing requirements of the NYSE, which would
apply so long as the Echelon Common Stock remained listed on the NYSE, require
stockholder approval of certain issuances equal to or exceeding 20% of the then
outstanding voting power or then outstanding number of shares of Echelon Common
Stock. Authorized but currently unissued shares, if issued, may be used for a
variety of corporate purposes, including future public offerings to raise
additional capital or to facilitate corporate acquisitions. Echelon currently
has no plans to issue additional shares of Echelon Common Stock or Echelon
Preferred Stock other than in connection with employee compensation plans. See
"Management and Executive Compensation."
One of the effects of the existence of unissued and unreserved Echelon
Common Stock and Echelon Preferred Stock may be to enable the Board of Directors
of Echelon to issue shares to persons friendly to current management, which
issuance could render more difficult or discourage an attempt to obtain control
of Echelon by means of a merger, tender offer, proxy contest or otherwise, and
thereby protect the continuity of Echelon's management and possibly deprive the
stockholders of opportunities to sell their shares of Echelon Common Stock at
prices higher than prevailing market prices. Such additional shares also could
be used to
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<PAGE> 64
dilute the stock ownership of persons seeking to obtain control of Echelon
pursuant to the operation of the Stockholder Rights Agreement, which is
discussed below.
ECHELON RIGHTS AGREEMENT
Pursuant to a Stockholder Rights Agreement dated November 15, 1996 (as the
same may be amended from time to time, the "Echelon Rights Agreement") between
Echelon and The First National Bank of Boston (the "Echelon Rights Agent"), on
November 4, 1996 the Board of Directors of Echelon declared a dividend of one
preferred share purchase right (a "Right") for each outstanding share of Echelon
Common Stock. The dividend was payable on November 15, 1996 (the "Record Date")
to Florida Progress, which was the sole stockholder of record on the record date
therefore. Each Right entitles the registered holder to purchase from Echelon
one-hundredth of a share of Series A Junior Participating Echelon Preferred
Stock, par value $.01 per share (the "Echelon Preferred Stock"), of Echelon at a
price of $55 per one-hundredth of a share of Echelon Preferred Stock (as the
same may be adjusted, the "Purchase Price"), subject to adjustment.
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 15% or more of the outstanding
shares of Echelon Common Stock or (ii) 10 business days (or such later date as
may be determined by action of the Board of Directors prior to such time as any
person or group of affiliated persons becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding shares of
Echelon Common Stock (the earlier of such dates, the "Rights Distribution
Date"), the Rights will be evidenced by such Echelon Common Stock certificate.
The Echelon Rights Agreement provides that, until the Rights Distribution
Date (or earlier redemption or expiration of the Rights), the Rights will be
transferred with and only with the Echelon Common Stock. Until the Rights
Distribution Date (or earlier redemption or expiration of the Rights), Echelon
Common Stock will be issued with Rights, and certificates will contain a
notation incorporating the Echelon Rights Agreement by reference. Until the
Rights Distribution Date (or earlier redemption or expiration of the Rights),
the surrender for transfer of any certificates for shares of Echelon Common
Stock will also constitute the transfer of the Rights associated with the shares
of Echelon Common Stock represented by such certificates. As soon as practicable
following the Rights Distribution Date, separate certificates evidencing the
Rights ("Right Certificates") will be mailed to holders of record of the Echelon
Common Stock as of the close of business on the Rights Distribution Date and
such separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Rights Distribution Date. The
Rights will expire on November 14, 2006 (the "Final Expiration Date"), unless
the Final Expiration Date is advanced or extended or unless the Rights are
earlier redeemed or exchanged by Echelon, in each case as described below.
The Purchase Price payable, and the number of shares of Echelon Preferred
Stock or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Echelon Preferred Stock, (ii) upon the grant to holders of the Echelon Preferred
Stock of certain rights or warrants to subscribe for or purchase Echelon
Preferred Stock at a price, or securities convertible into Echelon Preferred
Stock with a conversion price, less than the then-current market price of the
Echelon Preferred Stock or (iii) upon the distribution to holders of the Echelon
Preferred Stock of evidences of indebtedness or assets (excluding regular
periodic cash dividends or dividends payable in Echelon Preferred Stock) or of
subscription rights or warrants (other than those referred to above).
The number of Rights are also subject to adjustment in the event of a stock
dividend on the Echelon Common Stock payable in shares of Echelon Common Stock
or subdivisions, consolidations or combinations of the Echelon Common Stock
occurring, in any such case, prior to the Distribution Date.
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<PAGE> 65
Shares of Echelon Preferred Stock purchasable upon exercise of the Rights
will not be redeemable. Each share of Echelon Preferred Stock will be entitled,
when, as and if declared, to a minimum preferential quarterly dividend payment
of $1 per share but will be entitled to an aggregate dividend of 100 times the
dividend declared per share of Echelon Common Stock. In the event of
liquidation, dissolution or winding up of Echelon, the holders of the Echelon
Preferred Stock will be entitled to a minimum preferential liquidation payment
of $10 per share (plus any accrued but unpaid dividends) but will be entitled to
an aggregate payment of 100 times the payment made per share of Echelon Common
Stock. Each share of Echelon Preferred Stock will have 100 votes, voting
together with the Echelon Common Stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of Echelon Common Stock are
converted or exchanged, each share of Echelon Preferred Stock will be entitled
to receive 100 times the amount received per share of Echelon Common Stock.
These rights are protected by customary antidilution provisions in the Echelon
Rights Agreement.
Because of the nature of the Echelon Preferred Stock's dividend,
liquidation and voting rights, the value of the one-hundredth interest in a
share of Echelon Preferred Stock purchasable upon exercise of each Right should
approximate the value of one share of Echelon Common Stock.
If any person or group of affiliated or associated persons becomes an
Acquiring Person, each holder of a Right, other than Rights beneficially owned
by the Acquiring Person (which will thereupon become void), will thereafter have
the right to receive upon exercise of a Right and payment of the Purchase Price,
that number of shares of Echelon Common Stock having a market value equal to two
times the Purchase Price. The sale of the Echelon Preferred Stock upon exercise
of Rights will be made pursuant to a registration statement under the Securities
Act of 1933, as amended.
If, after a person or group has become an Acquiring Person, Echelon is
acquired in a merger or other business combination transaction or 50% or more of
its consolidated assets or earning power are sold, proper provision will be made
so that each holder of a Right (other than Rights beneficially owned by an
Acquiring Person which will have become void) will thereafter have the right to
receive, upon the exercise thereof and payment of the Purchase Price, that
number of shares of common stock of the person with whom Echelon has engaged in
the foregoing transaction (or its parent), which number of shares at the time of
such transaction will have a market value equal to two times the Purchase Price.
At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by such person or group of 50% or more of the outstanding
shares of Echelon Common Stock or the occurrence of an event described in the
prior paragraph, the Board of Directors of Echelon may exchange the Rights
(other than Rights owned by such person or group which will have become void),
in whole or in part, at an exchange ratio of one share of Echelon Common Stock,
or a fractional share of Echelon Preferred Stock (or of a share of a class or
series of Echelon's preferred stock having similar rights, preferences and
privileges), of equivalent value per Right (subject to adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Echelon Preferred Stock will be
issued (other than fractions which are integral multiples of one-one-hundredth
of a share of Echelon Preferred Stock, which may, at the election of Echelon, be
evidenced by depositary receipts) and in lieu thereof, an adjustment in cash
will be made based on the market price of the Echelon Preferred Stock on the
last trading day prior to the date of exercise.
At any time prior to the time an Acquiring Person becomes such, the Board
of Directors of Echelon may redeem the Rights in whole, but not in part, at a
price of $.01 per Right (hereinafter referred to in this description of the
Rights as the "Redemption Price"). The redemption of the Rights may be made
effective at such time, on such basis and with such conditions as the Board of
Directors in its sole discretion may establish. Immediately upon any redemption
of the Rights, the right to exercise the Rights will terminate and the only
right of the holders of Rights will be to receive the Redemption Price.
For so long as the Rights are then redeemable, the Echelon Board of
Directors may, except with respect to the redemption price, amend the Rights in
any manner. After the Rights are no longer redeemable, the
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<PAGE> 66
Echelon Board of Directors may, except with respect to the redemption price,
amend the Rights in any manner that does not adversely affect the interests of
holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of Echelon, including, without limitation, the right to
vote or to receive dividends.
A copy of the Echelon Rights Agreement has been filed as an Exhibit to the
Registration Statement on Form 10 of Echelon in respect of the registration of
the Echelon Common Stock and Rights under the Exchange Act. A copy of the
Echelon Rights Agreement is available free of charge from Echelon. The summary
description of the Rights set forth above does not purport to be complete and is
qualified in its entirety by reference to the Echelon Rights Agreement, as the
same may be amended from time to time, which is hereby incorporated herein by
reference.
CERTAIN EFFECTS OF THE ECHELON RIGHTS AGREEMENT
The Echelon Rights Agreement is designed to protect stockholders of Echelon
in the event of unsolicited offers to acquire Echelon and other coercive
takeover tactics which, in the opinion of the Board of Directors of Echelon,
could impair its ability to represent stockholder interests. The provisions of
the Echelon Rights Agreement may render an unsolicited takeover of Echelon more
difficult or less likely to occur or might prevent such a takeover, even though
such takeover may offer Echelon's stockholders the opportunity to sell their
stock at a price above the prevailing market price and may be favored by a
majority of the stockholders of Echelon.
NO PREEMPTIVE RIGHTS
No holder of any class of stock of Echelon authorized at the time of the
Distribution will have any preemptive right to subscribe for any securities of
Echelon of any kind or class.
TRANSFER AGENT AND REGISTRAR
The First National Bank of Boston has been appointed as transfer agent and
registrar for the Echelon Common Stock.
FLORIDA BUSINESS CORPORATION ACT
Echelon is subject to several anti-takeover provisions under Florida law
that apply to a public corporation organized under Florida law unless the
corporation has elected to opt out of such provisions in its Articles of
Incorporation or (depending on the provision in question) its By-laws. Echelon
has not elected to opt out of these provisions. The Florida Business Corporation
Act (the "Florida Act") contains a provision that prohibits the voting of shares
in a publicly held Florida corporation which are acquired in a "control share
acquisition" unless the holders of a majority of the corporation's voting shares
(exclusive of shares held by officers of the corporation, inside directors or
the acquiring party) approve the granting of voting rights as to the shares
acquired in the control share acquisition. A control share acquisition is
defined as an acquisition that immediately thereafter entitles the acquiring
party to vote in the election of directors within each of the following ranges
of voting power: (i) one-fifth or more but less than one third of such voting
power, (ii) one third or more but less than a majority of such voting power and
(iii) more than a majority of such voting power.
The Act also contains an "affiliated transaction" provision that prohibits
a publicly-held Florida corporation from engaging in a broad range of business
combinations or other extraordinary corporate transactions with an "interested
stockholder" unless (i) the transaction is approved by a majority of
disinterested directors before the person becomes an interested stockholder,
(ii) the interested stockholder has owned at least 80% of the corporation's
outstanding voting shares for at least five years, or (iii) the interested
stockholder is the beneficial owner of at least 90% of the corporation's
outstanding voting shares, exclusive of those shares acquired by the interested
stockholder directly from the corporation in a transaction approved by
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<PAGE> 67
a majority of the disinterested directors. An interested stockholder is defined
as a person who together with affiliates and associates beneficially owns more
than 10% of the corporation's outstanding voting shares.
PROVISIONS OF ECHELON ARTICLES OF INCORPORATION AND BY-LAWS AFFECTING CHANGES IN
CONTROL
Certain provisions of the Echelon Articles of Incorporation and By-laws may
delay or make more difficult unsolicited acquisitions or changes of control of
Echelon. Such provisions may enable Echelon to develop its business in a manner
that will foster its long-term growth without disruption caused by the threat of
a takeover not deemed by its Board of Directors to be in the best interests of
Echelon and its stockholders. Such provisions could have the effect of
discouraging third parties from making proposals involving an unsolicited
acquisition or change of control of Echelon, although such proposals, if made,
might be considered desirable by a majority of Echelon's stockholders. Such
provisions may also have the effect of making it more difficult for third
parties to cause the replacement of the current Board of Directors of Echelon.
These provisions include (i) the availability of capital stock for issuance from
time to time at the discretion of the Board of Directors (see "Authorized but
Unissued Capital Stock," above), (ii) a classified Board of Directors, (iii)
prohibition against stockholders acting by written consent in lieu of a meeting,
(iv) limitations on calling meetings of stockholders, (v) requirements for
advance notice for raising business or making nominations at stockholders'
meetings, and (vi) the ability of the Board of Directors to increase the size of
the Board of Directors and to appoint directors to newly created directorships.
These provisions are present in the Articles of Incorporation or By-laws of
Echelon.
Classified Board of Directors
The Echelon Articles of Incorporation provide for Echelon's Board of
Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one third of Echelon's Board of
Directors will be elected each year. See "Management and Executive
Compensation--Board of Directors."
Echelon believes that a classified Board of Directors will help to assure
the continuity and stability of its Board of Directors, and its business
strategies and policies as determined by its Board of Directors, because a
majority of the directors at any given time will have prior experiences as
directors of Echelon. This provision should also help to ensure that Echelon's
Board of Directors, if confronted with an unsolicited proposal from a third
party that has acquired a block of Echelon's voting stock, will have sufficient
time to review the proposal and appropriate alternatives and to seek the best
available result for all stockholders.
This provision could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of Echelon's Board of
Directors until the second annual meeting of stockholders following the date the
acquiror obtained the controlling stock interest, could have the effect of
discouraging a potential acquiror from making a tender offer or otherwise
attempting to obtain control of Echelon's and thus could increase the likelihood
that incumbent directors will retain their positions.
No Stockholder Action by Written Consent; Special Meetings
The Echelon Articles of Incorporation and By-laws provide that stockholder
action can be taken only at an annual or special meeting and cannot be taken by
written consent in lieu of a meeting. The Echelon Articles of Incorporation and
By-laws also provide that special meetings of the stockholders may be called
only by (i) the Chief Executive Officer or President of Echelon, (ii) a vote of
the majority of the Board of Directors or (iii) upon the written demand of the
holders of not less than 33 1/3% of Echelon's outstanding voting power.
Advance Notice for Raising Business or Making Nominations at Meetings
The By-laws of Echelon establish an advance notice procedure for
stockholder proposals to be brought before an annual meeting of stockholders and
for nominations by stockholders of candidates for election as directors at an
annual or special meeting at which directors are to be elected. Only such
business may be conducted at an annual meeting of stockholders as has been
brought before the meeting by, or at the direction of, the Chairman of the Board
of Directors, or by a stockholder of Echelon who is entitled to vote at the
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meeting who has given to the Secretary of Echelon timely written notice, in
proper form, of the stockholder's intention to bring that business before the
meeting. The chairman of such meeting has the authority to make such
determinations. Only persons who are nominated by, or at the direction of, the
Chairman of the Board of Directors, or who are nominated by a stockholder who
has given timely written notice, in proper form, to the Secretary prior to a
meeting at which directors are to be elected will be eligible for election as
directors of Echelon.
To be timely, a stockholder's notice of business to be brought before an
annual meeting and nominations of candidates for election as directors at any
annual meeting shall be delivered to the Secretary of Echelon at the principal
executive offices of Echelon not less than 70 days nor more than 90 days prior
to the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is advanced by
more than 20 days, or delayed by more than 70 days, from such anniversary date,
notice by the stockholder to be timely must be so delivered not earlier than the
ninetieth day prior to such annual meeting and not later than the close of
business on the later of the seventieth day prior to such annual meeting or the
tenth day following the day on which public announcement of the date of such
meeting is first made.
To be timely, a stockholder's notice of nominations of persons for election
to the Board of Directors may be made at such a special meeting of stockholders
if the stockholder's notice shall be delivered to the Secretary of Echelon at
the principal executive offices of Echelon not earlier than the ninetieth day
prior to such special meeting and not later than the close of business on the
later of the seventieth day prior to such special meeting or the tenth day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting.
The notice of any nomination for election as a director must set forth the
name and address of, and the class and number of shares of Echelon held by the
stockholder who intends to make the nomination and the beneficial owner, if any,
on whose behalf the nomination is being made; the name and address of the person
or persons to be nominated; a representation that the stockholder is a holder of
record of stock of Echelon entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; a description of all arrangements or understandings
between the stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the stockholder; such other information regarding each nominee
proposed by such stockholder as would have been required to be included in a
proxy statement filed pursuant to the proxy rules of the SEC had each nominee
been nominated, or intended to be nominated, by the Board of Directors; and the
consent of each nominee to serve as a director if so elected.
Number of Directors; Filling of Vacancies; Removal
The Echelon Articles of Incorporation and By-laws provide that newly
created directorships resulting from any increase in the authorized number of
directors (or any vacancy) may be filled by a vote of a majority of directors
then in office. Accordingly, the Board of Directors of Echelon may be able to
prevent any stockholder from obtaining majority representation on the Board of
Directors by increasing the size of the Board of Directors and filling the newly
created directorships with its own nominees. Directors may be removed only for
cause.
Amendments to the Articles of Incorporation
The Echelon Articles of Incorporation require the affirmative vote of the
holders of at least 66 2/3% in voting power of all the shares of Echelon
entitled to vote generally in the election of directors, voting together as a
single class, to alter, amend or repeal provisions of the Articles of
Incorporation relating to (i) the amendment of the Articles of Incorporation
and/or the By-laws, (ii) all provisions concerning directors, including those
dealing with the number of directors, the classified Board of Directors,
procedure for nominations for director, removal of directors and the filling of
director vacancies and (iii) calling and taking actions at meetings of
stockholders.
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Indemnification and Limitation of Liability for Directors and Officers
The Echelon By-laws provide that Echelon shall have the power but not the
obligation to indemnify directors and officers to the fullest extent permitted
by the laws of the State of Florida. Echelon has entered into indemnification
agreements with all of its executive officers and directors creating certain
indemnification obligations on Echelon's part in favor of the directors and
executive officers and, as permitted by applicable law. These indemnification
agreements clarify and expand the circumstances under which a director or
executive officer will be indemnified.
The indemnification rights conferred by the By-laws and indemnification
agreements are not exclusive of any other right, under the Florida Act or
otherwise, to which a person seeking indemnification may otherwise be entitled.
Echelon will also provide liability insurance for the directors and officers for
certain losses arising from claims or charges made against them while acting in
their capacities as directors or officers.
The effect of such indemnification arrangements may be to exempt or limit
the liability of such executive officers and directors to Echelon or its
stockholders for monetary damages for breach of fiduciary duty to Echelon,
except to the extent such exemption or limitation is not permitted under the
Florida Act as the same exists or may hereafter be amended.
AVAILABLE INFORMATION
Echelon has filed with the SEC a Registration Statement on Form 10 with
respect to the shares of Echelon Common Stock to be received by the stockholders
of Florida Progress in the Distribution. This Information Statement does not
contain all of the information set forth in the Form 10 Registration Statement
and the exhibits thereto, to which reference is hereby made. Statements made in
this Information Statement as to the contents of any contract, agreement or
other document referred to herein are not necessarily complete. With respect to
each such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement and the
exhibits thereto may be inspected and copied at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the Regional Offices of the SEC at Seven World Trade Center, Suite
1300, New York, New York 10048 and in the Citicorp Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661 and may be obtained through the SEC
Internet address at http://www.sec.gov.
REPORTS OF ECHELON
After the Distribution, Echelon will be required to comply with the
reporting requirements of the Exchange Act and, in accordance therewith, to file
reports, proxy statements and other information with the SEC.
After the Distribution, such reports, proxy statements and other
information may be inspected and copied at the public reference facilities of
the SEC listed above and obtained by mail from the SEC as described above. The
Echelon Common Stock has been accepted for listing on the NYSE, subject to
notice of issuance, and when such shares of Echelon Common Stock commence
trading on the NYSE, such reports, proxy statements and other information will
be available for inspection at the offices of the NYSE, 20 Broad Street, New
York, New York 10005.
Additionally, Echelon intends to provide annual reports, containing audited
financial statements, to its stockholders in connection with its annual meetings
of stockholders.
No person is authorized to give any information or to make any
representations other than those contained in this Information Statement, and,
if given or made, such information or representations must not be relied upon as
having been authorized.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ECHELON INTERNATIONAL INCORPORATED
Independent Auditors' Report.......................................................... F-2
Financial Statements:
Consolidated Statements of Operations and Deficit for the Nine Months Ended
September 30, 1996 and 1995 (unaudited) and each of the years in the three year
period ended December 31, 1995................................................... F-3
Consolidated Balance Sheets as of September 30, 1996 (unaudited) and December 31,
1995
and 1994......................................................................... F-4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1996
and 1995 (unaudited) and each of the years in the three year period ended
December 31, 1995................................................................ F-5
Notes to Consolidated Financial Statements.......................................... F-6
PROGRESS POTOMAC CAPITAL VENTURES
Independent Auditors' Report.......................................................... F-20
Financial Statements:
Statements of Income for each of the years in the three year period ended December
31, 1995......................................................................... F-21
Balance Sheets as of December 31, 1995 and 1994..................................... F-22
Statements of Changes in Joint Venturers' Capital for each of the years in the three
year period ended December 31, 1995.............................................. F-23
Statements of Cash Flows for each of the years in the three year period ended
December 31, 1995................................................................ F-24
Notes to Financial Statements....................................................... F-25
</TABLE>
F-1
<PAGE> 71
INDEPENDENT AUDITORS' REPORT
To the Stockholder of
Echelon International Corporation:
We have audited the accompanying consolidated balance sheets of Echelon
International Corporation and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations and deficit and cash flows for
each of the years in the three year period ended December 31, 1995, as listed in
the Index to Financial Statements herein. These consolidated financial
statements are the responsibility of Echelon International Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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 financial position of Echelon
International Corporation and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
St. Petersburg, Florida
October 24, 1996, except as
to the last three paragraphs
of Note 5, which are as
of November 5, 1996
F-2
<PAGE> 72
ECHELON INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
<TABLE>
<CAPTION>
UNAUDITED
NINE MONTHS
ENDED SEPTEMBER
30, YEAR ENDED DECEMBER 31,
--------------- ------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SALES AND REVENUES:
Real estate operations --
Rental income:
Outside........................................ $ 7.1 $ 5.9 $ 7.9 $ 5.8 $ 7.8
Affiliates..................................... 1.8 1.7 2.2 2.5 2.1
Sale of development properties................... 18.2 0.9 0.9 5.0 17.5
Marina and other revenues........................ 5.5 4.8 7.2 5.5 4.5
Lending and leasing operations --
Interest income.................................. 11.8 15.4 21.7 22.4 22.6
Earned income on finance leases.................. 2.1 2.8 4.8 4.4 7.7
Other............................................ 2.1 2.2 2.9 3.2 4.3
------ ----- ----- ----- -----
48.6 33.7 47.6 48.8 66.5
------ ----- ----- ----- -----
OPERATING EXPENSES:
Cost of operations.................................. 8.6 7.0 10.5 9.0 10.0
Cost of development properties sold................. 18.5 0.8 0.8 4.8 18.5
Depreciation........................................ 4.3 4.6 6.4 5.2 5.4
Provision for lease, loan and real estate losses.... 33.9 4.6 7.0 10.6 6.6
Interest expense:
Affiliates....................................... 13.9 15.1 19.9 20.5 21.3
Outside.......................................... 1.7 1.6 2.1 2.6 4.1
Allocated administrative expenses of affiliates..... 1.3 1.3 1.6 1.4 1.8
Marketing and other administrative.................. 2.9 2.3 3.6 2.5 1.2
Other, net.......................................... (1.3) 4.2 5.6 1.4 3.3
------ ----- ----- ----- -----
83.8 41.5 57.5 58.0 72.2
------ ----- ----- ----- -----
LOSS BEFORE INCOME TAXES.............................. (35.2) (7.8) (9.9) (9.2) (5.7)
INCOME TAX BENEFIT.................................... (13.5) (3.9) (4.9) (4.2) (0.7)
------ ----- ----- ----- -----
NET LOSS.............................................. (21.7) (3.9) (5.0) (5.0) (5.0)
Retained deficit at beginning of period............. (50.5) (42.3) (42.3) (34.1) (26.6)
Dividends paid to Florida Progress.................. 0.0 (2.4) (3.2) (3.2) (2.5)
------ ----- ----- ----- -----
Retained deficit at end of period................... $(72.2) $(48.6) $(50.5) $(42.3) $(34.1)
====== ===== ===== ===== =====
Shares of common stock outstanding.................... 6.5 6.5 6.5 6.5 6.5
Net loss per common share............................. $(3.34) $(0.60) $(0.77) $(0.77) $(0.77)
====== ===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 73
ECHELON INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
LEASES, LOANS, PROPERTY & OTHER INVESTMENTS:
Leases and loans receivable, net (Note 2)...................... $ 235.1 $309.3 $408.9
Property, net of accumulated depreciation of $35.3 million in
1996, $32.6 million in 1995 and $24.7 million in 1994 (Note
3).......................................................... 132.9 153.6 146.7
Investments in and advances to unconsolidated affiliates....... 32.9 39.9 43.9
------ ------ ------
400.9 502.8 599.5
------ ------ ------
ASSETS HELD FOR SALE (Note 4).................................... 32.8 0.0 0.0
------ ------ ------
CURRENT ASSETS:
Cash and equivalents........................................... 0.2 0.4 0.6
Accounts receivable, net....................................... 1.4 2.0 2.4
Current portion of leases and loans receivable................. 42.5 42.4 14.8
Income taxes receivable........................................ 0.0 0.0 0.9
Inventories.................................................... 3.2 2.2 1.5
Miscellaneous.................................................. 0.4 0.6 0.3
------ ------ ------
47.7 47.6 20.5
------ ------ ------
OTHER NON-CURRENT ASSETS......................................... 2.5 4.1 3.4
------ ------ ------
Total assets................................................ $ 483.9 $554.5 $623.4
====== ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and other liabilities......................... $ 14.4 $ 10.0 $ 5.1
Income taxes payable........................................... 3.8 9.6 0.0
Current portion of long-term debt.............................. 2.5 10.2 8.3
------ ------ ------
Total current liabilities................................... 20.7 29.8 13.4
DUE TO FLORIDA PROGRESS AND AFFILIATES (Note 6).................. 103.0 256.2 290.3
LONG-TERM DEBT (Note 5).......................................... 17.9 23.0 24.4
DEFERRED INCOME TAXES (Note 9)................................... 162.9 182.3 224.3
OTHER LIABILITIES................................................ 0.3 2.4 2.0
------ ------ ------
Total Liabilities........................................... 304.8 493.7 554.4
------ ------ ------
STOCKHOLDER'S EQUITY (Note 13):
Preferred stock, $.01 par value, 10,000,000 shares authorized
and none issued............................................. 0.0 0.0 0.0
Common Stock, $.01 par value, 25,000,000 shares authorized,
6,467,018 issued and outstanding............................ 0.1 0.1 0.1
Additional paid-in capital..................................... 251.2 111.2 111.2
Retained deficit............................................... (72.2) (50.5) (42.3)
------ ------ ------
Total stockholder's equity.................................. 179.1 60.8 69.0
------ ------ ------
Total liabilities and stockholder's equity.................. $ 483.9 $554.5 $623.4
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 74
ECHELON INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
UNAUDITED
NINE MONTHS
ENDED SEPTEMBER
30, YEAR ENDED DECEMBER 31,
--------------- ------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.............................................. $(21.7) $ (3.9) $ (5.0) $ (5.0) $ (5.0)
Adjustment for noncash items:
Depreciation........................................ 4.3 4.6 6.4 5.2 5.4
Deferred income taxes............................... (19.4) (31.9) (42.0) (20.5) (24.3)
Amortization of investment tax credits.............. (0.5) (3.7) (0.3) (1.5) (1.4)
Provision for lease, loan and real estate losses.... 33.9 4.6 7.0 10.6 6.6
(Gain) loss on sale of assets....................... 0.5 4.9 4.0 (0.2) (1.0)
Equity in losses of unconsolidated affiliates,
net.............................................. 1.9 1.1 1.5 4.1 4.2
Changes in working capital:
Accounts payable and other liabilities........... 0.1 (0.1) 4.9 (0.9) (3.0)
Income taxes receivable/payable.................. (5.8) 8.9 10.5 (12.7) (4.0)
Other working capital changes.................... (0.2) (0.8) (0.6) 0.5 3.0
Other operating activities.......................... (5.4) 0.1 (9.3) 0.7 (2.6)
------ ------ ------ ------ ------
(12.3) (16.2) (22.9) (19.7) (22.1)
------ ------ ------ ------ ------
INVESTING ACTIVITIES:
Purchase of leases and loans.......................... 0.0 0.0 0.0 (5.7) (42.6)
Proceeds from sale or collection of leases and
loans............................................... 23.6 47.5 74.0 65.5 79.2
Real estate property additions........................ (7.5) (2.4) (4.1) (1.3) (1.2)
Proceeds from sale of real estate properties.......... 17.6 0.7 0.7 4.9 16.7
Proceeds from sale of businesses...................... 0.0 0.0 0.0 2.1 10.5
Distributions from unconsolidated affiliates, net of
investments......................................... (1.2) .4 (0.9) 3.5 8.4
------ ------ ------ ------ ------
32.5 46.2 69.7 69.0 71.0
------ ------ ------ ------ ------
FINANCING ACTIVITIES:
Repayment of long-term debt........................... (11.5) (9.7) (9.7) (8.2) (25.9)
Decrease in due to Florida Progress and affiliates.... (148.9) (18.4) (34.1) (37.4) (21.4)
Equity contribution from Parent....................... 140.0 0.0 0.0 0.0 0.0
Dividends paid to Florida Progress.................... 0.0 (2.4) (3.2) (3.2) (2.5)
------ ------ ------ ------ ------
(20.4) (30.5) (47.0) (48.8) (49.8)
------ ------ ------ ------ ------
Net increase(decrease) in cash and equivalents........ (0.2) (0.5) (0.2) 0.5 (0.9)
Beginning cash and equivalents........................ 0.4 0.6 0.6 0.1 1.0
------ ------ ------ ------ ------
Ending cash and equivalents........................... $ 0.2 $ 0.1 $ 0.4 $ 0.6 $ 0.1
====== ====== ====== ====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................ $ 10.7 $ 11.6 $ 22.4 $ 22.9 $ 27.6
Income taxes (net of refunds)....................... 13.4 4.9 26.7 29.1 27.7
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 75
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REFERENCES TO PERIODS ENDED SEPTEMBER 30 ARE UNAUDITED
(1) SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
SPIN-OFF TRANSACTION
On July 1, 1996 the Board of Directors of Florida Progress Corporation
("Florida Progress") approved in principle a plan to spin-off Echelon
International Corporation (the "Company"). Prior to the Distribution (as defined
below), as part of a pre-Distribution reorganization, (i) Talquin Development
Company, a direct wholly owned subsidiary of Progress Credit Corporation
("PCC"), was merged with and into PCC, (ii) PCC was merged with and into
Progress Leasing Corporation ("Progress Leasing"), a direct wholly owned
subsidiary of PCC, and (iii) Progress Leasing was merged with and into Echelon,
which was a direct, wholly owned subsidiary of Progress Leasing and which, prior
to such merger, was known as PLC Leasing Corporation. Echelon, together with
PCC, Talquin, Progress Leasing and their respective subsidiaries, are
collectively referred to as the "Echelon Group". Upon the merger of Progress
Leasing with and into Echelon, Echelon became the successor to the Echelon
Group. Echelon was a legal entity as of the dates and for the periods presented
in the financial statements. The spin-off will be effected by distributing (the
"Distribution") to the holders of Florida Progress's common stock one share of
the Company's common stock for each 15 shares of Florida Progress common stock.
Following the Distribution, which is expected to occur during the fourth quarter
of 1996, the Company will operate as an independent company whose shares of
common stock will be publicly traded; financial support previously provided by
Florida Progress will be discontinued. In accordance with the plan of
Distribution, as of September 30, 1996, Florida Progress made a capital
contribution of $140 million to the Company by converting intercompany
indebtedness to equity.
The Company has obtained third-party secured financing of $105 million to
provide liquidity to the Company to execute its business plan and to repay in
part advances from Florida Progress. See Note 5. The remaining debt owed to
Florida Progress is expected to be approximately $36 million and will be
evidenced by a secured interest bearing note issued to Progress Capital
Holdings, Inc., a wholly owned subsidiary of Florida Progress. The note will
mature in four years and will require specified principal payments upon the
disposition by the Company of certain non-strategic operating and direct finance
leasing interests and other assets.
The financial information included herein may not necessarily reflect the
financial position and results of operations of the Company in the future or
what the financial position and results of operations of the Company would have
been had it been a separate, stand-alone entity during the periods reported. It
is expected that after the Distribution, the Company will incur additional
administrative expenses, including investor relations, Board of Directors fees
and expenses, insurance costs and audit and legal fees. See the Unaudited Pro
Forma Consolidated Statements of Operations for the year ended December 31, 1995
for a presentation of the effects of such anticipated additional expenses.
DESCRIPTION OF BUSINESS AND PRINCIPLES OF PRESENTATION
The accompanying consolidated financial statements include the financial
results of the Company and its majority owned operations. The common stock of
the Company will be distributed by Florida Progress to its stockholders as of a
date to be established.
The Company is a real estate and financial services company. Prior to July
1, 1996, pursuant to a strategy adopted by Florida Progress, the Company has
been operating under a strategy of orderly liquidation of all of its businesses
and assets. The strategy of the Company after the Distribution will primarily be
the development, ownership and management of commercial and multi-family
residential real estate projects and to maximize the value of its commercial
lending and leasing assets.
All significant intercompany balances and transactions have been
eliminated. Investments in 20% to 50% owned joint ventures and partnerships are
accounted for using the equity method. A 20.9% investment in common stock of a
non-publicly traded entity is accounted for by the cost method. See Note 8.
F-6
<PAGE> 76
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REFERENCES TO PERIODS ENDED SEPTEMBER 30 ARE UNAUDITED
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
The unaudited interim financial statements reflect all normal and recurring
adjustments, which are in the opinion of management, necessary for a fair
statement of the results for the interim periods presented.
EARNED INCOME ON FINANCE LEASES
Finance leases consist of direct financing leases and leveraged leases.
Income on direct financing leases is recognized by a method which produces a
constant periodic rate of return on the outstanding investment in the lease.
Income on leveraged leases is recognized by a method which produces a constant
rate of return on the outstanding investment in the lease net of the related
deferred tax liability in the years in which the net investment is positive. The
net investment in leveraged leases is the aggregate of rentals receivable (net
of principal and interest on the related nonrecourse third party debt) and
estimated residual value of the equipment less the unearned income.
FINANCIAL INSTRUMENTS
Estimated fair value amounts have been determined by the Company using
available market information and discounted cash flow analysis. Judgment is
required in interpreting market data to develop estimates of fair value.
Accordingly, the estimates may be materially different from the amounts that the
Company could realize in a current market transaction.
Estimating fair values for loans associated with the airline industry is
difficult due to the limited number of transactions. Management, therefore, has
estimated a range of values for these loans. See Note 2.
The Company currently has no derivative financial instruments, such as
futures, forwards, swaps or options contracts.
ALLOWANCE FOR LEASE AND LOAN LOSSES
In accordance with SFAS No. 114 a loan is considered impaired when
management determines that it is probable that the Company will not collect all
amounts due according to the contractual terms of the loan. An allowance for
loss on an impaired loan is recognized when the present value of the expected
future cash flows, discounted at the loan's effective rate, is less than the
carrying value of the loan. When an impaired loan is collateral dependent, and
foreclosure is probable, the lower of the carrying amount of the loan, or the
market value of collateral less costs to sell, is used to measure the amount of
allowance for loss to be recognized.
Allowance for losses on leases is provided when management has determined
that it is probable that the net investment in a lease will not be recovered due
to lessee credit problems. The allowance is measured by the difference between
net investment in the lease and the market value of the leased asset less costs
to sell. Establishing the allowance for losses relies substantially upon
management judgment utilizing the best available information at the time of
review.
PROPERTY AND DEPRECIATION
The Company records property at cost adjusted for any impairment and
provides for depreciation primarily on a straight-line basis over the estimated
service lives or lease terms of the related assets. The Company reviews its
property for impairment whenever events or changes in circumstances indicate
that the
F-7
<PAGE> 77
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REFERENCES TO PERIODS ENDED SEPTEMBER 30 ARE UNAUDITED
carrying amount of an asset may not be recoverable. For all properties, other
than property held for sale or development, a loss is recognized, and the
property written down, when the carrying amount exceeds the indicated fair
value. Fair value is determined using quoted market prices, when available, or
discounted cash flows. Impairment losses on property for sale and under
development are recognized when fair value less cost to dispose is less than
carrying value.
REAL ESTATE TRANSACTIONS
Real estate revenues include rent from leasing operations and sales of real
estate. Rental revenues, net of any rent concessions given to lessees, are
recognized ratably over the lease period. Profit from the sale of real estate is
recognized only upon the closing of a sale, the transfer of ownership rights to
the purchaser and receipt of an adequate cash down payment. If the cash down
payment is not adequate, profits are deferred using the installment method of
accounting.
INTEREST EXPENSE
The accompanying consolidated statements of operations and deficit include
an allocation of Florida Progress's interest expense based upon the average
outstanding amounts due to Florida Progress and affiliates. See Note 6 for a
more detailed description of the allocation procedures. Management believes the
allocation method used is reasonable.
INCOME TAXES
Taxable income of the Company has been included in the consolidated income
tax returns of Florida Progress. Florida Progress's "tax allocation policy" is
to allocate current income taxes to each subsidiary in an amount equal to its
stand-alone tax liability. Benefits of losses are allocated to the subsidiary
generating the loss upon utilization in the consolidated tax return. At the time
of the Distribution, the Florida Progress and the Company will execute a tax
sharing agreement which allocates all pre and post distribution tax liabilities
between the Company and Florida Progress.
Deferred taxes are provided on all significant temporary differences
between the financial and tax basis of assets and liabilities using presently
enacted tax rates in accordance with Financial Accounting Standard (SFAS) No.
109, "Accounting for Income Taxes," which was implemented in 1993. The effect of
implementing SFAS No. 109 was immaterial.
EARNINGS PER COMMON SHARE
The net loss per common share reflects, for all periods presented the
outstanding common shares of Echelon after giving effect to the changes in the
capitalization as discussed in Note 12. There were no options, warrants or other
potentially dilutive securities outstanding during the periods presented.
RECENTLY ADOPTED ACCOUNTING STANDARDS
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosure." These
standards require the Company to compute present values for impaired loans when
determining the allowance for credit losses. There was no impact on earnings as
a result of implementing these standards.
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," on January 1,
1996. This standard requires that long-lived assets and certain intangible
assets be reviewed for impairment whenever events or changes in circumstances
indicate
F-8
<PAGE> 78
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REFERENCES TO PERIODS ENDED SEPTEMBER 30 ARE UNAUDITED
that the carrying amount of an asset may not be recoverable through future cash
flows from the use and disposition of the asset. An impairment loss recognized
on assets to be held and used is measured as the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets held for sale
are reported at the lower of carrying amount or net realizable value. There was
no impact on earnings as a result of implementing this standard.
(2) LEASES AND LOANS RECEIVABLE AND FAIR VALUE OF FINANCIAL INSTRUMENTS
At September 30, 1996, and at December 31, 1995 and 1994, investments in
leases and loans receivable were as follows:
<TABLE>
<CAPTION>
UNAUDITED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Finance leases:
Rentals receivable..................................... $ 165.4 $197.6 $226.3
Unguaranteed residual values........................... 105.6 109.7 153.5
Unearned income........................................ (54.9) (62.5) (78.7)
Deferred investment tax credits........................ (14.2) (14.7) (20.5)
------ ------ ------
Total finance leases........................... 201.9 230.1 280.6
Commercial finance loans receivable...................... 93.8 153.6 176.8
Allowance for losses..................................... (18.1) (32.0) (33.7)
------ ------ ------
277.6 351.7 423.7
Less: current portion.................................... 42.5 42.4 14.8
------ ------ ------
$ 235.1 $309.3 $408.9
====== ====== ======
</TABLE>
Finance leases consist primarily of leveraged investments in aircraft as
described below. The majority of the aircraft leases have remaining terms of 10
to 15 years, with a maximum of 23 years. Rentals receivable from finance leases
represent unpaid rentals less principal and interest on nonrecourse third-party
debt. The Company's share of rentals receivable is subordinate to the debt
holders who have security interests in the leased assets.
At December 31, 1995, net contractual maturities of rentals receivable
under the contracts were $11.9 million, $10.4 million, $9.6 million, $12.9
million and $12.2 million for each of the years in the five year period from
1996 through 2000, respectively, and $140.5 million in total thereafter.
Net income recognized from leveraged leases (after payments to nonrecourse
lenders, but before other borrowing costs) was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ---- -----
(IN MILLIONS)
<S> <C> <C> <C>
Lease income..................................................... $ 2.0 $0.5 $ 2.7
Income tax effect................................................ (1.0) (0.1) (1.3)
Effect of change in tax rate on deferred assets/liabilities...... 0.0 0.0 (2.9)
Gain (loss) on sale of equipment................................. (1.1) 0.2 3.8
Amortization of investment tax credits........................... 0.3 1.5 1.4
----- ---- -----
$ 0.2 $2.1 $ 3.7
===== ==== =====
</TABLE>
The Company's commercial finance loans are secured by first mortgage liens
on the related commercial real estate or by security interests in aircraft,
aircraft engines or spare parts. These loans are further
F-9
<PAGE> 79
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REFERENCES TO PERIODS ENDED SEPTEMBER 30 ARE UNAUDITED
collateralized, where applicable, by an assignment to the Company of the
borrowers' lease agreements, and, in some cases, third party guaranties.
At September 30, 1996, and at December 31, 1995 and 1994, the Company's
portfolio included investments in the airline industry totaling $215.9 million,
$294.6 million and $357.6 million, respectively. Investments in the commercial
real estate industry totaled $109.6 million, $122.2 million and $134.6 million
at the same dates.
At December 31, 1995, $58.6 million of loans receivable were impaired under
the definition of SFAS 114. The Company had assigned approximately $5 million of
the $18.1 million total of allowances for loan losses to these loans. In
connection with management's plan to dispose of certain non-strategic assets,
$35.1 million of the these loans have been reclassified to "Assets Held for
Sale". See Note 4. At September 30, 1996, the Company has determined that the
remaining loan of $23.5 million is considered impaired in accordance with SFAS
114. No valuation allowance is required because, in the opinion of management,
the estimated current market value of the underlying property is in excess of
the $23.5 million loan balance and cash flow from leases on this property, which
have been assigned to the Company, supports the current recorded value of this
loan.
The Company's portfolio included $65.1 million, $90.2 million and $61.0
million in loans and leases performing under restructured agreements at
September 30, 1996, and December 31, 1995 and 1994, respectively. All
restructured assets are performing in accordance with their new terms and the
restructurings are not anticipated to materially reduce the Company's future
annual revenue.
During 1995, 1994 and 1993, the Company recorded $5.0 million, $9.9 million
and $5.9 million, respectively, for possible loan and lease losses and had
write-offs totaling $6.7 million, $.7 million and $4.3 million, respectively.
Leases and loans generally are placed on nonaccrual status when management
believes the collectibility of interest or principal is unlikely. There were no
assets on nonaccrual status at September 30, 1996, or at December 31, 1995 or
1994.
In the opinion of management, the estimated fair value of financial
instruments at September 30, 1996, December 31, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
----------------------- -----------------------------
1996 1995 1994 1996 1995 1994
----- ------ ------ ----- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Real Estate loans................. $93.1 $106.8 $118.4 $93.1 $ 106.6 $ 117.1
Aircraft loans.................... 0.7 49.8 58.4 0.7 14 to 44 14 to 43
Debt (Note 5)..................... 20.4 33.2 32.7 20.4 33.2 32.7
</TABLE>
Management's estimate of aircraft loan fair values takes into account not
only market interest rates but additionally considers published estimates of
aircraft market values.
(3) PROPERTY
The Company's established allowance for losses of $18.0 million was applied
as a write down of property cost as of December 31, 1995 in contemplation of the
adoption of SFAS 121 on January 1, 1996. The Company recognized an additional
$3.8 million impairment during the nine months ended September 30, 1996 which is
reflected in the allowance for losses. The Company recognized an impairment on
an income producing building when a tenant gave notice to not extend its lease.
This loss was measured using discounted cash flows. The Company recognized an
impairment loss on real estate under development when it was
F-10
<PAGE> 80
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REFERENCES TO PERIODS ENDED SEPTEMBER 30 ARE UNAUDITED
determined that the carrying value of the property plus costs to complete
development of the property exceeded its market value.
The depreciable lives and carrying values of property are as follows:
<TABLE>
<CAPTION>
UNAUDITED DECEMBER 31,
DEPRECIABLE SEPTEMBER 30, ---------------
LIVES (YEARS) 1996 1995 1994
------------- ------------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Real estate development projects:
For sale and under development............. $ 32.5 $ 51.9 $ 52.8
Income producing:
Land.................................... 15.1 15.2 18.8
Buildings and improvements.............. 5-40 106.5 104.5 101.6
Equipment and other..................... 3-10 1.6 2.0 1.9
------ ------ ------
155.7 173.6 175.1
Other property:
Aircraft on operating lease................ 10 12.5 12.5 12.5
Equipment, furniture and vehicles.......... 2-25 0.0 0.1 0.6
------ ------ ------
168.2 186.2 188.2
Less: accumulated depreciation............... 35.3 32.6 24.7
allowance for losses................... 0.0 0.0 $ 16.8
------ ------ ------
$ 132.9 $153.6 $146.7
====== ====== ======
</TABLE>
(4) ASSETS HELD FOR SALE
At June 30, 1996, the Company's management adopted a plan to dispose of
certain non-strategic assets. These assets and their respective reserves have
been classified as "Assets Held for Sale" at September 30, 1996. Management
expects that the disposal of these assets will be completed within two years.
Assets held for sale consist of the following:
<TABLE>
<CAPTION>
PREVIOUS BALANCE SHEET CLASSIFICATION
------------------------------------------------------------------------ UNAUDITED
SEPTEMBER 30,
1996
-------------
(IN MILLIONS)
<S> <C>
Leases and loans receivable, net of $40.8 million valuation allowance... $27.1
Property, net of depreciation........................................... 2.4
Investments in unconsolidated affiliates................................ 3.3
-----
$32.8
=====
</TABLE>
As a result of the decision to dispose of these non-strategic assets, the
Company recognized a loss of $30.1 million at June 30, 1996. The Company
recognized this loss on leases and loans receivable in accordance with SFAS 114,
and on property and investments in unconsolidated affiliates in accordance with
SFAS 121. Assets held for sale are reflected at the lower of carrying amount or
fair value less cost to dispose.
F-11
<PAGE> 81
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REFERENCES TO PERIODS ENDED SEPTEMBER 30 ARE UNAUDITED
(5) LONG-TERM DEBT
Long-term debt outstanding is as follows:
<TABLE>
<CAPTION>
UNAUDITED DECEMBER 31,
INTEREST SEPTEMBER 30, -------------
RATE 1996 1995 1994
-------- ------------- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
First mortgages................................... 8.0%(a) $ 0.7 $ 8.6 $ 6.8
Delayed equity obligation on finance lease........ 10.0% 19.7 21.9 23.3
Other............................................. 0.0 2.7 2.6
----- ----- -----
20.4 33.2 32.7
Less: current portion of long-term debt........... 2.5 10.2 8.3
----- ----- -----
$17.9 $23.0 $24.4
===== ===== =====
</TABLE>
- ---------------
(a) Weighted average interest rate at December 31, 1995.
In connection with an aircraft lease restructured in 1992, the Company
agreed to provide additional equity over the next eleven years. The equity
contributions will be paid to the nonrecourse debt holders by the Company and
collected from the lessee over the remaining lease term. The present value of
the additional equity using a 10% discount rate was $21.9 million and $23.3
million at December 31, 1995 and 1994, respectively, and is included in
long-term debt on the accompanying Balance Sheets.
On November 5, 1996, Echelon obtained a three-year secured loan from
Salomon Brothers Realty Corp. in the principal amount of $105 million. The loan
is secured by five of Echelon's commercial real estate properties, substantially
all of Echelon's real estate loan portfolio and certain additional collateral.
For additional consideration, and subject to certain conditions, Echelon may
extend the term of the loan for one or two additional one-year periods. The loan
requires mandatory monthly principal payments based on an amortization schedule
of 25 years (or, in the case of the real estate loan portfolio, the scheduled
principal payments actually received, if greater), provided, however, that the
scheduled amortization is accelerated to 18 years if the loan-to-value of
collateral ratio is greater than 75%. Additional principal payments may be due
upon the sale of individual items of collateral. Under the loan, monthly
payments of interest at the rate of LIBOR plus 2.95% per annum are due on the
unpaid principal balance.
If the loan-to-value of collateral ratio exceeds 75%, then Echelon will be
required to deposit the cash flow from the assets pledged as collateral into a
collection account to be disbursed monthly to pay scheduled loan payments,
property expenses, and other items and to fund certain reserves. Cash balances
remaining in such account would then be released to Echelon. Under the terms of
the loan, the lender has the right to give notice if it determines the
loan-to-value of collateral ratio exceeds 75% and Echelon has certain rights to
contest that determination. If the loan-to-value of collateral ratio exceeds
80%, then remaining cash balances in such account which would otherwise have
been released to Echelon will be applied monthly to reduce the principal amount
of the loan until the ratio is less than 80%. The imposition of such a
requirement could have a material adverse impact on Echelon's ability to
successfully implement its business plan because the items comprising the
collateral represent Echelon's key sources of operating cash flow. In addition,
the loan agreement contains covenants that require Echelon to maintain a ratio
of debt to total capitalization of not greater than 60% and to maintain certain
levels of liquidity during each year of the loan.
Debt maturities are $10.6 million, $6.0 million, $5.8 million, $97.9
million and $7.1 million for each of the years in the period 1996 through 2000,
respectively, including scheduled principal payments on the $105 million loan
discussed above.
F-12
<PAGE> 82
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REFERENCES TO PERIODS ENDED SEPTEMBER 30 ARE UNAUDITED
(6) RELATED PARTY TRANSACTIONS
The Company utilized accounting, legal, risk management, human resource,
tax, treasury, management, facility and office services of Florida Progress and
its affiliates and is billed for these services, including a portion of the
affiliates' overhead. Charges for these services and overhead were $1.6 million,
$1.4 million and $1.8 million in 1995, 1994 and 1993, respectively. These costs
were charged to Echelon using the affiliates' actual cost allocated to each
affiliate based on its pro rata usage of those services. Management believes
this method to be reasonable. Management's estimate of the increased level of
these services which would have been needed on a stand-alone basis was $2.5
million for the year ended December 31, 1995.
Florida Progress and its affiliates rent facility and office space in
several of the Company's office buildings for which the Company has received
payments of $2.2 million, $2.5 million and $2.1 million in 1995, 1994 and 1993,
respectively. A portion of these amounts were billed to the Company in
connection with the affiliates' allocations of facility services.
Florida Progress managed the cash and financing requirements of the Company
for the periods presented. Advances and payables between the Company and Florida
Progress, and its affiliates, consisted of the following at September 30, 1996
and at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
UNAUDITED DECEMBER 31,
SEPTEMBER 30, -----------------
1996 1995 1994
------------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Accounts and interest payable.......................... $ 1.9 $ 6.2 $ 6.5
Advances from Florida Progress......................... 101.1 250.0 283.8
------ ------ ------
Due to Florida Progress and affiliates................. $ 103.0 $ 256.2 $ 290.3
====== ====== ======
</TABLE>
Interest expense reflected in the accompanying consolidated financial
statements related to the intercompany advances from Florida Progress represents
interest allocated to the Company. The effective interest rate on the average
outstanding intercompany advances for the years ended December 31, 1995, 1994
and 1993 and for the nine month period ended September 30, 1996 was 6.0%, 6.6%,
7.5% and 7.2%, respectively.
(7) RETIREMENT BENEFIT PLANS
Pension Benefits. Florida Progress has a noncontributory defined benefit
pension plan covering its employees and those of certain subsidiaries, including
the Company. The benefits are based on length of service, compensation and
social security benefits. The participating companies make annual contributions
to the plan based on an actuarial determination and consideration of tax
regulations and funding requirements under federal law. Employees of the Company
will terminate employment with Florida Progress and employees vested with
Florida Progress will remain in Florida Progress's defined benefit pension plan
on the effective date of the Distribution. This liability will continue to be
reflected in Florida Progress's defined benefit pension plan after the
Distribution.
Based on actuarial calculations and the funded status of the pension plan,
the Company was not required to record an expense or contribute to the plan in
1995, 1994 or 1993. Net assets and accumulated benefits are not determined
separately for the participating subsidiaries of Florida Progress.
Other Postretirement Benefits. The Company, through Florida Progress,
provides certain health care and life insurance benefits for retired employees.
Employees become eligible for these benefits when they reach normal retirement
age. The Company accrues the employer's obligation for postretirement benefits
by the date employees attain full eligibility to receive such benefits.
Accumulated benefits are not determined
F-13
<PAGE> 83
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REFERENCES TO PERIODS ENDED SEPTEMBER 30 ARE UNAUDITED
separately for the participating subsidiaries of Florida Progress. The Company's
costs to date have been negligible.
(8) INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company has a 50% interest in a joint venture which is engaged in the
business of leasing aircraft equipment. Additionally, the Company has
investments in limited partnerships and corporate joint ventures, of which no
investment exceeds 40%. The Company accounts for its investments in the joint
venture, limited partnerships and corporate joint ventures by the equity method.
The Company also owns 20.9% of the outstanding common stock of a non-publicly
traded entity which is accounted for by the cost method because the Company has
concluded it is unable to exercise significant influence over such entity. At
September 30, 1996 such investment was classified as "Assets Held for Sale" and
has been recorded at a fair value of zero. See Note 4.
At September 30, 1996 and at December 31, 1995 and 1994, investments in and
advances to unconsolidated affiliates were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------
1996 1995 1994
------------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Joint venture.............................................. $31.4 $33.2 $34.5
Limited partnership interests, corporate joint ventures.... 1.5 3.6 6.3
Common stock............................................... 0.0 3.1 3.1
----- ----- -----
$32.9 $39.9 $43.9
===== ===== =====
</TABLE>
F-14
<PAGE> 84
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REFERENCES TO PERIODS ENDED SEPTEMBER 30 ARE UNAUDITED
The Company includes equity in earnings from unconsolidated partnerships
and joint ventures in other revenues. Presented below is combined summarized
financial information for partnerships and joint ventures accounted for under
the equity method as of September 30, 1996 and as of December 31, 1995 and 1994
and for the years ended December 31, 1995, 1994 and 1993. Amounts reflect 100%
of these entities' balances and results of their operations for these periods.
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------
1996 1995 1994
------------- ------------- ------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Finance lease receivable..................................... $59.5 $ 63.0 $ 65.3
Property and equipment, net.................................. 3.1 3.4 13.1
Current assets............................................... 1.3 1.3 1.2
Other assets, net............................................ 0.0 12.8 14.5
----- ----- -----
$63.9 $ 80.5 $ 94.1
===== ===== =====
LIABILITIES AND EQUITY INTEREST
Long-term debt............................................... $ 0.0 $ 0.0 $ 8.1
Other noncurrent liabilities................................. 1.2 10.5 0.9
Other partners' equity....................................... 31.3 33.2 44.3
----- ----- -----
32.5 43.7 53.3
----- ----- -----
Company investment:
Advances................................................... 0.0 0.0 2.7
Equity interest............................................ 31.4 36.8 38.1
----- ----- -----
31.4 36.8 40.8
----- ----- -----
$63.9 $ 80.5 $ 94.1
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER DECEMBER 31,
30, ------------------
1996 1995 1994 1993
----------- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUES AND EXPENSES
Revenues........................................................ $ 4.5 $8.2 $9.8 $9.0
Expenses........................................................ 0.4 2.8 4.0 2.3
---- ---- ---- ----
Combined net earnings of unconsolidated entities................ $ 4.1 $5.4 $5.8 $6.7
---- ---- ---- ----
Company's equity in net earnings of unconsolidated entities..... $ 2.1 $2.8 $3.0 $3.4
==== ==== ==== ====
</TABLE>
F-15
<PAGE> 85
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REFERENCES TO PERIODS ENDED SEPTEMBER 30 ARE UNAUDITED
(9) INCOME TAXES
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Components of income tax expense (benefit):
Payable currently:
Federal......................................................... $ 32.4 $ 15.2 $ 21.4
State........................................................... 4.7 1.1 2.2
------ ------ ------
37.1 16.3 23.6
------ ------ ------
Deferred, net:
Federal......................................................... (36.3) (18.6) (21.7)
State........................................................... (5.7) (1.9) (2.6)
------ ------ ------
(42.0) (20.5) (24.3)
------ ------ ------
$ (4.9) $ (4.2) $ (0.7)
====== ====== ======
</TABLE>
The provision for income taxes differs from income taxes computed at the
statutory federal income tax rate for each of the above years. The primary
differences between income taxes computed at statutory rates and the actual
income tax expense are detailed below:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Taxes computed at federal statutory income tax rate............. $(3.7) $(3.5) $ 2.3
Effect of change in tax rate on deferred assets/liabilities..... 0.0 0.0 3.7
Rate difference on leveraged lease deferred tax reversals....... (0.9) (0.8) (1.8)
Amortization of investment tax credits.......................... (0.3) (1.5) (1.4)
Investment tax credit basis difference.......................... 0.1 1.1 0.8
Other........................................................... (0.1) 0.5 0.3
----- ----- -----
$(4.9) $(4.2) $(0.7)
===== ===== =====
</TABLE>
The following summarizes the components of deferred tax liabilities and
assets at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
------ ------
(IN MILLIONS)
<S> <C> <C>
Deferred tax liabilities:
Difference in tax basis of property................................ $ 8.7 $ 13.2
Difference in accounting for leveraged leases...................... 184.3 226.6
Other.............................................................. 11.4 10.5
----- -----
Total deferred tax liabilities:............................ 204.4 250.3
----- -----
Deferred tax assets:
Accrued book expenses.............................................. 18.5 22.2
Other.............................................................. 3.6 3.8
----- -----
Total deferred tax assets.................................. 22.1 26.0
----- -----
Net non-current deferred tax liabilities................... $182.3 $224.3
===== =====
</TABLE>
The Company expects the results of future operations will generate
sufficient taxable income to allow the utilization of deferred tax assets.
F-16
<PAGE> 86
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REFERENCES TO PERIODS ENDED SEPTEMBER 30 ARE UNAUDITED
(10) BUSINESS SEGMENTS
The Company's principle business segments are "Lending and Leasing" and
"Real Estate." Lending and Leasing includes leveraged leases, operating leases
and commercial finance loans. The airline industry is the primary industry
included in Lending and Leasing. See Note 3 for information regarding
concentration of risk. Real Estate includes office, commercial and industrial
leasing, land sales and marina operations.
Business segment information for the nine months ended September 30, 1996
and for the years ended December 31, 1995, 1994 and 1993 is summarized below. No
single customer accounted for 10% or more of unaffiliated revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
UNAUDITED -------------------------------
NINE MONTHS 1995
ENDED -------------
SEPTEMBER 30,
1996 (IN MILLIONS) 1994 1993
------------- ------ ------
<S> <C> <C> <C> <C>
Revenues:
Lending and Leasing................................. $ 16.0 $ 29.4 $ 30.0 $ 34.6
Real Estate......................................... 32.6 18.2 18.8 31.9
----- ----- ----- -----
$ 48.6 $ 47.6 $ 48.8 $ 66.5
===== ===== ===== =====
Income (loss) before income taxes:
Lending and Leasing................................. $ (22.8) $ 2.1 $ 1.0 $ 6.5
Real Estate......................................... (12.4) (12.0) (10.2) (12.2)
----- ----- ----- -----
$ (35.2) $ (9.9) $ (9.2) $ (5.7)
===== ===== ===== =====
Identifiable assets:
Lending and Leasing................................. $ 347.0 $ 400.3 $478.8 $552.6
Real Estate......................................... 136.9 154.2 144.6 148.9
----- ----- ----- -----
$ 483.9 $ 554.5 $623.4 $701.5
===== ===== ===== =====
Depreciation:
Lending and Leasing................................. $ 0.9 $ 1.4 $ 1.6 $ 1.2
Real Estate......................................... 3.4 5.0 3.6 4.2
----- ----- ----- -----
$ 4.3 $ 6.4 $ 5.2 $ 5.4
===== ===== ===== =====
Additions to leases, loans and property:
Lending and Leasing................................. $ 0.0 $ 0.0 $ 5.7 $ 42.6
Real Estate......................................... 7.5 4.1 1.3 1.2
----- ----- ----- -----
$ 7.5 $ 4.1 $ 7.0 $ 43.8
===== ===== ===== =====
</TABLE>
(11) COMMITMENTS AND CONTINGENCIES
The Company is subject to regulation with respect to the environmental
effects of its operations. The Company's disposal of hazardous waste through
third party vendors may result in costs to clean up facilities found to be
contaminated. Federal and state statutes authorize governmental agencies to
compel responsible parties to clean up certain abandoned or uncontrolled
hazardous waste sites. The Company has been notified by the Environmental
Protection Agency that a former subsidiary is or could be a potentially
responsible party at one site. Liability for cleanup costs of this site is joint
and several. Based upon information currently available, the Company believes
that its liability for cleanup of this site will not be material and does not
F-17
<PAGE> 87
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REFERENCES TO PERIODS ENDED SEPTEMBER 30 ARE UNAUDITED
believe that it will be required to pay a significantly disproportionate share
of the total cleanup costs. In addition, the Company may also be responsible for
additional environmental cleanup at other sites. Based on information currently
available to the Company, the Company estimates that its proportionate share of
liability for cleaning up all sites ranges from $0.1 million to $1.0 million,
and it has reserved $0.5 million for potential costs that management estimates
to be probable. Management currently believes that the ultimate outcome of these
matters will not have a material adverse effect upon the Company's results of
operations, financial condition or liquidity.
Through a previous partnership, the Company remains contingently liable for
first mortgage bonds issued to residents of the life care communities owned by
the former partnership. The contingent liability reduces over time as those who
were residents at the time of the sale of the Company's interest discontinue
their residency. If the current owners fail to perform their obligations and if
the partnership assets, consisting primarily of land and buildings, were
worthless, the Company could be liable for an additional $32.2 million as of
December 31, 1995. The Company considers the incurrence of this liability to be
remote based on asset values and the indemnification agreement from the current
owners to the Company.
(12) SUBSEQUENT EVENTS
In October 1996, the Echelon Board of Directors adopted Amended and
Restated Articles of Incorporation which increased the number of authorized
common shares from 100 to 25,000,000, changed the par value from $1.00 to $0.01;
and converted each share of $1.00 par value common stock into 64,670.18 shares
of $.01 par value common stock. The conversion of common shares and the effect
on loss per share has been reflected in all periods presented. Additionally,
Echelon has authorized 10,000,000 shares of $.01 par value preferred stock. No
shares of preferred stock have been issued or are outstanding.
In October 1996, the Echelon Board of Directors approved several stock
based benefit plans, and reserved an aggregate of 1,200,000 shares of Echelon
common stock for issuance pursuant to the following plans:
Stock Option Plan. A maximum of 150,000 shares of Echelon Common Stock are
reserved for issuance under the plan. Under the Stock Option Plan, incentive
stock options, nonqualified stock options or any combination thereof may be
granted to any employee of Echelon. In general, the exercise price of the
options will be determined by the committee, but such price will not be less
than the market price of Echelon Common Stock on the date the option is granted.
Options will normally vest 20% each year after issuance over a period of five
years and will expire after 10 years.
Stock Purchase Plan. An aggregate of 75,000 shares of Echelon Common Stock
are reserved for issuance under the plan. Under the Stock Purchase Plan, all
employees will be given the opportunity to purchase shares of Echelon Common
Stock two times a year at a price equal to 85% of the market price of the stock
immediately prior to the beginning of each offering period. The Stock Purchase
Plan provides for two offering periods, the months of March and September, in
each of the years 1997-2006.
Echelon Long Term Incentive Plan ("LTIP"). An aggregate of 950,000 shares
of Echelon Common Stock are reserved for issuance under the plan. Under the
Echelon LTIP, restricted stock, incentive stock options, nonqualified stock
options and stock appreciation rights or any combination thereof may be granted
to Echelon employees. The exercise price of the options granted under the plan
will be determined in the discretion of the committee administering the plan,
which price may not be less than the market price of Echelon Common Stock on the
date the option is granted. Options will normally vest 20% each year after
issuance over a period of five years and will expire after 10 years. The
committee may condition awards of restricted stock and stock appreciations
rights upon satisfaction of performance criteria or other conditions.
F-18
<PAGE> 88
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REFERENCES TO PERIODS ENDED SEPTEMBER 30 ARE UNAUDITED
Directors' Plan. An aggregate of 25,000 shares of Echelon Common Stock are
reserved for issuance under the plan. Directors who are not employees of Echelon
("Non-Employee Directors") will receive an annual retainer fee of $15,000 paid
quarterly in the form of Echelon Common Stock. In addition to the annual
retainer, each year Non-Employee Directors who are elected or are continuing as
Non-Employee Directors as of the conclusion of Echelon's annual meeting of
stockholders will receive options to purchase 1,000 shares of Echelon Common
Stock. The exercise price of the options will be equal to the market price of
Echelon Common Stock on the date the option is granted. Options will vest fully
at the end of one year and will expire after five years.
Additionally in October 1996, the Board granted 273,232 shares of
restricted common stock to officers under the LTIP, and granted options to
purchase 134,840 common shares at an exercise price equal to the closing price
for Echelon Common Stock eight months after the completion of the Distribution.
(13) QUARTERLY DATA (UNAUDITED)
Summarized quarterly data for 1995 and 1994:
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
1995
Revenue...................................... $ 10.7 $ 12.3 $ 10.7 $13.9
Net loss..................................... (1.2) (1.4) (1.3) (1.1)
1994
Revenue...................................... $ 9.5 $ 15.1 $ 11.9 $12.3
Net loss..................................... (1.1) (1.0) (1.2) (1.7)
</TABLE>
F-19
<PAGE> 89
INDEPENDENT AUDITORS' REPORT
To the Venturers of
Progress Potomac Capital Venture:
We have audited the accompanying balance sheets of Progress Potomac Capital
Venture as of December 31, 1995 and 1994, and the related statements of income,
changes in joint venturers' capital and cash flows for each of the years in the
three year period ended December 31, 1995. These financial statements are the
responsibility of Progress Potomac Capital Venture's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we 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 financial statements referred to above present fairly,
in all material respects, the financial position of Progress Potomac Capital
Venture as of December 31, 1995 and 1994, and the results of its operations and
cash flows for each of the years in the three year period ended December 31,
1995, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
St. Petersburg, Florida
November 6, 1996
F-20
<PAGE> 90
PROGRESS POTOMAC CAPITAL VENTURES
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Finance Lease Revenue................................ $5,379,114 $5,884,136 $6,345,395
Rental Income........................................ 741,046 741,046 741,046
Interest Income...................................... 219,650 335,899 372,597
---------- ---------- ----------
6,339,810 6,961,081 7,459,038
---------- ---------- ----------
EXPENSES:
Amortization of Management Fees...................... 0 60,097 18,917
Administration Fee................................... 60,000 60,000 60,000
Depreciation......................................... 444,000 444,000 265,933
Other................................................ 3,000 3,000 3,000
---------- ---------- ----------
507,000 567,097 347,850
---------- ---------- ----------
NET INCOME............................................. $5,832,810 $6,393,984 $7,111,188
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 91
PROGRESS POTOMAC CAPITAL VENTURES
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Cash.............................................................. $ 200,243 $ 186,710
Jet Engines (net of accumulated depreciation of $1,815,948 in 1995
and $1,371,948 in 1994)......................................... 3,384,052 3,828,052
Direct Financing Lease -- Continental Airlines.................... 56,854,337 62,682,327
Restricted Cash................................................... 1,258,314 827,625
Other Receivable.................................................. 222,660 507,403
Notes Receivable from Continental Airlines........................ 5,910,738 2,054,947
----------- -----------
Total Assets............................................ $67,830,344 $70,087,064
=========== ===========
LIABILITIES AND JOINT VENTURERS' CAPITAL
Accrued Expenses.................................................. $ 15,000 $ 15,000
Unearned Income................................................... 198,786 185,261
Maintenance Deposits.............................................. 1,258,314 827,625
----------- -----------
Total Liabilities............................................ 1,472,100 1,027,886
Joint Venturers' Capital:
Echelon......................................................... 33,179,122 34,529,589
Potomac......................................................... 33,179,122 34,529,589
----------- -----------
Total Joint Venturers' Capital............................... 66,358,244 69,059,178
----------- -----------
Total Liabilities and Joint Venturers' Capital.......... $67,830,344 $70,087,064
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 92
PROGRESS POTOMAC CAPITAL VENTURES
STATEMENTS OF CHANGES IN JOINT VENTURERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
ECHELON INTERNATIONAL POTOMAC CAPITAL
CORPORATION CORPORATION
CAPITAL ACCOUNT CAPITAL ACCOUNT TOTAL
--------------------- ---------------- ------------
<S> <C> <C> <C>
December 31, 1992........................... $40,129,021 $ 40,129,021 $ 80,258,042
Net Income................................ 3,555,594 3,555,594 7,111,188
Cash Distributions........................ (6,145,784) (6,145,784) (12,291,568)
Capital Contribution...................... 415,738 415,738 831,476
----------- ----------- ------------
December 31, 1993........................... 37,954,569 37,954,569 75,909,138
Net Income................................ 3,196,992 3,196,992 6,393,984
Cash Distributions........................ (6,621,972) (6,621,972) (13,243,944)
----------- ----------- ------------
December 31, 1994........................... 34,529,589 34,529,589 69,059,178
Net Income................................ 2,916,405 2,916,405 5,832,810
Cash Distributions........................ (4,266,872) (4,266,872) (8,533,744)
----------- ----------- ------------
December 31, 1995........................... $33,179,122 $ 33,179,122 $ 66,358,244
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 93
PROGRESS POTOMAC CAPITAL VENTURES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income...................................... $ 5,832,810 $ 6,393,984 $ 7,111,188
Adjustments for Non Cash Items:
Depreciation................................. 444,000 444,000 265,933
Amortization................................. 0 60,097 18,917
Changes in Assets and Liabilities:
Restricted Cash.............................. (430,689) (6,327) (577,645)
Other Receivable............................. 284,743 252,695 (760,100)
Unearned Income.............................. 13,525 0 0
Maintenance Deposits......................... 430,689 6,327 577,645
---------- ---------- ----------
Net cash provided by operating
activities............................ 6,575,078 7,150,776 6,635,938
---------- ---------- ----------
INVESTING ACTIVITIES:
Proceeds from Collections of Leases............. 1,117,787 5,322,969 4,264,621
Proceeds from Collections of Notes Receivable... 854,412 770,207 556,534
---------- ---------- ----------
Net cash provided by investing
activities............................ 1,972,199 6,093,176 4,821,155
---------- ---------- ----------
FINANCING ACTIVITIES:
Distributions to Venturers...................... (8,533,744) (13,243,944) (11,460,092)
---------- ---------- ----------
Net Increase in Cash.............................. 13,533 8 (2,999)
Beginning Cash.................................... 186,710 186,702 189,701
---------- ---------- ----------
Ending Cash Balance............................... $ 200,243 $ 186,710 $ 186,702
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 94
PROGRESS POTOMAC CAPITAL VENTURES
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND PRINCIPLES OF PRESENTATION
Progress Potomac Capital Ventures ("PPCV") is a joint venture, formed in
February 1988, between Echelon International Corporation ("Echelon"), successor
to Progress Credit Corporation, and Potomac Capital Corporation ("Potomac"). The
purpose of the formation of the joint venture is to purchase, lease, and finance
aircraft and aircraft equipment. The joint venture is controlled 50/50 and all
decisions must be unanimously agreed to by the venturers. The income or loss
generated in each fiscal year is distributed annually based upon the pro rata
share of each venturer's capital accounts as of the end of the respective fiscal
year. The joint venture will be dissolved in 2027, unless all assets owned by
the joint venture are sold or disposed of prior to this date, at which time the
joint venture will be dissolved.
PPCV's operations consist of a direct finance lease and an operating lease.
The direct finance lease involves two DC10-30s that are currently on lease to
Continental Airlines ("Continental"). The lease was initiated in February of
1990 and expires in February of 2002. In 1992, Echelon and Potomac agreed to
revise the terms with Continental pursuant to which Continental issued a
deferred rent note for 4 months worth of rents (including interest) to be paid
back in 48 months. This note earns interest at 10.42% annually. Again in 1995,
both parties agreed to revise the terms of the Continental lease by deferring a
portion of the rent payable for 16 months, retroactive to February 1995, and
issuing another deferred rent note specific to the 1995 deferment. This note
earns interest at 8% annually, requires interest payments only for the first six
months, and principal and interest payments thereafter. The principal is
scheduled to be paid in full by 2000. The total amount of deferred rent notes
receivable from Continental as of December 31, 1995 and 1994, is $5,910,738 and
$2,054,947, respectively.
The operating lease involves two CFM-56 jet engines leased to America West.
The lease expires on December 31, 1997. As part of the leasing arrangement with
America West, America West is required to make payments to PPCV in order to
provide a maintenance and repair reserve for the engines. The funds deposited
are recorded as restricted cash as PPCV can only use the funds for maintenance
and repair. The funds are also recorded by PPCV as an other liability as any
excess funds will be returned to America West upon termination of the lease.
Aircraft and aircraft equipment leasing involves numerous risks, including
risks stemming from the obsolescence or physical deterioration of aircraft or
equipment and the possibility of defaults by lessees. In addition, fluctuations
in general business and economic conditions, the adoption of restrictive
regulations and legislation, changes in consumer demand for air travel,
fluctuations in fuel prices and other factors over which the lessors of aircraft
have no control could be expected to adversely affect the supply and demand of
the aircraft or aircraft leases and may cause cost increases related to the
leasing of aircraft that cannot be offset by increased revenues. The market for
aircraft and related equipment is currently characterized by a relatively large
supply of most types of aircraft and a relatively weak demand, which adversely
affects the marketability and near-term value of the aircraft leased assets.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
EARNED INCOME ON DIRECT FINANCING LEASE
Income on direct financing leases is recognized by a method which produces
a constant periodic rate of return on the outstanding investment in the lease.
F-25
<PAGE> 95
PROGRESS POTOMAC CAPITAL VENTURES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DEPRECIATION
The jet engines are depreciated on a straight line basis over sixteen
years.
INCOME TAXES
The joint venture is not a taxable entity. The taxable income is passed
through to each of the venturers as income is allocated according to the joint
venture agreement.
LEASES RECEIVABLE
Effective January 1, 1995, the joint venture adopted SFAS No. 114,
"Accounting by Creditors for the Impairment of a Loan," as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure." These standards require the joint venture to compute present values
for impaired loans when determining the allowance for credit losses. There was
no impact on earnings as a result of implementing and applying these standards
to the Continental direct finance lease.
IMPAIRED ASSETS
The joint venture will be required to adopt SFAS No. 121, "Accounting for
the Impairment of the Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", on January 1, 1996. This standard requires that long lived assets and
certain intangible assets be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable through future cash flows from the use and disposition of the asset.
The adoption of this standard is not expected to have a material impact on
earnings.
FINANCIAL INSTRUMENTS
Estimated fair value amounts have been determined by the joint venture
using the available market information and discounted cash flow analysis.
Judgment is required in interpreting market data to develop estimates of fair
value. Accordingly, the estimates may be materially different from the amounts
that the joint venture could realize in a current market transaction.
The joint venture has no derivative financial instruments, such as futures,
forwards, swaps or options contracts.
(2) FINANCIAL INSTRUMENTS
In the opinion of management , the estimated fair value of the Continental
notes receivable, at December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
--------------- ----------
<S> <C> <C>
1994....................................................... $ 2,054,947 $2,054,947
1995....................................................... $ 5,910,738 $5,910,738
========== ==========
</TABLE>
F-26
<PAGE> 96
PROGRESS POTOMAC CAPITAL VENTURES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) RENTAL INCOME UNDER OPERATING LEASE
The following is a schedule by years of future minimum rentals on
noncancelable leases as of December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
-------------------------------------------------------------------------
<S> <C>
1996..................................................................... $ 795,144
1997..................................................................... 795,144
----------
Total minimum future rentals........................................ $1,590,288
==========
</TABLE>
(4) NET INVESTMENT IN DIRECT FINANCING LEASE
The following lists the components of the net investment in the direct
financing lease as of December 31:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Minimum lease payments receivable........................... $68,956,643 $81,163,747
Initial Direct Cost......................................... 1,079,446 1,331,767
Estimated residual value of the leased property............. 7,800,000 7,800,000
Less: Unearned income....................................... (20,981,752) (26,613,187)
----------- ------------
Net Investment in direct finance lease...................... $56,854,337 $62,682,327
=========== ============
</TABLE>
The future minimum lease payments for each of the succeeding five years are
$11,200,000 per year.
F-27
<PAGE> 97
APPENDIX TO ELECTRONIC FORMAT DOCUMENT
This Information Statement contains spaces for the following graphic and
image materials:
(1) The front cover will be folded. The inside front cover contains
four photographs: (a) an apartment building captioned Residential Real
Estate Development, (b) an office building captioned Commercial Real Estate
Development, (c) an airplane captioned Aircraft and Other Leases and (d)
employees reviewing documents captioned Real Estate Services and Property
Management.
(2) The fold-out portion of the front cover contains photographs of
real estate properties and maps. The left side contains (a) a map of the
State of Florida highlighting the cities where Echelon's properties are
located, (b) a map of the Tampa Bay area indicating where Echelon's
properties are located, (c) a photograph of the Barnett Tower and (d) a
photograph of Carillon. The right side contains photographs of McNulty
Station, Harborage of Bayboro, Highpoint Center, 100 Carillon, Promenade,
7th Avenue and Bay Isle Key Apartments.
(3) The inside back cover contains a photograph of the officers and
certain employees of Echelon.
<PAGE> 1
EXHIBIT 10.1
DISTRIBUTION AGREEMENT
by and between
FLORIDA PROGRESS CORPORATION,
a Florida corporation,
and
ECHELON INTERNATIONAL CORPORATION,
a Florida corporation,
Dated _______, 1996
<PAGE> 2
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS....................................... 2
1.1 General............................................... 2
1.2 References to Time.................................... 10
1.3 References; Interpretation............................ 10
ARTICLE II
CERTAIN TRANSACTIONS PRIOR TO THE DISTRIBUTION DATE............... 10
2.1 Transfer of Assets.................................... 10
2.2 Articles of Incorporation; By-laws; Rights
Agreement............................................. 10
2.3 Issuance of Stock..................................... 10
2.4 Registration and Listing.............................. 11
2.5 Echelon Board......................................... 11
2.6 Notices to Third Parties.............................. 11
2.7 Licenses and Permits.................................. 11
2.8 Settlement of Intercompany Accounts................... 12
2.9 Indebtedness and Capital Structure.................... 12
2.10 Resignations.......................................... 12
2.11 Ancillary Agreements.................................. 13
2.12 No Representations or Warranties...................... 13
2.13 Certain Contingent Liabilities........................ 13
ARTICLE III
THE DISTRIBUTION................................... 14
3.1 Record Date and Distribution Date..................... 14
3.2 The Agent............................................. 14
3.3 Delivery of Share Certificates to Agent............... 14
ARTICLE IV
INDEMNIFICATION..................................... 15
4.1 Indemnification....................................... 15
4.2 Procedures for Indemnification for Third-Party
Claims................................................ 15
4.3 Remedies Cumulative................................... 17
4.4 Indemnification Payments.............................. 17
ARTICLE V
CERTAIN ADDITIONAL COVENANTS........................... 18
5.1 Assumption and Satisfaction of Liabilities............ 18
5.2 Intercompany Agreements............................... 18
5.3 Guarantees............................................ 19
5.4 Further Assurances.................................... 21
5.5 Witness Services...................................... 21
<PAGE> 3
TABLE OF CONTENTS (CONTINUED)
Page
5.6 Certain Post-Distribution Transactions................ 21
5.7 Certain Agreements of Echelon......................... 22
5.8 Corporate Names....................................... 22
5.9 Transfers Not Effected Prior to the
Distribution; Transfers Deemed Effective as of
the Distribution Date................................. 23
ARTICLE VI
ACCESS TO INFORMATION................................ 24
6.1 Provision of Corporate Records........................ 24
6.2 Access to Information................................. 24
6.3 Reimbursement; Other Matters.......................... 25
6.4 Retention of Records.................................. 25
6.5 Confidentiality....................................... 25
6.6 Privileged Matters.................................... 26
6.7 Ownership of Information.............................. 28
6.8 Limitation of Liability............................... 28
6.9 Other Agreements Providing for Exchange of
Information........................................... 28
ARTICLE VII
ADMINISTRATIVE SERVICES............................... 28
7.1 Performance of Services............................... 28
7.2 Independence.......................................... 28
ARTICLE VIII
DISPUTE RESOLUTION................................... 29
8.1 Negotiation........................................... 29
8.2 Arbitration........................................... 29
8.3 Continuity of Service and Performance................. 30
ARTICLE IX
INSURANCE......................................... 30
ARTICLE X
MISCELLANEOUS...................................... 31
10.1 Complete Agreement; Construction...................... 31
10.2 Ancillary Agreements.................................. 31
10.3 Counterparts.......................................... 31
10.4 Survival of Agreements................................ 31
10.5 Expenses.............................................. 31
10.6 Notices............................................... 32
10.7 Waivers............................................... 32
10.8 Amendments............................................ 32
10.9 Assignment............................................ 32
ii
<PAGE> 4
TABLE OF CONTENTS (continued)
Page
10.10 Successors and Assigns..................................... 33
10.11 Termination................................................ 33
10.12 Subsidiaries............................................... 33
10.13 Third Party Beneficiaries.................................. 33
10.14 Title and Headings......................................... 33
10.15 Exhibits and Schedules..................................... 33
10.16 GOVERNING LAW.............................................. 34
10.17 Consent to Jurisdiction.................................... 34
10.18 Severability............................................... 34
EXHIBITS AND SCHEDULES
EXHIBIT A Form of PCH Note
Schedule 1.1(a) Retained Assets of the Florida Progress Group,
if any
Schedule 1.1(b) Retained Liabilities of the Florida Progress,
Group, if any
Schedule 2.8 Settlement of Intercompany Accounts
Schedule 5.2(a) Intercompany Agreements which are not to be
Cancelled
Schedule 5.2(b) Intercompany Agreements which are not to be
Cancelled
Schedule 5.3(a) Guarantees by the Florida Progress Group
iii
<PAGE> 5
DISTRIBUTION AGREEMENT
This DISTRIBUTION AGREEMENT, dated ______ __, 1996, by and
between FLORIDA PROGRESS CORPORATION, a Florida corporation ("Florida
Progress"), and ECHELON INTERNATIONAL CORPORATION, a Florida corporation and an
indirect wholly owned subsidiary of Florida Progress ("Echelon").
W I T N E S S E T H:
WHEREAS, prior to entering into this Agreement, the Echelon
Group consisted of (i) Progress Credit Corporation ("PCC"), a Florida
corporation and a direct, wholly owned subsidiary of Progress Capital Holdings,
Inc. ("PCH"), (ii) Talquin Development Company ("Talquin"), a Florida
corporation and a direct, wholly owned subsidiary of PCC, (iii) Progress Leasing
Corporation ("Progress Leasing"), a Florida corporation and a direct, wholly
owned subsidiary of PCC, (iv) Echelon, formerly known as PLC Leasing Corporation
("PLC Leasing") and a direct, wholly owned subsidiary of Progress Leasing and
(v) their respective Subsidiaries;
WHEREAS, prior to entering into this Agreement, (i) Talquin,
merged with and into PCC, (ii) PCC, merged with and into Progress Leasing and
(iii) Progress Leasing, merged with and into Echelon, which, as a result of such
merger, became the successor to Talquin, PCC and Progress Leasing (collectively,
the "Pre-Distribution Mergers");
WHEREAS, it has been proposed that Florida Progress distribute
the shares of Echelon Common Stock (and Echelon Rights) to Florida Progress
stockholders and enter into this Agreement and effect the Distribution and the
other transactions contemplated hereby, subject to the terms and conditions set
forth herein and in the Ancillary Agreements;
WHEREAS, the respective Boards of Directors of Florida
Progress, PCH and Echelon have duly considered the foregoing, have determined
the Distribution and the other transactions contemplated hereby to be desirable
and in the best interests of Florida Progress, PCH and Echelon, respectively;
WHEREAS, the Distribution is intended to qualify as a
tax-free spin-off under Section 355 of the Code; and
WHEREAS, the parties hereto have determined that it is
necessary and desirable to set forth their agreements that will govern certain
matters prior to and following the Distribution;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained and intending to be legally bound thereby, the
parties hereto agree as follows:
<PAGE> 6
2
ARTICLE I
DEFINITIONS
1.1 General. As used in this Agreement, the following
terms shall have the following meanings:
Action: any action, suit, arbitration, inquiry, proceeding or
investigation by or before any court, any governmental or other regulatory or
administrative agency, body or commission or any arbitration tribunal.
Affiliate: with respect to any specified Person, a Person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, such specified Person; provided,
however, that for purposes of this Agreement, no member of either Group shall be
deemed to be an Affiliate of any member of the other Group.
Agent: , as the distribution agent appointed by
Florida Progress to distribute the shares of Echelon Common Stock pursuant to
the Distribution.
Agreement: this Agreement, as the same may be amended,
supplemented, or otherwise modified from time to time in accordance with the
terms hereof, together with all Schedules and Exhibits attached hereto or
delivered simultaneously herewith.
Agreement Disputes: as defined in Section 8.1 hereof.
Aircraft: as defined in Section 5.3 hereof.
Ancillary Agreements: all of the written agreements,
instruments, assignments or other arrangements (other than this Agreement)
entered into in connection with the transactions contemplated hereby, including,
without limitation, the Employee Benefits Allocation Agreement, the PCH Note,
the Tax Sharing Agreement and the Transition Services Agreement, and any
exhibit, schedule or appendix to any of the foregoing.
Assets: assets, properties and rights (including goodwill),
wherever located, whether real, personal or mixed, tangible, intangible or
contingent, in each case whether or not recorded or reflected or required to be
recorded or reflected on the books and records or financial statements of any
Person, including, without limitation, the following:
(i) all accounting and other books, records and files
whether in paper, microfilm, microfiche, computer
tape or disc, magnetic tape or any other form;
<PAGE> 7
3
(ii) all apparatus, computers and other electronic data
processing equipment, fixtures, machinery, equipment,
furniture, office equipment, automobiles, trucks,
aircraft and other transportation equipment, special
and general tools, test devices, prototypes and
models and other tangible personal property;
(iii) all inventories of materials, parts, raw materials,
supplies, work-in-process and finished goods and
products;
(iv) all interests in real property of whatever nature,
including easements, whether as owner, mortgagee or
holder of a Security Interest in real property,
lessor, sublessor, lessee, sublessee or otherwise;
(v) all interests in any capital stock or other equity
interests of any Subsidiary or any other Person, all
bonds, notes, debentures or other securities issued
by any Subsidiary or any other Person, all loans,
advances or other extensions of credit or capital
contributions to any Subsidiary or any other Person
and all other investments in securities of any
Person;
(vi) all license agreements, leases of personal property,
open purchase orders for raw materials, supplies,
parts or services, unfilled orders for the
manufacture and sale of products and other contracts,
agreements or commitments;
(vii) all deposits, letters of credit and performance and
surety bonds;
(viii) all written technical information, data,
specifications, research and development information,
engineering drawings, operating and maintenance
manuals, and materials and analyses prepared by
consultants and other third parties;
(ix) all intellectual property, including patents,
copyrights, trade names, trademarks, service marks
and registrations and applications for any of the
foregoing, mask works, trade secrets, inventions,
data bases, other proprietary information and
licenses from third Persons granting the right to use
any of the foregoing;
(x) all computer applications, programs and other
software, including operating software, network
software, firmware, middleware, design software,
design tools, systems documentation and instructions;
<PAGE> 8
4
(xi) all cost information, sales and pricing data,
customer prospect lists, supplier records, customer
and supplier lists, customer and vendor data,
correspondence and lists, product literature,
artwork, design, development and manufacturing files,
vendor and customer drawings, formulations and
specifications, quality records and reports and other
books, records, studies, surveys, reports, plans and
documents;
(xii) the right to receive mail and other communications;
(xiii) all prepaid expenses, trade accounts and other
accounts and notes receivables;
(xiv) all rights under leveraged leases, direct finance
leases, operating or other equipment leases or other
contracts or agreements, all claims or rights against
any Person arising from the ownership of any asset,
all rights in connection with any bids or offers and
all claims, chooses in action or similar rights,
whether accrued or contingent;
(xv) all rights under insurance policies and all rights in
the nature of insurance, indemnification or
contribution;
(xvi) all licenses (including radio and similar licenses),
permits, approvals and authorizations which have been
issued by any governmental authority;
(xvii) cash or cash equivalents, bank accounts, lock boxes
and other deposit arrangements; and
(xviii) interest rate, currency, commodity or other swap,
collar, cap or other hedging or similar agreements or
arrangements.
Business Plan: the Echelon business plan set forth in the
Progress Credit Corporation Ten-Year Financial Projections and Assumptions
1997-2006.
Code: the Internal Revenue Code of 1986, as amended, and the
Treasury regulations promulgated thereunder, including any successor
legislation.
Distribution: the distribution on the Distribution Date to
holders of record of shares of Florida Progress Common Stock as of the Record
Date of the Echelon Common Stock owned by Florida Progress on the basis of one
share of Echelon Common
<PAGE> 9
5
Stock for each 15 outstanding shares of Florida Progress Common Stock.
Distribution Date: the date fixed by the Board of Directors of
Florida Progress as the date on which the Distribution is to be effected.
Echelon: as defined in the recitals to this Agreement.
Echelon Assets: collectively, all of the rights and Assets
(excluding Tax and employee-related Assets) of the parties hereto or any of
their respective Subsidiaries primarily relating to the Echelon Business,
including (i) all rights and Assets of Echelon under this Agreement or any
Ancillary Agreement (or any exhibit, schedule or appendix hereto or thereto) and
(ii) the Assets included on the PCC Balance Sheet or the accounting records
supporting such balance sheet and any Assets acquired by any member of the
Florida Progress Group or the Echelon Group primarily relating to the Echelon
Business after the date of the PCC Balance Sheet, but excluding (x) any Assets
included on the PCC Balance Sheet which have been disposed of after the date of
the PCC Balance Sheet, and (y) any Assets identified or set forth on Schedule
1.1(a) hereto.
Echelon Business: all of the businesses and operations
conducted directly or indirectly at any time by any member of the Echelon Group
which relate to real estate development, real estate management, or real estate,
aircraft or other equipment finance, lending and/or leasing, and all of the
businesses and operations conducted by any member of the Echelon Group directly
or indirectly on or after the Distribution Date, including, in each case, any
investment managed by any such Person.
Echelon Common Stock: the common stock, par value $.01 per
share, of Echelon, together with the Echelon Rights.
Echelon Group: Echelon, as successor to the group of companies
consisting of PCC, Talquin, Progress Leasing, and PLC Leasing Corporation, the
Subsidiaries thereof, and any Persons which may hereafter be organized or
acquired directly or indirectly as Echelon Subsidiaries.
Echelon Indemnitees: each member of the group of companies
which formerly comprised the Echelon Group, each of their respective directors,
officers, employees and agents and each of the heirs, executors, successors and
assigns of any of the foregoing.
Echelon Investments: any corporation, partnership or other
business entity, in which any member of the Echelon Group has owned or will own
any equity interest or other investment and which relates to the business and
operations conducted by Echelon or any Echelon Subsidiary, other than a member
of the Florida Progress Group.
<PAGE> 10
6
Echelon Liabilities: collectively, all Liabilities (other than
Tax and employee-related Liabilities, which shall be the subject of the Tax
Sharing Agreement and Employee Benefits Allocation Agreement, respectively) of
the parties hereto or any of their respective Subsidiaries(whenever arising,
whether prior to, at or after the Effective Time) primarily arising out of or in
connection with or otherwise relating to the management or conduct, before or
after the Effective Time, of the Echelon Business, or the Echelon Assets, and
including, (i) all the Liabilities of Echelon under this Agreement or any
Ancillary Agreement (or any exhibit, schedule or appendix hereto or thereto),
(ii) Liabilities reflected on the PCC Balance Sheet or the accounting records
supporting such balance sheet and any Liabilities assumed or incurred by any
member of the Florida Progress Group or the Echelon Group primarily arising out
of or in connection with or otherwise relating to the Echelon Business after the
date of the PCC Balance Sheet, and (iii) all Liabilities relating to or
involving the Echelon Business or the current, former or future Assets or
operations of any member of the Echelon Group which arise under, relate to or
are based upon any law, statute, regulation, rule, judgment, decree, rule of
common law or any similar requirement relating to hazardous or toxic substances
or materials or to the protection of human health or the environment; provided,
however, that any Liabilities set forth or identified on Schedule 1.1(b) hereto
shall not be Echelon Liabilities and shall instead be deemed hereunder to
constitute Florida Progress Liabilities.
Echelon Rights: the preferred stock purchase rights of Echelon
issued pursuant to the Rights Agreement dated November 15, 1996 by and between
Echelon and The First National Bank of Boston, as Rights Agent.
Echelon Subsidiaries: all Subsidiaries of Echelon and all
Echelon Investments.
Effective Time: 12:01 a.m., St. Petersburg, Florida time, on
the Distribution Date.
Employee Benefits Allocation Agreement: the Employee
Benefits Agreement dated as of __________ ____, 1996, between Florida
Progress and Echelon.
Employee Benefit Plan: has the meaning set forth in
Section 1.1 of the Employee Benefits Allocation Agreement.
Exchange Act: the Securities Exchange Act of 1934, as
amended, together with the rules and regulations promulgated
thereunder.
Florida Progress: as defined in the recitals to this
Agreement.
<PAGE> 11
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Florida Progress Assets: collectively, all of the rights and
Assets of Florida Progress or any direct or indirect Subsidiary of Florida
Progress, including any Assets acquired under this Agreement or any Ancillary
Agreement, but excluding the Echelon Assets.
Florida Progress Business: all of the businesses and
operations conducted at any time, whether prior to, on or after the Distribution
Date, by any direct or indirect Subsidiary of Florida Progress, other than the
Echelon Business.
Florida Progress Common Stock: the common stock, without par
value, of Florida Progress.
Florida Progress Group: Florida Progress and the Florida
Progress Subsidiaries, other than Echelon and other members of the Echelon
Group.
Florida Progress Indemnitees: each member of the Florida
Progress Group, each of their respective directors, officers, employees and
agents and each of the heirs, executors, successors and assigns of any of the
foregoing.
Florida Progress Liabilities: collectively, all obligations
and Liabilities of Florida Progress or any direct or indirect Subsidiary of
Florida Progress, including all Liabilities incurred under this Agreement or any
Ancillary Agreement, but excluding the Echelon Liabilities.
Florida Progress Subsidiaries: all Subsidiaries of Florida
Progress, other than Echelon and the other members of the Echelon Group
(including the Echelon Investments).
Group: the Florida Progress Group or the Echelon Group.
Indemnifiable Losses: any and all losses, Liabilities, claims,
damages, demands, costs or expenses (including, without limitation, reasonable
attorneys' fees and any and all out-of-pocket expenses) reasonably incurred in
investigating, preparing for or defending against any Actions or potential
Actions or in settling any Action or potential Action or in satisfying any
judgment, fine or penalty rendered in or resulting from any Action.
Indemnifying Party: as defined in Section 4.2 hereof.
Indemnitee: as defined in Section 4.2 hereof.
Information Statement: the information statement to be
included in the Registration Statement and sent to Florida
Progress stockholders in connection with the Distribution,
including any amendment or supplement thereto.
<PAGE> 12
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Liabilities: any and all losses, claims, charges, debts,
demands, actions, causes of action, suits, damages, obligations, payments, costs
and expenses, sums of money, accounts, reckonings, bonds, specialties,
indemnities and similar obligations, exonerations, covenants, contracts,
controversies, agreements, promises, doings, omissions, variances, guarantees,
make whole agreements and similar obligations, and other liabilities, including
all contractual obligations, whether absolute or contingent, matured or
unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown,
whenever arising, and including those arising under any law, rule, regulation,
Action, threatened or contemplated Action (including the costs and expenses of
demands, assessments, judgments, settlements and compromises relating thereto
and attorneys' fees and any and all costs and expenses (including allocated
costs of in-house counsel and other personnel), whatsoever reasonably incurred
in investigating, preparing or defending against any such Actions or threatened
or contemplated Actions), order or consent decree of any governmental or other
regulatory or administrative agency, body or commission or any award of any
arbitrator or mediator of any kind, and those arising under any contract,
commitment or undertaking, including those arising under this Agreement or any
Ancillary Agreement, in each case, whether or not recorded or reflected or
required to be recorded or reflected on the books and records or financial
statements of any Person.
NYSE: the New York Stock Exchange.
PCC: as defined in the recitals to this Agreement.
PCC Balance Sheet: the [combined] balance sheet of
PCC, Talquin, Progress Leasing and PLC Leasing, including the
notes thereto, as of _____________ ____, 1996, set forth in the
Information Statement.
PCH: as defined in the recitals to this Agreement.
PCH Note: the note to be issued by Echelon to PCH upon
the Distribution in substantially the form of Exhibit A hereto.
Person: any natural person, corporation, business
trust, joint venture, association, company, limited liability
company, partnership or government, or any agency or political
subdivision thereof.
PLC Leasing: as defined in the recitals to this
Agreement.
Pre-Distribution Mergers: as defined in the recitals
to this Agreement.
Progress Leasing: as defined in the recitals to this
<PAGE> 13
9
Agreement.
Record Date: [__________, 1996].
Records: as defined in Section 6.1 hereof.
Registration Statement: the registration statement on
Form 10 to effect the registration of the Echelon Common Stock
pursuant to the Exchange Act.
Rules: as defined in Section 8.2 hereof.
SEC: the Securities and Exchange Commission.
Securities Act: the Securities Act of 1933, as
amended, together with the rules and regulations promulgated
thereunder.
Security Interest: any mortgage, security interest, pledge,
lien, charge, claim, option, right to acquire, voting or other restriction,
right-of-way, covenant, condition, easement, encroachment, restriction on
transfer, or other encumbrance of any nature whatsoever.
Subsidiary: with respect to any specified Person, any
corporation, partnership or other legal entity of which such Person or any of
its Subsidiaries controls or owns, directly or indirectly, more than 50% of the
stock or other equity interest entitled to vote on the election of members to
the board of directors or similar governing body; provided, however, that,
except for the definitions of "Florida Progress Assets," "Florida Progress
Liabilities" and "Florida Progress Business," for purposes of this Agreement,
Echelon and the Echelon Subsidiaries shall not be deemed to be Subsidiaries of
Florida Progress or any of the Florida Progress Subsidiaries.
Talquin: as defined in the recitals to this Agreement.
Tax: as defined in the Tax Sharing Agreement.
Tax Sharing Agreement: the Tax Sharing Agreement dated
as of ___________ ____, 1996, between Florida Progress and Echelon.
Third-Party Claim: as defined in Section 4.2 hereof.
Transfer Agent: as defined in Section 2.3 hereof.
Transition Services Agreement: the Transition Services
Agreement dated as of ___________ ____, 1996, between Florida Progress
and Echelon.
1.2 References to Time. All references in this
Agreement to times of the day shall be to St. Petersburg, Florida
time.
<PAGE> 14
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1.3 References; Interpretation. References in this Agreement
to any gender include references to all genders, and references to the singular
include references to the plural and vice versa. The words "include," "includes"
and "including" when used in this Agreement shall be deemed to be followed by
the phrase "without limitation." Unless the context otherwise requires,
references in this Agreement to Articles, Sections, Exhibits and Schedules shall
be deemed references to Articles and Sections of, and Exhibits and Schedules to,
such Agreement. Unless the context otherwise requires, the words "hereof,"
"hereby" and "herein" and words of similar meaning when used in this Agreement
refer to this Agreement in its entirety and not to any particular Article,
Section or provision of this Agreement.
ARTICLE II
CERTAIN TRANSACTIONS PRIOR TO THE DISTRIBUTION DATE
2.1 Transfer of Assets. Except as otherwise specifically set
forth in this Agreement [or any Schedule hereto] or in any Ancillary Agreement,
on or prior to the Distribution Date:
(a) Florida Progress shall, on behalf of itself and the
Florida Progress Subsidiaries, transfer or cause to be transferred to Echelon
all of Florida Progress' and the Florida Progress Subsidiaries' right, title and
interest in the Echelon Assets, and
(b) Echelon shall, on behalf of itself and the Echelon
Subsidiaries, transfer to Florida Progress or another member of the Florida
Progress Group all of Echelon's and the Echelon Subsidiaries' right, title and
interest in the Florida Progress Assets.
2.2 Articles of Incorporation; By-laws; Rights Agreement.
Prior to the Distribution Date, Florida Progress and Echelon shall take all
action necessary so that, at the Distribution Date, the Articles of
Incorporation, By-laws and Rights Agreement of Echelon shall be in the forms
attached as exhibits to the Registration Statement.
2.3 Issuance of Stock. (a) Echelon shall have issued to PCH, a
direct, wholly owned subsidiary of Florida Progress, as a stock dividend, such
number of shares of Echelon Common Stock as will be required to effect the
Distribution, as certified by Florida Progress' stock transfer agent (the
"Transfer Agent"). In connection therewith Florida Progress shall have caused
PCH to deliver to Echelon for cancellation the share certificate then
held by PCH representing shares of Echelon Common Stock, and PCH shall have
received a new certificate representing the total number of shares of Echelon
Common Stock to be owned by PCH after giving effect to such stock dividend.
<PAGE> 15
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(b) Florida Progress shall cause PCH to issue to Florida
Progress as a stock dividend all of the shares of Echelon Common Stock owned by
PCH after receipt of the dividend contemplated by the preceding paragraph (a).
2.4 Registration and Listing. Prior to the Distribution Date:
(a) The parties hereto shall use reasonable efforts to take
all such action as may be necessary or appropriate under state securities and
blue sky laws in connection with the transactions contemplated by this Agreement
or any Ancillary Agreement.
(b) Echelon shall prepare, file and seek to make effective, an
application for the listing of the Echelon Common Stock on the NYSE, subject to
official notice of issuance.
(c) The parties hereto shall cooperate in preparing, filing
with the SEC and causing to become effective any registration statements or
amendments thereto, including any amendments to the Registration Statement,
which are necessary or appropriate in order to effect the transactions
contemplated hereby [or to reflect the establishment of, or amendments to, any
Employee Benefit Plans contemplated hereby or by the Employee Benefits
Allocation Agreement requiring registration under the Securities Act].
2.5 Echelon Board. Prior to the Distribution Date, the parties
hereto shall take all steps necessary so that, effective immediately after the
Distribution, the Board of Directors of Echelon shall be comprised of those
individuals so named in the Information Statement.
2.6 Notices to Third Parties. In addition to the actions
described in Section 2.7 hereof, Echelon shall, and the members of the Florida
Progress Group shall cooperate with the efforts of Echelon to, make all other
filings and give notice to and obtain consents from all third parties that may
reasonably be required to consummate the transactions contemplated by this
Agreement and the Ancillary Agreements.
2.7 Licenses and Permits. On or prior to the Distribution
Date, or as soon thereafter as is practicable, Echelon shall prepare and file
with the appropriate licensing and permitting authorities applications for the
transfer or issuance to Echelon of all material governmental licenses and
permits required for Echelon to operate the Echelon Business after the
Distribution. The members of the Florida Progress Group and Echelon shall
cooperate and use all commercially reasonable efforts to secure the transfer or
issuance of the licenses and permits.
<PAGE> 16
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2.8 Settlement of Intercompany Accounts. Without limiting the
terms of Section 2.9 hereof, as of the Effective Time, all intercompany
receivables, payables and loans (other than receivables, payables and loans
otherwise specifically provided for in any of the Ancillary Agreements or
hereunder), including, without limitation, in respect of any cash balances, any
cash balances representing deposited checks or drafts for which only a
provisional credit has been allowed or any cash held in any centralized cash
management system, between Echelon, on the one hand, and any member of the
Florida Progress Group, on the other hand, shall be settled, capitalized or
converted into ordinary trade accounts, in each case as set forth on Schedule
2.8 hereto.
2.9 Indebtedness and Capital Structure. On or prior to the
Distribution Date, Florida Progress and Echelon shall take, or shall cause to be
taken, the following actions:
(a) Echelon shall deliver to PCH the PCH Note in substantially
the form of Exhibit A hereto in the principal amount of $[36] million;
(b) Florida Progress shall contribute $[18] million to the
equity of Echelon to provide cash for the payment of expenses incurred in
evaluating and implementing the Distribution and to provide additional
liquidity.
2.10 Resignations. Subject to Section 2.5 hereof, Florida
Progress shall cause all its employees to resign, effective as of the Effective
Time, from all positions as officers or directors of Echelon in which they
serve. Echelon shall cause all its employees to resign, effective as of the
Distribution Date, from all positions as officers or directors of any member of
the Florida Progress Group in which they serve.
2.11 Ancillary Agreements. Prior to the Distribution Date,
each of Florida Progress and Echelon shall enter into the Ancillary Agreements
and any other agreements in respect of the Distribution reasonably necessary or
appropriate in connection with the transactions contemplated hereby and thereby.
If there shall be a conflict between the provisions of this Agreement and the
provisions of the Ancillary Agreements, the provisions of the Ancillary
Agreements shall control. Notwithstanding the
<PAGE> 17
13
foregoing, the effectiveness of the Ancillary Agreements shall be
conditioned upon the Distribution.
2.12 No Representations or Warranties. Each of the parties
hereto agrees that neither party hereto is, in this Agreement or in any other
agreement or document contemplated by this Agreement or otherwise, making any
representation or warranty whatsoever, as to title or value of Assets being
transferred. It is also agreed that all Assets either transferred to or retained
by the parties, as the case may be, shall be "as is, where is" and that (subject
to Section 5.4 hereof) the party to which such Assets are to be transferred
hereunder shall bear the economic and legal risk that such party's title to any
such Assets shall be other than good and marketable and free from encumbrances.
Similarly, each party hereto agrees that neither party hereto is representing or
warranting in any way that the obtaining of any consents or approvals, the
execution and delivery of any amendatory agreements and the making of any
filings or applications contemplated by this Agreement will satisfy the
provisions of any or all applicable agreements or the requirements of any or all
applicable laws or judgments, it being agreed that the party to which any Assets
are transferred shall bear the economic and legal risk that any necessary
consents or approvals are not obtained or that any requirements of laws or
judgments are not complied with.
2.13 Certain Contingent Liabilities. (a) Each of the parties
hereto agrees that any Liability arising out of or in relation to any
litigation, claims or proceedings brought by a third party or governmental
agency who or which contends that its consent, authorization or approval was
required in order to effectuate the Pre-Distribution Mergers or the Distribution
shall be the responsibility of Echelon, and shall be deemed to be Echelon
Liabilities accordingly.
(b) Echelon, on behalf of itself and the members of the
Echelon Group, hereby waives any right which Echelon or any such Person may have
at any time to seek contribution or any other recovery from or against any
member of the Florida Progress Group for any and all Liabilities, other than
Florida Progress Liabilities, relating to or involving the Echelon Business or
the current, former or future Assets, or operations of any member of the Echelon
Group which arise under, relate to or are based upon any law, statute,
regulation, rule, judgment, decree, rule of common law or any similar
requirement relating to hazardous or toxic substances or materials or to the
protection of human health or the environment.
(c) Echelon and Florida Progress agree that each party shall
assume liability for 50% of the total amount of any Liabilities arising out of,
relating to or based upon any misstatements or omissions, or alleged
misstatements or omissions, in the Registration Statement; provided, however,
that
<PAGE> 18
14
until any Third-Party Claim giving rise to any such Liabilities has been the
subject of a final non-appealable judgment or otherwise definitively settled,
solely for purposes of determining the procedures for responding to such
Third-Party Claim and the rights of the parties under Section 4.2 hereof, such
Liabilities shall be deemed to be Florida Progress Liabilities, and 50% of the
total amount of such Liabilities shall become Echelon Liabilities only after
such Liabilities have become the subject of such a final non-appealable judgment
or otherwise definitively settled.
ARTICLE III
THE DISTRIBUTION
3.1 Record Date and Distribution Date. The Board of Directors
of Florida Progress, in its sole discretion, shall have established the Record
Date and the Distribution Date and shall establish any appropriate procedures in
connection with the Distribution.
3.2 The Agent. Prior to the Distribution Date, Florida
Progress shall enter into an agreement with the Agent providing for, among other
things, the payment of the Distribution, including the payment of cash in lieu
of fractional shares, to the holders of Florida Progress Common Stock in
accordance with this Article III.
3.3 Delivery of Share Certificates to Agent. Florida Progress
shall deliver to the Agent share certificates representing the outstanding
shares of Echelon Common Stock delivered to Florida Progress by PCH pursuant to
Section 2.3(b) hereof and shall instruct the Agent to distribute, on or as soon
as practicable following the Distribution Date, such common shares to holders of
record of shares of Florida Progress Common Stock on the Record Date as further
contemplated by the Information Statement and herein. Echelon shall provide all
share certificates that the Agent shall require in order to effect the
Distribution.
ARTICLE IV
INDEMNIFICATION
4.1 Indemnification. (a) Except as specifically otherwise
provided in any provision of this Agreement or of any Ancillary Agreement,
Florida Progress shall, subject to this Article IV, indemnify, defend and hold
harmless the Echelon Indemnitees from and against any and all Indemnifiable
Losses of the Echelon Indemnitees arising out of, by reason of or otherwise in
connection with the Florida Progress Liabilities or alleged Florida Progress
Liabilities, including any breach by Florida
<PAGE> 19
15
Progress of any provision of this Agreement or any Ancillary Agreement.
(b) Except as specifically otherwise provided in any provision
of this Agreement or of any Ancillary Agreement, Echelon shall, subject to this
Article IV, indemnify, defend and hold harmless the Florida Progress Indemnitees
from and against any and all Indemnifiable Losses of the Florida Progress
Indemnitees arising out of, by reason of or otherwise in connection with the
Echelon Liabilities or alleged Echelon Liabilities including any breach by
Echelon of any provision of this Agreement or any Ancillary Agreement.
4.2 Procedures for Indemnification for Third-Party Claims. (a)
If a claim or demand is made against a Florida Progress Indemnitee or an Echelon
Indemnitee (each, an "Indemnitee") by any Person who is not a party to this
Agreement (a "Third-Party Claim") as to which such Indemnitee is entitled to
indemnification pursuant to this Agreement, such Indemnitee shall notify the
party which is or may be required pursuant to Section 4.1 hereof to make such
indemnification (the "Indemnifying Party") in writing, and in reasonable detail,
of the Third-Party Claim promptly (and in any event within [15] business days)
after receipt by such Indemnitee of written notice of the Third-Party Claim;
provided, however, that failure to give such notification shall not affect the
indemnification provided hereunder except to the extent the Indemnifying Party
shall have been actually prejudiced as a result of such failure (except that the
Indemnifying Party shall not be liable for any expenses incurred during the
period in which the Indemnitee failed to give such notice). Thereafter, the
Indemnitee shall deliver to the Indemnifying Party, promptly (and in any event
within five business days) after the Indemnitee's receipt thereof, copies of all
notices and documents (including court papers) received by the Indemnitee
relating to the Third-Party Claim.
If a Third-Party Claim is made against an Indemnitee, the
Indemnifying Party shall be entitled to participate in the defense thereof and,
if it so chooses and acknowledges in writing its obligation to indemnify the
Indemnitee therefor, to assume the defense thereof with counsel selected by the
Indemnifying Party; provided that such counsel is not reasonably objected to by
the Indemnitee. Should the Indemnifying Party so elect to assume the defense of
a Third-Party Claim, the Indemnifying Party shall, within [30] days (or sooner
if the nature of the Third- Party Claim so requires), notify the Indemnitee of
its intent to do so, and the Indemnifying Party shall thereafter not be liable
to the Indemnitee for legal or other expenses subsequently incurred by the
Indemnitee in connection with the defense thereof; provided, that such
Indemnitee shall have the right to employ counsel to represent such Indemnitee
if, in such Indemnitee's reasonable judgment, a conflict of interest between
such Indemnitee and such Indemnifying Party exists in respect of such claim
which would make representation of both such parties
<PAGE> 20
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by one counsel inappropriate, and in such event the fees and expenses of such
separate counsel shall be paid by such Indemnifying Party. Where there is more
than one Indemnitee and the Indemnifying Party is responsible for the fees and
expenses of separate counsel on behalf of such Indemnitees, the Indemnifying
Party shall be responsible for the fees and expenses of only one such separate
counsel unless, in the reasonable opinion of such counsel, the interests of the
Indemnitees are such that representation by a single counsel would or could
create a conflict of interest or otherwise be inappropriate, in which event the
several Indemnitees may employ separate counsel to the extent necessary to avoid
such conflict or as otherwise may be reasonably appropriate, and the fees and
expenses of each such separate counsel shall be paid by such Indemnifying Party.
If the Indemnifying Party assumes such defense, the Indemnitee shall have the
right to participate in the defense thereof and to employ counsel, subject to
the proviso of the preceding sentence, at its own expense, separate from the
counsel employed by the Indemnifying Party, it being understood that the
Indemnifying Party shall control such defense. The Indemnifying Party shall be
liable for the fees and expenses of counsel employed by the Indemnitee for any
period during which the Indemnifying Party has failed to assume the defense
thereof (other than during the period prior to the time the Indemnitee shall
have given notice of the Third-Party Claim as provided above). If the
Indemnifying Party so elects to assume the defense of any Third-Party Claim, all
of the Indemnitees shall cooperate with the Indemnifying Party in the defense or
prosecution thereof, including by providing or causing to be provided, Records
and witnesses as soon as reasonably practicable after receiving any request
therefor from or on behalf of the Indemnifying Party.
If the Indemnifying Party acknowledges in writing
responsibility for a Third-Party Claim, then in no event will the Indemnitee
admit any liability with respect to, or settle, compromise or discharge, any
Third-Party Claim without the Indemnifying Party's prior written consent;
provided, however, that the Indemnitee shall have the right to settle,
compromise or discharge such Third-Party Claim without the consent of the
Indemnifying Party if the Indemnitee releases (in writing) the Indemnifying
Party from its indemnification obligation hereunder with respect to such
Third-Party Claim and such settlement, compromise or discharge would not
otherwise adversely affect the Indemnifying Party. If the Indemnifying Party
acknowledges in writing liability for a Third-Party Claim, the Indemnitee will
agree to any settlement, compromise or discharge of a Third-Party Claim that the
Indemnifying Party may recommend and that by its terms obligates the
Indemnifying Party to pay the full amount of the liability in connection with
such Third-Party Claim and releases the Indemnitee completely in connection with
such Third- Party Claim and that would not otherwise adversely affect the
Indemnitee; provided, however, that the Indemnitee may refuse to agree to any
such settlement, compromise or discharge if the Indemnitee agrees that the
Indemnifying Party's indemnification
<PAGE> 21
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obligation with respect to such Third-Party Claim shall not exceed the amount
that would be required to be paid by or on behalf of the Indemnifying Party in
connection with such settlement, compromise or discharge. If an Indemnifying
Party elects not to assume the defense of a Third-Party Claim, or fails to
notify an Indemnitee of its election to do so as provided herein, such
Indemnitee may compromise, settle or defend such Third-Party Claim.
Notwithstanding the foregoing, the Indemnifying Party shall
not be entitled to assume the defense of any Third-Party Claim (and shall be
liable for the fees and expenses of counsel incurred by the Indemnitee in
defending such Third-Party Claim) if the Third-Party Claim seeks an order,
injunction or other equitable relief or relief for other than money damages
against the Indemnitee which the Indemnitee reasonably determines, after
conferring with its counsel, cannot be separated from any related claim for
money damages. If such equitable relief or other relief portion of the
Third-Party Claim can be so separated from that for money damages, the
Indemnifying Party shall be entitled to assume the defense of the portion
relating to money damages.
(b) In the event of payment by an Indemnifying Party to any
Indemnitee in connection with any Third-Party Claim, such Indemnifying Party
shall be subrogated to and shall stand in the place of such Indemnitee as to any
events or circumstances in respect of which such Indemnitee may have any right
or claim relating to such Third-Party Claim against any claimant or plaintiff
asserting such Third-Party Claim. Such Indemnitee shall cooperate with such
Indemnifying Party in a reasonable manner, and at the cost and expense of such
Indemnifying Party, in prosecuting any subrogated right or claim.
4.3 Remedies Cumulative. The remedies provided in this Article
IV shall be cumulative and shall not preclude assertion by any Indemnitee of any
other rights or the seeking of any and all other remedies against any
Indemnifying Party.
4.4 Indemnification Payments. Indemnification required by this
Article IV shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or loss,
liability, claim, damage or expense is incurred.
ARTICLE V
CERTAIN ADDITIONAL COVENANTS
5.1 Assumption and Satisfaction of Liabilities. Except as
otherwise specifically set forth in any Ancillary Agreement, and subject to
Section 2.8 hereof, from and after the Distribution Date, (i) Florida Progress
shall, and shall cause each member of the Florida Progress Group to, assume,
pay,
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perform and discharge all Florida Progress Liabilities and (ii) Echelon shall
assume, pay, perform and discharge all Echelon Liabilities. To the extent
reasonably requested to do so by the other party hereto, each party hereto
agrees to sign such documents, in a form reasonably satisfactory to such party,
as may be reasonably necessary to evidence the assumption of any Liabilities
hereunder.
5.2 Intercompany Agreements. (a) Except for this Agreement and
the Ancillary Agreements, all contracts, licenses, agreements, commitments or
other arrangements, formal or informal, between any member of the Florida
Progress Group, on the one hand, and any member of the Echelon Group (or any
predecessor thereof), on the other, in existence as of the Distribution Date,
pursuant to which any member of the Florida Progress Group provides to any
member of the Echelon Group any services (including, without limitation,
management, administrative, legal, financial, accounting, data processing,
insurance, or technical support), or the use of any Florida Progress Assets, or
the secondment of any employee, or pursuant to which rights, privileges or
benefits are accorded to any member of the Echelon Group or the Echelon Business
as a unit of the Florida Progress Group, shall terminate as of the close of
business on the day prior to the Distribution Date, except as specifically
provided herein or on Schedule 5.2(a) hereto or in any Ancillary Agreement.
From and after the Distribution Date, no member of the Echelon Group shall have
any rights under any such contract, license, agreement, commitment or
arrangement with any member of the Florida Progress Group, except as
specifically provided herein or on Schedule 5.2(a) hereto or in any Ancillary
Agreement.
(b) Except for this Agreement and the Ancillary Agreements,
all contracts, licenses, agreements, commitments or other arrangements, formal
or informal, between any member of the Echelon Group, on the one hand, and any
member of the Florida Progress Group, on the other, in existence as of the
Distribution Date, pursuant to which any member of the Echelon Group provides to
any member of the Florida Progress Group any services (including, without
limitation, management, administrative, legal, financial, accounting, data
processing, insurance, or technical support), or the use of any Echelon Assets,
or the secondment of any employee, or pursuant to which rights, privileges or
benefits are accorded to any member of the Florida Progress Group or the Florida
Progress Business as a unit of the Echelon Group, shall terminate as of the
close of business on the day prior to the Distribution Date, except as
specifically
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provided herein or on Schedule 5.2(b) hereto or in any Ancillary Agreement.
From and after the Distribution Date, no member of the Florida Progress Group
shall have any rights under any such contract, license, agreement, commitment or
arrangement with any member of the Echelon Group, except as specifically
provided herein or on Schedule 5.2(b) hereto or in any Ancillary Agreement.
5.3 Guarantees. (a) Except as otherwise specified in any
Ancillary Agreement, Florida Progress and Echelon shall use their commercially
reasonable efforts to have, on or prior to the Distribution Date, or as soon as
practicable thereafter, any member of the Florida Progress Group removed as
guarantor of or obligor for any Echelon Liability, including, without
limitation, in respect of those guarantees and obligations set forth on
Schedule 5.3(a) hereto.
(b) If Florida Progress or Echelon is unable to obtain, or to
cause to be obtained, any such required removal as set forth in clause (a) of
this Section 5.3, then the applicable guarantor or obligor shall continue to be
bound as such and, unless not permitted by law or the terms thereof, Echelon
shall, as agent or subcontractor for such guarantor or obligor, pay, perform and
discharge fully all the obligations or other liabilities of such guarantor or
obligor thereunder from and after the date hereof, and such obligations shall be
Echelon Liabilities.
(c) Without the prior written consent of the Chief Financial
Officer or Treasurer of Florida Progress, from and after the Distribution Date,
Echelon shall not renew or extend the term of, increase its obligations under,
or transfer to a third party, by sale, assignment, merger or operation of law or
otherwise any loan, lease, contract or other obligation of Echelon for which any
member of the Florida Progress Group is or may be liable unless all obligations
of the Florida Progress Group with respect thereto are thereupon terminated by
documentation reasonably satisfactory in form and substance to the Chief
Financial Officer or Treasurer of Florida Progress.
(d) For so long as Florida Progress or any member of the
Florida Progress Group is a guarantor of or obligor for any agreement by Echelon
to be and remain a "citizen of the United States" as defined in 49 U.S.C.
Section 40102 or in 46 U.S.C. Section 802, Echelon agrees (i) that it shall be
and remain a "citizen of the United States" as so defined and, in particular,
that it will have a president, a chairman and persons comprising at least
two-thirds of its board of directors who are citizens of the United States and
(ii) that in the event its status as a "citizen of the
<PAGE> 24
20
United States" as defined in 49 U.S.C. Section 40102 changes, or it makes public
disclosure of circumstances as a result of which it believes that such status is
likely to change, it will notify Florida Progress and any member of the Florida
Progress Group who is a guarantor of or obligor for any such Echelon Liability
of such change in its status promptly after obtaining knowledge thereof or such
belief as soon as practicable after such public disclosure but in any event
within ten business days after such public disclosure. If at any time when
Florida Progress or any member of the Florida Progress Group is a guarantor of
or obligor for any such Echelon Liability, Echelon ceases to be a "citizen of
the United States" as defined in 49 U.S.C. Section 40102, and (A) any aircraft
owned or controlled by Echelon (the "Aircraft") is then registered in the United
States and the Aircraft shall be or would thereupon become ineligible for
registration in the name of the relevant owner trustee under the Federal
Aviation Act (the "FAA Act") as in effect at such time as a result of such lack
of citizenship (without regard to the "based and primarily used" provisions
thereof) and the regulations then applicable thereunder, or (B) (1) the Aircraft
is then registered in a jurisdiction other than the United States, (2) a lessee,
sublessee or sub-sublessee has given notice that it proposes to register the
Aircraft within 120 days in the United States and (3) at the time such
registration in the United States is proposed to occur, the Aircraft would be
ineligible for registration in the name of the relevant owner trustee under the
FAA Act as in effect at such time as a result of such lack of citizenship
(without regard to the "based and primarily used" provisions thereof) and the
regulations then applicable thereunder, then Echelon shall forthwith (x)
transfer all (but not less than all) of its right, title and interest in and to
the Aircraft or (y) take such other action, including, without limitation, the
establishment of a voting trust or voting powers agreement (in which case
Echelon shall remain the beneficial owner of the Aircraft), as may be necessary
to prevent the deregistration of the Aircraft under the FAA Act or to maintain
such registration of the Aircraft or to make possible such registration of the
Aircraft in the United States and to prevent Florida Progress from being
adversely affected as a result thereof. Any voting powers or voting trust
arrangement utilized by Echelon (or any transferee of Echelon) shall be approved
by the Federal Aviation Administration (to the extent required by the FAA Act or
the Federal Aviation Administration).
(e) In addition to and not in limitation of the provisions of
paragraph (d) above, Echelon agrees (i) not to permit the imposition or
continuance of any lien or other Security Interest on any asset which would
result in the breach of any obligation guaranteed by Florida Progress or any
member of the Florida Progress Group, (ii) not to do or take any other action,
or fail to do or take any action, which would result in the breach of any other
obligation guaranteed by Florida Progress or any member of the Florida Progress
Group, and (iii) to do and take any and all actions necessary to cause any
guarantee of any
<PAGE> 25
21
Echelon Liability by Florida Progress or of any member of the Florida Progress
Group to be cancelled, discharged or otherwise terminated as promptly as
practicable.
5.4 Further Assurances. In case at any time after the
Effective Time any further action is reasonably necessary or desirable to carry
out the purposes of this Agreement and the Ancillary Agreements, the proper
officers of each party to this Agreement shall take all such necessary action.
Without limiting the foregoing, Florida Progress and Echelon shall use their
commercially reasonable efforts promptly to obtain all consents and approvals,
to enter into all amendatory agreements and to make all filings and applications
that may be required for the consummation of the transactions contemplated by
this Agreement and the Ancillary Agreements, including, without limitation, all
applicable governmental and regulatory filings.
5.5 Witness Services. At all times from and after the
Distribution Date, each of Florida Progress and Echelon shall use their
commercially reasonable efforts to make available to the other, upon reasonable
written request, its and its Subsidiaries' officers, directors, employees and
agents as witnesses to the extent that (i) such persons may reasonably be
required in connection with the prosecution or defense of any Action or
threatened Action in which the requesting party may from time to time be
involved and (ii) there is no conflict in the Action or threatened Action
between the requesting party and the party receiving the request. A party
providing witness services to the other party under this Section shall be
entitled to receive from the recipient of such services, upon the presentation
of invoices therefor, payments for such amounts, relating to disbursements and
other out-of-pocket expenses (which shall be deemed to exclude the costs of
salaries and benefits of employees who are witnesses), as may be reasonably
incurred in providing such witness services.
5.6 Certain Post-Distribution Transactions. (a)(i) Florida
Progress shall comply, and shall cause each member of the Florida Progress Group
to comply, with and otherwise not take action inconsistent with each
representation and statement made with respect to Florida Progress or any other
member of the Florida Progress Group to the Internal Revenue Service in
connection with the request by Florida Progress for a ruling letter in respect
of the Distribution as to certain tax aspects of the Distribution and (ii) until
two years after the Distribution Date, Florida Progress will maintain its status
as a company engaged in the active conduct of a trade or business, as defined in
Section 355(b) of the Code.
(b)(i) Echelon shall comply with and otherwise not take action
inconsistent with each representation and statement made with respect to Echelon
to the Internal Revenue Service in connection with the request by Florida
Progress for a ruling letter in respect of the Distribution as to certain tax
aspects
<PAGE> 26
22
of the Distribution and (ii) until two years after the Distribution Date,
Echelon will maintain its status as a company engaged in the active conduct of a
trade or business, as defined in Section 355(b) of the Code.
5.7 Certain Agreements of Echelon. Echelon hereby agrees that
it is Echelon's plan and intention to use its reasonable best efforts to
implement the Business Plan. Echelon acknowledges that, as provided for in the
Business Plan, Florida Progress has provided Echelon with capitalization and
liquidity which the parties believe is sufficient to allow Echelon to carry out
the Business Plan, including liquidity reserves which the parties believe are
sufficient to address unforeseen business risks or events. Echelon agrees to
maintain at all times a liquidity reserve of at least $27 million during the
first 12 months following the Distribution Date, a liquidity reserve of at least
$25 million during the period beginning on the first day of the second year
following the Distribution Date and ending on the last day of the second year
following the Distribution Date, and a liquidity reserve of at least $17 million
during the period beginning on the first day of the third year following the
Distribution Date and ending on the last day of such third year.
5.8 Corporate Names. (a) Except as otherwise specifically
provided in any Ancillary Agreement:
(i) as soon as reasonably practicable after the Distribution
Date but in any event within two months thereafter, Echelon will, at
its own expense, remove (or, if necessary, on an interim basis, cover
up) any and all exterior signs and other identifiers located on any of
its property or premises which refer or pertain to Florida Progress or
which include the Florida Progress name, logo or other trademark or
other Florida Progress intellectual property; and
(ii) as soon as is reasonably practicable after the
Distribution Date but in any event within six weeks thereafter, Echelon
will remove from all letterhead, envelopes, invoices and other
communications media of any kind, all references to Florida Progress,
including the "Florida Progress" or "Progress" name, logo and any other
trademark or other Florida Progress intellectual property, and Echelon
shall not use or display the "Florida Progress" or "Progress" name,
logo or other trademark or Florida Progress intellectual property
without the prior written consent of Florida Progress.
(b) Except as otherwise specifically provided in any
Ancillary Agreement:
(i) as soon as reasonably practicable after the Distribution
Date but in any event within two months thereafter, Florida Progress
will, at its own expense,
<PAGE> 27
23
remove (or, if necessary, on an interim basis, cover up) any and all
exterior signs and other identifiers located on any of its property or
premises owned or used by it or other members of the Florida Progress
Group which refer or pertain to Echelon or which include the "Echelon,"
"Talquin," "Progress Credit," "Progress Leasing" or "PLC Leasing" name,
logo or other trademark or other Echelon intellectual property; and
(ii) as soon as is reasonably practicable after the
Distribution Date but in any event within six weeks thereafter, Florida
Progress will, and will cause the other members of the Florida Progress
Group to, remove from all letterhead, envelopes, invoices and other
communications media of any kind, all references to Echelon, including
the "Talquin," "Progress Credit," "Progress Leasing" or "PLC Leasing"
name, logo and any other trademark or other Echelon intellectual
property, and Florida Progress and the other members of the Florida
Progress Group shall not use or display the "Talquin," "Progress
Credit," "Progress Leasing" or "PLC Leasing" name, logo or other
trademark or Echelon intellectual property without the prior written
consent of Echelon.
5.9 Transfers Not Effected Prior to the Distribution;
Transfers Deemed Effective as of the Distribution Date. To the extent that any
transfers contemplated by Article II and V shall not have been consummated on or
prior to the Distribution Date, the parties shall cooperate to effect such
transfers as promptly following the Distribution Date as shall be practicable.
Nothing herein shall be deemed to require the transfer of any Assets or the
assumption of any Liabilities which by their terms or operation of law cannot be
transferred; provided, however, that the parties hereto and their respective
Subsidiaries shall cooperate to seek to obtain any necessary consents or
approvals for the transfer of all Assets and Liabilities contemplated to be
transferred pursuant to Article II and V. In the event that any such transfer of
Assets or Liabilities has not been consummated, from and after the Distribution
Date the party retaining such Asset or Liability shall hold such Asset in trust
for the use and benefit of the party entitled thereto (at the expense of the
party entitled thereto) or retain such Liability for the account of the party by
whom such Liability is to be assumed pursuant hereto, as the case may be, and
take such other action as may be reasonably requested by the party to whom such
Asset is to be transferred, or by whom such Liability is to be assumed, as the
case may be, in order to place such party, insofar as is reasonably possible, in
the same position as would have existed had such Asset or Liability been
transferred as contemplated hereby. As and when any such Asset or Liability
becomes transferable, such transfer shall be effected forthwith. The parties
agree that, as of the Distribution Date, each party hereto shall be deemed to
have acquired complete and sole beneficial ownership over all of the Assets,
together with all
<PAGE> 28
24
rights, powers and privileges incident thereto, and shall be deemed to have
assumed in accordance with the terms of this Agreement all of the Liabilities,
and all duties, obligations and responsibilities incident thereto, which such
party is entitled to acquire or required to assume pursuant to the terms of this
Agreement.
ARTICLE VI
ACCESS TO INFORMATION
6.1 Provision of Corporate Records. Prior to or as promptly as
practicable after the Distribution Date, Florida Progress shall deliver to
Echelon all corporate books, records and files (collectively, "Records") of
Echelon in its possession and copies of the relevant portions of all Records of
the Florida Progress Group relating directly and primarily to the Echelon
Assets, the Echelon Business, or the Liabilities of Echelon, including, in each
case, all active agreements, active litigation files and government filings.
From and after the Distribution Date, all Records so delivered shall be the
property of Echelon.
6.2 Access to Information. Other than in circumstances in
which indemnification is sought pursuant to Article IV (in which event the
provisions of such Article will govern), from and after the Distribution Date,
each of Florida Progress and Echelon shall afford to the other and its
authorized accountants, counsel and other designated representatives reasonable
access during normal business hours, subject to appropriate restrictions for
classified, privileged or confidential information, to the personnel,
properties, books and records of such party and its Subsidiaries insofar as such
access is reasonable required by the other party and relates to (x) such other
party or the conduct of its business prior to the Effective Time or (y) any
Ancillary Agreement to which the party requesting such access and the party
requested to grant such access are parties.
6.3 Reimbursement; Other Matters. Except to the extent
otherwise contemplated by any Ancillary Agreement, a party providing Records or
access to information to the other party under this Article VI shall be entitled
to receive from the recipient, upon the presentation of invoices therefor,
payments for such amounts, relating to supplies, disbursements and other
out-of-pocket expenses, as may be reasonably incurred in providing such Records
or access to information.
<PAGE> 29
25
6.4 Retention of Records. Except as otherwise agreed in
writing, or as otherwise provided in the Ancillary Agreements, each of Florida
Progress and Echelon shall, and shall cause any members of its Group to, retain
all information in such party's possession or under its control relating
directly and primarily to the pre-Distribution Business, Assets or Liabilities
of the other party that is less than ten years old until such information is at
least ten years old except that if, prior to the expiration of such period,
information in the possession or control of either party is to be destroyed or
disposed of, and such information is at least three years old, prior to
destroying or disposing of any such information, (1) the party that is proposing
to dispose of or destroy any such information shall provide no less than 30
days' prior written notice to the other party, specifying the information
proposed to be destroyed or disposed of, and (2) if, prior to the scheduled date
for such destruction or disposal, the other party requests in writing that any
of the information proposed to be destroyed or disposed of be delivered to such
other party, the party that is proposing to dispose of or destroy such
information promptly shall arrange for the delivery of the requested information
to a location specified by, and at the expense of, the requesting party.
6.5 Confidentiality. Each of (i) Florida Progress and the
Florida Progress Subsidiaries and (ii) Echelon and the Echelon Subsidiaries
shall not use or permit the use of (without the prior written consent of the
other) and shall keep, and shall cause its consultants and advisors to keep,
confidential all information concerning the other party in its possession or
under its control (except to the extent that (A) such information has been in
the public domain through no fault of such party, (B) such information has been
later lawfully acquired from other sources by such party or (C) this Agreement
or any other Ancillary Agreement or any other agreement entered into pursuant
hereto permits the use or disclosure of such information) to the extent such
information (x) relates to the period up to the Effective Time, (y) relates to
any Ancillary Agreement or (z) is obtained in the course of performing services
for the other party pursuant to any Ancillary Agreement, and neither party shall
(without the prior written consent of the other) otherwise release or disclose
such information to any other Person, except such party's auditors and
attorneys, unless compelled to disclose such information by judicial or
administrative process or unless such disclosure is required by law and such
party has used commercially reasonable efforts to consult with the other party
prior to such disclosure.
6.6 Privileged Matters. The parties hereto recognize that
legal and other professional services that have been and will be provided prior
to the Distribution Date have been and will be rendered for the benefit of each
of the members of the Florida Progress Group and the members of the Echelon
Group, and that each of the members of the Florida Progress Group and the
members of the Echelon Group should be deemed to be the client
<PAGE> 30
26
for the purposes of asserting all privileges which may be asserted under
applicable law. To allocate the interests of each party in the information as to
which any party is entitled to assert a privilege, the parties agree as follows:
(a) Florida Progress shall be entitled, in perpetuity, to
control the assertion or waiver of all privileges in connection with privileged
information which relates solely to the Florida Progress Business, whether or
not the privileged information is in the possession of or under the control of
Florida Progress or Echelon. Florida Progress shall also be entitled, in
perpetuity, to control the assertion or waiver of all privileges in connection
with privileged information that relates solely to the subject matter of any
claims constituting Florida Progress Liabilities, now pending or which may be
asserted in the future, in any lawsuits or other proceedings initiated against
or by Florida Progress, whether or not the privileged information is in the
possession of or under the control of Florida Progress or Echelon.
(b) Echelon shall be entitled, in perpetuity, to control the
assertion or waiver of all privileges in connection with privileged information
which relates solely to the Echelon Business, whether or not the privileged
information is in the possession of or under the control of Florida Progress or
Echelon. Echelon shall also be entitled, in perpetuity, to control the assertion
or waiver of all privileges in connection with privileged information which
relates solely to the subject matter of any claims constituting Echelon
Liabilities, now pending or which may be asserted in the future, in any lawsuits
or other proceedings initiated against or by Echelon, whether or not the
privileged information is in the possession of Echelon or under the control of
Florida Progress or Echelon.
(c) The parties hereto agree that they shall have a shared
privilege, with equal right to assert or waive, subject to the restrictions in
this Section 6.6, with respect to all privileges not allocated pursuant to the
terms of Sections 6.6(a) and (b) hereto. All privileges relating to any claims,
proceedings, litigation, disputes, or other matters which involve both Florida
Progress and Echelon in respect of which both Florida Progress and Echelon
retain any responsibility or liability under this Agreement shall be subject to
a shared privilege between them.
(d) No party hereto may waive any privilege which could be
asserted under any applicable law, and in which the other party hereto has a
shared privilege, without the consent of the other party, except to the extent
reasonably required in connection with any litigation with third parties or as
provided in subsection (e) below. Consent shall be in writing, or shall be
deemed to be granted unless written objection is made within 20 days after
notice upon the other party requesting such consent.
<PAGE> 31
27
(e) In the event of any litigation or dispute between the
parties hereto, a party and a Subsidiary of the other party hereto, or a
Subsidiary of one party hereto and a Subsidiary of other party hereto, either
such party may waive a privilege in which the other party has a shared
privilege, without obtaining the consent of the other party, provided that such
waiver of a shared privilege shall be effective only as to the use of
information with respect to the litigation or dispute between the parties and/or
their Subsidiaries, and shall not operate as a waiver of the shared privilege
with respect to third parties.
(f) If a dispute arises between the parties hereto or their
respective Subsidiaries regarding whether a privilege should be waived to
protect or advance the interest of either party, each party agrees that it shall
negotiate in good faith, shall endeavor to minimize any prejudice to the rights
of the other party, and shall not unreasonably withhold consent to any request
for waiver by the other party. Each party hereto specifically agrees that it
will not withhold consent to waiver for any purpose except to protect its own
legitimate interests.
(g) Upon receipt by either party hereto or by any Subsidiary
thereof of any subpoena, discovery or other request which arguably calls for the
production or disclosure of information subject to a shared privilege or as to
which the other party has the sole right hereunder to assert a privilege, or if
either party obtains knowledge that any of its or any of its Subsidiaries'
current or former directors, officers, agents or employees have received any
subpoena, discovery or other requests which arguably calls for the production or
disclosure of such privileged information, such party shall promptly notify the
other party of the existence of the request and shall provide the other party a
reasonable opportunity to review the information and to assert any rights it may
have under this Section 6.6 or otherwise to prevent the production or disclosure
of such privileged information.
(h) The transfer of all Records and other information pursuant
to this Agreement is made in reliance on the agreement of Florida Progress and
Echelon, as set forth in Sections 6.5 and 6.6, to maintain the confidentiality
of privileged information and to assert and maintain all applicable privileges.
The access to information being granted pursuant to Sections 6.1 and 6.2 hereof,
the agreement to provide witnesses and individuals pursuant to Sections 4.2 and
5.5 hereof, the furnishing of notices and documents and other cooperative
efforts contemplated by Section 4.2 hereof, and the transfer of privileged
information between the parties and their respective Subsidiaries pursuant to
this Agreement shall not be deemed a waiver of any privilege that has been or
may be asserted under this Agreement or otherwise.
6.7 Ownership of Information. Any information owned by one
party or any of its Subsidiaries that is provided to a requesting party pursuant
to Article IV or this Article VI shall
<PAGE> 32
28
be deemed to remain the property of the providing party. Unless specifically set
forth herein, nothing contained in this Agreement shall be construed as granting
or conferring rights of license or otherwise in any such information.
6.8 Limitation of Liability. Neither party shall have any
liability to the other party in the event that any information exchanged or
provided pursuant to this Agreement which is an estimate or forecast, or which
is based on an estimate or forecast, is found to be inaccurate.
6.9 Other Agreements Providing for Exchange of Information.
The rights and obligations granted under this Article VI are subject to any
specific limitations, qualifications or additional provisions on the sharing,
exchange or confidential treatment of information set forth in any Ancillary
Agreement.
ARTICLE VII
ADMINISTRATIVE SERVICES
7.1 Performance of Services. Beginning on the Distribution
Date, Florida Progress will provide, or cause one or more of its Subsidiaries to
provide, to Echelon such services on such terms as may be set forth in the
Transition Services Agreement.
7.2 Independence. Unless otherwise agreed in writing, all
employees and representatives of Florida Progress providing the scheduled
services to Echelon will be deemed for purposes of all compensation and employee
benefits matters to be employees or representatives of Florida Progress and not
employees or representatives of Echelon. In performing such services, such
employees and representatives will be under the direction, control and
supervision of Florida Progress (and not Echelon) and Florida Progress will have
the sole right to exercise all authority with respect to the employment
(including, without limitation, termination of employment), assignment and
compensation of such employees and representatives.
ARTICLE VIII
DISPUTE RESOLUTION
8.1 Negotiation. In the event of a controversy, dispute or
claim arising out of, in connection with, or in relation to the interpretation,
performance, nonperformance, validity or breach of this Agreement or otherwise
arising out of, or in any way related to this Agreement or the transactions
contemplated hereby, including, without limitation, any claim based on contract,
tort, statute or constitution (collectively,
<PAGE> 33
29
"Agreement Disputes"), the general counsels of the parties (or, such other
senior officer appointed by the Chief Executive Officer of the relevant party)
shall negotiate in good faith for a reasonable period of time to settle such
Agreement Dispute, provided such reasonable period shall not, unless otherwise
agreed by the parties in writing, exceed [30] days from the time the parties
began such negotiations; provided further that in the event of any arbitration
in accordance with Section 8.2 hereof, the parties shall not assert the defenses
of statute of limitations and laches arising for the period beginning after the
date the parties began negotiations hereunder, and any contractual time period
or deadline under this Agreement or any Ancillary Agreement to which such
Agreement Dispute relates shall not be deemed to have passed until such
Agreement Dispute has been resolved.
8.2 Arbitration. If after such reasonable period such general
counsels (or other appointed officers) are unable to settle such Agreement
Dispute (and in any event, unless otherwise agreed in writing by the parties,
after [60] days have elapsed from the time the parties began such negotiations),
such Agreement Dispute shall be determined, at the request of either party, by
arbitration conducted in St. Petersburg, before and in accordance with the
then-existing International Arbitration Rules of the American Arbitration
Association (the "Rules"). In any dispute between the parties hereto, the number
of arbitrators shall be one. Any judgment or award rendered by the arbitrator
shall be final, binding and nonappealable (except upon grounds specified in 9
U.S.C. Section 10(a) as in effect on the date hereof). If the parties are unable
to agree on an arbitrator, the arbitrator shall be selected in accordance with
the Rules. Any controversy concerning whether an Agreement Dispute is an
arbitrable Agreement Dispute, whether arbitration has been waived, whether an
assignee of this Agreement is bound to arbitrate, or as to the interpretation of
enforceability of this Article VIII shall be determined by the arbitrator. In
resolving any dispute, the parties intend that the arbitrator applies the
substantive laws of the [State of New York], without regard to the choice of law
principles thereof. The parties intend that the provisions to arbitrate set
forth herein be valid, enforceable and irrevocable. The parties agree to comply
with any award made in any such arbitration proceedings that has become final in
accordance with the Rules and agree to enforcement of or entry of judgment upon
such award, by any court of competent jurisdiction, including (a) the Circuit
Court of the State of Florida, Pinellas County, or (b) the United States
District Court for the Middle District of Florida, in accordance with Section
10.16 hereof. The arbitrator shall be entitled, if appropriate, to award any
remedy in such proceedings, including, without limitation, monetary damages,
specific performance and all other forms of legal and equitable relief;
provided, however, the arbitrator shall not be entitled to award punitive
damages. Without limiting the provisions of the Rules, unless otherwise agreed
in writing by the parties or permitted by this Agreement,
<PAGE> 34
30
the parties shall keep confidential all matters relating to the arbitration or
the award, provided such matters may be disclosed (i) to the extent reasonably
necessary in any proceeding brought to enforce the award or for entry of a
judgment upon the award and (ii) to the extent otherwise required by law.
Notwithstanding Article 32 of the Rules, the party which is not the prevailing
party in the arbitration shall be responsible for all of the costs of the
arbitration, including legal fees and other costs specified by such Article 32.
Nothing contained herein is intended to or shall be construed to prevent either
party, in accordance with Article 22(3) of the Rules or otherwise, from applying
to any court of competent jurisdiction for interim measures or other provisional
relief in connection with the subject matter of any Agreement Disputes.
8.3 Continuity of Service and Performance. Unless otherwise
agreed in writing, the parties will continue to provide service and honor all
other commitments under this Agreement and each Ancillary Agreement during the
course of dispute resolution pursuant to the provisions of this Article VIII
with respect to all matters not subject to such dispute, controversy or claim.
ARTICLE IX
INSURANCE
On or before the Distribution Date, Florida Progress and
Echelon will take such actions with respect to insurance coverage of the Echelon
Assets and the Echelon Business as Florida Progress and Echelon shall reasonably
deem appropriate to permit Echelon to implement a smooth transition to being an
independent company upon the Distribution.
ARTICLE X
MISCELLANEOUS
10.1 Complete Agreement; Construction. This Agreement,
including the Exhibits and Schedules, and the Ancillary Agreements shall
constitute the entire agreement between the parties with respect to the subject
matter hereof and shall supersede all previous negotiations, commitments and
writings with respect to such subject matter. In the event of any inconsistency
between this Agreement and any Exhibit or Schedule hereto, the Exhibit or
Schedule shall prevail. Other than Section 2.12 and Article VIII, which shall
prevail over any inconsistent or conflicting provisions in any Ancillary
Agreement, notwithstanding any other provisions in this Agreement to the
contrary, in the event and to the extent that there shall be a conflict between
the provisions of this Agreement and the provisions of any Ancillary Agreement,
such Ancillary Agreement shall control.
<PAGE> 35
31
10.2 Ancillary Agreements. Subject to the last sentence of
Section 10.1 hereof, this Agreement is not intended to address, and should not
be interpreted to address, the matters specifically and expressly covered by the
Ancillary Agreements.
10.3 Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement,
and shall become effective when one or more such counterparts have been signed
by each party and delivered to the other party.
10.4 Survival of Agreements. Except as otherwise contemplated
by this Agreement, all covenants and agreements of the parties contained in this
Agreement shall survive the Distribution Date.
10.5 Expenses. Except as otherwise set forth in this Agreement
or any Ancillary Agreement, all costs and expenses incurred on or prior to the
Distribution Date (whether or not paid on or prior to the Distribution Date) in
connection with the preparation, execution, delivery and implementation of this
Agreement and any Ancillary Agreement, the Registration Statement, the
Information Statement, and the Distribution and the consummation of the
transactions contemplated thereby shall be charged to and paid by Florida
Progress to the extent such costs and expenses exceed 100% of the amount
contributed by Florida Progress to Echelon pursuant to Section 2.9(b).
Except as otherwise set forth in this Agreement or any Ancillary Agreement, each
party shall bear its own costs and expenses incurred after the Distribution
Date. Any amount or expense to be paid or reimbursed by one party hereto to the
other party hereto shall be so paid or reimbursed promptly after the existence
and amount of such obligation is determined and demand therefore is made.
10.6 Notices. All notices and other communications hereunder
shall be in writing and hand delivered or mailed by registered or certified mail
(return receipt requested) or sent by any means of electronic message
transmission with delivery confirmed (by voice or otherwise) to the parties at
the following addresses (or at such other addresses for a party as shall be
specified by like notice) and will be deemed given on the date on which such
notice is received:
To Florida Progress Corporation:
3201 34th Street South
St. Petersburg, Florida 33711
Telephone: (813) 866-5153
Telecopy: (813) 866-4881
Attn: General Counsel
<PAGE> 36
32
To Echelon International Corporation:
One Progress Plaza
Suite 2400
St. Petersburg, Florida 33701
Telephone: (813) 824-6768
Telecopy: (813) 824-6536
Attn: Chief Executive Officer
10.7 Waivers. The failure of either party to require strict
performance by the other party of any provision in this Agreement will not waive
or diminish such party's right to demand strict performance thereafter of that
or any other provision hereof.
10.8 Amendments. Subject to the terms of Section 10.11 hereof,
this Agreement may not be modified or amended except by an agreement in writing
signed by each of the parties hereto.
10.9 Assignment. (a) This Agreement shall not be assignable,
in whole or in part, directly or indirectly, by either party hereto without the
prior written consent of the other party hereto, and any attempt to assign any
rights or obligations arising under this Agreement without such consent shall be
void.
(b) Echelon will not distribute to its stockholders any
interest in any Echelon Subsidiary, by way of a spin-off distribution, split-off
or other exchange of interests in a Echelon Subsidiary for any interest in
Echelon held by Echelon stockholders, or any similar transaction or
transactions, unless the distributed Echelon Subsidiary undertakes to Florida
Progress to be jointly and severally liable for all Echelon Liabilities
hereunder.
10.10 Successors and Assigns. The provisions to this Agreement
shall be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and permitted assigns.
10.11 Termination. This Agreement (including, without
limitation, Article IV hereof) may be terminated and the Distribution may be
amended, modified or abandoned at any time prior to the Distribution by and in
the sole discretion of Florida Progress without the approval of Echelon or the
stockholders of Florida Progress. In the event of such termination, no party
shall have any liability of any kind to the other party or any other Person.
After the Distribution, this Agreement may not be terminated except by an
agreement in writing signed by the parties; provided, however, that Article IV
shall not be terminated or amended after the Distribution in respect of
<PAGE> 37
33
the third party beneficiaries thereto without the consent of such
Persons.
10.12 Subsidiaries. Florida Progress shall cause to be
performed, and hereby guarantees the performance of, all actions, agreements and
obligations set forth herein to be performed by any Florida Progress Subsidiary.
If Echelon subsequently organizes or acquires any Subsidiary, Echelon shall not
permit such Subsidiary to take or fail to take any action, if taking or failing
to take such action would result in a breach of this Agreement if taken or
failed to be taken, as the case may be, by Echelon. Echelon shall cause to be
performed, and hereby guarantees the performance of, all actions, agreements and
obligations set forth herein to be performed by any Echelon Subsidiary.
10.13 Third Party Beneficiaries. Except as provided in Article
IV relating to Indemnitees, this Agreement is solely for the benefit of the
parties hereto and their respective Subsidiaries and Affiliates and should not
be deemed to confer upon third parties any remedy, claim, liability,
reimbursement, claim of action or other right in excess of those existing
without reference to this Agreement.
10.14 Title and Headings. Titles and headings to sections
herein are inserted for the convenience of reference only and are not intended
to be a part of or to affect the meaning or interpretation of this Agreement.
10.15 Exhibits and Schedules. The Exhibits [and Schedules]
shall be construed with and as an integral part of this Agreement to the same
extent as if the same had been set forth verbatim herein.
10.16 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA APPLICABLE TO
CONTRACTS MADE AND TO BE PERFORMED IN THE STATE OF FLORIDA.
10.17 Consent to Jurisdiction. Without limiting the provisions
of Article VIII hereof, each of the parties irrevocably submits to the exclusive
jurisdiction of (a) the Circuit Court of the State of Florida, Pinellas County,
and (b) the United States District Court for the Middle District of Florida, for
the purposes of any suit, action or other proceeding arising out of this
Agreement or any transaction contemplated hereby. Each of the parties agrees to
commence any action, suit or proceeding relating hereto either in the United
States District Court for the Middle District of Florida or if such suit, action
or other proceeding may not be brought in such court for jurisdictional reasons,
in the Circuit Court of the State of Florida, Pinellas County. Each of the
parties further agrees that service of any process, summons, notice or document
by U.S. registered mail to such party's respective address set forth
<PAGE> 38
34
above shall be effective service of process for any action, suit or proceeding
in Florida with respect to any matters to which it has submitted to jurisdiction
in this Section 10.17. Each of the parties irrevocably and unconditionally
waives any objection to the laying of venue of any action, suit or proceeding
arising out of this Agreement or the transactions contemplated hereby in (i) the
Circuit Court of the State of Florida, Pinellas County, or (ii) the United
States District Court for the Middle District of Florida, and hereby further
irrevocably and unconditionally waives and agrees not to plead or claim in any
such court that any such action, suit or proceeding brought in any such court
has been brought in an inconvenient forum.
10.18 Severability. In the event any one or more of the
provisions contained in this Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby. The parties shall endeavor in good-faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions, the economic effect of which comes as close as possible to
that of the invalid, illegal or unenforceable provisions.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed as of the day and year first above written.
FLORIDA PROGRESS CORPORATION,
a Florida corporation
By:________________________
ECHELON INTERNATIONAL
CORPORATION,
a Florida corporation
By:________________________
<PAGE> 1
EXHIBIT 10.5
NOTE
$[36,000,000.00] St. Petersburg, Florida
_________ __, 1996
FOR VALUE RECEIVED, the undersigned, ECHELON INTERNATIONAL
CORPORATION, a Florida corporation (the "Borrower"), hereby unconditionally
promises to pay on __________ __, 2000 (the "Maturity Date") to the order of
PROGRESS CAPITAL HOLDINGS, INC., a Florida corporation (the "Lender"), in lawful
money of the United States of America and in immediately available funds, the
principal amount of [THIRTY-SIX MILLION AND 00/100 DOLLARS ($36,000,000.00)],
or, if less, the unpaid principal amount of the loan made by the Lender
pursuant to this Note.
The Borrower may, at any time and from time to time, prepay this
Note, in whole or in part, without premium or penalty, upon at least four
business days' irrevocable notice to the Lender, specifying the date and amount
of prepayment. If any such notice is given, the amount specified in such notice
shall be due and payable on the date specified therein, together with accrued
and unpaid interest to such date on the amount prepaid. Amounts prepaid may not
be reborrowed.
The Borrower agrees that immediately upon the sale or other transfer
or disposition of any asset listed on Schedule 1 attached hereto and the receipt
of the proceeds by the Borrower, the Borrower shall make a mandatory prepayment
of the principal amount of this Note. The amount which the Borrower is required
to pay to the Lender pursuant to this paragraph upon such sale or other transfer
or disposition is the lesser of (a) the then outstanding principal amount of
this Note or (b):
(i) Where the Borrower's sale or other transfer or disposition of
any asset listed on Schedule 1 attached hereto results in a taxable gain,
the cash received by the Borrower from such sale, other transfer or
disposition minus the Borrower's current taxes due on such sale, transfer,
or disposition; and
(ii) Where the Borrower's sale or other transfer or disposition of
any asset listed on Schedule 1 attached hereto results in a taxable loss,
the cash received by the Borrower from such sale, other transfer or
disposition plus the current tax benefit the Borrower receives from the
aforementioned tax loss (as received by the Borrower through the filing of
a tax return or the reduction of estimated tax payments).
So long as any principal amount remains outstanding under this Note,
the Borrower shall, within 30 days following the end of each fiscal quarter of
the Borrower, provide Lender with a certificate of the chief executive officer
of Borrower describing in reasonable detail any third party proposals to
purchase any of the assets described on Schedule 1 hereto and the identity of
any proposed third party purchasers. The Lender agrees to take all necessary
actions to release its security interest (i) in any asset listed on Schedule 1
concurrent with the sale, transfer or other disposition of such asset and (ii)
in all assets listed on Schedule 1 upon payment by the Borrower of all amounts
outstanding under this Note.
The Borrower also agrees that immediately upon the occurrence of a
Change in Control, the Borrower shall be required to repay this Note at a price
equal to 100% of the then outstanding principal amount, together with accrued
and unpaid interest, if any, to the date of repayment. A Change in Control shall
be deemed to have occurred if (a) any person or "group" (within the meaning of
Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) (i)
<PAGE> 2
2
shall have acquired beneficial ownership of 20% or more of any outstanding class
of capital stock having ordinary voting power in the election of directors of
the Borrower or (ii) shall obtain the power (whether or not exercised) to elect
a majority of the Borrower's directors, (b) the Board of Directors of the
Borrower shall not consist of a majority of Continuing Directors or (c) a
"Change of Control" (however denominated) under any other indebtedness of the
Borrower shall occur. For purposes of this provision, "Continuing Directors"
shall mean the directors of the Borrower on the date hereof and each other
director, if such other director's nomination for election to the Board of
Directors of the Borrower is recommended by a majority of the then Continuing
Directors.
The Borrower further agrees to pay interest in like money on the
unpaid principal amount hereof from time to time outstanding until paid in full
(both before and after judgment). Such interest shall be payable semi-annually
in arrears, and shall be compounded monthly and calculated on the basis of a
360-day year for actual days elapsed. This Note shall bear interest for each day
during an Interest Period at a rate per annum equal to the LIBOR Rate determined
for such day plus 3.25% until maturity (whether as stated, by acceleration or
otherwise), and after maturity at the rate which is 2.00% above such contractual
rate until such principal is paid in full (both before and after judgment).
"LIBOR Rate" means, with respect to each day during each Interest
Period, the rate per annum equal to the rate at which The Chase Manhattan Bank,
N.A. is offered dollar deposits at or about 10:00 A.M., New York City time, two
business days prior to the beginning of such Interest Period in the interbank
eurodollar market where its eurodollar and foreign currency and exchange
operations are then being conducted, for delivery on the first day of such
Interest Period for the number of days comprised therein and in an amount
comparable to the amount of the principal amount of this Note to be outstanding
during such Interest Period.
"Interest Period" means, (a) initially, the period commencing on the date
hereof and ending 30 days thereafter, and (b) thereafter, each period commencing
on the last day of the next preceding Interest Period and ending thirty days
thereafter; provided that, (i) if any Interest Period would otherwise end on a
day that is not a business day, such Interest Period shall be extended to the
next succeeding business day; and (ii) any Interest Period that would otherwise
extend beyond the Maturity Date or beyond the date final payment is due on this
Note shall end on the Maturity Date or such date of final payment, as the case
may be.
If any payment on this Note becomes due and payable on a Saturday,
Sunday or other day on which commercial banks in the State of Florida are
authorized or required by law to close, the maturity thereof shall be extended
to the next succeeding day which is not a Saturday, Sunday or other day on which
commercial banks in the State of Florida are authorized or required by law to
close, and, with respect to payments of principal, interest thereon shall be
payable at the then applicable rate during such extension.
This Note is secured as provided in each of the
____________________, each dated as of _______, 1996 (collectively, as amended,
supplemented or otherwise modified from time to time, the "Mortgages"), by the
Borrower for the benefit of the Lender. Reference is hereby made to the
Mortgages for a description of the properties and assets in which a security
interest has been granted, the nature and extent of the security, the terms and
conditions upon which the security interest has granted and the rights of the
Lenders in respect thereof.
<PAGE> 3
3
If any of the following events shall occur and be continuing:
(a) the Borrower shall fail to pay the principal hereof when due in
accordance with the terms hereof; or the Borrower shall fail to pay any
interest hereon, or any other amount payable hereunder, within five days
after any such interest or other amount becomes due in accordance with the
terms hereof, and in each such case such default shall continue unremedied
for five days after receipt by the Borrower of notice of such default from
the Lender; or
(b) (i) the Borrower shall commence any case, proceeding or other
action (A) under any existing or future law of any jurisdiction, domestic
or foreign, relating to bankruptcy, insolvency, reorganization or relief
of debtors, seeking to have an order for relief entered with respect to
it, or seeking to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to it or its debts,
or (B) seeking appointment of a receiver, trustee, custodian, conservator
or other similar official for it or for all or any substantial part of its
assets, or the Borrower shall make a general assignment for the benefit of
its creditors; or (ii) there shall be commenced against the Borrower any
case, proceeding or other action of a nature referred to in clause (i)
above which (A) results in the entry of an order for relief or any such
adjudication or appointment or (B) remains undismissed, undischarged or
unbonded for a period of 60 days; or (iii) there shall be commenced
against the Borrower any case, proceeding or other action seeking issuance
of a warrant of attachment, execution, distraint or similar process
against all or any substantial part of its assets which results in the
entry of an order for any such relief which shall not have been vacated,
discharged, or stayed or bonded pending appeal within 60 days from the
entry thereof; or (iv) the Borrower shall take any action in furtherance
of, or indicating its consent to, approval of, or acquiescence in, any of
the acts set forth in clause (i), (ii), or (iii) above; or (v) the
Borrower shall generally not, or shall be unable to, or shall admit in
writing its inability to, pay its debts as they become due; or
(c) (i) for any reason any Mortgage ceases to be or is not in full
force and effect (except in accordance with its terms) in any material
respect and such default shall continue unremedied for 30 days after the
earlier of receipt by the Borrower of notice of such default from the
Lender or actual knowledge of such default by a senior officer of the
Borrower, (ii) the Borrower shall assert in writing that any such Mortgage
has ceased to be or is not in full force and effect (except in accordance
with its terms) or (iii) the lien created by such Mortgage shall cease to
be enforceable and of the same effect and priority purported to be created
thereby; or
(d) the Borrower shall (i) default in any payment of principal of or
interest of indebtedness under the Loan Agreement, dated as of November 5,
1996, among the Borrower, Salomon Brothers Realty Corp., as Lender, and
LaSalle National Bank, as Collateral Agent (the "Loan Agreement") beyond
the period of grace (not to exceed 30 days), if any, provided in the Loan
Agreement; or (ii) default in the observance or performance of any other
agreement or condition relating to any such indebtedness or contained in
any instrument or agreement evidencing, securing or relating thereto, or
any other event shall occur or condition exist, the effect of which
default or other event or condition is to cause, or to permit the holder
or holders of such indebtedness (or a trustee or agent on behalf of such
holder or holders) to cause, with the giving of notice if required, such
indebtedness to become due prior to its stated maturity;
<PAGE> 4
4
then, and in any such event, (A) in the case of any event specified in clause
(i) or (ii) of paragraph (b) above, automatically all principal owing hereunder
(with accrued interest thereon) and all other amounts owing under this Note
shall immediately become due and payable, and (B) in the case of any other event
specified in paragraphs (a), (b), (c) or (d) above, the Lender may, by notice to
the Borrower, declare the principal amount owing hereunder (with accrued
interest thereon) and all other amounts owing under this Agreement to be due and
payable forthwith, whereupon the same shall immediately become due and payable.
The Borrower hereby represents and warrants to the Lender that this
Note has been duly authorized, executed and delivered by the Borrower and
constitutes the legal, valid and binding obligation of the Borrower, enforceable
against it in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally and by
general equitable principles (whether enforcement is sought by proceedings in
equity or at law).
The Borrower hereby waives the requirements of demand, presentment,
protest and notice of dishonor and all other demands or notices of any kind in
connection with the delivery, acceptance, performance, default, dishonor or
enforcement of this Note.
Any provision of this Note which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
No failure to exercise and no delay in exercising, on the part of
the Lender, any right, remedy, power or privilege hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right, remedy,
power or privilege hereunder preclude any other or further exercise thereof or
the exercise of any other right, remedy, power or privilege. The rights,
remedies, powers and privileges herein provided are cumulative and not exclusive
of any rights, remedies, powers and privileges provided by law.
For so long as this Note or any obligation hereunder remains
outstanding, the Borrower hereby irrevocably waives and agrees not to assert all
rights of set-off, counterclaim or defense to payment, whether now existing or
hereafter arising, that the Borrower may have against the Lender.
Neither this Note, nor any terms hereof, may be amended,
supplemented or modified except by written amendment executed by the Borrower.
The Borrower hereby irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Note, or for recognition and enforcement of
any judgment in respect thereof, to the non-exclusive general jurisdiction
of the courts of the State of Florida, the courts of the United States of
America for the Middle District of Florida, and appellate courts from any
thereof;
(b) to the extent permitted by applicable law, consents that any
such action or proceeding may be brought in such courts and waives any
objection that it may now or hereafter have to the venue of any such
action or proceeding in any such court or that such
<PAGE> 5
5
action or proceeding was brought in an inconvenient court and agrees not
to plead or claim the same;
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail
(or any substantially similar form of mail), postage prepaid, to the
Borrower at Echelon International Corporation, One Progress Plaza, Suite
2400, St. Petersburg, Florida 33701, Attention: President, or at such
other address provided to the Lender by the Borrower;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the
right to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any right
it may have to claim or recover in any legal action or proceeding referred
to in this paragraph any special, exemplary, punitive or consequential
damages.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF FLORIDA.
THE BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY
JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS NOTE AND FOR ANY
COUNTERCLAIM THEREIN.
Echelon International Corporation
By: _________________________________
Name:
Title:
<PAGE> 6
SCHEDULE 1 TO NOTE
ASSETS CONSTITUTING SECURITY
DIRECT FINANCE LEASE
Southwest -- 1984 B737-300
OPERATING LEASE
Continental/Air Micronesia -- B727-200 Advance
Note Receivable from American Finance Group with respect to
Operating Lease to Southwest for Three 737-200s
AIRCRAFT LOANS
Pegasus -- ChallengAir DC 10-30
Pegasus -- TWA L1011-50
OWNED REAL ESTATE
Gadsden Station Record Studio
5th Avenue
Riverside Ranch
Royal Oaks
Progress Packaging
Killebrew -- Note Receivable
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ECHELON
INTERNATIONAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND THE YEAR ENDED DECEMBER 31, 1995 INCORPORATED BY
REFERENCE IN THE REGISTRATION STATEMENT ON FORM 10 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH REGISTRATION STATEMENT FILED ON FORM 10.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> SEP-30-1996 DEC-31-1995
<CASH> 200 400
<SECURITIES> 0 0
<RECEIVABLES> 43,900 44,400
<ALLOWANCES> 0 0
<INVENTORY> 3,200 2,200
<CURRENT-ASSETS> 47,700 47,600
<PP&E> 168,200 186,200
<DEPRECIATION> 35,300 32,600
<TOTAL-ASSETS> 483,900 554,500
<CURRENT-LIABILITIES> 20,700 29,800
<BONDS> 120,900 279,200
0 0
0 0
<COMMON> 100 100
<OTHER-SE> 179,000 60,700
<TOTAL-LIABILITY-AND-EQUITY> 483,900 554,500
<SALES> 0 0
<TOTAL-REVENUES> 48,600 47,600
<CGS> 0 0
<TOTAL-COSTS> 31,400 17,700
<OTHER-EXPENSES> 36,800 17,800
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 15,600 22,000
<INCOME-PRETAX> (35,200) (9,900)
<INCOME-TAX> (13,500) (4,900)
<INCOME-CONTINUING> (21,700) (5,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (21,700) (5,000)
<EPS-PRIMARY> (3.34) (.77)
<EPS-DILUTED> 0 0
</TABLE>
