<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 26, 1994
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
GRUBB & ELLIS COMPANY
................................................................................
(Name of Registrant as Specified in Its Charter)
GRUBB & ELLIS COMPANY
................................................................................
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
/ / $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
/ / Fee computed on table below per Exchange Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
...........................................................................
2) Aggregate number of securities to which transaction applies:
...........................................................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11*.
...........................................................................
4) Proposed maximum aggregate value of transaction:
...........................................................................
* Set forth the amount on which the filing fee is calculated and state how it
was determined.
/ / Check box if any party of the fee is offset as provided by Exchange
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: ______________________________________________
2) Form Schedule or Registration Statement No. __________________________
3) Filing Party: ________________________________________________________
4) Date Filed: __________________________________________________________
<PAGE>
PRELIMINARY COPY
DATED MAY 26, 1994
GRUBB & ELLIS COMPANY
One Montgomery Street
Telesis Tower
San Francisco, California 94104
June __, 1994
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
Grubb & Ellis Company (the "Company") to be held on August 16, 1994 in San
Francisco Rooms A, B and C of the Grand Hyatt on Union Square Hotel, 345
Stockton Street, San Francisco, California, commencing at 3:00 p.m.
At the Annual Meeting, you will be asked to vote upon a proposed plan of
financing for the Company (the "Financing Transactions") and amendments to the
Company's Restated Certificate of Incorporation to modify the terms of the
Company's outstanding preferred stock (the "Amendments to Preferred Stock"). In
addition, you will be asked to elect six directors to the Company's board of
directors. The accompanying Proxy Statement provides information concerning the
Financing Transactions, the Amendments to Preferred Stock and the nominees for
directors. Please read this information carefully.
The Company continues to confront many challenges from continuing
uncertainties in the real estate markets. The Board of Directors has
unanimously concluded that the Financing Transactions are necessary for the
continued financial and operating viability of the Company and are in the best
interests of the Company and the stockholders. The Financing Transactions would
result in the deferral of approximately $15 million of debt repayments over the
next three years and provide approximately $10 million of equity financing which
would alleviate the impact of negative cash flow from operations and the payment
of amounts to settle various lawsuits which arose in previous years. The
Financing Transactions, which are described in the Proxy Statement, consist of
the following principal elements:
* BRIDGE LOAN. Warburg, Pincus Investors, L.P. ("Warburg"), the
Company's principal stockholder, has agreed to provide the Company
with interim loan financing of up to $10 million.
* RIGHTS OFFERING AND WARBURG STAND-BY AGREEMENT. The Company
proposes to issue each common stockholder one nontransferable right
to purchase one share of common stock at $2.375 for each share of
common stock held of record on August 24, 1994. Warburg has agreed
to purchase at $2.375 per share up to approximately 3,900,000 shares
of common stock not purchased by common stockholders in the rights
offering for an aggregate of approximately $9.3 million. Warburg
will pay for such shares through the cancellation of indebtedness
under its interim loan. Warburg also will exercise outstanding
warrants for an aggregate exercise price of approximately $900,000,
thus assuring that the Company will receive approximately
$10 million as a result of the Financing Transactions.
* PRUDENTIAL DEBT AGREEMENT. The Prudential Insurance Company of
America ("Prudential"), the Company's principal lender, would defer
$15 million of principal payments which would have been due from
1994 through 1996 until 1997 through 1999, waive compliance with
certain covenants until April 1, 1997 and extend other maturities
to 2001.
* ISSUANCE OF NEW WARRANTS AND AMENDMENTS TO PREFERRED STOCK. The
Company will issue Warburg and Prudential new warrants to purchase
325,000 and 150,000 shares of common stock, respectively. Certain
terms of the Company's outstanding preferred stock held by Warburg
and Prudential would be amended to eliminate the mandatory
redemption provisions,
<PAGE>
increase the dividend rates beginning in 2002 and amend the
anti-dilution provisions. The terms of the outstanding warrants to
purchase common stock held by Warburg and Prudential also would be
amended.
In deciding to approve the Financing Transactions, the Board of Directors
took into account, among other things, the Company's immediate need for working
capital, the Company's inability beyond the near term to service the principal
payments due on its indebtedness owed to Prudential, the unavailability of any
other acceptable equity alternative and that a reorganization under the federal
bankruptcy laws is believed to be a significantly less desirable alternative for
a service-intensive business. See "Proposal No. 1: Financing Transactions --
Reasons for the Financing Transactions and Board's Recommendation."
The Financing Transactions, if approved and implemented, will have a
material effect on the Company and on the common stockholders. Among other
things, the Financing Transactions may result in a significant dilution of the
voting power of the common stockholders, depending on the participation of the
common stockholders in the rights offering. In addition, adjustments in the
number of shares issuable upon conversion of the Company's preferred stock,
adjustments in the number of shares issuable upon exercise of existing warrants
to purchase the Company's common stock, and the issuance of shares upon exercise
of the new warrants granted to Warburg and Prudential would dilute the voting
power of the common stockholders and would reduce a common stockholder's
ownership interest in the Company. See "Proposal No. 1: Financing Transactions
- - -- Risk Factors After the Financing Transactions."
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS TO THE STOCKHOLDERS OF THE
COMPANY THAT THEY VOTE FOR THE FINANCING TRANSACTIONS AND THE AMENDMENTS TO
PREFERRED STOCK PROPOSALS AND FOR THE NOMINEES TO THE BOARD OF DIRECTORS.
Your vote is important to the Company. Whether or not you plan to attend
the meeting, please return a completed proxy card in the enclosed envelope. If
you do attend the meeting and wish to vote in person, you may withdraw your
proxy and vote your shares personally.
We look forward to seeing you at the meeting.
Sincerely,
Joe F. Hanauer
Chairman of the Board of Directors
<PAGE>
PRELIMINARY COPY
[LOGO]
GRUBB & ELLIS COMPANY
One Montgomery Street
Telesis Tower
San Francisco, California 94104
____________________
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held August 16, 1994
The Annual Meeting of the Stockholders of Grubb & Ellis Company (the
"Company") will be held in San Francisco Rooms A, B and C of the Grand Hyatt On
Union Square Hotel, 345 Stockton Street, San Francisco, California, on
August 16, 1994 at 3:00 p.m. local time, for the following purposes:
1. To consider and vote upon proposed financing transactions (the
"Financing Transactions") described under "Proposal No. 1: Financing
Transactions" in the accompanying Proxy Statement which would result in an
investment of approximately $10 million for equity of the Company through
a proposed rights offering to the Company's stockholders, the retirement
of a $10 million bridge loan and certain amendments to existing debt and
equity instruments.
2. To consider and vote upon amendments to the Company's Restated
Certificate of Incorporation to amend the terms of the Company's
outstanding Preferred Stock as described in "Proposal No. 2: Amendments
to Preferred Stock" in the accompanying Proxy Statement.
3. To elect six (6) directors to the Board of Directors to serve
for one year and until their successors are elected and qualified.
4. To transact such other business as may properly come before
the Annual Meeting and any adjournment or postponement thereof.
Proposal No. 2 will be submitted to the stockholders for a vote only
in the event that Proposal No. 1 is approved.
The Financing Transactions and other important matters are explained
in the attached Proxy Statement and the Company's 1993 Annual Report to
Stockholders and Quarterly Report on Form 10-Q for the quarter ended March 31,
1994 which accompany this Proxy Statement, all of which you are urged to read
carefully.
Stockholders of record at the close of business on June 22, 1994
will receive this Notice and are entitled to vote at the Annual Meeting.
Please complete, sign and date the enclosed proxy card and mail it
promptly in the enclosed reply envelope.
BY ORDER OF THE BOARD OF DIRECTORS
Robert J. Walner
Secretary
Dated: June __, 1994
<PAGE>
TABLE OF CONTENTS
PAGE
----
SUMMARY...................................................................... 1
The Annual Meeting........................................................ 1
Purpose of the Annual Meeting............................................. 1
Background................................................................ 1
Required Vote............................................................. 2
Risk Factors After the Financing Transactions............................. 2
Terms of the Financing Transactions....................................... 2
Amendments to Preferred Stock............................................. 7
Absence of Dividends...................................................... 8
Certain Relationships..................................................... 8
Summary of Anticipated Effects of the Financing Transactions.............. 8
No Appraisal or Dissenters' Rights........................................ 10
Market and Trading Information............................................ 10
Election of Directors..................................................... 10
Historical and Pro Forma Capitalization................................... 11
SOLICITATION AND REVOCATION OF PROXIES....................................... 12
General................................................................... 12
Record Date; Voting Rights................................................ 12
Required Vote............................................................. 12
No Appraisal or Dissenters' Rights........................................ 13
Proxies................................................................... 13
Voting Procedures......................................................... 13
PROPOSAL NO. 1: FINANCING TRANSACTIONS...................................... 14
Background and Financial Condition........................................ 14
Financial Restructuring................................................... 16
1993 Financial Results.................................................... 17
First Quarter 1994 Financial Results...................................... 17
Financing Transactions and Deferral of Debt Payments...................... 18
Reasons for the Financing Transactions and Board's Recommendation......... 19
Fairness Opinion.......................................................... 22
Terms of the Financing Transactions....................................... 24
Summary of Anticipated Effects of the Financing Transactions; Dilution.... 34
Risk Factors After the Financing Transactions............................. 35
Certain Income Tax Consequences........................................... 39
Non-Approval of Financing Transactions.................................... 41
Use of Proceeds........................................................... 42
PROPOSAL 2: AMENDMENTS TO PREFERRED STOCK................................... 42
Description of Preferred Stock............................................ 42
Amendments to Preferred Stock............................................. 45
Description of Common Stock............................................... 47
MARKET FOR THE COMPANY'S STOCK............................................... 48
PROPOSAL NO. 3: ELECTION OF DIRECTORS....................................... 48
Information Concerning Nominees for Director.............................. 49
i
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................................ 51
EXECUTIVE COMPENSATION....................................................... 53
Compensation of Executive Officers........................................ 53
Compensation of Directors................................................. 55
Employment Contracts and Termination of Employment and
Change-In-Control Arrangements...................................... 55
Report on Repricing of Options............................................ 56
Compensation Committee Interlocks and Insider Participation............... 59
Compensation Committee Report on Executive Compensation................... 62
Stock Price Performance................................................... 65
RELATED PARTY TRANSACTIONS................................................... 66
AUDITORS..................................................................... 66
SUBMISSION OF STOCKHOLDER PROPOSALS.......................................... 67
REPORT TO STOCKHOLDERS....................................................... 67
INCORPORATION BY REFERENCE; AVAILABLE INFORMATION............................ 67
APPENDIX A - Amendments to Restated Certificate of Incorporation............ A-1
APPENDIX B - Fairness Opinion of Robert Fleming, Inc........................ B-1
ii
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO MORE DETAILED INFORMATION SET FORTH
ELSEWHERE IN THIS PROXY STATEMENT, ITS APPENDICES, AND THE COMPANY'S 1993 ANNUAL
REPORT TO STOCKHOLDERS AND QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 1994 WHICH ACCOMPANY THIS PROXY STATEMENT, ALL OF WHICH SHOULD BE
REVIEWED CAREFULLY.
THE ANNUAL MEETING
The Annual Meeting of the Stockholders (the "Annual Meeting") of
Grubb & Ellis Company (the "Company") will be held on Tuesday, August 16, 1994,
at 3:00 p.m. local time, in San Francisco Rooms A, B and C of the Grand Hyatt On
Union Square Hotel, 345 Stockton Street, San Francisco, California. Only
holders of record of capital stock of the Company at the close of business on
June 22, 1994 (the "Record Date") will be entitled to vote at the Annual
Meeting.
PURPOSE OF THE ANNUAL MEETING
At the Annual Meeting, the Company's stockholders (the
"Stockholders") will be asked to consider and vote upon both a proposed plan of
financing for the Company and amendments to the Company's Restated Certificate
of Incorporation (the "Certificate of Incorporation") to modify the terms of the
Company's outstanding Preferred Stock (as defined below). The Stockholders will
also be asked to elect six directors (the "Directors") to the Company's board of
directors (the "Board").
BACKGROUND
The proposed financing transactions (the "Financing Transactions")
would result in an investment of approximately $10 million for equity of the
Company through the issuance of Common Stock of the Company, $.01 par value (the
"Common Stock"), in connection with a proposed rights offering (the "Rights
Offering") to the holders of Common Stock (the "Common Stockholders") and the
retirement of a $10 million bridge loan which has been provided by the Company's
principal stockholder, Warburg, Pincus Investors, L.P. ("Warburg"). The
Financing Transactions also will involve the amendment of certain agreements
between the Company and its principal lender, The Prudential Insurance Company
of America ("Prudential"), the issuance to Warburg and Prudential of warrants to
purchase 325,000 and 150,000 shares of Common Stock, respectively, and
amendments to the outstanding Senior Preferred Stock (as defined below), the
outstanding Junior Preferred Stock (as defined below) and outstanding warrants
to purchase Common Stock.
REASONS FOR THE FINANCING TRANSACTIONS AND BOARD'S RECOMMENDATIONS
The Board has unanimously concluded that the Financing Transactions
are necessary for the continued financial and operating viability of the Company
and are in the best interests of the Company and the Stockholders. In deciding
to approve the Financing Transactions, the Board took into account, among other
things, the Company's immediate need for working capital, the Company's need to
retire the Bridge Loan (as defined below), the Company's inability beyond the
near term to service the principal payments due on its indebtedness owed to
Prudential, the unavailability of any other acceptable equity alternative
1
<PAGE>
and that a reorganization under the federal bankruptcy laws is believed to be a
significantly less desirable alternative for a service-intensive business. See
"Proposal No. 1: Financing Transactions-Reasons for the Financing Transactions
and Board's Recommendation." THE BOARD RECOMMENDS TO THE STOCKHOLDERS THAT
THEY VOTE FOR THE FINANCING TRANSACTIONS.
REQUIRED VOTE
Approval of the Financing Transactions, other than the proposed
amendments to the outstanding Preferred Stock, will require the affirmative vote
of the holders of at least a majority of the outstanding shares of capital stock
present in person or by proxy at the Annual Meeting and entitled to vote on the
Financing Transactions, other than Warburg and Prudential (the "Required Vote").
Approval of the proposed amendments to the Preferred Stock will require the
affirmative vote of the holders of at least a majority of the outstanding shares
of capital stock, and approval of the holders of at least two-thirds of the
class of Preferred Stock being amended, voting as a separate class.
RISK FACTORS AFTER THE FINANCING TRANSACTIONS
EVEN IF THE FINANCING TRANSACTIONS ARE CONSUMMATED, AN INVESTMENT IN
THE COMPANY WILL BE SUBJECT TO A HIGH DEGREE OF RISK. SEE "PROPOSAL NO. 1:
FINANCING TRANSACTIONS -- RISK FACTORS AFTER THE FINANCING TRANSACTIONS" FOR A
DESCRIPTION OF CERTAIN OF THOSE RISKS.
TERMS OF THE FINANCING TRANSACTIONS
LOAN AGREEMENTS
BRIDGE LOAN. On March 29, 1994, Warburg and the Company entered
into a Loan and Security Agreement pursuant to which Warburg has agreed to make
advances to the Company from time to time in an aggregate principal amount for
all such advances outstanding not to exceed $10 million at any time (the "Bridge
Loan"). The outstanding principal amount of the Bridge Loan bears interest at a
rate of 5% per annum. If the Company does not obtain Stockholder approval for
additional financing, such as the Rights Offering, by December 31, 1994, then
the outstanding principal amount of the Bridge Loan will bear interest at 10%
per annum retroactive to the date of the first advance under the Bridge Loan.
All outstanding principal and interest on the Bridge Loan mature on April 28,
1995. The Bridge Loan is secured by the Company's commercial brokerage revenues
and amounts held in a cash collateral account established by the Company.
Prudential also has a lien on the cash collateral account which is subordinated
to Warburg's lien.
PRUDENTIAL DEBT AGREEMENT. Upon consummation of the Financing
Transactions, the Company and Prudential will amend the loan agreement entered
into with Prudential (the "Prudential Debt Agreement") with respect to the
outstanding 9.9% Senior Notes (the "Senior Notes"), 10.65% Subordinated
Payment-in-Kind Notes (the "PIK Notes") and Revolving Credit Note (the
"Revolving Credit Note"). Pursuant to the amendment, $15 million principal
amount of the Senior Notes, the PIK Notes and the Revolving Credit Note which
would have been due from 1994 through 1996 will be deferred and no principal
payments will be required until November 1, 1997, and thereafter (A) the
Revolving Credit Note will mature November 1, 1999, (B) principal on the Senior
Notes will be payable in two equal installments on November 1, 1997 and 1998,
and (C) the PIK Notes will be payable in two approximately equal installments on
November 1, 2000 and 2001, (ii) the
2
<PAGE>
interest rate on the PIK Notes will increase from 10.65% to 11.65% per annum on
January 1, 1996, (iii) the temporary repayment requirements applicable to the
Revolving Credit Note and certain covenants relating to working capital,
cumulative operating losses and capital expenditures will be ineffective until
April 1, 1997, (iv) the Company will be required to maintain a ratio of EBITDA
(as defined in the Prudential Debt Agreement) to total interest expense equal to
or greater than 2:1 on a rolling 12 month basis as of April 1, 1997 and
quarterly thereafter, (v) the Company will be required to make supplemental debt
payments commencing in 1998 if the Company generates certain levels of cash flow
and (vi) certain other restrictions and covenants will be eliminated from the
Prudential Debt Agreement or waived by Prudential.
The following table compares the required principal payments due
under the existing terms of the Prudential Debt Agreement with the required
principal payments due under the Prudential Debt Agreement after giving effect
to the amendments which would be effected in connection with the Financing
Transactions.
<TABLE>
<CAPTION>
PRINCIPAL DUE UNDER PRINCIPAL DUE UNDER
EXISTING TERMS OF PRUDENTIAL DEBT
PRUDENTIAL DEBT AGREEMENT(1) AGREEMENT AS AMENDED
---------------------------- -------------------
<S> <C> <C>
1994 $4,000,000 $ -0-
1995 $5,500,000 $ -0-
1996 $5,500,000 $ -0-
1997 $3,000,000 $5,000,000
1998 $3,000,000 $5,000,000
1999 $3,000,000 $5,000,000
2000 -0- $4,500,000
2001 -0- $4,500,000
<FN>
____________________
(1) Under the Prudential Debt Agreement, the Company is required to repay all
outstanding principal under the Revolving Credit Note for a 60-day period
each year. The amount due under the Revolving Credit Note currently is
$5,000,000, all of which would be required to be paid in 1994. The
Revolving Credit Note matures on December 31, 1994, at which time, the
Company may convert such Note into a new term note which would mature on
December 31, 1996. The table assumes that the Company elected to make
such conversion. Pursuant to the proposed amendments to the Prudential
Debt Agreement, the requirement to repay principal under the Revolving
Credit Note will be deferred until November 1, 1999 and the Company will
not have the option of converting the Revolving Credit Note into a new
term note. The table excludes PIK Notes issued and to be issued in lieu
of cash interest.
</TABLE>
RIGHTS OFFERING AND WARBURG STAND-BY AGREEMENT
Subject to obtaining the Required Vote of the Stockholders for the
Financing Transactions, the Company will issue to each Common Stockholder one
nontransferable right (a "Right") for each share of Common Stock held of record
on August 24, 1994 (the "Rights Offering"). Each Right will entitle the holder
to purchase, during a period of approximately 30 days (the "Subscription
Period") one share of Common Stock at a subscription price of $2.375 per share
(the "Subscription Price"). Each Common Stockholder who validly exercises all
of his or her Rights may oversubscribe at the Subscription Price for
3
<PAGE>
additional shares of Common Stock to the extent that unsubscribed shares are
available as a result of other Common Stockholders electing not to exercise
their Rights. The maximum number of shares which may be purchased through the
oversubscription right will be the number of shares held by such holder as of
the record date for the Rights Offering, subject to proration. Warburg has
entered into a Stand-by Agreement pursuant to which it has agreed to purchase at
$2.375 per share up to approximately 3,900,000 shares of Common Stock not
purchased by Common Stockholders in the Rights Offering for an aggregate of
approximately $9.3 million. Warburg will pay for such shares through the
cancellation of indebtedness outstanding under the Bridge Loan, including
accrued interest on the Bridge Loan. The remainder of the indebtedness under
the Bridge Loan will be retired in connection with Warburg's exercise of its
Contingent Warrants (as defined below) for an aggregate exercise price of
$887,818 as described below. The maximum net proceeds of the Rights Offering
are estimated to be approximately $10.1 million, which will be used to retire
any remaining indebtedness under the Bridge Loan and meet the Company's
operational needs.
THIS PROXY STATEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK TO BE ISSUED PURSUANT
TO THE RIGHTS OFFERING. A REGISTRATION STATEMENT RELATING TO SUCH SHARES OF
COMMON STOCK HAS BEEN FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE
COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. SHARES OF COMMON STOCK TO BE
ISSUED IN CONNECTION WITH THE RIGHTS OFFERING WILL NOT BE SOLD PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
ISSUANCE OF NEW WARRANTS
As consideration for providing the Bridge Loan, agreeing to acquire
unsubscribed shares of Common Stock in connection with the Rights Offering, and
agreeing to the other transactions contemplated by the Rights Offering, the
Company will issue to Warburg warrants to purchase 325,000 shares of Common
Stock at an exercise price of $2.375 per share (the "Warburg 1994 Warrants").
As consideration for modifying the Prudential Debt Agreement with the Company,
waiving noncompliance with certain covenants and agreeing to the other
transactions contemplated by the Financing Transactions, the Company will issue
to Prudential warrants to purchase 150,000 shares of Common Stock at an exercise
price of $2.375 per share (the "Prudential 1994 Warrants" and together with the
Warburg 1994 Warrants, the "New Warrants"). Any or all of the New Warrants may
be exercised at any time until five years after the date of issuance. The other
terms of the New Warrants will be the same as the terms of the Existing Warrants
(as defined below), after giving effect to the amendments to the Existing
Warrants discussed below (including the amendments to the Warrant Anti-Dilution
Provisions (as defined below).
1993 RESTRUCTURING
On January 29, 1993, the stockholders of the Company approved a
financial recapitalization and debt restructuring (the "Restructuring"),
pursuant to which Warburg, for a purchase price of $12,850,000, purchased (i)
128,266 shares of the Company's 12% Senior Convertible Preferred Stock (the
"Senior Preferred Stock"), (ii) five-year warrants initially to purchase 340,000
shares of Common Stock, at an exercise price of $5.00 per share (the "$5.00
Warrants"), (iii) five-year warrants initially to purchase 142,000 shares of
Common Stock at an exercise price of $5.50 per share (the "$5.50 Warrants" and
together with the $5.00 Warrants, the "Warburg 1993 Warrants"), and (iv)
warrants to purchase 373,818 shares of Common Stock at an exercise price of
$5.00 per share, subject to certain limitations (the "Contingent Warrants").
Also pursuant to the Restructuring, Joe F. Hanauer ("Hanauer"), who is currently
Chairman of the Board, for a purchase price of $900,000,
4
<PAGE>
purchased (i) 8,894 shares of Senior Preferred Stock, (ii) $5.00 Warrants
initially to purchase 160,000 shares of Common Stock, (iii) $5.50 Warrants
initially to purchase 58,000 shares of Common Stock and (iv) Contingent Warrants
to purchase 26,182 shares of Common Stock.
Pursuant to the Restructuring, the Company and Prudential agreed to
restructure the existing indebtedness of the Company owed to Prudential,
including the issuance to Prudential, in exchange for the cancellation of $15
million of subordinated debt, 150,000 shares of the Company's 5% Junior
Convertible Preferred Stock (the "Junior Preferred Stock" and together with the
Senior Preferred Stock, the "Preferred Stock") and $5.50 Warrants initially to
purchase 200,000 shares of Common Stock (the "Prudential 1993 Warrants"). The
Warburg 1993 Warrants, the Prudential 1993 Warrants and the $5.00 Warrants and
$5.50 Warrants held by Hanauer are sometimes collectively referred to herein as
the "Existing Warrants."
As part of the Restructuring, Warburg, Prudential, Hanauer and the
Company entered into a Stockholders' Agreement (as amended as of this date, the
"Stockholders' Agreement"), which provides for the nomination of up to three
persons for election as Director by Warburg and up to two persons for election
as Director by Prudential.
Pursuant to the Financing Transactions, the Existing Warrants and
the Preferred Stock will be subject to certain amendments and adjustments which
are summarized below. See "Proposal No. 1: Financing Transactions" and
"Proposal No. 2: Amendments to Preferred Stock." The following chart describes
the changes to the outstanding Preferred Stock, Existing Warrants and Contingent
Warrants held by Warburg and Prudential which will be effected in connection
with the Financing Transactions:
<TABLE>
<CAPTION>
CURRENT EXERCISE PRICE NEW EXERCISE PRICE
AND AMOUNT OF AND AMOUNT OF
SECURITY UNDERLYING SECURITIES UNDERLYING SECURITIES(1)
- - --------------------------- ---------------------- ------------------------
<S> <C> <C>
WARBURG
Senior Preferred Stock Convertible into 4,256,083 Convertible into
shares at a conversion price 4,674,641 shares at a
of $3.0137 per share. conversion price of
$2.7649 per share.
$5.00 Warrants Exercisable for 340,000 shares Exercisable for 465,770
at an exercise price of $5.00 shares at an exercise
per share. price of $3.50 per
share.
$5.50 Warrants Exercisable for 142,000 shares Exercisable for 201,396
at an exercise price of $5.50 shares at an exercise
per share. price of $3.50 per
share.
Contingent Warrants Exercisable for 373,818 shares Exercisable for 373,818
at an exercise price of $5.00 shares at an exercise
per share. price of $2.375 per
share.
PRUDENTIAL
Junior Preferred Stock Convertible into 2,674,511 Convertible into
shares at a conversion price 2,674,511 shares at a
of $5.6085 per share. conversion price of
$5.6085 per share.
Prudential $5.50 Warrants Exercisable for 200,000 shares Exercisable for 200,000
at an exercise price of $5.50 shares at an exercise
per share. price of $3.50 per
share.
<FN>
______________________
(1) Assumes the issuance of all shares of Common Stock reserved for issuance
in the Rights Offering. The exact adjustments will be based on, among
other things, the number of shares of Common Stock issued in the Rights
Offering. The terms of the Senior Preferred Stock, the $5.00 Warrants,
the $5.50 Warrants and the Contingent Warrants held by Hanauer will be
subject to certain anti-dilution adjustments. See "Proposal No. 1:
Financing Transactions -- Terms of the Financing Transactions" and
"Proposal No. 2: Amendments to Preferred Stock."
</TABLE>
5
<PAGE>
AMENDMENTS TO EXISTING WARRANTS
Upon consummation of the Financing Transactions, the Warburg 1993
Warrants and the Prudential 1993 Warrants will be subject to certain adjustments
and amendments. The exercise price and the number of shares of Common Stock
issuable upon exercise of each Existing Warrant currently are subject to
adjustment from time to time upon the occurrence of certain events, including
upon the issuance of rights, options, warrants or securities directly or
indirectly convertible into Common Stock, and certain issuances of Common Stock,
for a consideration per share less than the greater of the current market price
or the warrant exercise price per share on the date of such issue (the "Warrant
Anti-Dilution Provisions"). Upon consummation of the Financing Transactions,
the exercise prices of the Warburg 1993 Warrants will be reduced to $3.50 per
share and the number of shares issuable upon exercise of the Warburg 1993
Warrants will be increased from 340,000 and 142,000 to approximately 465,800 and
201,400 shares of Common Stock for the $5.00 Warrants and $5.50 Warrants,
respectively. The exact adjustments will be based on, among other things, the
number of shares of Common Stock issued in the Rights Offering. The exercise
price of the Prudential 1993 Warrants will be reduced to $3.50 per share, but
the number of shares of Common Stock issuable upon exercise will not change.
Upon consummation of the Financing Transactions, the Warrant Anti-Dilution
Provisions contained in the Existing Warrants held by Warburg and Prudential
will be amended to, among other things, eliminate the anti-dilution protection
upon issuance of shares at a price which is less than the greater of the market
price and the exercise price.
EXERCISE OF CONTINGENT WARRANTS
Upon consummation of the Restructuring, Warburg acquired Contingent
Warrants to purchase 373,818 shares of Common Stock only in the event that the
Company incurs a defined liability in excess of $1,500,000 at an aggregate
exercise price equal to the lesser of 93.45% of the amount by which such excess
liabilities exceed $500,000 or $5.00 per share multiplied by the number of
shares purchased. The other terms of the Contingent Warrants, including the
anti-dilution provisions, are the same as those contained in the Existing
Warrants. Concurrently with the consummation of the Rights Offering, the
exercise price of the Contingent Warrants will be reduced to $2.375 per share
(the same price as the Subscription Price of the Rights to be distributed to
Common Stockholders in the Rights Offering), and Warburg will exercise all of
its Contingent Warrants to purchase 373,818 shares of Common Stock and pay the
aggregate exercise price of $887,818 through the cancellation of indebtedness
under the Bridge Loan.
AMENDMENTS TO STOCKHOLDERS' AGREEMENT
The Stockholders' Agreement, which contains agreements among
Warburg, Prudential and Hanauer with respect to voting for the election of
Directors and grants Warburg, Prudential and Hanauer certain registration rights
with respect to the securities received by them in the Restructuring, will be
amended so that Warburg and Prudential will have the same registration rights
for the New Warrants, the Common Stock issuable upon exercise of the New
Warrants and any shares of Common Stock acquired in connection with the Rights
Offering. The Common Stock issuable upon exercise of the New Warrants and the
Common Stock acquired in connection with the Rights Offering will be subject to
the voting requirements of the Stockholders' Agreement.
6
<PAGE>
AMENDMENTS TO PREFERRED STOCK
Upon consummation of the Financing Transactions, the terms of the
Senior Preferred Stock and the terms of the Junior Preferred Stock will be
amended as described below. See "Proposal No. 2: Amendments to Preferred
Stock."
REDEMPTION PROVISIONS. The Preferred Stock is subject to
mandatory redemption at certain specified times commencing on November 1, 2001.
Upon consummation of the Financing Transactions, the mandatory redemption
provisions will be eliminated, except that under certain limited circumstances,
the Company may be required to redeem the Junior Preferred Stock in connection
with an underwritten public offering of the Company's Common Stock as described
in "Conversion of Junior Preferred Stock" below.
ANTI-DILUTION PROVISIONS. The outstanding shares of Senior
Preferred Stock held by Warburg and Hanauer currently are convertible into an
aggregate of 4,551,201 shares of Common Stock, at the option of the holder, at a
conversion price of $3.0137 per share of Common Stock. The outstanding shares
of Junior Preferred Stock currently are convertible into an aggregate of
2,674,511 shares of Common Stock, at the option of the holder, at a conversion
price of $5.6085 per share of Common Stock. The Preferred Stock currently
provides that the conversion prices are subject to adjustment from time to time
upon the occurrence of certain events, including upon the issuance of rights,
options, warrants or securities directly or indirectly convertible into Common
Stock, and certain issuances of Common Stock for a consideration per share less
than the greater of the current market price or the conversion price per share
on the date of such issue (the "Preferred Stock Anti-Dilution Provisions").
Upon consummation of the Rights Offering and upon application of the Preferred
Stock Anti-Dilution Provisions, the conversion price of the Senior Preferred
Stock will be adjusted to approximately $2.75 per share, assuming the issuance
of all shares reserved for issuance in the Rights Offering. As a result of the
adjustment to the conversion price, the number of shares of Common Stock
issuable upon conversion of the Senior Preferred Stock held by Warburg and
Hanauer will increase to approximately 4,998,800. The exact adjustments will be
based on, among other things, the number of shares of Common Stock issued in the
Rights Offering. Prudential has agreed to waive the application of the
Preferred Stock Anti-Dilution Provisions with respect to the Junior Preferred
Stock in connection with the Financing Transactions. Upon consummation of the
Financing Transactions, the Preferred Stock Anti-Dilution Provisions contained
in the Senior Preferred Stock held by Warburg and the Junior Preferred Stock
held by Prudential will be amended to, among other things, eliminate the
anti-dilution protection upon issuance of shares at a price which is less than
the greater of the market price and the conversion price.
DIVIDEND RATE. Holders of the Senior Preferred Stock and the
Junior Preferred Stock are entitled to receive cumulative dividends payable in
cash, at a rate of 12% and 5% per annum, respectively. Upon consummation of the
Financing Transactions, the Junior Preferred Stock will be amended to increase
the dividend rate effective January 1, 2002 to 10% per annum with further
increases of 1% per annum effective January 1, 2003 and January 1, 2004 and 2%
per annum effective January 1, 2005 and each January 1 thereafter. Also in
connection with the Financing Transactions, the Senior Preferred Stock will be
amended so that at such time as the dividend rate on the Junior Preferred Stock
would increase above the dividend rate on the Senior Preferred Stock, the
dividend rate on the Senior Preferred Stock will increase by the same amount.
Assuming no other changes to the dividend rates of the Preferred Stock, as a
result of these amendments, the dividend rate on the Senior Preferred Stock will
increase by 2% per annum effective January 1, 2005.
7
<PAGE>
The Preferred Stock is subject to mandatory conversion provisions under certain
limited circumstances.
CONVERSION OF JUNIOR PREFERRED STOCK. The Junior Preferred Stock
will be amended to provide that in the event that the Company undertakes to sell
Common Stock in an underwritten public offering and the Company's investment
bankers advise the Company that in order to complete the public offering on the
most favorable terms to the Company it is necessary to retire the Junior
Preferred Stock, then the Company may direct all holders of the Junior
Preferred Stock to convert the Junior Preferred Stock; provided that such
holders will be obligated to convert only after the later of the time Warburg
has committed to convert its Senior Preferred Stock and the consummation of
such underwritten public offering. If the holders of the Junior Preferred
Stock are required to convert the Junior Preferred Stock at a time when the
Common Stock issuable upon conversion would have a value less than the accreted
value of the Junior Preferred Stock (including all unpaid dividends), then such
holders must either, at their option, require the Company to redeem the Junior
Preferred Stock at the accreted value or convert the Junior Preferred Stock.
ABSENCE OF DIVIDENDS
The Company does not anticipate paying any cash dividends in the
foreseeable future. The Prudential Debt Agreement prohibits the payment of cash
dividends or distributions on the Common Stock. In addition, unless full
cumulative dividends have been paid on the Senior Preferred Stock and the Junior
Preferred Stock, the Company will not be entitled to pay dividends on the Common
Stock. See "Proposal No. 1: Financing Transactions -- Risk Factors After the
Financing Transactions."
CERTAIN RELATIONSHIPS AND CONFLICTS OF INTEREST
As a result of the Restructuring, Warburg and Prudential entered
into various agreements with the Company pursuant to which, among other things,
Warburg and Prudential together hold more than 50% of the outstanding voting
power of the Company. For a description of the Restructuring, see "Proposal No.
1: Financing Transactions -- Financial Restructuring" and "Executive
Compensation -- Compensation Committee Interlocks and Insider Participation."
In considering the recommendation of the Board with respect to the Financing
Transactions, Common Stockholders should be aware that two of the Board's six
members have been nominated by Warburg and thus have certain interests that are
in addition to and may conflict with those of Common Stockholders. In addition,
Hanauer holds Preferred Stock and warrants which will be subject to certain
anti-dilution adjustments as a result of the Financing Transactions. As a
significant institutional investor in real estate, Prudential utilizes the
services of the Company and its competitors on a regular basis. For a
description of the fees paid to the Company by Prudential for 1993, see
"Executive Compensation -- Compensation Committee Interlocks and Insider
Participation." For a description of certain other related party transactions
and relationships, see "Related Party Transactions."
SUMMARY OF ANTICIPATED EFFECTS OF THE FINANCING TRANSACTIONS
The Financing Transactions, if approved and implemented, will have a
material effect on the Company and on the holders of the Company's Common Stock.
The Financing Transactions may result in a significant dilution of the voting
power of the
8
<PAGE>
Common Stockholders, depending on the participation of the Common Stockholders
in the Rights Offering. In addition, adjustments in the number of shares
issuable upon conversion of the Senior Preferred Stock, adjustments in the
number of shares issuable upon exercise of the Existing Warrants held by Warburg
and Hanauer and the Contingent Warrants held by Hanauer, the issuance of shares
upon exercise of the Contingent Warrants held by Warburg and the issuance of the
New Warrants will have a dilutive effect on the voting power of the Common
Stockholders. Such dilution would reduce a Common Stockholder's ownership
interest in the Company.
The following tables set forth the equity ownership of the Company
(1) prior to the consummation of the Financing Transactions, (2) after the
consummation of the Financing Transactions, assuming that Common Stockholders,
other than Prudential, acquire all shares of Common Stock reserved for issuance
in connection with the Rights Offering, and (3) after the consummation of the
Financing Transactions, assuming that Common Stockholders do not purchase any
shares of Common Stock upon exercise of the Rights, and that Warburg acquires
3,900,000 shares of Common Stock, which is approximately the maximum number
which it has agreed to acquire in connection with the Rights Offering.
<TABLE>
<CAPTION>
After Financing Transactions After Financing Transactions
Assuming Common Assuming Common
Before Financing Stockholders Purchase Stockholders Do Not Purchase
Transactions(1) Shares in Rights Offering(3) Shares in Rights Offering(5)
----------------------- ---------------------------- -----------------------------
Percent Percent Percent
of Equity of Equity of Equity
Assuming Assuming Assuming
Percent Exercise of Percent All Warrants Percent All Warrants
of Equity Warrants(2) of Equity Exercised(4) of Equity Exercised(6)
--------- ----------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Public 34.3% 30.9% 49.7% 45.2% 24.5% 22.2%
Warburg 36.6 39.5 29.9 32.6 54.5 54.9
Hanauer 2.7 4.3 2.2 3.8 2.2 3.9
Prudential 26.4 25.3 18.2 18.4 18.8 19.0
----- ----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
<FN>
____________________
(1) Assumes conversion of all shares of Senior Preferred Stock and conversion
of all shares of Junior Preferred Stock held by Prudential. Holders of
the Senior Preferred Stock and the Junior Preferred Stock have one vote
for each share of Common Stock into which the Preferred Stock could be
converted. Does not assume exercise of stock options issued pursuant to
the Company's stock option plans.
(2) Assumes the exercise of all Existing Warrants held by Warburg, Hanauer and
Prudential and the exercise of Contingent Warrants held by Warburg and
Hanauer.
(3) Assumes the purchase of all shares of Common Stock issuable upon exercise
of all Rights by Common Stockholders, other than Prudential, and the
exercise by Warburg of Contingent Warrants. Also assumes conversion of
the Senior Preferred Stock held by Warburg and Hanauer (as adjusted upon
application of the anti-dilution provisions) and conversion of the Junior
Preferred Stock held by Prudential. Does not assume exercise of stock
options issued pursuant to the Company's stock option plans.
(4) Assumes (i) the exercise of Existing Warrants, as amended, held by
Warburg, Hanauer and Prudential (as adjusted upon application of the
anti-dilution provisions), (ii) the exercise of the New Warrants held by
Warburg and Prudential, and (iii) the exercise of Contingent Warrants held
by Hanauer (as adjusted upon application of the anti-dilution provisions).
(5) Assumes acquisition by Warburg of 3,900,000 shares of Common Stock in
connection with the Rights Offering and the exercise by Warburg of
Contingent Warrants. Also assumes conversion of the Senior Preferred
Stock held by Warburg and Hanauer (as adjusted upon application of the
anti-dilution provisions), and acquisition by Hanauer of approximately
21,000 shares of Common Stock upon exercise of Rights and conversion of
the Junior Preferred Stock held by Prudential. Does not assume exercise
of stock options issued pursuant to the Company's stock option plans.
(6) Assumes (i) the exercise of Existing Warrants, as amended, held by
Warburg, Hanauer and Prudential (as adjusted upon application of the
anti-dilution provisions), (ii) the exercise of New Warrants held by
Warburg and Prudential for 325,000 and 150,000 shares of Common Stock,
respectively, and (iii) the exercise of Contingent Warrants held by
Hanauer (as adjusted upon application of the anti-dilution provisions).
</TABLE>
9
<PAGE>
NO APPRAISAL OR DISSENTERS' RIGHTS
Under Delaware law, Stockholders are not entitled to any statutory
dissenters' right to appraisal of their shares of Common Stock in connection
with the Financing Transactions.
MARKET AND TRADING INFORMATION
The Company's Common Stock is traded on the New York Stock Exchange
("NYSE") and the Pacific Stock Exchange. On March 28, 1994, the last trading
day prior to the announcement of the Financing Transactions by the Company, the
closing sales price of the Common Stock on the NYSE was $3-3/8 per share. On
__________________, 1994, the closing sales price of the Common Stock on the
NYSE was _____ per share. See "Market for the Company's Stock."
ELECTION OF DIRECTORS
Stockholders are being asked to vote on the election of six
Directors. Pursuant to the Stockholders' Agreement, Warburg, Prudential and
Hanauer have agreed to vote all of the shares which they hold in favor of the
election of all nominees. The nominees are Reuben S. Leibowitz and John D.
Santoleri, designees of Warburg, Joe F. Hanauer, currently Chairman of the
Board, and Wilbert F. Schwartz, Lawrence S. Bacow and R. David Anacker, who are
currently Directors. As the shares held by Warburg, Prudential and Hanauer
represent in excess of 50% of the outstanding voting power of the Company, all
such nominees will be elected.
THE BOARD RECOMMENDS TO THE STOCKHOLDERS THAT THEY VOTE FOR THE
NOMINEES LISTED ABOVE.
10
<PAGE>
HISTORICAL AND PRO FORMA CAPITALIZATION
The following table sets forth the capitalization of the Company as
of March 31, 1994, and such capitalization as adjusted to give effect to the
consummation of the Financing Transactions, including the Rights Offering,
assuming that the Financing Transactions had occurred as of March 31, 1994.
This table should be read in conjunction with the Company's consolidated
financial statements for the three months ended March 31, 1994 contained in the
Form 10-Q for the quarter ended March 31, 1994, accompanying this Proxy
Statement.
<TABLE>
<CAPTION>
March 31, 1994
(unaudited)
(in thousands)
----------------------------
Historical Pro Forma(1)
----------- ------------
<S> <C> <C>
Long-term debt obligations:
Current portion $ 256 $ 256
Long-term portion 29,432 29,432
-------- --------
Total long-term debt obligations 29,688 29,688
-------- --------
Redeemable preferred stock:
12% Senior convertible preferred stock:
137,160 shares outstanding 14,857 --
5% Junior convertible preferred stock:
150,000 shares outstanding 15,737 --
-------- --------
Total redeemable preferred stock 30,594 --
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value:
1,000,000 shares authorized; 287,160 shares
issued as redeemable preferred stock; as
adjusted: 8,894 shares of Series A 12% Senior
Convertible Preferred Stock outstanding,
128,266 shares of Series B 12% Senior
Convertible Preferred Stock outstanding and
150,000 shares of 5% Junior Convertible
Preferred Stock outstanding -- 30,594
Common stock, $.01 par value:
25,000,000 shares authorized; 4,112,358 shares
outstanding; 8,224,716 shares outstanding
as adjusted 42 87
Capital in excess of par 47,591 57,851
Retained deficit (121,725) (121,725)
-------- --------
Total stockholders' equity (deficit) (74,092) (33,193)
-------- --------
Total redeemable preferred stock and
stockholders' equity (deficit)
(43,498) (33,193)
-------- -------
Total capitalization $(13,810) $(3,505)
-------- -------
-------- -------
<FN>
___________________
(1) Assumes consummation of the Financing Transactions, including the issuance
of 4,112,358 shares of Common Stock pursuant to the Rights Offering,
issuance of 373,818 shares of Common Stock upon exercise of Contingent
Warrants, and the effectiveness of amendments to the Certificate of
Incorporation pursuant to which the mandatory redemption provisions of
the Preferred Stock will be eliminated. Also assumes payment of expenses
attributable to the Rights Offering of $350,000.
</TABLE>
11
<PAGE>
SOLICITATION AND REVOCATION OF PROXIES
GENERAL
The Board of Directors (the "Board") of Grubb & Ellis Company (the
"Company") is soliciting your proxy for the Annual Meeting of Stockholders (the
"Annual Meeting") to be held on August 16, 1994 at 3:00 p.m. in San Francisco
Rooms A, B and C of the Grand Hyatt On Union Square Hotel, 345 Stockton Street,
San Francisco, California. Only holders of record of capital stock of the
Company (the "Capital Stock") at the close of business on June 22, 1994 (the
"Record Date") will be entitled to vote at the Annual Meeting.
Information in this proxy statement about the Company's directors
(the "Directors") or executive officers is provided only for the periods during
which they held such positions. References to numbers of shares of the
Company's common stock (the "Common Stock") reflect the one-for-five reverse
stock split which occurred January 29, 1993.
RECORD DATE; VOTING RIGHTS
This Proxy Statement and the enclosed proxy card are being mailed on
or about June , 1994 to holders of Common Stock, holders of 12% Senior
Convertible Preferred Stock (the "Senior Preferred Stock"), and holders of 5%
Junior Convertible Preferred Stock (the "Junior Preferred Stock" and together
with the Senior Preferred Stock, the "Preferred Stock") on June 22, 1994 (the
"Record Date"), who are entitled to notice of and to vote at the Annual Meeting.
On the Record Date, there were 4,412,358 shares of Common Stock outstanding.
Each of the holders of Common Stock (the "Common Stockholders") is entitled to
one vote for each share of Common Stock held. The holders of Preferred Stock
are entitled to vote in accordance with the number of shares of Common Stock
into which their shares of Preferred Stock are convertible. As of the Record
Date, holders of Senior Preferred Stock were entitled to 4,551,201 votes in the
aggregate, and holders of Junior Preferred Stock were entitled to 2,674,511
votes in the aggregate. The total number of votes available at the Record Date
was 11,638,070. The presence, in person or by proxy, of a majority of the votes
which all of the Company's Stockholders ("Stockholders") are entitled to cast
will constitute a quorum.
REQUIRED VOTE
Under the requirements of the New York Stock Exchange (the "NYSE")
on which the shares of Common Stock are listed, certain parts of the Financing
Transactions require approval by holders of a majority of the votes cast in
Proposal No. 1: Financing Transactions. Pursuant to the terms of the Financing
Transactions, approval of Proposal No. 1 will require the affirmative vote of
the holders of at least a majority of the outstanding shares of Capital Stock
present in person or by proxy and entitled to vote on the Financing
Transactions, other than Warburg and Prudential (the "Required Vote"). With
respect to Proposal No. 1, shares of Capital Stock held by Warburg and
Prudential will be voted in proportion to the shares of Common Stock voted by
the other Stockholders. Approval of Proposal No. 2, Amendments to Preferred
Stock, pursuant to which the Company's Restated Certificate of Incorporation
(the "Certificate of Incorporation") will be amended, will require the
affirmative vote of the holders of at least a majority of the outstanding shares
of Capital Stock, and approval of the holders of at least two-thirds of the
class of Preferred Stock being
12
<PAGE>
amended, voting as a separate class. The election of each nominee for Director
as described under Proposal No. 3, Election of Directors, will require the
affirmative vote of a plurality of the voting power of the shares of Capital
Stock represented at the Annual Meeting and entitled to vote. Cumulative voting
for the election of Directors is not permitted.
Proposal No. 2, Amendments to Preferred Stock, will be submitted to
the Stockholders for a vote only in the event that Proposal No. 1 is approved.
NO APPRAISAL OR DISSENTERS' RIGHTS
Under Delaware law, Stockholders are not entitled to any statutory
dissenters' rights to appraisal of their shares of Common Stock in connection
with the Financing Transactions.
PROXIES
When the enclosed proxy is executed, dated and returned prior to the
date of the Annual Meeting, the shares represented will be voted by the persons
named as proxy in accordance with your directions. You may revoke your proxy at
any time prior to voting at the Annual Meeting by delivering written notice to
the Secretary of the Company, by submitting a subsequently dated proxy or by
attending the meeting and voting by ballot before the polls are closed.
The Board is not aware of any matters to be presented at the Annual
Meeting other than the Financing Transactions, amendments to the Preferred Stock
and the election of Directors. If any other matters are properly presented, the
persons named to act as proxies may vote on such matters in accordance with
their discretion.
The cost of the solicitation of proxies will be borne by the
Company. The Company has engaged _____________________________________ to
solicit proxies for a fee of approximately $__________ plus reasonable
out-of-pocket expenses estimated to be approximately $__________. Banks,
brokers and other nominees will be reimbursed for customary expenses incurred in
connection with forwarding of the Company's proxy solicitation materials to
beneficial holders. In addition, proxies may be solicited, without additional
compensation, by Directors, officers and other regular employees of the Company
by telephone, mail or in person.
VOTING PROCEDURES
Shares represented by proxies that reflect abstentions or "broker
non-votes" (i.e., shares held by a broker or nominee which are represented at
the Annual Meeting, but with respect to which such broker or nominee is not
empowered to vote on a particular proposal or proposals) will be counted as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum. The vote required for the election of Directors is the
affirmative vote of a plurality of the shares voting. Unless authority to vote
for any Director is withheld in the proxy, votes will be cast in favor of
election of the nominees. Votes withheld from election of Directors are counted
as votes "against" election of Directors. The vote required for approval of the
amendments to the Preferred Stock is the affirmative vote of holders of at least
a majority of the votes represented by all of the outstanding shares of Capital
Stock entitled to vote at the Annual Meeting, and the affirmative vote of at
least two-thirds of the Preferred Stock which is being amended, voting
13
<PAGE>
as a separate class. Therefore, as to the proposals to amend the Preferred
Stock, abstentions and broker non-votes will have the same effect as votes
against the proposals. Approval of the Financing Transactions will require the
affirmative vote of holders of a majority of the outstanding shares of Capital
Stock present in person or by proxy and entitled to vote on the Financing
Transactions, other than Warburg and Prudential. In accordance with the
Company's Bylaws, as to that proposal, abstentions and broker non-votes will not
be counted as votes for or against the proposal, and will not be included in
counting the number of votes necessary for approval of the proposal. If no vote
is marked with respect to a matter, shares will be voted in accordance with the
Board's recommendations. Except with respect to the amendment of the Preferred
Stock, which will require approval of each class of Preferred Stock being
amended, all shares of Common Stock and Preferred Stock vote together as one
class.
PROPOSAL NO. 1: FINANCING TRANSACTIONS
BACKGROUND AND FINANCIAL CONDITION
In 1980, the Company was primarily a West Coast real estate
brokerage operation. The Company concluded that it would be best positioned to
serve large corporate clients and institutional investors by operating on a
nationwide basis and providing a full range of real estate services in addition
to brokerage services. The Company implemented this strategy through the
acquisition of existing brokerage businesses and diversification into fee-based
real estate related services. These services included appraisal and consulting,
property management, mortgage brokerage and asset management. In 1981, the
Company became a publicly owned company through a merger, thereby acquiring a
number of real estate assets that were later sold.
From 1981 through 1986, the Company grew dramatically, acquiring 24
regional and local real estate services firms in the commercial brokerage,
residential brokerage, property management, and related services areas. The
acquisitions have enabled the Company to provide diversified services to
multi-regional and national clients. Most of the acquired companies no longer
use their original company names and are identified solely as Grubb & Ellis
Company. By 1987, the Company operated 162 offices in 95 cities in 19 states
and the District of Columbia, with approximately 4,100 real estate agents and
2,600 non-agent employees. In November 1986, the Company borrowed $35 million
from Prudential to refinance debt incurred in connection with the acquisitions.
This debt consisted of $10 million of 9.9% Senior Notes (the "Old Senior Notes")
and $25 million of 10.65% Subordinated Notes (the "Old Subordinated Notes").
14
<PAGE>
The following table sets forth the Company's revenue and expenses
for the five years ended December 31, 1993 (dollars in thousands):
<TABLE>
<CAPTION>
1993(1) 1992(2) 1991(3) 1990 1989
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue
Real estate brokerage commissions.......... $162,141 $185,253 $228,085 $276,288 $318,593
Real estate service fees and commissions... 38,590 37,709 38,149 42,734 38,973
Other...................................... 993 1,201 2,400 2,338 4,464
--------- --------- --------- -------- --------
Total Revenue................................... 201,724 224,163 268,634 321,360 362,030
--------- --------- --------- -------- --------
--------- --------- --------- -------- --------
Costs and expenses
Real estate brokerage and other
commissions.............................. 100,250 117,154 138,459 165,896 190,879
Selling, general and administrative........ 59,398 71,606 76,502 92,303 87,929
Salaries and wages......................... 44,780 48,412 58,477 69,558 68,702
Allowances for property and litigation
losses.................................... 0 18,985 3,037 7,088 608
Interest, depreciation and amortization 14,929 27,077 41,011 15,966 11,825
Provision for income taxes................. 575 605 445 300 1,566
--------- --------- --------- -------- --------
Total costs and expenses................... 219,932 283,839 317,931 351,111 361,509
--------- --------- --------- -------- --------
Net income (loss).......................... $ (18,208) $(59,676) $(49,297) $(29,751) $ 521
--------- --------- --------- -------- --------
--------- --------- --------- -------- --------
<FN>
___________________
(1) Northern California residential brokerage operations were sold in March
1993 and real estate advisory business was sold in February 1993.
(2) Georgia residential brokerage operations were sold in January 1992.
(3) Texas residential brokerage operations were sold in July 1991.
</TABLE>
Since 1988, the Company's business and financial condition has been
substantially impaired. The largest factor contributing to the decline in the
Company's revenue, business and financial condition has been the general
economic recession and resulting severe downturn in activity levels and prices
within the commercial real estate sector. In addition, the Company's expansion
prior to 1986 resulted in a significant increase in the Company's level of fixed
costs and overhead. Beginning in Texas in 1985, where approximately 40% of the
Company's commercial and residential brokerage operations were based, brokerage
revenue declined due to the collapse of oil and gas prices and general
unavailability of credit. The 1986 Tax Reform Act limited the ability of
investors to utilize losses generated from real estate investments and
significantly reduced the demand for investments in real estate throughout the
country. In 1987, the real estate recession began to affect commercial
brokerage operations in the Northeast. By late 1989, revenue from commercial
brokerage operations nationwide decreased dramatically, reflecting substantial
declines in the number of and prices for investment and land transactions due to
recessionary economic conditions and the continued unavailability of credit.
In addition, real estate partnerships and joint ventures sponsored
or participated in by the Company were adversely impacted as the real estate
markets deteriorated. As a result, the Company either lost its investment or
had to contribute additional cash either to service debt for which the Company
was liable or to meet its obligations under partnership agreements.
Beginning in 1989, the Company adopted certain cost-cutting measures
including closing selected offices and reducing its work force and salary
expenses. In 1990, in response to adverse real estate market conditions, the
Company closed 15 offices in locations judged to be non-strategic. In 1991, the
Company closed four additional offices and also sold its Texas residential
brokerage operations. In January 1992, the Company sold
15
<PAGE>
its Georgia residential brokerage operations, leaving California as its sole
focus for residential business at that time. Restructuring charges in
connection with these measures of approximately $15.3 million were first
incurred by the Company in the third quarter of 1990, including amounts for
additional reserves for joint ventures and partnerships in the Company's Texas
operations. Operating expenses were further reduced and additional
restructuring charges of $36.7 million were taken in the third and fourth
quarters of 1991. In order to cover the Company's negative cash flow, in
February 1991, the Company arranged and fully utilized a $5 million revolving
line of credit from Prudential (the "1991 Revolving Line of Credit").
FINANCIAL RESTRUCTURING
From 1990 to late 1992, the Company actively pursued equity
financing to strengthen its liquidity and meet its short- and long-term working
capital needs, as the severe economic recession had hindered its ability to meet
debt principal and interest obligations to Prudential. On January 29, 1993, the
Stockholders approved a proposal for restructuring the debt and equity of the
Company (the "Restructuring"), which involved a cash investment of $12,850,000
by Warburg and $900,000 by Joe F. Hanauer ("Hanauer"), a private investor who
became Chairman of the Board of the Company. Pursuant to the Restructuring
Warburg purchased (i) 128,266 shares of the Company's Senior Preferred Stock,
(ii) five-year warrants initially to purchase 340,000 shares of Common Stock, at
an exercise price of $5.00 per share (the "$5.00 Warrants"), (iii) five-year
warrants initially to purchase 142,000 shares of Common Stock at an exercise
price of $5.50 per share (the "$5.50 Warrants" and together with the $5.00
Warrants, the "Warburg 1993 Warrants"), and (iv) warrants to purchase 373,818
shares of Common Stock at an exercise price of $5.00 per share, subject to
certain limitations (the "Contingent Warrants"). Also pursuant to the
Restructuring, Hanauer purchased (i) 8,894 shares of Senior Preferred Stock,
(ii) $5.00 Warrants initially to purchase 160,000 shares of Common Stock, (iii)
$5.50 Warrants initially to purchase 58,000 shares of Common Stock and (iv)
Contingent Warrants to purchase 26,182 shares of Common Stock.
Also pursuant to the Restructuring, Prudential canceled $10 million
of the Old Senior Notes in exchange for $10 million of the 9.9% Senior Notes
(the "Senior Notes"), and canceled $15 million of the Old Subordinated Notes in
exchange for 150,000 shares of the 5% Junior Preferred Stock and warrants
exercisable for 200,000 shares of Common Stock at an exercise price of $5.50 per
share (the "Prudential 1993 Warrants"). Prudential also canceled the remaining
$10 million of Old Subordinated Notes in exchange for $10 million of 10.65%
Payment-In-Kind Notes (the "PIK Notes"), which were reduced to approximately $9
million when Prudential exercised its then existing warrant to purchase 397,549
shares of Common Stock at an exercise price per share of $7.30 (giving effect to
the reverse stock split which was effected on January 29, 1993). Approximately
$1,982,000 of accrued interest payable to Prudential also was canceled in
conjunction with the exercise of this warrant. Additionally, the $5 million
1991 Revolving Line of Credit was exchanged for a $5 million Revolving Credit
Note due December 31, 1994 (the "Revolving Credit Note"), exchangeable for a
two-year term loan due December 31, 1996. The Senior Note, Subordinated Note
and Revolving Credit Note Agreement with Prudential dated November 2, 1992 (the
"Prudential Debt Agreement") prohibits the payment of cash dividends and
contains additional restrictions on the making of acquisitions, loans,
investments, debt and sales of assets. The Company also is required to maintain
a defined working capital ratio. As of December 31, 1993, the Company did not
meet the working capital ratio requirement, and was in violation of certain
other covenants. However, Prudential provided a waiver of these covenants as of
December 31, 1993. The Prudential Debt Agreement also requires the
16
<PAGE>
Company to periodically make certain principal and interest payments. During
1993, Prudential allowed a deferral of the $2 million principal payment on the
Senior Notes due November 1, 1993, until May 1, 1994.
As a result of the Restructuring, Warburg and Hanauer together hold
approximately 39% and Prudential holds approximately 26% of the Company's equity
on a fully diluted basis but before exercise of outstanding warrants at June 1,
1994. Warburg and Hanauer together hold approximately 44% and Prudential holds
approximately 25% of the Company's equity on a fully diluted basis at June 1,
1994, assuming the exercise of all outstanding warrants.
1993 FINANCIAL RESULTS
The Company's net loss for 1993 was $18.2 million compared to a net
loss of $59.7 million for the previous year. The Company's results included a
one-time restructuring charge of $13.5 million related to a write-off of
goodwill and restructuring charges associated with its operations. During 1993,
stockholders' deficit increased by $17.4 million from 1992 and book value
decreased from $(14.29) per share of Common Stock, giving effect to the
one-for-five reverse stock split, to $(16.96) per common share, as a direct
result of the loss from operations and special charges and unusual items.
During 1993 and the first quarter of 1994, the Company continued to
close or sell additional offices. In February 1993, the Company completed the
sale of the real estate advisory business of Grubb & Ellis Realty Advisers,
Inc., a wholly owned subsidiary of the Company, to a privately held concern. In
early March 1993, the Company sold its Northern California residential real
estate brokerage operations. The sale included 13 residential real estate
offices located throughout Northern California as well as a relocation office.
Under the terms of the sale, most of the approximately 400 employees and
salespersons of the Company's Northern California residential operations became
employees of the purchaser. Also, in October 1993, the Company's residential
mortgage services operations in Northern California were closed. The Company's
only remaining residential brokerage and residential mortgage service operations
are in Southern California. Effective February 1994, the Company closed
unprofitable appraisal and consulting offices in Dallas, Phoenix and Atlanta.
During 1993 and 1994, the Company has settled, or reached agreement to settle,
various lawsuits and claims which arose before existing management began
operating the Company. The settlement of these lawsuits and claims have
required, and will require, the Company to pay a substantial amount of cash.
FIRST QUARTER 1994 FINANCIAL RESULTS
During the first quarter of 1994, the Company had a net loss of $4.7
million. Total revenues of $39.1 million for the first quarter of 1994 declined
over the same quarter in 1993 by approximately $3.2 million, or 7.6%. Excluding
revenue from the sold Northern California residential brokerage operations and
certain offices closed during the last quarter of 1993 and the first quarter of
1994, as well as government contracting business conducted during the first
quarter of 1993 which was not repeated in 1994, revenue increased approximately
$2.8 million or 7.9% in the first quarter of 1994 compared to the first quarter
of 1993.
Effective February 1, 1994, the Company modified its reporting
structure to increase operating efficiencies and reduce costs. The
modifications include the integration of
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<PAGE>
management of commercial brokerage operations with the appraisal and consulting
and commercial mortgage brokerage operations, on a regional basis. The
integration also includes those property management operations which the Company
has resumed, independent of Axiom Real Estate Management, Inc. ("Axiom"), a
majority owned subsidiary of the Company which provides property and facilities
management. Axiom closed certain offices pursuant to its strategic objectives.
Additionally, in February 1994, the Company closed several unprofitable
appraisal and consulting offices.
Excluding the decline in expenses resulting from the sale of the
Northern California residential brokerage operations and the closure of offices,
operating expenses increased by $2.0 million, or 8.6%, in the first quarter of
1994 compared to the same period in 1993, primarily due to several key
management positions being filled in the latter part of 1993 and additional
investments in training, computer systems, and other resources.
FINANCING TRANSACTIONS AND DEFERRAL OF DEBT PAYMENTS
As of the end of 1993, the Company projected that without additional
capital, the Company would be unable to meet its working capital needs and
service its principal obligations to Prudential. As of December 31, 1993, the
Company did not meet the working capital covenant contained in the Prudential
Debt Agreement.
The Company explored various alternatives in order to meet its
short- and long-term cash requirements, including reducing costs, closing
additional operations and obtaining financing. Throughout late 1993 and early
1994, the Company held discussions with Warburg and Prudential concerning the
possibility of additional investments in the Company and with Prudential
concerning a possible deferral of amounts due under the Prudential Debt
Agreement. During that time, Prudential indicated that it was unwilling to
invest additional capital into the Company.
During March 1994, the Company, Warburg and Prudential substantially
completed negotiations on the terms of the proposed financing transactions (the
"Financing Transactions," as described below in "Proposal No. 1: Financing
Transactions"). On March 28, 1994, Warburg and the Company entered into a Loan
and Security Agreement pursuant to which Warburg agreed to loan the Company up
to $10 million at an initial interest rate of 5% per annum with a maturity date
of April 28, 1995 (the "Bridge Loan"). Also, at that time, Prudential waived
certain failures to perform under the Prudential Debt Agreement, including the
non-compliance with the working capital ratio and cumulative loss covenants.
At the same time, the Company, Warburg and Prudential also
substantially completed their negotiations with respect to (i) the terms of a
proposed Rights Offering (the "Rights Offering") which would result in an
investment of approximately $10 million for equity of the Company through the
issuance of Common Stock and the retirement of the $10 million loan provided by
Warburg, (ii) a deferral of the Company's obligations to repay principal under
the Prudential Debt Agreement until November 1, 1997 and a waiver of certain
covenants under the Prudential Debt Agreement through April 1, 1997, and (iii)
the terms of certain amendments to the Preferred Stock and the Existing Warrants
held by each of Warburg and Prudential.
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<PAGE>
The following table compares the required principal payments due
under the existing terms of the Prudential Debt Agreement with the required
principal payments due under the Prudential Debt Agreement after giving effect
to the amendments which would be effected in connection with the Financing
Transactions.
<TABLE>
<CAPTION>
Principal Due Under Principal Due Under
Existing Terms of Prudential Debt
Prudential Debt Agreement(1) Agreement as Amended
----------------------------- --------------------
<S> <C> <C>
1994 $4,000,000 $ -0-
1995 $5,500,000 $ -0-
1996 $5,500,000 $ -0-
1997 $3,000,000 $5,000,000
1998 $3,000,000 $5,000,000
1999 $3,000,000 $5,000,000
2000 -0- $4,500,000
2001 -0- $4,500,000
<FN>
____________________
(1) Under the Prudential Debt Agreement, the Company is required to repay all
outstanding principal under the Revolving Credit Note for a 60-day period
each year. The amount due under the Revolving Credit Note currently is $5
million, all of which would be required to be paid in 1994. The Revolving
Credit Note matures on December 31, 1994, at which time, the Company may
convert such Note into a new term note which would mature on December 31,
1996. The table assumes that the Company elected to make such conversion.
Pursuant to the proposed amendments to the Prudential Debt Agreement, the
requirement to repay principal under the Revolving Credit Note will be
deferred until November 1, 1999. The table excludes PIK Notes issued and
to be issued in lieu of cash interest.
</TABLE>
Should the Financing Transactions not be approved by the Required
Vote of Stockholders, the Prudential Debt Agreement will not be amended to defer
principal and to waive the effectiveness of certain covenants until April 1,
1997. In that case, the Company would owe Prudential $4 million and be required
to repay in full the $5 million outstanding under the Revolving Credit Note, and
make no borrowings under the Revolving Credit Note for 60 days. In addition,
the $10 million loan provided by Warburg will mature pursuant to its terms on
April 28, 1995. It is extremely unlikely that alternative financing could be
arranged in a timely manner which would allow the Company to meet its
obligations, and the business would be unable to continue as a going concern and
the Company would be forced to seek protection from its creditors under the
federal bankruptcy laws.
REASONS FOR THE FINANCING TRANSACTIONS AND BOARD'S RECOMMENDATION
The Board has unanimously concluded that, in its business judgment,
the Financing Transactions are the most viable financing alternative for the
Company presently available and are in the best interests of both the Company
and the Stockholders. THE BOARD UNANIMOUSLY RECOMMENDS TO THE STOCKHOLDERS
THAT THEY VOTE FOR THE FINANCING TRANSACTIONS.
In deciding to approve the Financing Transactions, the Board took
into account, among other things, the following factors:
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<PAGE>
1. THE INABILITY OF THE COMPANY TO SERVICE PRUDENTIAL DEBT.
The Board considered the timing and extent of the Company's principal
obligations due to Prudential, including $4 million principal payments on
the Senior Notes due in 1994, plus a requirement to pay down the $5
million Revolving Credit Note for a 60-day period during 1994, and $5.5
million in 1995 with respect to the Senior Notes and the Revolving Credit
Note. The Board considered that it was extremely unlikely that there
would be any viable equity proposals, other than the Financing
Transactions, which would have provided the funds or the deferrals and
waivers in order to allow the Company not to be in default under the
Prudential Debt Agreement. Pursuant to the Financing Transactions,
Prudential will defer all principal payments due under the Prudential Debt
Agreement until November 1, 1997 and thereafter extend the maturity on the
Revolving Credit Note until November 1, 1999, on the Senior Notes until
November 1, 1997 and 1998, and on the PIK Notes until November 1, 2000 and
2001. Approximately $15 million which would be due from 1994 through 1996
will be deferred until 1997 through 1999. Payment of an additional
approximately $9 million of principal which would be due in 1997 through
1999 will be deferred to 2001 and 2002. Prudential also has agreed that
covenants requiring the Company to maintain a defined working capital
ratio, limiting the amount of cumulative operating losses, limiting
capital expenditures and requiring periodic repayment of the Revolving
Credit Note will not be in effect through April 1, 1997. As of December
31, 1993, the Company was in default under certain of those covenants, and
unless compliance was waived, amended or terminated, anticipated that it
would continue to be in default of such provisions for the foreseeable
future.
2. ABSENCE OF OTHER ACCEPTABLE ALTERNATIVES. Prior to the
Restructuring and prior to negotiating the Financing Transactions, the
Company explored other sources of equity capital. At the time the Bridge
Loan was entered into, there were no other viable sources of cash
available to the Company to meet its working capital obligations and its
debt obligations to Prudential. The Board considered the restructuring of
the Prudential debt to be imperative to a viable transaction and believes
that there are no viable equity alternatives at the present time other
than the Financing Transactions.
3. CASH REQUIREMENTS. The Company has had substantial cash
commitments in connection with the indebtedness under the Prudential Debt
Agreement and in connection with the settlement of various lawsuits and
claims which arose before current management began operating the Company.
The cash provided by the Bridge Loan enabled the Company to meet, on an
interim basis, its operating obligations as well as the amounts required
to be paid in settlement of the various lawsuits and claims. As of June
1, 1994, the Company had borrowed $6 million under the Bridge Loan. The
Financing Transactions, which will provide an equity investment of
approximately $10 million and will result in the deferral of approximately
$15 million of principal amount of the Senior Notes, the PIK Notes and the
Revolving Credit Note which would be due from 1994 through 1996. The
Company believes that the Financing Transactions will provide sufficient
working capital to fund current operations, necessary capital expenditures
and repayments of indebtedness. In reaching this conclusion, the Company
has considered the nonrecurring nature of the lawsuits which generally
arose out of discontinued operations and current management's efforts to
reduce expenses. The estimated costs
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<PAGE>
necessary to make required payments under the Prudential debt in 1994 and
to fund currently estimated capital expenditures in 1994 is approximately
$7.3 million.
4. STRUCTURE OF THE RIGHTS OFFERING. The Board took into
account that the Rights Offering is structured in a way which will give
the Common Stockholders the ability to obtain shares of Common Stock in
the Company at $2.375 per share prior to Warburg having the opportunity to
acquire such shares through the conversion of its Bridge Loan. The Common
Stockholders also would have an oversubscription right to purchase shares
of Common Stock not acquired by other Common Stockholders prior to Warburg
having any right to acquire Common Stock in the Rights Offering. The
Board also considered that in the event that Common Stockholders do not
elect to purchase shares in the Rights Offering, Warburg will acquire up
to 3,900,000 shares of Common Stock, guaranteeing that the Company will
receive an equity investment of approximately $10 million in connection
with the Financing Transactions. In addition, the Board took into account
that approval of the Financing Transactions will require approval of
Stockholders, other than Warburg and Prudential.
5. TERMS OF THE FINANCING TRANSACTIONS. The Board also
considered the benefits to the Company and the Common Stockholders of
certain of the proposed modifications to the Preferred Stock and the
Existing Warrants, as well as benefits to the principal Stockholders.
Pursuant to the Financing Transactions, provisions of the Preferred Stock
which would have required the Company to make periodic redemptions of the
Preferred Stock on November 1 of each of 2000, 2001 and 2002 will be
eliminated, thus relieving the Company of the obligation to pay
approximately $28.7 million, plus accrued dividends, to redeem Preferred
Stock. The Board also considered the effect that Warburg's and
Prudential's agreements would have on the equity interests of the Common
Stockholders. Warburg and Prudential have agreed to eliminate, with
respect to future transactions, certain anti-dilution provisions which
apply to the Preferred Stock and Existing Warrants. If these provisions
are not eliminated, they could dilute the equity interests of the Common
Stockholders in the future. The Board also considered the benefits to be
received by Warburg and Prudential, including the issuance of the New
Warrants to purchase 325,000 and 150,000 shares of Common Stock,
respectively, at an exercise price of $2.375 per share. The New Warrants
to be issued to Warburg and Prudential represent approximately 1.8% and
.8%, respectively, of the Common Stock on a fully diluted basis, assuming
exercise of all warrants. The Board took into account the reduction of
the exercise prices of the Existing Warrants to $3.50 per share, which was
slightly lower than the adjustment which would have occurred pursuant to
the terms of those securities, and the reduction in the exercise price of
Warburg's Contingent Warrants to $2.375 per share. The number of shares
issuable upon conversion of the Preferred Stock and exercise of the
Existing Warrants held by Warburg will increase pursuant to the existing
terms of those securities, whereas the adjustment in the exercise prices
of the Existing Warrants held by Prudential, the Junior Preferred Stock
and the Contingent Warrants held by Warburg will occur without any
increase in the number of shares issuable upon conversion and exercise of
such securities.
6. THE ALTERNATIVE OF REORGANIZATION UNDER CHAPTER 11. Unless
the Financing Transactions are completed, the Company will be in default
under certain of the financial covenants contained in the Prudential Debt
Agreement. While the Company believes that it would have been able to
make required principal payments
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<PAGE>
of $2 million on the Senior Notes in May 1994, it does not believe it
would have been able to make required principal payments of $5 million on
the Revolving Credit Note and an additional principal payment of $2
million on the Senior Notes in 1994 and additional principal payments
under the Prudential Debt Agreement of $5.5 million in 1995. Upon a
payment default, the Company could be forced into an immediate bankruptcy
proceeding seeking reorganization or liquidation or, alternatively, the
Company could pursue an "out-of-court" bankruptcy-type reorganization to
obtain protection from creditors. The Board believes that a
reorganization is a significantly less desirable alternative for a
service-intensive business that relies primarily on independent agents and
its reputation in the industry and that there is a significant risk that
the holders of Common Stock would be left with negligible value after a
reorganization or liquidation in bankruptcy. To the extent that the
Company's assets are less than its liabilities, in a reorganization or
liquidation the holders of Common Stock would not be expected to receive
any value. Therefore, the Board believes that the Stockholders will
retain a greater percentage interest in the Company following the
Restructuring than they would after a reorganization or liquidation in
bankruptcy.
7. RECOMMENDATION OF MANAGEMENT. The Board took into account
the view of the management that the Financing Transactions are in the best
interests of the Company and the Stockholders when considered in their
entirety and when compared to other alternatives. Management's view was
based on its belief that without an infusion of capital the Company could
not survive as a viable business entity even if extensions or forbearance
could be obtained on the Prudential debt.
8. FAIRNESS OPINION OF ROBERT FLEMING INC.. The Board took
into account the opinion of Robert Fleming Inc. ("Flemings") that the
consideration to be paid by the Company to Warburg and Prudential for
their participation in the Financing Transactions, the form and
methodology of the Financing Transactions and the terms of the Financing
Transactions are fair, from a financial point of view, to the Company and
the Common Stockholders. See "--Fairness Opinion."
FAIRNESS OPINION
In April 1994, the Company retained Flemings to render to the Board
an opinion as to the fairness, from a financial point of view, to the Company
and the Common Stockholders (other than Warburg, Purdential and Hanauer) of the
terms of the Financing Transactions. Flemings was not retained to provide
financial advisory services to the Company with respect to the Financing
Transactions or any alternatives thereto. At the May 10, 1994 meeting of the
Board, at the request of the Company, Flemings orally delivered the substance
of its written opinion that, on and as of the date of such opinion and based
upon and subject to the assumptions and circumstances described in such opinion,
(i) the consideration to be paid by the Company to Warburg and Prudential for
their participation in the Financing Transactions and the form, methodology and
terms of the Financing Transactions were fair, from a financial point of view,
to the Company and the Common Stockholders of the Company (other than Warburg,
Prudential and Hanauer) and (ii) Flemings was not requested and did not give
any opinion to the Board regarding the exercise price of the Rights in the
Rights Offering. No limitations were imposed by the Company on the scope of
Flemings' investigation or the procedures followed by Flemings in rendering
its opinion. Flemings was
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<PAGE>
not requested and did not make any recommendation to the Board as to terms of
the Financing Transactions, which were determined through arm's-length
negotiations among the parties. Flemings' opinion does not constitute a
recommendation to any Stockholder of the Company as to how such Stockholder
should vote with respect to the Financing Transactions. In addition, Flemings'
opinion does not address the Company's business decision to proceed with or
enter into the Financing Transactions or the effect of the Financing
Transactions on the future market value of shares of Common Stock of the
Company. A copy of the opinion of Flemings dated as of May 10, 1994 is attached
to this Proxy Statement as Appendix B and is incorporated by reference herein.
HOLDERS OF COMMON STOCK OF THE COMPANY ARE URGED TO READ THE OPINION IN ITS
ENTIRETY FOR A DESCRIPTION OF FACTORS CONSIDERED AND ASSUMPTIONS MADE BY
FLEMINGS IN RENDERING ITS OPINION.
In connection with rendering its opinion, Flemings reviewed and
analyzed, among other things, (i) drafts of this Proxy Statement and the
registration statement related to the Rights Offering, and such other publicly
available information concerning the Company which Flemings believed to be
relevant to its inquiry, (ii) financial and operating information with respect
to the business, operations and prospects of the Company furnished to Flemings
by the Company, (iii) a trading history of the Common Stock and a comparison of
that trading history and various valuation measures with those of other
companies which Flemings deemed relevant, (iv) a comparison of the historical
financial results and present financial condition of the Company with those of
other companies which Flemings deemed relevant, and (v) a comparison of the
financial terms of the Financing Transactions with the terms of certain other
recent transactions which Flemings deemed relevant. In addition, Flemings had
discussions with the management of the Company concerning its business,
operations, assets, financial condition and prospects and undertook such other
studies, analyses and investigations as Flemings deemed appropriate.
In rendering its opinion, Flemings also considered (i) the Company's
need for an immediate cash infusion in order to remain financially and
operationally viable and to retain key employees, (ii) the limited sources of
capital available for investment in real estate business generally and (iii) the
dilutive effect of the Financing Transactions which would be experienced by
holders of outstanding Common Stock.
In rendering its opinion, Flemings assumed and relied upon the
accuracy and completeness of the financial and other information provided by the
Company and used by Flemings in arriving at its opinion without independent
verification. In arriving at its opinion, Flemings did not conduct a physical
inspection of the properties and facilities of the Company, did not meet with
agents from any of the sales offices of the Company, and did not make or obtain
any evaluations or appraisals of the assets or liabilities of the Company.
Flemings' opinion was based on market, economic and other conditions as they
existed on, and could be evaluated as of, the date thereof. Flemings' opinion
assumes that Warburg, Prudential and Hanauer effected a change in control of the
Company in the Restructuring in 1993. Regarding the exercise price of the
Rights for the Rights Offering, Flemings was not requested and did not give any
opinion to the Board, and its opinion does not constitute a recommendation to
any Stockholder of the Company as to how such Stockholder should vote with
respect to approving the Financing Transactions or whether or not such
Stockholder should participate in the Rights Offering, if approved.
Flemings is an internationally recognized investment banking firm
and, as part of its investment banking activities, Flemings is regularly engaged
in the evaluation of businesses and their securities in connection with mergers
and acquisitions, negotiated
23
<PAGE>
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate, estate and other
purposes. The Board selected Flemings to render an opinion because of its
expertise, reputation and familiarity with rights offering transactions.
Prior to this engagement, the Company had no prior business
relationship with Flemings. Flemings has acted as financial advisor for other
companies in which Warburg or its affiliates have significant or controlling
interests. As compensation for the rendering of its opinion, the Company has
paid Flemings a retainer fee of $10,000 and paid Flemings an additional fee of
$65,000 upon delivery of the fairness opinion. In addition, the Company has
agreed to indemnify Flemings against certain liabilities to which Flemings may
become subject in connection the rendering of its opinion, including liabilities
that may arise under the federal securities laws.
TERMS OF THE FINANCING TRANSACTIONS
BRIDGE LOAN AGREEMENT
On March 29, 1994, Warburg and the Company entered into a Loan and
Security Agreement (the "Bridge Loan Agreement") pursuant to which Warburg has
agreed to make advances to the Company from time to time in an aggregate
principal amount for all such advances outstanding not to exceed $10 million at
any time (the "Bridge Loan"). The outstanding principal amount of the Bridge
Loan bears interest at a rate of 5% per annum. If the Company does not obtain
Stockholder approval for additional financing to retire the Bridge Loan, such as
the Rights Offering, by December 31, 1994, then the outstanding principal amount
of the Bridge Loan will bear interest at 10% per annum retroactive to the date
of the first advance under the Bridge Loan Agreement. All outstanding principal
and interest on the Bridge Loan mature on April 28, 1995. As of June 1, 1994,
the Company had borrowed $6 million under the Bridge Loan.
Pursuant to the Bridge Loan Agreement, the Company has established a
system pursuant to which all commercial brokerage commissions are deposited into
a cash collateral account. The Company's obligations under the Bridge Loan
Agreement are secured by the cash collateral account and all rights to payment
in respect of all commercial real estate brokerage fees and commissions due to
the Company or any of its subsidiaries in connection with the commercial real
estate brokerage operations of the Company and its subsidiaries. Prior to the
existence of an event of default under the Bridge Loan Agreement and delivery of
the requisite notice of blockage of the cash collateral account (a "Notice of
Blockage"), the Company may make withdrawals from the cash collateral account,
and may use the proceeds from the Bridge Loan, for any general corporate purpose
other than certain Prohibited Uses. "Prohibited Uses" include uses of proceeds
for (i) the satisfaction of a judgment or other award of damages in excess of
$1 million in any one case or group of consolidated cases, (ii) annual capital
expenditures in excess of the greater of $5,000,000 or two times the Company's
consolidated total assets, (iii) severance payments to a single employee of the
Company or any subsidiary in excess of $1 million, or (iv) payment in respect of
any lease of real property entered into after the date of the Bridge Loan
Agreement if the aggregate rent required under such lease during its term
exceeds $5 million. After the delivery of a Notice of Blockage, the right of
the Company to make any withdrawal from the cash collateral account will be
terminated and Warburg's security interest in the cash collateral account will
be subordinated in right of payment to the extent of the proceeds in the cash
collateral account to the prior payment of commissions to be paid to real
estate
24
<PAGE>
agents and brokers as compensation for the commercial real estate brokerage
operations that gave rise to the brokerage commissions collected by the Company.
Pursuant to an amendment to the Prudential Debt Agreement, the Company has
granted Prudential a lien on the cash collateral account to secure the Company's
obligations under the Prudential Debt Agreement. Prudential's lien is
subordinated to Warburg's lien.
Pursuant to the Bridge Loan Agreement, the Company is subject to
various affirmative and negative covenants, including a prohibition from
entering into guarantees of new liabilities and from pledging any Company assets
as security for any liabilities or obligations of any other person.
Upon an event of default, indebtedness under the Bridge Loan
Agreement, at Warburg's option, will become immediately due and Warburg will not
have any further obligation to make advances under the Bridge Loan Agreement.
An event of default under the Bridge Loan Agreement includes (i) the Company's
failure to pay principal, interest, fees or other amounts due under the Bridge
Loan Agreement, (ii) any material default under the Company's other loan
agreements or delivery by Prudential of a Notice of Blockage after an event of
default under the Prudential Debt Agreement, (iii) a money judgment, writ or
warrant of attachment or similar process involving any individual case in an
amount in excess of $1 million or in the aggregate at any time in an amount in
excess of $3 million (in either case not adequately covered by insurance as to
which an insurance company has acknowledged coverage) which shall have been
entered or filed against the Company or any of its subsidiaries or any of their
respective assets and shall remain undischarged for a period of 60 days, (iv)
the Company becoming insolvent, filing for bankruptcy or similar events, and (v)
a material adverse change in the condition (financial or otherwise), operations,
properties or performance of the Company or any other event which Warburg
reasonably and in good faith believes impairs, or is substantially likely to
impair either the prospect of payment or performance by the Company of its
obligations, or the rights and remedies of Warburg, under the Bridge Loan
Agreement or related documents.
PRUDENTIAL DEBT AGREEMENT
Pursuant to the Restructuring, Prudential and the Company entered
into the Prudential Debt Agreement, pursuant to which the Company issued $10
million of the Senior Notes and approximately $9 million of the PIK Notes.
Semi-annual interest payments are required pursuant to both the Senior Notes and
the PIK Notes, although until all of the Senior Notes have been retired, the
interest on the PIK Notes may be paid in kind, by the issuance of additional PIK
Notes. Annual principal payments are required in the amount of (i) $2 million
on November 1 of each of 1993 and 1994 with respect to the Senior Notes, (ii) $3
million on November 1 of each of 1995 and 1996, also with respect to the Senior
Notes, (iii) one third of the principal amount of the PIK Notes on November 1 of
each of 1997 and 1998, and (iv) all remaining outstanding principal amounts of
PIK Notes on November 1, 1999. All annual principal payments also will include
accrued and unpaid interest on the principal so paid. The Company was unable to
make the principal payment due on the Senior Notes on November 1, 1993, and
Prudential agreed to defer such payment until May 1, 1994.
Pursuant to the Prudential Debt Agreement, the Company also issued
Prudential the $5 million Revolving Credit Note. The Revolving Credit Note
bears interest at 2.5% above LIBOR, which interest is payable quarterly. During
one sixty consecutive-day period during 1994, the Company will be required to
pay down in full, and make no
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additional borrowings pursuant to, or permit any fees to be outstanding with
respect to, the Revolving Credit Note (the "Pay Down Provision"). After the
expiration of such sixty-day period, the full $5 million may once again become
available. Additionally, upon maturity, the Company may have the option of
converting the Revolving Credit Note into a new term note, which would mature on
December 31, 1996 (the "Converted Term Note"). The Converted Term Note would
have an interest rate of LIBOR plus 3% and mature on December 31, 1996, and
require semi-annual principal payments (payable on June 30 and December 31 of
each of 1995 and 1996) of $1,250,000.
The Prudential Debt Agreement contains a provision whereby if the
Company or any subsidiary pays a liability, or (upon certain circumstances)
becomes obligated to pay liabilities, in excess of $1,500,000, any of which
arise out of a single event (or a series of related events) and relate to
certain liabilities or contingent liabilities (other than for borrowed money) of
certain partnerships or joint ventures in which the Company or any subsidiary
owns or owned an interest, then, upon notice to Prudential, Prudential will
defer certain of the principal (but not interest) payments on the Senior Notes
or the Revolving Credit Note. Principal payments will be deferred in an amount
equal to the lesser of (i) $3,000,000 and (ii) the amount by which the relevant
liability exceeds $1,500,000. Any amounts deferred will have to be repaid after
the earlier to occur of (i) five years from the date of the deferral notice and
(ii) the maturity of the Senior Notes.
The Prudential Debt Agreement contains significant restrictions on
the payment of cash dividends on and repurchases of stock of the Company. The
Prudential Debt Agreement also contains significant restrictions on the
Company's (and certain of its subsidiaries') ability to, among other things,
(i) incur debt and liens upon their properties, (ii) enter into guarantees and
make loans, investments and advances, (iii) merge or enter into similar business
combinations, (iv) conduct any business other than their present businesses,
(v) sell assets, including receivables, and (vi) enter into certain other
transactions. Further, the Company's ability to make capital expenditures and
purchase the stock or assets of any other person or entity during the term of
the Prudential Debt Agreement will be limited to the aggregate of $10 million
plus additional amounts based upon, among other things, the Company's earnings
(or minus the Company's losses) and other proceeds as defined by the Prudential
Debt Agreement.
The Prudential Debt Agreement contains various other covenants. For
example, the Prudential Debt Agreement requires that the Company (combined with
certain of its subsidiaries and taken as a whole) must (i) maintain a ratio (the
"Working Capital Ratio") of Consolidated Current Assets to Consolidated Current
Liabilities (as such terms are defined in the Prudential Debt Agreement),
excluding the current portion of long-term debt, of at least 1:1 at the end of
each of its fiscal quarters, (ii) not permit the sum of the net loss before
interest, taxes, depreciation, amortization and non-recurring items and
excluding certain other items (a "Cumulative Loss") to exceed $4 million as of
December 31, 1993, and $6 million as of the end of each fiscal quarter after the
fiscal quarter ended December 31, 1993 for any two consecutive fiscal quarters.
As of December 31, 1993, the Company was not in compliance with the Working
Capital Ratio requirement.
On March 28, 1994, in connection with the negotiation of the
Financing Transactions, Prudential agreed to waive the Company's failure to
comply with the Working Capital Ratio as of December 31, 1993, and waived
certain provisions relating to certain asset sales and incurrence of debt that
the Company had made during 1993. Prudential also agreed to waive the Company's
obligations to pay principal amounts under the Prudential
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Debt Agreement (including the payment of $2 million principal amount on the
Senior Notes due in May 1994) and compliance with the Working Capital Ratio
requirement, the Cumulative Loss requirement, restrictions on capital
expenditures and the Pay Down Provision with respect to the Revolving Credit
Note until the earlier of (i) execution of a definitive amendment to the
Prudential Debt Agreement or (ii) December 31, 1994. Prudential also waived any
provisions of the Prudential Debt Agreement which would have prohibited the
Company from entering into the Bridge Loan Agreement.
AMENDMENTS TO PRUDENTIAL DEBT AGREEMENT
Pursuant to the Financing Transactions, Prudential and the Company
will amend the Prudential Debt Agreement to provide that (i) $15 million
principal amount of the Senior Notes, the PIK Notes and the Revolving Credit
Note which would have been due from 1994 through 1996 will be deferred and no
principal payments will be required until November 1, 1997, and thereafter
(A) the Revolving Credit Note will mature on November 1, 1999, (B) principal on
the Senior Notes will be payable in two equal installments on November 1 of each
of 1997 and 1998, and (C) principal on the PIK Notes will be payable in two
approximately equal installments on November 1 of each of 2000 and 2001,
(ii) the interest rate on the PIK Notes will increase from 10.65% to 11.65% per
annum on January 1, 1996, (iii) the Pay Down Provisions applicable to the
Revolving Credit Note and the covenants requiring the Company to maintain the
Working Capital Ratio, the Cumulative Loss provisions and covenants restricting
the Company's capital expenditures will be ineffective until April 1, 1997,
(iv) as of April 1, 1997 and quarterly thereafter, the Company will be required
to maintain a ratio of EBITDA (as defined below) to total interest expense at
least 2:1 on a rolling 12-month basis, (v) commencing January 1, 1998, if in the
preceding year Adjusted Cash Flow (as defined below) exceeds $5 million, then
the Company will be required to make supplemental debt repayments in the
following year (50% on July 1 and 50% on October 1) in an amount equal to 75% of
such excess, with payments being applied to the PIK Notes in reverse order of
maturity, and (vi) the Company will not be required to use the proceeds of any
public offering to repay indebtedness under the Prudential Debt Agreement.
"Adjusted Cash Flow" is defined as earnings before interest, taxes, depreciation
and amortization ("EBITDA") less the sum of (a) pre-tax earnings of Axiom, net
of any debt repayments or dividend payments from Axiom, (b) interest paid in
cash, (c) taxes paid in cash, and (d) supplemental debt repayments made pursuant
to clause (v) above.
RIGHTS OFFERING AND WARBURG STAND-BY AGREEMENT
Subject to the approval of the Financing Transactions at the Annual
Meeting, the Company will distribute at no cost to Common Stockholders one right
(a "Right") for each share of Common Stock held of record on August 24, 1994.
Each Right will entitle the holder to purchase at a subscription price of $2.375
(the "Subscription Price") one share of Common Stock (the "Basic Subscription
Privilege"). The Rights will be nontransferable. The Rights will expire
approximately 30 days after issuance.
To the extent any shares of Common Stock offered pursuant to the
Rights Offering are not purchased pursuant to the Basic Subscription Privilege,
a Common Stockholder who exercises all of its Rights may oversubscribe at the
Subscription Price for additional shares of Common Stock up to a maximum number
equal to the number of shares of Common Stock held by such Common Stockholder as
of the record date for the Rights Offering, subject to proration (the
"Oversubscription Privilege").
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Warburg has entered into a Stand-by Agreement pursuant to which it
has agreed to purchase at the Subscription Price up to approximately 3,900,000
shares of Common Stock not purchased pursuant to the Basic Subscription
Privilege or the Oversubscription Privilege. Warburg will pay for such shares
through the cancellation of indebtedness of the Company outstanding under the
Bridge Loan, including accrued interest on the Bridge Loan. See "-- Summary of
Anticipated Effects of the Financing Transactions; Dilution." As of June 1,
1994, the Company had borrowed $6 million under the Bridge Loan. To the extent
needed to fulfill its stand-by commitment, Warburg will advance additional
amounts under the Bridge Loan immediately prior to the consummation of the
Financing Transactions.
The net proceeds to the Company from the sale of the Common Stock
offered pursuant to the Rights Offering are estimated to be approximately $10.1
million (assuming all of the shares of Common Stock reserved for issuance upon
exercise of Rights are purchased and after deducting estimated offering
expenses). Net cash proceeds from the Rights Offering will be used to retire
the Bridge Loan and to meet the Company's operational needs.
If Warburg is required to fulfill its entire standby commitment, all
indebtedness under the Bridge Loan will be retired as a result of Warburg's
purchase of approximately 3,900,000 shares of Common Stock for an aggregate of
$9,262,500, plus Warburg's exercise of its Contingent Warrants for an aggregate
price of $887,818.
THIS PROXY STATEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK TO BE ISSUED PURSUANT
TO THE RIGHTS OFFERING. A REGISTRATION STATEMENT RELATING TO SUCH SHARES OF
COMMON STOCK HAS BEEN FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE
COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. SHARES OF COMMON STOCK TO BE
ISSUED IN CONNECTION WITH THE RIGHTS OFFERING WILL NOT BE SOLD PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
ISSUANCE OF NEW WARRANTS
As consideration for providing the Bridge Loan, agreeing to acquire
unsubscribed shares of Common Stock in connection with the Rights Offering and
agreeing to the other transactions contemplated by the Financing Transactions,
the Company will issue Warburg warrants to purchase 325,000 shares of Common
Stock at an exercise price of $2.375 per share (the "Warburg 1994 Warrants").
As consideration for modifying the Prudential Debt Agreement with the Company,
waiving noncompliance with certain covenants and agreeing to the other
transactions contemplated by the Financing Transactions, the Company will issue
Prudential warrants to purchase 150,000 shares of Common Stock at an exercise
price of $2.375 per share (the "Prudential 1994 Warrants" and together with the
Warburg 1994 Warrants, the "New Warrants"). Any or all of the New Warrants may
be exercised at any time until five years after the date of issuance. The other
terms of the New Warrants will be the same as the Existing Warrants, after
giving effect to the amendments thereto which will be made in connection with
the Financing Transactions (including the elimination of the Warrant
Anti-Dilution Provisions).
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AMENDMENTS TO THE EXISTING WARRANTS
Warburg and Hanauer hold Existing Warrants to purchase an aggregate
of 500,000 shares of Common Stock at an initial exercise price of $5.00 per
share and Existing Warrants to purchase an aggregate of 200,000 shares at an
initial exercise price of $5.50 per share and Prudential holds Existing Warrants
to purchase 200,000 shares at an initial exercise price of $5.50 per share. Any
or all of the Existing Warrants may be exercised at any time until January 29,
1998, which is the fifth anniversary of the closing date of the Restructuring.
Payment of the aggregate exercise price may be made in cash or at the election
of the holder by delivering warrants, the value of which will be deemed to be
equal to the difference between the then current Market Price (as defined) per
share and the exercise price. Payment of the aggregate price of the Prudential
1993 Warrants may also be made by the cancellation by Prudential and the
delivery to the Company of the Senior Notes, PIK Notes, the New Revolving Credit
Note or Converted Term Note or by cancellation of accrued and unpaid interest
thereon.
The exercise price and the number of shares of Common Stock issuable
upon exercise of each Existing Warrant are subject to adjustment from time to
time upon the occurrence of certain stock dividends or distributions, stock
splits, reverse stock splits, certain issuances of rights, options, warrants or
securities directly or indirectly convertible into Common Stock at a price per
share less than the greater of the current Market Price or the exercise price
per share on the date of such issue, certain extraordinary dividends or
distributions to all holders of Common Stock, and certain issuances of Common
Stock for a consideration per share less than the greater of the current market
price or the exercise price per share on the date of such issue (the "Warrant
Anti-Dilution Provisions"). Upon consummation of the Financing Transactions,
the Warrant Anti-Dilution Provisions contained in the Existing Warrants held by
Warburg and Prudential will be amended to provide that in the event of certain
stock dividends or distributions, stock splits, reverse stock splits and stock
reclassifications, mergers, consolidations or similar transactions, each holder
of such Existing Warrants will have the right to receive upon exercise the
number and kind of shares or other securities or property which it would have
been entitled to receive had the Existing Warrants been exercised immediately
prior to such event. As amended, the Existing Warrants held by Warburg and
Prudential no longer will have the benefit of receiving adjustments to the
exercise price and number of shares issuable upon exercise in the event of
certain dilutive stock issuances, including issuances of rights, options,
warrants or securities convertible into Common Stock at a price per share less
than the greater of the current market price or the exercise price per share.
Pursuant to the Warrant Anti-Dilution Provisions, the issuance of
shares of Common Stock pursuant to the Rights Offering and upon exercise of
Contingent Warrants would result in an adjustment in both the exercise price and
the number of shares issuable upon exercise of all of the Existing Warrants. In
particular, for Existing Warrants with an exercise price of $5.00 per share, the
exercise price would be adjusted to approximately $3.65 per share, and for
Existing Warrants with an exercise price of $5.50 per share, the exercise price
would be adjusted to approximately $3.88 per share, and the number of shares
issuable upon exercise would be proportionately increased. Pursuant to
agreements among Warburg, Prudential and the Company, the exercise prices of the
Existing Warrants held by Warburg and Prudential will be reduced to $3.50 per
share, the number of shares issuable upon exercise of the Warburg 1993 Warrants
will be adjusted only to extent of the proportionate adjustment provided for in
the Warrant Anti-Dilution Provisions, and the number of shares issuable upon
exercise of the Prudential 1993 Warrants will not be subject
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to any adjustment. Therefore, upon consummation of the Financing Transactions,
and assuming the issuance of all shares reserved for issuance in the Rights
Offering, Warburg's $5.00 Warrants to purchase 340,000 will be exchanged for
warrants to purchase approximately 466,000 shares of Common Stock at $3.50 per
share, Warburg's $5.50 Warrants to purchase 142,000 shares will be exchanged for
warrants to purchase approximately 201,000 shares of Common Stock at $3.50 per
share, and the Prudential 1993 Warrants will be exchanged for warrants to
purchase 200,000 shares of Common Stock at $3.50 per share. The exact
adjustments to the number of shares issuable upon exercise of the Existing
Warrants held by Warburg will be based on, among other things, the number of
shares of Common Stock issued in the Rights Offering.
In connection with the Restructuring, the Company also issued
Existing Warrants to Hanauer. Pursuant to the Warrant Anti-Dilution Provisions,
and assuming the issuance of all shares reserved for issuance in the Rights
Offering, the current exercise prices of $5.00 and $5.50 per share of Hanauer's
Existing Warrants will be adjusted to approximately $3.65 and $3.88 per share,
respectively, and the number of shares of Common Stock issuable upon exercise of
such warrants will be increased proportionately from 160,000 and 58,000 shares,
respectively, to approximately 219,000 and 82,000 shares of Common Stock,
respectively, upon consummation of the Financing Transactions. The exact
adjustments will be based on, among other things, the number of shares of Common
Stock issued in the Rights Offering.
EXERCISE OF CONTINGENT WARRANTS
Upon consummation of the Restructuring, Warburg and Hanauer acquired
Contingent Warrants to purchase 373,818 and 26,182 shares of Common Stock,
respectively, at an exercise price of $5.00 per share, which Contingent Warrants
will become exercisable for a period of 90 days in the event that Warburg and
Hanauer are notified that the Company or any subsidiary pays a liability
("Contingent Liability") or becomes obligated to pay a liability which
(a) exceeds $1,500,000 and (b)(i) arises out of a single event, occurrence or
proceeding (or a series of events, occurrences or proceedings which arise out of
or present the same factual issues) and (ii) relates to any partnership
liability of any partnership or joint venture in which the Company or any
subsidiary owns or owned, directly or indirectly, any partnership or other
equity interest, or of which the Company or any subsidiary is or was a general
partner, other than indebtedness for borrowed money, which partnership liability
is identified on the disclosure schedule to the Purchase Agreement which was
executed in connection with the Restructuring. Warburg and Hanauer have the
right to exercise all or a portion of their respective Contingent Warrants up to
an aggregate exercise price equal to the lesser of (x) the amount by which such
liability exceeds $500,000 and (y) $5.00 multiplied by the number of shares
issuable upon exercise of the Contingent Warrants. In the event that Hanauer
determines not to exercise his Contingent Warrants, he has agreed to offer them
to Warburg for an aggregate consideration of $1.00. The other terms of the
Contingent Warrants, including the anti-dilution provisions, are the same as
those contained in the Existing Warrants. In 1994, the Company incurred a
Contingent Liability and the Contingent Warrants have therefore become
exercisable. It is expected that Hanauer will not exercise his Contingent
Warrants at this time, and it is also expected that Warburg will not acquire
Hanauer's Contingent Warrants.
Upon consummation of the Financing Transactions, the exercise price
of the Contingent Warrants held by Warburg will be reduced to $2.375 per share
(the same price as the Subscription Price of the Rights to be distributed to
Common Stockholders in the Rights
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Offering) and those Contingent Warrants will continue to represent the right to
purchase 373,818 shares of Common Stock. Concurrently with the consummation of
the Rights Offering, Warburg will exercise all of its Contingent Warrants and
pay the aggregate exercise price of $887,818 through the cancellation of
indebtedness under the Bridge Loan.
Pursuant to the anti-dilution provisions in the Contingent Warrants
held by Hanauer, and assuming the issuance of all shares reserved for issuance
in the Rights Offering, the current exercise price of $5.00 per share will be
adjusted to approximately $3.65 per share, and the number of shares of Common
Stock issuable upon exercise of such warrants will be increased proportionately
from 26,182 shares to approximately 35,867 shares of Common Stock following
consummation of the Financing Transactions. The exact adjustments will be based
on, among other things, the number of shares of Common Stock issued in the
Rights Offering. Had the Company, Warburg and Prudential not agreed to fix the
exercise price of the Contingent Warrants held by Warburg to $2.375 per share
upon consummation of the Financing Transactions and to not increase the number
of shares issuable upon exercise, the exercise price of Warburg's Contingent
Warrants and number of shares issuable upon exercise would have been adjusted in
the same manner as the Contingent Warrants held by Hanauer.
AMENDMENTS TO PREFERRED STOCK
Upon consummation of the Restructuring, the Company issued Warburg
and Hanauer 128,266 and 8,894 shares of Senior Preferred Stock and issued to
Prudential 150,000 shares of Junior Preferred Stock. Upon consummation of the
Financing Transactions, the terms of the Preferred Stock will be amended to,
among other things, eliminate the mandatory redemption provisions, except under
certain limited circumstances, increase the dividend rates beginning in 2002
and, with respect to the Preferred Stock held by Warburg and Prudential, amend
the anti-dilution provisions. Stockholders are being asked to vote separately
on the proposed amendments to the Preferred Stock. For a description of the
existing terms of the Preferred Stock and the proposed amendments, see "Proposal
No. 2: Amendments to Preferred Stock."
STOCKHOLDERS' AGREEMENT
Upon consummation of the Restructuring, the Company, Warburg,
Hanauer and Prudential entered into the Stockholders' Agreement dated January
29, 1993 and amended July 1, 1993 (the "Stockholders' Agreement").
VOTING AGREEMENT. Pursuant to the Stockholders' Agreement, at any
special or annual meeting of Stockholders at which Directors are to be elected
or in connection with a solicitation of consents through which Directors are to
be elected, each "Stockholder" (as defined below) is required to vote (or give a
written consent with respect to) all of its shares of Capital Stock in favor of:
(i) the election to the Board of one nominee designated by Prudential (the
"Prudential Nominee") and two nominees designated by Warburg (the "Warburg
Nominees"); and (ii) the election to the Board of such other nominees, not
running in opposition to the Prudential Nominees or to the Warburg Nominees, who
shall have been selected or approved as such by the Board. Warburg or
Prudential may at any time cause the Stockholders' Agreement to be amended so
that the required number of Prudential Nominees is increased to two and the
required number of Warburg Nominees is increased to three. Prudential and
Warburg will not be obligated to comply with the foregoing provisions if the
Board has failed, in the case of Prudential, to nominate for election to the
Board the
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required number of Prudential Nominees after being requested to do so by
Prudential, or has failed, in the case of Warburg, to nominate for election to
the Board the required number of Warburg Nominees after being requested to do so
by Warburg. "Stockholder" is currently defined in the Stockholders' Agreement
to mean Warburg, Prudential and any other person (except Hanauer) who agrees to
be bound by the terms of the Stockholders' Agreement, provided that no person
shall be a "Stockholder" if such person ceases to beneficially own (x) at least
51% of the Senior Preferred Stock, Warburg 1993 Warrants and all issued Warburg
Registrable Securities (as defined below) or (y) at least 75% of the Junior
Preferred Stock, Prudential $5.50 Warrants and all issued Prudential Registrable
Securities (as defined below).
The Stockholders' Agreement also provides that each "Stockholder"
(i) will vote against removal of the other party's nominees (unless requested by
such party to vote for removal in which case it will do so), (ii) will exercise
its best efforts to cause its nominees on the Board to vote in favor of a
nominee of the other party to fill any vacancy on the Board created by the
resignation, removal or death of such party's nominee if the effect of failing
to so fill such vacancy would be that there would be less than one Prudential
Nominee or two Warburg Nominees remaining on the Board, and (iii) at any special
or annual meeting of Stockholders prior to the Company's 1995 annual meeting,
will vote (or give a written consent with respect to) all of its shares of
Capital Stock in favor of electing Hanauer as a Director or against removal of
Hanauer as a Director.
The provisions of the Stockholders' Agreement pertaining to voting
by Stockholders will terminate at such time as there is only one Stockholder.
In any event, the provisions of the Stockholders' Agreement with respect to
voting arrangements and restrictions will terminate no later than ten years from
the date of the Stockholders' Agreement in accordance with applicable law,
subject to extension by the agreement of the remaining parties to the
Stockholders' Agreement.
Pursuant to the Stockholders' Agreement, Reuben S. Leibowitz, John
D. Santoleri and Douglas M. Karp were Warburg Nominees, and Wilbert F. Schwartz
and John P. Mullman were Prudential Nominees who were elected to the Board in
January 1993. Mr. Karp and Mr. Mullman have resigned from the Board. In
February 1993, Mr. Schwartz became President and Chief Executive Officer of the
Company and was no longer a Prudential Nominee. Messrs. Leibowitz, Santoleri
and Schwartz have been nominated for election to the Board. See "Proposal No. 3
- - -- Election of Directors."
Upon consummation of the Financing Transactions, the definition of
"Stockholder" in the Stockholders' Agreement will be amended to mean Warburg,
Prudential and any other person (except Hanauer) who agrees to be bound by the
terms of the Stockholders' Agreement, provided that no person shall be a
"Stockholder" (as defined in the Stockholders' Agreement) if such person ceases
to beneficially own (x) at least 51% of the Senior Preferred Stock, Warburg 1993
Warrants, Warburg 1994 Warrants and all issued Warburg Registrable Securities or
(y) at least 75% of the Junior Preferred Stock, Prudential $5.50 Warrants,
Prudential 1994 Warrants and all issued Prudential Registrable Securities.
As a result of Prudential's current stock ownership, which is in
excess of 25% of the outstanding voting power, and certain of its rights under
the Stockholders' Agreement, the Company has been unable to comply with certain
regulations which would enable it to provide services to the Resolution Trust
Company (the "RTC") and the Federal Deposit Insurance Corporation (the "FDIC").
The Company is currently in contact with the RTC to
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determine what limits might be placed on Prudential in order to satisfy RTC
regulations. Prudential has expressed its willingness to enter into certain
amendments to the Stockholders' Agreement to eliminate one impediment to
resumption of the Company's contracting business with the RTC and the FDIC,
including (i) terminating the voting agreements contained in the Stockholders'
Agreement, (ii) waiving, but not relinquishing, its right to appoint Directors
until such time as Prudential's equity ownership in the Company will not impair
the Company's ability to perform government contracting services, and (iii) to
the extent that Prudential is entitled to cast more than 24.9% of the votes
which all Stockholders are eligible to cast on any matter, granting a proxy to
the Board to vote the excess shares (but only the excess shares) on such matter
in proportion to the vote thereon of all Stockholders other than Prudential.
Prudential will continue to have registration rights under the Stockholders'
Agreement as described below. For reasons unrelated to Prudential's equity
ownership, the Company currently is prohibited from entering into new service
contracts with the RTC and the FDIC. The Company plans to file a response to
the RTC's proposed exclusion. Both matters must be resolved before the Company
can be eligible to resume its RTC and FDIC contracting business. The Company is
unable to predict the outcome or timing of these matters or whether or when it
will be allowed to resume RTC and FDIC contracting services.
REGISTRATION RIGHTS. The Stockholders' Agreement provides that at
any time each of (i) the holders of at least 30% of the aggregate number (on the
date of the Stockholders' Agreement) of shares of Common Stock issued or
issuable upon conversion of any Senior Preferred Stock and all shares of Common
Stock issued or issuable upon exercise of any Existing Warrants and Contingent
Warrants issued to Warburg and Hanauer (collectively, the "Warburg Registrable
Securities"), may make three written requests to the Company for registration
under the Securities Act of all or part of such securities; provided, however,
that Warburg may make any of such three requests for registration regardless of
the percentage of Warburg Registrable Securities held by it, and (ii) each of
the holders of at least 30% of the aggregate number (on the date of the
Stockholders' Agreement) of shares of Common Stock issued upon exercise of the
Old Prudential Warrants, all shares of Common Stock issued or issuable upon
conversion of any Junior Preferred Stock and all shares of Common Stock issued
or issuable upon exercise of any Prudential $5.50 Warrants (collectively, the
"Prudential Registrable Securities") may make three written requests to the
Company for registration under the Securities Act of all or part of such
securities; provided, however, that Prudential may make any of such three
requests for registration regardless of the percentage of Prudential Registrable
Securities held by it.
The Stockholders' Agreement also provides that in the event a holder
of Warburg Registrable Securities requests a registration pursuant to the
foregoing provisions, Hanauer may elect to include a proportionate share of
Warburg Registrable Securities held by him in which case he will be permitted to
sell such Warburg Registrable Securities on the same terms as the holder of the
Warburg Registrable Securities requesting such registration.
Pursuant to the Stockholders' Agreement, holders of Warburg
Registrable Securities and Prudential Registrable Securities also have certain
"piggyback" registration rights to include their securities, subject to certain
limitations, in any other registration statement filed by the Company for its
own account or pursuant to any of the foregoing requests, or otherwise.
Whenever the Company effects a registration pursuant to the registration rights
provisions of the Stockholders' Agreement, the Company will be required to pay
the costs of such registration of securities, except that each selling
stockholder will bear its pro rata share of customary underwriting discounts and
commissions, the customary
33
<PAGE>
fees and expenses of its counsel and applicable transfer taxes. The
Stockholders' Agreement contains customary indemnification and contribution
provisions relating to the exercise by the holders of registrable securities of
their registration rights thereunder.
Upon consummation of the Financing Transactions, the Stockholders'
Agreement will be amended to extend the registration rights currently granted to
Warburg and Prudential to the Warburg 1994 Warrants and the Prudential 1994
Warrants to be issued in connection with the Financing Transactions, any shares
of Common Stock issued upon exercise of such Warrants and any shares of Common
Stock acquired by Warburg, Hanauer or Prudential, as the case may be, in
connection with the Rights Offering. Warburg, Prudential and Hanauer have not
requested that the Company include any Registrable Securities in the
registration statement which the Company filed in connection with the Rights
Offering.
SUMMARY OF ANTICIPATED EFFECTS OF THE FINANCING TRANSACTIONS; DILUTION
The Financing Transactions, if approved and implemented, will have a
material effect on the Company and on the holders of the Company's Common Stock.
The Financing Transactions may result in a significant dilution of the voting
interests of the Company's Common Stockholders, depending on the participation
of the Stockholders in the Rights Offering. Such dilution would reduce a Common
Stockholder's ownership interest in the Company.
The following tables set forth the equity ownership of the Company
prior to the consummation of the Financing Transactions and after the
consummation of the Financing Transactions, assuming that Common Stockholders
fully subscribe to the Rights Offering.
<TABLE>
<CAPTION>
After Financing Transactions
Assuming Common Stockholders
Before Financing Transactions(1) Purchase Shares in Rights Offering(3)
-------------------------------------- ----------------------------------------
Percent of Percent
Equity of Equity
Number of Assuming Number of Assuming
Common Percent Exercise of Common Percent All Warrants
Shares of Equity Warrants(2) Shares of Equity Exercised(4)
--------- --------- ----------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Public 3,994,000 34.3% 30.9% 8,385,000 49.7% 45.2%
Warburg 4,256,000 36.6 39.5 5,048,000 29.9 32.6
Hanauer 316,000 2.7 4.3 366,000 2.2 3.8
Prudential 3,072,000 26.4 25.3 3,072,000 18.2 18.4
---------- ----- ----- ---------- ----- -----
Total 11,638,000 100.0% 100.0% 16,872,000 100.0% 100.0%
<FN>
___________________
(1) Assumes conversion of the Senior Preferred Stock held by Warburg and
Hanauer into approximately 4,256,000 and 295,000 shares of Common Stock,
respectively. Assumes conversion of the Junior Preferred Stock held by
Prudential into approximately 2,675,000 shares of Common Stock. Holders
of the Senior Preferred Stock and the Junior Preferred Stock have one vote
for each share of Common Stock into which the Preferred Stock could be
converted. Does not assume exercise of stock options issued pursuant to
the Company's stock option plans.
(2) Assumes the exercise of Existing Warrants held by Warburg, Hanauer and
Prudential for 482,000, 218,000 and 200,000 shares of Common Stock,
respectively. Assumes the exercise of Contingent Warrants held by Warburg
and Hanauer for approximately 374,000 and 26,000 shares of Common Stock,
respectively.
(3) Assumes the purchase of all shares of Common Stock issuable upon exercise
of all Rights by Common Stockholders, other than Prudential, and the
exercise by Warburg of Contingent Warrants to purchase approximately
374,000 shares of Common Stock. Also assumes conversion of the Senior
Preferred Stock held by Warburg and Hanauer into 4,675,000 and 324,000
shares of Common Stock, respectively, and conversion of the Junior
Preferred Stock held by Prudential into approximately 2,675,000 shares of
Common Stock. Does not assume exercise of stock options issued pursuant
to the Company's stock option plans.
(4) Assumes (i) the exercise of Existing Warrants, as amended, held by
Warburg, Hanauer and Prudential for 667,000, 301,000 and 200,000 shares of
Common Stock, respectively, (ii) the exercise of New Warrants held by
Warburg and Prudential for 325,000
</TABLE>
34
<PAGE>
and 150,000 shares of Common Stock, respectively, and (iii) the exercise
of Contingent Warrants held by Hanauer for 36,000 shares of Common Stock.
The following table sets forth the equity ownership of the Company
after the consummation of the Financing Transactions, assuming that Common
Stockholders do not purchase any shares of Common Stock upon exercise of the
Rights, and that Warburg acquires 3,900,000 shares of Common Stock, which is
approximately the maximum number which it has agreed to acquire in connection
with the Rights Offering.
<TABLE>
<CAPTION>
After Financing Transactions
Assuming Common Stockholders Do Not
Purchase Shares in Rights Offering(1)
--------------------------------------
Percent
of Equity
Number of Assuming
Common Percent All Warrants
Shares of Equity Exercised(2)
---------- --------- ------------
<S> <C> <C> <C>
Public 1,994,000 24.5% 22.2%
Warburg 8,902,000 54.5 54.9
Hanauer 364,000 2.2 3.9
Prudential 3,072,000 18.8 19.0
---------- ----- -----
Total 16,332,000 100.0% 100.0%
<FN>
____________________
(1) Assumes acquisition by Warburg of 3,900,000 shares of Common Stock in
connection with the Rights Offering and the exercise by Warburg of
Contingent Warrants to purchase approximately 374,000 shares of Common
Stock. Also assumes conversion of the Senior Preferred Stock held by
Warburg and Hanauer into 4,639,000 and 322,000 shares of Common Stock,
respectively, the acquisition by Hanauer of approximately 21,000 shares of
Common Stock upon exercise of Rights and conversion of the Junior
Preferred Stock held by Prudential into approximately 2,675,000 shares of
Common Stock. Does not assume exercise of stock options issued pursuant
to the Company's stock option plans.
(2) Assumes (i) the exercise of Existing Warrants, as amended, held by
Warburg, Hanauer and Prudential for 654,000, 295,000 and 200,000 shares of
Common Stock, respectively, (ii) the exercise of New Warrants held by
Warburg and Prudential for 325,000 and 150,000 shares of Common Stock,
respectively, and (iii) the exercise of Contingent Warrants held by
Hanauer for 35,000 shares of Common Stock.
</TABLE>
RISK FACTORS AFTER THE FINANCING TRANSACTIONS
Even if the Financing Transactions are consummated, an investment in
the Company will be subject to a number of risks, certain of which are detailed
below.
CONTINUING REAL ESTATE RECESSION
The prolonged real estate recession continues to place severely
negative pressures on both the volume of transactions and prices for real
estate. Further declines in the volume of transactions and prices for real
estate could adversely and materially affect the Company's operating results,
cash flow and financial condition and could require the Company to discontinue
certain of its operations or sell additional assets. The Company has incurred
net losses in each of the last four fiscal years, and may, after completion of
the Financing Transactions, continue to incur operating losses. There can be no
assurance that after the Rights Offering the Company will be able to achieve
increased revenue or profitability.
CONTINUING LEVERAGE
After completion of the Financing Transactions, the Company will
continue to have substantial debt obligations of approximately $24 million under
the Prudential Debt
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<PAGE>
Agreement and will continue to have significant Preferred Stock dividend
obligations. Management believes that, after completion of the Financing
Transactions, it will have sufficient operating cash flow to pay interest and
scheduled amortization on all of its outstanding indebtedness. Assuming the
Financing Transactions are consummated, in 1994 the Company's obligations for
interest payments will be approximately $1.3 million. See "Proposal No. 1:
Financing Transactions -- Financing Transactions and Deferral of Debt Payments"
for a description of the Company's future obligations of principal payments.
However, even if the Financing Transactions are completed, the Company's ability
to meet its debt service obligations will depend on a number of factors,
including its ability to improve operating cash flow. There can be no assurance
that targeted levels of operating cash flow will actually be achieved. The
Company's ability to maintain or increase operating cash flow will be largely
dependent upon the real estate markets across the country.
LACK OF LIQUIDITY
The operating activities of the Company and the settlement of
various lawsuits which arose before existing management began operating the
Company continue to consume net cash. The Company believes that as a result of
the proceeds of the Rights Offering, the cost reduction programs already
implemented, the nonrecurring nature of lawsuits which generally arose out of
discontinued operations and the deferral of principal owed to Prudential, the
Company will have sufficient cash liquidity through 1994. In order for cash
flow from operating activities to be sufficient to sustain the Company's
operations beyond 1994, the Company must achieve an increase in revenue. There
can be no assurance that such an increase in revenue will occur or that it will
be sufficient to maintain adequate cash to continue operations beyond 1994.
THE ALTERNATIVE OF REORGANIZATION UNDER CHAPTER 11
If, in the future, the Company's financial forecasts indicate that
there is no longer a reasonable prospect for survival, the Company could be
required to restructure its financial affairs under the Federal Bankruptcy Code
or seek some other type of restructuring. If the Company were unable to meet
its debt service burden, the Company would be forced to seek protection from its
creditors under applicable federal bankruptcy laws. If this were to occur and
the Company were forced to reorganize or liquidate its assets, it is likely that
holders of Common Stock would receive little, if any, consideration in respect
of their shares. The Company believes that a reorganization under Chapter 11 is
a significantly less desirable alternative for a service-intensive business that
relies primarily on independent agents and its reputation in the industry.
POSSIBLE DECLINE OF STOCK PRICE
The issuance of approximately 4,412,000 shares pursuant to the
Rights Offering and 373,818 shares upon exercise of Warburg's Contingent
Warrants at $2.735 per share and the New Warrants to purchase 475,000 shares of
Common Stock at $2.375, which together would represent approximately 28% of the
equity of the Company on a fully diluted basis, could adversely affect the
market price of the Common Stock. On March 28, 1994, the last trading day prior
to the announcement of the Financing Transactions by the Company, the closing
sales price on the New York Stock Exchange (the "NYSE") was $3-3/8 per share.
On June , 1994, the closing sales price of the Common Stock on the NYSE
was _____ per share.
36
<PAGE>
DILUTION OF EXISTING COMMON STOCK
Upon consummation of the Financing Transactions, the percentage of
the Company's voting securities owned by existing Common Stockholders, other
than Prudential and Hanauer, could be reduced significantly on a fully diluted
basis. If the Financing Transactions are approved, and if Common Stockholders
do not participate in the Rights Offering, the outstanding voting power held by
such Common Stockholders will be reduced from approximately 34% to approximately
24% of the outstanding voting power of the Company. On a fully diluted basis,
assuming exercise of all outstanding warrants and conversion of Preferred Stock,
the outstanding voting power held by such Common Stockholders will be reduced
from approximately 31% to approximately 22% of the outstanding voting power of
the Company. See "-- Summary of Anticipated Effects of the Financing
Transactions; Dilution."
DILUTION UPON EXERCISE OF RIGHTS
The exercise price per Right significantly exceeds the Company's net
tangible book value per share as of March 31, 1994, after giving effect to the
completion of the Rights Offering and the other Financing Transactions. Based
on an exercise price of $2.375 per share, Common Stockholders who exercise
Rights would have experienced an immediate dilution in net tangible book value
of $6.52 per share and $5.06 per share assuming the exercise of all outstanding
warrants. See "Summary -- Historical and Pro Forma Capitalization."
CONTROLLING STOCKHOLDERS
Warburg currently holds approximately 36.6% of the outstanding
Capital Stock of the Company, and approximately 39.5% on a fully diluted basis
assuming the exercise of warrants. Following the completion of the Financing
Transactions, Warburg will hold between approximately 29.9% and approximately
54.5% of the outstanding Capital Stock of the Company, depending on the
participation of the Common Stockholders in the Rights Offering. On a fully
diluted basis, assuming exercise of all outstanding warrants, Warburg will hold
between approximately 32.6% and approximately 54.9% of the outstanding Capital
Stock of the Company, depending on the participation of the Common Stockholders
in the Rights Offering. Warburg, through ownership of its Senior Preferred
Stock and Common Stock and Board representation, is able to substantially
influence the management of the day-to-day operations and affairs of the
Company. In the event that Warburg controls more than 50% of the outstanding
voting power of the Company, Warburg will have the power to elect a majority of
its Directors (subject to its obligations under the Stockholders' Agreement) and
to approve any action requiring Stockholder approval, assuming compliance with
applicable Delaware law and the Certificate of Incorporation, including approval
of certain corporate transactions, including a merger or the sale of all or
substantially all of the Company's assets.
Prudential holds approximately 26.4% of the outstanding Capital
Stock of the Company (approximately 25.3% on a fully diluted basis assuming the
exercise of all warrants) and is the Company's principal lender. Following the
completion of the Financing Transactions, Prudential will hold approximately 18%
of the outstanding Capital Stock of the Company. As a significant institutional
investor in real estate, Prudential also utilizes the services of the Company
and its competitors on a regular basis. In 1993, Prudential, its affiliates and
franchisees paid the Company approximately $4.6 million during 1993 for
management of several of its properties and for leasing commissions. The
Company also
37
<PAGE>
rents office space in the ordinary course of business under a long-term lease
from a partnership of which Prudential is a general partner, paying
approximately $1,312,000 in rent during 1993. See "Executive Compensation --
Compensation Committee Interlocks and Insider Participation."
In considering the recommendation of the Board with respect to the
Financing Transactions, Common Stockholders should be aware that two of the
Board's six members have been nominated by Warburg and thus have certain
interests that are in addition to and may conflict with those of Common
Stockholders. In addition, Hanauer holds Preferred Stock and warrants which
will be subject to certain anti-dilution adjustments as a result of the
Financing Transactions.
ABSENCE OF DIVIDENDS
The Company does not anticipate paying any cash dividends in the
foreseeable future. The Prudential Debt Agreement contains provisions that
prohibit payment of cash dividends or distributions on the Common Stock. In
addition, unless full cumulative dividends have been paid on the Senior
Preferred Stock and the Junior Preferred Stock, the Company will not be entitled
to pay dividends on the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Financing Transactions, a total of
approximately 9,353,000 shares of Common Stock will be issuable upon conversion
of the Preferred Stock and upon exercise of outstanding warrants. The Company
also has stock option, purchase and other plans covering up to 1,650,000 shares
of Common Stock. Options to purchase 339,272 shares of Common Stock under the
stock option plans were outstanding as of June 1, 1994. If converted and
exercised, these shares of Preferred Stock and warrants and options, along with
the issuance of shares under other Company plans, would result in the issuance
of a substantial number of shares of Common Stock, thereby diluting the
proportionate equity interests of the holders of the Common Stock. No
prediction can be made as to the effect, if any, that future sales of shares, or
the availability of shares for future sales, will have on the market price of
the Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock (including shares issued upon the exercise of warrants or options),
or the perception that such sales could occur, could adversely affect
prevailing market prices for the Common Stock.
CONTINUED LISTING CRITERIA
There are certain quantitative and qualitative criteria for the
continued listing of the Common Stock on the NYSE. The Company does not now
meet several of the criteria, including a minimum level of net tangible assets
and three year average net income, and does not anticipate it will meet such
criteria after the Financing Transactions. In the event of delisting, the
Company will use its best efforts to have its Common Stock traded in another
market, such as the over-the-counter market. However, the delisting of the
Common Stock by the NYSE could have an adverse impact on the market price and
liquidity of the Common Stock.
38
<PAGE>
CERTAIN INCOME TAX CONSEQUENCES
The following summary of federal income tax consequences is based on
current law, is for general information only and is not based upon or supported
by a ruling of the Internal Revenue Service (the "Service"). The tax treatment
of a holder of Rights or Common Stock acquired on exercise of a Right may vary
depending upon his particular situation. Certain holders (including insurance
companies, tax-exempt organizations, financial institutions, broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States) may be subject to special rules not discussed below. EACH HOLDER SHOULD
CONSULT HIS OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OF
RECEIVING, HOLDING, EXERCISING AND DISPOSING OF THE RIGHTS OR COMMON STOCK,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, FOREIGN AND PENDING
TAX LAWS.
RIGHTS
RECEIPT OF RIGHTS. Pursuant to Section 305(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), a holder should not recognize
income for federal income tax purposes by reason of the receipt of a Right, and
the Company intends to so treat the distribution of Rights as a nontaxable
distribution.
If the Service were to take a contrary position with respect to this
matter, by deeming the distribution of Rights to constitute a taxable
distribution, a holder receiving a Right would recognize a dividend, taxable as
ordinary income, in an amount equal to the fair market value of the Right
received, but only to the extent of the current and accumulated earnings and
profits of the Company. To the extent the deemed distribution exceeds the
current and accumulated earnings and profits of the Company, such excess would
be treated first as a nontaxable recovery of adjusted tax basis in the Common
Stock with respect to which the Right was distributed and then as gain from the
sale or exchange of such Common Stock. A holder's tax basis in a Right received
in a taxable distribution would equal the fair market value of the Right as of
the date of distribution of the Right (the "Distribution Date").
Under the Company's intended treatment (i.e., a nontaxable
distribution), if a Right is exercised or sold, the tax basis of the Right in
the hands of a holder will be determined by allocating the holder's tax basis in
his shares of Common Stock with respect to which the Right was distributed
between such shares of Common Stock and the Right, in proportion to their
relative fair market values on the Distribution Date. If, however, the fair
market value of the Right on the Distribution Date is less than 15% of the fair
market value of the shares of Common Stock with respect to which the Right was
distributed, the holder's tax basis in the Right will be deemed to be zero
unless the holder affirmatively elects, in accordance with Treasury Regulations,
to apportion his tax basis in accordance with the preceding sentence. The
holding period of a Right will include the holding period for the shares of
Common Stock with respect to which the Right was distributed.
39
<PAGE>
EXERCISE OF RIGHTS. No gain or loss will be recognized by a
holder of Rights upon exercise of the Rights for cash. A holder who pays the
Subscription Price through surrender of Subordinated Notes may recognize gain to
the extent the Subscription Price exceeds the holder's tax basis in the
Subordinated Notes surrendered therefor. Additionally, a holder who pays the
Subscription Price through surrender of Subordinated Notes may be required to
recognize as ordinary income any accrued interest on the surrendered
Subordinated Notes that has not been taken into account previously as interest
income for tax purposes. The adjusted tax basis of a holder of Common Stock
acquired upon exercise of Rights will be equal to the sum of the holder's
adjusted tax basis in the exercised Rights and the Subscription Price. The
holding period for Common Stock acquired upon exercise of Rights will commence
on the date of such exercise.
EXPIRATION OF RIGHTS WITHOUT EXERCISE. If a holder of a Right
allows it to expire without exercise, the expiration will be treated as a sale
or exchange of the Right on the expiration date. Because an unexercised Right
should be treated upon expiration as having a zero basis in the hands of the
holder of the Right, such holder should not recognize loss as a result thereof.
DISPOSITION OF RIGHTS. The sale or other disposition of a Right
will result in the recognition of gain or loss by the holder in an amount equal
to the difference between the amount realized and the holder's adjusted tax
basis in the Right. Gain or loss will be capital gain or loss if the Common
Stock for which the Rights could be exercised was (or would be) a capital asset
in the hands of the holder, and will be long-term capital gain or loss if the
Common Stock with respect to which the Rights were distributed has a holding
period for tax purposes of more than one year.
ADJUSTMENT TO THE TERMS OF A RIGHT. An adjustment to the
Subscription Price of a Right, or the failure to make such an adjustment (and
possibly an adjustment to the number of shares of Common Stock purchasable upon
the exercise of the Right or the failure to make such an adjustment), in certain
circumstances may result in a distribution that could be taxable as a dividend
under the Code to the holder of the Right or the Common Stock. Alternatively, a
modification of the terms of a Right may be treated as a taxable exchange of the
Right for a new right to purchase Common Stock, with the holder recognizing gain
or loss (as discussed above), even though no cash may have been distributed to
the holder.
COMMON STOCK
DISPOSITION OF COMMON STOCK. The sale or other disposition of
Common Stock acquired on exercise of a Right will result in the recognition of
gain or loss by the holder of such Common Stock in an amount equal to the
difference between the amount realized and the holder's adjusted tax basis in
the Common Stock. Gain or loss will be capital gain or loss if the Common Stock
was held as a capital asset, and will be long-term capital gain or loss if the
Common Stock has a holding period for tax purposes of more than one year.
POTENTIAL LIMITATIONS ON USE OF LOSS CARRYFORWARDS
In general, upon a change of ownership, Section 382 of the Code
limits the amount of a loss corporation's taxable income that could be offset
annually by its carryforwards of net operating losses (and certain "built-in"
losses that are economically accrued but not recognized at the time of a change
of ownership) to an amount equal to the
40
<PAGE>
product obtained by multiplying the aggregate value of such corporation's
capital stock immediately prior to the requisite change of ownership by the
federal long-term tax-exempt interest rate. A change of ownership occurs and
Section 382 of the Code will apply if, within a three year "testing period,"
there is more than a 50 percentage point increase in the capital stock of the
loss corporation held by persons who own (actually or constructively) at least
five percent in value of the loss corporation's stock (with persons who
separately are less than five percent stockholders generally being treated in
the aggregate as a single stockholder). Except in limited circumstances,
options to acquire stock will be treated as if they had been exercised, on an
option-by-option basis, if such treatment results in the requisite change of
ownership.
Upon the reorganization of the Company in January 1993, a change of
ownership occurred for Section 382 purposes, which limited the availability of
any then existing net operating loss carryforwards and built-in losses of the
Company. Although the Company does not believe that the Rights Offering, of
itself, will trigger a change of ownership for purposes of Section 382 of the
Code, future events beyond the control of the Company, such as transactions in
its Common Stock or other ownership interests, could cause a change of ownership
and result in limitations on the use of losses by the Company. Therefore, there
can be no assurance that carryforwards of net operating loss (and certain
"built-in" loss, when recognized) of the Company will be available to offset
future income and tax liability of the Company.
BACKUP WITHHOLDING AND REPORTING REQUIREMENTS
A holder of Rights or Common Stock may be subject to backup
withholding at the rate of 31% with respect to dividends paid on and gross
proceeds from the sale or redemption of the Rights or Common Stock, unless the
holder (a) is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact or (b) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. Holders of Rights or Common Stock who do not provide the
Company with their correct taxpayer identification number may be subject to
penalties imposed by the Service. Any amount withheld under these rules will be
creditable against the holder's federal income tax liability.
The Company will report to the holders of Rights and Common Stock
and to the Service the amount of any "reportable payments" and any amount
withheld with respect to the Rights and Common Stock during each calendar year.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES
IS FOR GENERAL INFORMATION ONLY. ACCORDINGLY, EACH HOLDER OF RIGHTS AND COMMON
STOCK SHOULD CONSULT HIS OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF
THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE RIGHTS AND COMMON STOCK,
INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND PENDING TAX
LAWS.
NON-APPROVAL OF FINANCING TRANSACTIONS
In the event that the Financing Transactions are not approved by the
Stockholders, the Company will seek other equity financing and attempt to seek
other terms
41
<PAGE>
for restructuring the Prudential debt and the Bridge Loan. If the Financing
Transactions are not approved, and the Company is unsuccessful in obtaining
alternative equity financing and/or restructuring the Prudential debt, the
Company will be in default on certain of the financial covenants contained in
the Prudential Debt Agreement and expects it would default on the Senior Notes
and the Revolving Credit Note. The Company also expects that it would be unable
to pay its obligations under the Bridge Loan which matures in April 1995 and
would become due upon a default under the Prudential Debt Agreement. Upon such
payment defaults, Prudential and Warburg, among other things, could force the
Company into an immediate bankruptcy proceeding seeking reorganization or
liquidation or, alternatively, the Company could pursue an "out-of-court"
bankruptcy-type reorganization in order to obtain protection from creditors.
The Board believes that a reorganization is a significantly less desirable
alternative for a service-intensive business that relies primarily on the
independent agents and its reputation in the industry. See "-Reasons for the
Financing Transactions and Board's Recommendation."
USE OF PROCEEDS
The Company anticipates using the cash proceeds received by it from
the Financing Transactions for working capital and general corporate purposes.
THE BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
FINANCING TRANSACTIONS.
PROPOSAL 2: AMENDMENTS TO PREFERRED STOCK
In connection with the Financing Transactions, the Board unanimously
approved certain amendments to the terms of the Preferred Stock and directed
that such amendments be considered at the Annual Meeting. The amendments to the
Preferred Stock are an integral part of the Financing Transactions, and, for the
reasons set forth above, the Board believes that the amendments are in the best
interests of the Company and the Stockholders.
Proposal No. 2, amendments to the Preferred Stock, will be submitted
to the Stockholders for a vote only in the event that the Financing Transactions
are approved. In the event that the amendments to the Preferred Stock are not
approved, the Financing Transactions will not be effected.
Approval of Proposal No. 2 requires the affirmative vote of holders
of at least a majority of the outstanding shares of capital stock and the
approval of holders of at least two-thirds of the outstanding shares of Senior
Preferred Stock, voting as a separate class, and the approval of at least
two-thirds of the outstanding shares of Junior Preferred Stock, voting as a
separate class. Warburg and Hanauer, which are the only holders of Senior
Preferred Stock, and Prudential, which is the only holder of Junior Preferred
Stock, intend to vote all shares of Preferred Stock held by them in favor of
approval of the proposed amendments to the Preferred Stock.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE FOR THE AMENDMENTS TO THE PREFERRED STOCK.
DESCRIPTION OF PREFERRED STOCK
42
<PAGE>
SENIOR PREFERRED STOCK
The Senior Preferred Stock, with respect to dividend rights and
rights on redemption and/or liquidation, winding up and dissolution, ranks prior
to any other equity securities of the Company, including any other series of
Preferred Stock and the Common Stock. Holders of Senior Preferred Stock are
entitled to receive, out of any funds legally available therefor, cumulative
dividends payable in cash, at a rate of 12% per annum. Accrued but unpaid
dividends will increase at a compounding rate equal to 12% per annum compounded
annually. The effective dividend rate on the Senior Preferred Stock, net of
issuance costs, is 13% per annum. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of the shares
of Senior Preferred Stock will be entitled to be first paid out of the assets of
the Company available for distribution to the Stockholders an amount in cash
equal to $100.00 per share (the "Senior Stated Value") plus an amount equal to
all dividends (whether or not earned or declared) on such shares accrued and
unpaid thereon to the date of final distribution, before any payment shall be
made or any assets distributed to the holders of any other equity security of
the Company.
Each share of the Senior Preferred Stock is convertible, at the
option of the holder, at any time, into shares of Common Stock, which number of
shares is determined by dividing the Senior Stated Value by the conversion
price. Currently, the conversion price is $3.0137 per share of Common Stock.
Conversion of the 137,160 shares of Senior Preferred Stock would result in such
persons holding an aggregate of 4,551,201 shares of Common Stock. The Senior
Preferred Stock is subject to mandatory conversion in the event that (i) at all
times during a two-year period the ratio of consolidated debt to net income
before taxes, excluding extraordinary items, and income or loss from
discontinued operations plus total interest expense and depreciation and
amortization has not exceeded 3.0:1.0, (ii) on each trading day during a
six-month period the price of the Common Stock has exceeded $8.75 per share, and
(iii) the Company is in full compliance with the terms and conditions of all
agreements pursuant to which the Company has incurred indebtedness for borrowed
money.
JUNIOR PREFERRED STOCK
The Junior Preferred Stock, with respect to dividend rights and
rights on redemption and on liquidation, winding up or dissolution ranks prior
to any other equity securities of the Company, excluding the Senior Preferred
Stock. Holders of Junior Preferred Stock are entitled to receive, out of any
funds legally available therefor, cumulative dividends payable in cash at a rate
of 5% per annum. Accrued but unpaid dividends will increase at a compounding
rate equal to 5% per annum compounded annually. The effective dividend rate on
the Junior Preferred Stock, net of issuance costs, is 5.1% per annum. In the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, if assets are remaining after the payment in full of
the liquidation preference of the Senior Preferred Stock, the holders of the
shares of Junior Preferred Stock then outstanding will be next entitled to be
first paid out of the assets of the Company available for distribution to its
stockholders an amount in cash equal to $100.00 per share (the "Junior Stated
Value") plus an amount equal to all dividends (whether or not earned or
declared) on such shares accrued and unpaid thereon to the date of final
distribution, before any payment shall be made or any assets distributed to the
holders of any equity security of the Company.
43
<PAGE>
Each share of the Junior Preferred Stock is convertible into shares
of Common Stock, at the option of the holder, at any time, into shares of Common
Stock, which number of shares is determined by dividing the Junior Stated Value
by the conversion price. Currently, the conversion price is $5.6085 per share
of Common Stock. Conversion of the aggregate 150,000 shares of Junior Preferred
Stock would result in such persons holding an aggregate of 2,674,511 shares of
Common Stock. The Junior Preferred Stock is subject to mandatory conversion in
the event that (i) at all times during a two-year period the ratio of
consolidated debt to net income before taxes, excluding extraordinary items, and
income or loss from discontinued operations plus total interest expense and
depreciation and amortization has not exceeded 3.0:1.0, (ii) on each trading day
during a six-month period the price of the Common Stock has exceeded $8.75 per
share, and (iii) the Company is in full compliance with the terms and conditions
of all agreements pursuant to which the Company has incurred indebtedness for
borrowed money. Upon conversion, all accrued dividends are eliminated.
REDEMPTION PROVISIONS
On November 1, 2000, up to 50% of the shares of Senior Preferred
Stock issued at any time will be subject to mandatory redemption, with the
remaining shares subject to mandatory redemption on November 1, 2001, in each
case at the Senior Stated Value plus accrued and unpaid dividends and to the
extent the Company has the funds legally available therefor. Assuming full
satisfaction of the Company's mandatory redemption obligation with respect to
the Senior Preferred Stock, on November 1, 2000, 2001, 2002, and 2003, the
Company will be required to redeem 16.67%, 16.67%, 33.34% and all remaining
shares, respectively, of the Junior Preferred Stock, in each case at the Junior
Stated Value plus accrued and unpaid dividends and to the extent the Company has
the funds legally available therefor.
ANTI-DILUTION PROVISIONS
The conversion prices of the Senior Preferred Stock and the Junior
Preferred Stock are subject to adjustment from time to time upon the occurrence
of certain stock dividends or distributions, stock splits, reverse stock splits
and stock reclassifications. The conversion prices of the Senior Preferred
Stock and the Junior Preferred Stock also are subject to adjustment from time to
time upon the occurrence of certain issuances of rights, options, warrants or
securities directly or indirectly convertible into Common Stock at a price per
share less than the greater of the current market price or the conversion price
per share on the date of such issue, certain extraordinary dividends or
distributions to all holders of Common Stock, and certain issuances of Common
Stock for a consideration per share less than the greater of the current market
price or the conversion price per share on the date of such issue (the
"Preferred Stock Anti-Dilution Provisions"). The conversion price is not
subject to adjustment for accrued but unpaid dividends and upon conversion the
dividends are no longer payable.
VOTING RIGHTS
The Preferred Stock is entitled to vote on all matters submitted to
a vote of the Stockholders on an as-converted-to Common Stock basis. Without
the consent of two-thirds of the issued and outstanding shares of both the
Senior Preferred Stock and the Junior Preferred Stock, each voting separately as
a class, the Company may not (i) authorize or issue any class of shares ranking
on parity with or senior to either such security as to
44
<PAGE>
dividends, redemption or liquidation preference, (ii) increase the number of
authorized shares of, or issue such shares (except in payment of dividends) of
either such security, (iii) amend, alter, waive the application of or repeal
certain provisions of the Company's certificate of incorporation (the
"Certificate of Incorporation") or enter in any agreement or take any other
action which in any manner would alter, change or otherwise adversely affect the
powers, rights or preferences of either such security, (iv) effect a
reorganization, recapitalization, liquidation, dissolution, winding up, sale of
substantially all of the Company's assets or a merger, which transaction would
alter, change or adversely affect the powers, rights or privileges of the
security or (v) take any action which would cause a dividend to be deemed
received as either such security for certain purposes unless actually received.
The Certificate of Incorporation provides that the holders of Common Stock do
not have voting rights with respect to matters described in clauses (ii), (iii)
and (v) above, except as otherwise required by Delaware law.
AMENDMENTS TO PREFERRED STOCK
Upon consummation of the Financing Transactions, the Certificate of
Incorporation will be amended to effect certain amendments to the terms of the
Senior Preferred Stock held by Warburg and the Junior Preferred Stock. The
Senior Preferred Stock will be divided into two series, Series A and Series B.
The Series A Senior Convertible Preferred Stock, par value $.01 per share, will
be held by Hanauer and will be subject to certain amendments other than the
amendments to the Preferred Stock Anti-Dilution Provisions, and the Series B
Senior Convertible Preferred Stock, par value $.01 per share, will be held by
Warburg and will be subject to all of the proposed amendments. The amendments
to the Preferred Stock were agreed to by the parties in their negotiation of the
terms of the Financing Transactions. The following description of the proposed
amendments to the Preferred Stock is qualified in its entirety by reference to
the Amendment to Restated Certificate of Incorporation which is attached hereto
as Appendix A and is incorporated herein by reference. Stockholders should read
such amendment in its entirety.
AUTHORIZED PREFERRED STOCK
Currently, the Company is authorized to issue 1,000,000 shares of
Preferred Stock, of which 250,000 have been designated Senior Convertible
Preferred Stock and of which 200,000 have been designated Junior Convertible
Preferred Stock. Pursuant to the amendments, the Company will be authorized to
issue 1,000,000 shares of Preferred Stock, of which 50,000 will be designated
Series A Senior Convertible Preferred Stock, 200,000 will be designated Series B
Senior Convertible Preferred Stock and 200,000 will be designated Junior
Convertible Preferred Stock.
REDEMPTION PROVISIONS
The Senior Preferred Stock and the Junior Preferred Stock will be
amended to eliminate the mandatory redemption provisions, except that under
certain limited circumstances, the Company may be required to redeem the Junior
Preferred Stock in connection with an underwritten public offering of the
Company's Common Stock as described in "Conversion of Junior Preferred Stock"
below.
45
<PAGE>
ANTI-DILUTION PROVISIONS
As a result of the Financing Transactions and upon application of
the Preferred Stock Anti-Dilution Provisions, the conversion price of the Senior
Preferred Stock will be adjusted from $3.0137 to approximately $2.74 per share
of Common Stock, which will result in the Senior Preferred Stock held by Warburg
and Hanauer being convertible into an aggregate of approximately 4,675,000 and
324,000 shares of Common Stock, respectively. The exact adjustment will be
based on, among other things, the number of shares of Common Stock issued in the
Rights Offering. Prudential has agreed to waive the application of the
Preferred Stock Anti-Dilution Provisions in connection with the Financing
Transactions. As a result, the Junior Preferred Stock will continue to be
convertible into 2,674,511 shares of Common Stock and the conversion price will
remain at $5.6085 per share.
Upon consummation of the Financing Transactions, the Preferred Stock
Anti-Dilution Provisions contained in the Senior Preferred Stock held by Warburg
and the Junior Preferred Stock held by Prudential will be amended to provide
that in the event of certain stock dividends or distributions, stock splits,
reverse stock splits and stock reclassifications, mergers, consolidations or
similar transactions, each holder of such Preferred Stock will have the right to
receive upon conversion the number and kind of shares or other securities or
property which it would have been entitled to receive had the Preferred Stock
been converted immediately prior to such event. As amended, the Preferred Stock
held by Warburg and Prudential no longer will have the benefit of receiving an
adjustment to the number of shares issuable upon conversion in the event of
certain dilutive stock issuances, including issuances of rights, options,
warrants or securities convertible into Common Stock at a price per share less
than the greater of the current market price or the conversion price per share.
DIVIDEND RATE
The Junior Preferred Stock will be amended to increase the dividend
rate effective January 1, 2002 to 10% per annum with further increases of 1% per
annum effective January 1, 2003 and January 1, 2004 and 2% per annum effective
January 1, 2005 and each January 1 thereafter. Also in connection with the
Financing Transactions, the Senior Preferred Stock will be amended so that at
such time as the dividend rate on the Junior Preferred Stock would increase
above the dividend rate on such Senior Preferred Stock, the dividend rate on the
Senior Preferred Stock will increase by the same amount. Assuming no other
changes to the dividend rates of the Preferred Stock, as a result of these
amendments, the dividend rate on the Senior Preferred Stock held by Warburg will
increase by 2% per annum effective January 1, 2005.
CONVERSION OF JUNIOR PREFERRED STOCK
The Junior Preferred Stock will be amended to provide that in the
event that the Company undertakes to sell Common Stock in an underwritten public
offering and the Company's investment bankers advise the Company that in order
to complete the public offering on the most favorable terms to the Company it is
necessary to retire the Junior Preferred Stock, then the Company may direct all
holders of the Junior Preferred Stock to convert the Junior Preferred Stock;
provided that such holders will be obligated to convert only after the later of
the time Warburg has committed to convert its Senior Preferred Stock and the
consummation of such underwritten public offering. If the holders of the
Junior Preferred Stock are required to convert the Junior Preferred Stock at a
time when the Common Stock issuable upon conversion would have a value less
than the accreted value of
46
<PAGE>
the Junior Preferred Stock (including all unpaid dividends), then such holders
must either, at their option, require the Company to redeem the Junior
Preferred Stock at the accreted value or convert the Junior Preferred Stock.
DESCRIPTION OF COMMON STOCK
As of June 1, 1994, the Company was authorized to issue 25,000,000
shares of Common Stock and as of June 1, 1994 there were 4,412,358 shares
outstanding with a par value of $.01 per share. As of June 1, 1994, 1,650,000
shares were reserved for issuance under the Company's option, purchase and other
plans (of which options to purchase 339,272 shares of Common Stock were
outstanding under the Company's stock option plans), 60,000 shares were reserved
for the exercise of outstanding stock appreciation rights held by an executive
officer, and 8,525,700 additional shares of Common Stock were reserved for
issuance upon exercise or conversion of the Preferred Stock, the Existing
Warrants and the Contingent Warrants.
After consummation of the Financing Transactions, it is estimated
that there will be 9,199,000 shares outstanding (assuming 4,412,358 shares are
issued in connection with the Rights Offering and 373,818 shares are issued upon
Warburg's exercise of its Contingent Warrants), 1,650,000 shares reserved for
issuance under the Company's stock option, purchase and other plans, 60,000
shares reserved for the exercise of outstanding stock appreciation rights held
by an executive officer, and approximately 9,353,000 additional shares of Common
Stock reserved for issuance upon exercise or conversion of the Preferred Stock,
the Existing Warrants and the New Warrants. As a result of the foregoing, the
Company will have approximately 4,799,000 additional shares of Common Stock
available for other corporate purposes.
Except as set forth above, the holders of Common Stock of the
Company are entitled to one vote for each share of Common Stock held of record
on all matters submitted to a vote of the Stockholders. The holders of Common
Stock will continue to have all rights of stockholders permitted under Delaware
law except for and subject to those rights expressly granted to holders of the
Preferred Stock of the Company.
Warburg and Hanauer, on the one hand, and Prudential, on the other,
the holders of the Preferred Stock, have the right to vote as separate classes
on the amendments to the Preferred Stock, and all intend to vote all of their
shares of Preferred Stock in favor of the amendments.
THE BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
AMENDMENTS TO THE PREFERRED STOCK.
47
<PAGE>
MARKET FOR THE COMPANY'S STOCK
The principal markets for the Company's Common Stock are the NYSE
and the Pacific Stock Exchange. The following table sets forth the high and low
sales prices of the Company's Common Stock as reported on the NYSE composite
tape for the period indicated. The prices shown have been adjusted to give
retroactive effect to a one-for-five reverse stock split as of January 29, 1993.
<TABLE>
<CAPTION>
Price Range of
Common Stock
--------------
High Low
---- -----
<S> <C> <C>
1991
First Quarter........................................ $2-7/8 $1
Second Quarter....................................... 2-1/2 1-1/2
Third Quarter........................................ 2 1-3/8
Fourth Quarter....................................... 1-3/4 1-1/4
1992
First Quarter........................................ $2-1/2 $1-3/8
Second Quarter....................................... 2-1/8 1-1/4
Third Quarter........................................ 1-5/8 1
Fourth Quarter....................................... 1-1/4 7/8
1993
First Quarter........................................ $8 $1-7/8
Second Quarter....................................... 5-7/8 3-3/8
Third Quarter........................................ 4-1/2 2-3/4
Fourth Quarter....................................... 3-5/8 2-5/8
1994
First Quarter........................................ $3-7/8 $2-7/8
Second Quarter (through April 1994).................. 2-7/8 2-3/4
</TABLE>
On March 28, 1994, the last trading day prior to the announcement of
the Financing Transactions by the Company, the closing sales price of the Common
Stock on the NYSE was $3-3/8 per share. On __________________, 1994, the
closing sales price of the Common Stock on the NYSE was _____ per share.
The Company did not pay any cash dividends during the periods
indicated, and is prohibited from doing so under the Prudential Debt Agreement.
PROPOSAL NO. 3: ELECTION OF DIRECTORS
The Board of Directors currently consists of six Directors. John
Mullman, a representative of Prudential, resigned from the Board in January 1994
and Kenneth E. Field resigned from the Board as of May 10, 1994.
48
<PAGE>
The Board held ten meetings during the year ended December 31, 1993.
It has standing Audit and Compensation Committees, which are described below.
The Board does not have a Nominating Committee.
AUDIT COMMITTEE. The Audit Committee is responsible for
recommendation to the Board of the appointment of auditors; approval of the
scope of the annual audit; review of the audit results and compliance with the
auditors' recommendations; approval of non-audit services performed by the
auditors; review and recommendation with respect to financial reports to
stockholders and internal accounting and auditing controls; and monitoring
compliance with certain aspects of the Company's conflicts-of-interest policy.
The current members of the Audit Committee are Lawrence S. Bacow and R. David
Anacker. The Audit Committee held seven meetings during 1993.
COMPENSATION COMMITTEE. The functions of the Compensation
Committee are the approval of compensation arrangements for the executive
officers of the Company; proposing any compensation plans, including stock
plans, in which Directors and officers are eligible to participate; and
administration of the Company's stock plans and certain other compensation
plans. The current members of the Compensation Committee are Lawrence S. Bacow
and Reuben S. Leibowitz. During 1993, the Compensation Committee held five
meetings.
The names of the persons who have been nominated by the Board for
election as Directors at the Annual Meeting are set forth below. There are no
other nominees. Nominations for Director are made by written notice to the
Secretary of the Company, generally at least 14 days prior to the stockholders'
meeting at which directors are elected. All nominees have been Directors since
January 1993, except Mr. Anacker, who has been a Director since May 1994, and
all have consented to serve as Directors if elected.
If any nominee becomes unable to serve as a Director, the proxies
will be voted by the proxy holders for a substitute person nominated by the
Board, and authority to do so is included in the proxy. The Board has no reason
to believe that any of the nominees will be unable to serve as a Director of the
Company.
Pursuant to the Stockholders' Agreement, Messrs. Leibowitz and
Santoleri have been nominated by Warburg.
The term of office of each nominee who is elected extends until the
annual stockholders' meeting in 1995 and until his successor is elected and
qualified.
INFORMATION CONCERNING NOMINEES FOR DIRECTOR
Joe F. Hanauer, 56, Chairman of the Board of the Company, has, since
December 1988, been a general partner of Combined Investments, L.P., an
investment management business located in Laguna Beach, California, whose
investments include real estate. Since February 1993, Mr. Hanauer has served as
a director of certain subsidiaries of the Company and, through Combined
Investments, L.P., has also provided operational and management services to the
Company. From 1977 to December 1988, Mr. Hanauer was associated with Coldwell
Banker Residential Group, Inc., serving as Chairman and Chief Executive Officer
from 1984. Since March 1989, he has also been Chairman of the Greyhawk
Corporation ("Greyhawk"), a corporation of which he is a majority shareholder
and which has interests in real estate brokerage franchising. He is also a
director of MAF
49
<PAGE>
Bancorp. Mr. Hanauer was first elected as a Director of the Company in January
1993 pursuant to the Stockholders' Agreement.
R. David Anacker, 58, is Vice Chairman of Veriflo Corporation, an
industrial equipment manufacturing firm located in Richmond, California. From
November 1959 to November 1991, he was associated with American Building
Maintenance Industries, Inc. ("ABMI"), a property maintenance service firm
located in San Francisco, California, serving as director from 1979 and as
President and Chief Executive Officer from March 1984. He currently provides
consulting services to ABMI. He has served as a director of Axiom Real Estate
Management, Inc., a subsidiary of the Company, since August 1992. Mr. Anacker
was elected a Director of the Company in May 1994 to fill the vacancy created by
the resignation of Mr. Field.
Lawrence S. Bacow, 42, is a professor at the Massachusetts Institute
of Technology (M.I.T.) Center for Real Estate and the M.I.T. Department of Urban
Studies and Planning. He joined the M.I.T faculty in 1977 and the M.I.T. Center
for Real Estate in 1983, serving as the director of the Center for Real Estate
from 1990 until 1992. From December 1987 to June 1990, he was also a principal
of Artel Associates, a company which provided investment banking services to
real estate companies. Professor Bacow has served as a Director of the Company
since January 1993.
Reuben S. Leibowitz, 46, is a Managing Director of E.M. Warburg,
Pincus & Co., Inc. ("Warburg Pincus"), a venture banking and investment
counseling firm. He has been associated with Warburg Pincus since 1984.
Warburg Pincus is an affiliate of Warburg, the Company's principal stockholder.
Mr. Leibowitz is also a director of Chelsea GCA Realty, Inc. Mr. Leibowitz was
first elected as a Director of the Company in January 1993 as a representative
of Warburg pursuant to the Stockholders' Agreement.
John D. Santoleri, 30, has been a Vice President of Warburg, Pincus
Ventures, Inc., the venture banking subsidiary of Warburg Pincus, since 1991,
and has been associated with Warburg Pincus since June 1989. From June 1985 to
June 1989, he was associated with The Harlan Company, a New York-based real
estate consulting firm, and served there as Vice President from September 1988
to June 1989. Warburg, Pincus Ventures, Inc. is an affiliate of Warburg, the
Company's principal stockholder. Mr. Santoleri also serves as a director of
Chelsea GCA Realty, Inc. Mr. Santoleri was first elected as a Director of the
Company in January 1993 as a representative of Warburg pursuant to the
Stockholders' Agreement.
Wilbert F. Schwartz, 52, has been President and Chief Executive
Officer of the Company since February 1993. He will resign from such positions,
which resignation is expected to be effective July 1, 1994. He will remain a
Director of the Company. Mr. Schwartz has also served as a director of Axiom
Real Estate Management, Inc., a subsidiary of the Company, since February 1993.
He had been an employee of Prudential since 1976, serving as Managing Director
of its subsidiary, Prudential Investment Corp., from October 1991 until February
1993, and as President and Vice Chairman of Prudential's Real Estate Affiliates
division from March 1990 to October 1991. Mr. Schwartz was first elected as a
Director of the Company in January 1993 as a representative of Prudential, a
principal stockholder and the principal lender of the Company.
50
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information as of June 1, 1994
concerning beneficial ownership of Common Stock by known beneficial holders of
more than 5% of the outstanding Common Stock, Directors, named executive
officers, and all current Directors and executive officers as a group. Unless
otherwise noted, the listed persons have sole voting and dispositive powers with
respect to the shares held in their names, subject to community property laws if
applicable.
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership Percent of Class(1)
-------------------- -------------------
<S> <C> <C>
Warburg, Pincus Investors, L.P.
466 Lexington Avenue,
New York, NY 10017 5,111,901(2)(5) 55.4%
The Prudential Insurance
Company of America
Four Gateway Center
Newark, NJ 07102 3,272,060(3)(5) 46.8%
Joe F. Hanauer
Combined Investments, L.P.
361 Forest Ave., Suite 200
Laguna Beach, CA 92651 605,453(4)(5) 12.9%
FMR Corp.
82 Devonshire Street
Boston, MA 02109-3614 307,606(6) 7.5%
R. David Anacker 0 --
Lawrence S. Bacow 4,134(7)(8) *
John F. Carpenter 638(6) *
J. David Dawson 637(8) *
Gordon M. Hess 1,538(8) *
Reuben S. Leibowitz 0(2) --
John D. Santoleri 0(2) --
Wilbert F. Schwartz 218 *
Alvin L. Swanson, Jr. 81,804(9) 2.0%
Neil R. Young 3,082 *
All current Directors and 615,935(4)(7) 13.1%
executive officers as a group (12 persons)
*Does not exceed 1.0%
<FN>
________________________
(1) Percentages total more than 100% due to the requirement to count
derivative securities for certain purposes. The percentages of shares of
Common Stock beneficially owned by the designated persons assumes that no
other person exercises currently outstanding warrants or options or
convertible securities.
(2) At June 1, 1994, Warburg beneficially owned 5,111,901 shares of Common
Stock through its ownership of (i) 128,266 shares of Senior Preferred
Stock which are convertible into an aggregate of 4,256,083 shares of
Common Stock, (ii) Existing Warrants to purchase an aggregate of 482,000
shares of Common Stock, and (iii) Contingent Warrants to purchase 373,818
shares of Common Stock. Such Contingent Warrants have an aggregate
exercise price equal to the lesser of 93.45% of the amount by which such
excess liabilities exceed $500,000 and $5.00 times the number of shares
issuable upon exercise.
The sole general partner of Warburg is Warburg, Pincus & Co., a New York
general partnership ("WP"). E.M. Warburg, Pincus & Company, a New York
general partnership that has the same general partners as WP ("E.M.
Warburg"), manages Warburg. Lionel I. Pincus is the managing partner of
WP and E.M. Warburg and may be
</TABLE>
51
<PAGE>
<TABLE>
<S> <C>
deemed to control them. WP has a 20% interest in the profits of Warburg
and, through its wholly-owned subsidiary, E.M. Warburg, Pincus & Co., Inc.
("Warburg Pincus"), owns 1.13% of the limited partnership interests in
Warburg. Mr. Leibowitz, a Director of the Company, is a Managing Director
of Warburg Pincus and a general partner of WP and E.M. Warburg. As such,
he may be deemed to be a beneficial owner of an indeterminate portion of
the shares of Common Stock beneficially owned by Warburg, Warburg Pincus
and WP. He disclaims any such beneficial ownership. Mr. Santoleri, a
Director of the Company, is a Vice President of Warburg, Pincus Ventures,
Inc., which is an affiliate of Warburg. Mr. Santoleri disclaims
beneficial ownership of any shares of Common Stock beneficially owned by
Warburg.
(3) At June 1,1994, Prudential beneficially owned 3,272,060 shares of Common
Stock through its ownership of (i) 397,549 shares of Common Stock,
(ii) 150,000 shares of Junior Preferred Stock which are convertible into
an aggregate of 2,674,511 shares of Common Stock, and (iii) Existing
Warrants to purchase an aggregate of 200,000 shares of Common Stock.
(4) At June 1, 1994, Mr. Hanauer, a Director and Chairman of the Company,
beneficially owned 560,453 shares of Common Stock, through his ownership
of the following securities held in a trust of which Mr. Hanauer is the
trustee and he and his wife and children are beneficiaries: (i) 21,153
shares of Common Stock, (ii) 8,894 shares of Senior Preferred Stock
convertible into an aggregate of 295,118 shares of Common Stock,
(iii) Existing Warrants to purchase an aggregate of 218,000 shares of
Common Stock, and (iv) Contingent Warrants to purchase 26,182 shares of
Common Stock. Such Contingent Warrants have an aggregate exercise price
equal to the lesser of 6.55% of the amount by which such excess
liabilities exceed $500,000 and $5.00 multiples by the number of shares
issuable upon exercise. Includes options to purchase 45,000 shares of
Common Stock issued under the Company's employee stock option plan which
became exercisable on June 8, 1994.
(5) Pursuant to the rules promulgated under the Securities Exchange Act of
1934, as amended, Prudential, Warburg and Mr. Hanauer may be deemed to be
a "group," as defined in Section 13(d) of such Act. Prudential, Warburg
and Mr. Hanauer do not affirm the existence of such a group and disclaim
beneficial ownership of shares of Common Stock beneficially owned by any
other party.
(6) Includes 203,500 shares held by affiliates of FMR Corp., which is a
holding company for certain investment advisors. Information with
respect to FMR Corp. is based on the most recent Schedule 13D filed with
the Securities and Exchange Commission reflecting beneficial ownership of
Common Stock.
(7) Includes an option under a Company stock option plan which, as of June 1,
1994, was exercisable for 3,334 shares.
(8) Includes, in the aggregate, 838 shares held by immediate family members
of, and 424 shares held jointly with immediate family members by, all
current Directors and executive officers as a group.
(9) Includes 60,000 currently exercisable stock appreciation rights ("SARs")
held by Mr. Swanson which fully vested upon his resignation on May 20,
1993. The SARs are generally exercisable for shares of Common Stock with
an aggregate fair market value equal to the excess of the fair market
value of the Common Stock over $3.52.
</TABLE>
52
<PAGE>
EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth, for all persons who served as Chief
Executive Officer in 1993 and each of the four most highly compensated other
executive officers of the Company (determined as of December 31, 1993),
compensation earned, including deferred compensation, for services in all
capacities with the Company and its subsidiaries for the fiscal years ended
December 31, 1993, 1992, and 1991. Two additional tables provide information
about these employees' stock options.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
---------------------------- ------------
Securities
Other Annual Underlying All Other
Name and Salary Bonus Compensation Options/SARs Compensation
Principal Position Year ($) ($) ($) (#)(1) ($)
-------------------- ----- ------ ------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Wilbert F. Schwartz 1993 211,000 0 0 400,000 0
Chief Executive 1992 0 0 0 0 0
Officer(2) 1991 0 0 0 0 0
Alvin L. Swanson, Jr. 1993 92,000 0 14,000 0 149,000
Former Chief 1992 154,000 60,000 19,000 60,000 0
Executive Officer(3) 1991 0 0 12,000 0 0
Neil R. Young 1993 220,000 69,000 0 15,000 2,000(4)
President of the 1992 103,000 80,000 0 5,000(5) 0
Midwest/Texas 1991 73,000 82,000 0 800(5) 1,000(4)
Region
J. David Dawson 1993 195,000 0 0 20,000 2,000(4)
President of the 1992 81,000 0 0 20,000(5) 0
Eastern Region 1991 0 0 0 0 0
John F. Carpenter 1993 171,000 9,000 0 15,000 1,000(4)
President of the 1992 39,000 0 0 0 0
Pacific Northwest
Region 1991 0 0 0 0 0
Gordon M. Hess 1993 172,000 0 0 13,500 1,000(4)
Chief Administrative
Officer 1992 174,000 0 0 5,000(5) 0
1991 157,000 0 0 800(5) 0
<FN>
- - ---------------
(1) The amounts represent options to purchase the designated numbers of shares
of Common Stock, except with respect to Mr. Swanson, in which case the
amounts represent SARs.
(2) Mr. Schwartz was elected President and Chief Executive Officer in February
1993.
(3) Mr. Swanson served as President and Chief Executive Officer between May
1992 through February 1993. Other annual compensation in 1993 relates to
legal expenses incurred in connection with his employment contract, and in
1991 and 1992 represents directors fees. All other compensation relates
to his severance agreement, which includes $5,200 for health coverage.
(4) Represents Company contributions to the 401(k) plan accounts of the
designated individuals.
(5) These options were canceled in 1993 pursuant to a repricing program. The
repriced options are included in the 1993 grants of options.
</TABLE>
53
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants For Option Term(1)
- - -------------------------------------------------------------------------------- --------------------------
Number of Percent
Securities of Total Exercise
Underlying Options/SARs or Base
Options/SARs Granted to Price Expiration
Name Granted (#) Employees in ($/Sh) Date 5% ($) 10% ($)
- - --------------------- (2)(3) Fiscal Year ---------- ---------- ------- -------
------------ ------------
<S> <C> <C> <C> <C> <C>
Wilbert F. Schwartz 400,000 77.4% $3.50 June 8, 2001 $595,000 $1,494,000
Alvin L. Swanson, Jr. 00 -- -- -- --
Neil R. Young 15,000 2.9% $4.125 August 9, 2001 $30,000 $71,000
J. David Dawson 20,000 3.9% $4.125 August 9, 2001 $39,000 $94,000
John F. Carpenter 15,000 2.9% $4.125 August 9, 2001 $30,000 $71,000
Gordon M. Hess 13,500 3.6% $4.125 August 9, 2001 $27,000 $64,000
<FN>
- - ---------------
(1) The potential realizable value is calculated from the market price per
share, assuming the Common Stock appreciates in value at the stated
percentage rate from the date of grant of an option or SAR to the
expiration date. Actual gains, if any, are dependent on the future market
price of the Common Stock.
(2) The amounts represent options to purchase the designated numbers of shares
of Common Stock
(3) The option of Mr. Schwartz was granted on June 8, 1993, and the options of
Messrs. Young, Dawson, Carpenter and Hess were granted on August 9, 1993,
under the 1990 Amended and Restated Stock Option Plan, as amended. The
options were each granted at market value on the date of grant, and vest
in five, equal annual installments commencing one year from the date of
grant. Vesting accelerates upon certain conditions related to changes of
control of the Company or at the discretion of the Compensation Committee.
Upon termination of Mr. Dawson's employment on April 30, 1994, all of the
options held by him expired. In connection with the resignation of Mr.
Schwartz, all of the options held by him will be canceled.
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs
Shares Options/SARs at FY-End (#) at FY-End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable(1) Unexercisable(2)
- - -------------------- ------------ ------------ --------------------------- -------------------------
<S> <C> <C> <C> <C>
Wilbert F. Schwartz -- -- 0/400,000 --
Alvin L. Swanson, Jr. -- -- 60,000/0 --
Neil R. Young -- -- 0/15,000 --
J. David Dawson -- -- 0,20,000 --
John F. Carpenter -- -- 0,15,000 --
Gordon M. Hess -- -- 0/13,500 --
<FN>
- - ---------------
(1) Mr. Swanson was granted 60,000 SARs. The other amounts represent options
to purchase the designated numbers of shares of Common Stock as of March
1, 1994.
(2) The value of unexercised in-the-money options and SARs at fiscal year-end
was calculated based on the closing price of the Common Stock as reported
on the NYSE on December 31, 1993 ($3.125 per share).
</TABLE>
54
<PAGE>
COMPENSATION OF DIRECTORS
Only Directors who are not employees of the Company and who are
neither holders of five percent or more of the Capital Stock of the Company
("Five-Percent Holders") nor employees or affiliates of entities which are
Five-Percent Holders ("Outside Directors"), receive compensation for serving on
the Board and on its committees. Such compensation currently consists of an
annual retainer fee of $15,000 and a fee of $1,000 for each Board or committee
meeting attended. These fees are set by the Board.
In addition, under the 1993 Stock Option Plan for Outside Directors,
Outside Directors each receive an option to purchase 10,000 shares of Common
Stock upon the date of first election to the Board, with an exercise price equal
to market value on such date.
Pursuant to an agreement, effective as of February 1, 1993, between
the Company and Combined Investments, L.P., a company of which Hanauer is the
general partner, Hanauer devotes a substantial amount of his working time
providing operational and management services to the Company for compensation of
$15,000 per month plus expenses. During 1993, Combined Investments, L.P. earned
$165,000 under such agreement. The agreement is terminable by either party on
30 days' notice. On June 8, 1993, the Company granted Hanauer a stock option to
purchase 135,000 shares of Common Stock at an exercise price of $3.50 per share
under the Company's 1993 Amended and Restated Stock Option Plan. The exercise
price represents market value at the date of grant. The option vests in three
equal, annual installments commencing on the date of grant. Hanauer receives no
other fees or compensation from the Company for his service as Chairman of the
Board.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company entered into an agreement with Mr. Swanson as of May 20,
1992 in connection with his services as President and Chief Executive Officer.
Under the agreement, he received a base salary of $250,000, health benefits and
$60,000 of incentive compensation for services rendered during 1992. In
addition, pursuant to the agreement, 60,000 SARs were granted which expire seven
years from the date of grant and are exercisable for Common Stock or, in certain
circumstances, for cash. The exercise price of the SARs is generally equal to
the difference between the fair market value of a share of Common Stock at
exercise and $3.52. As of February 24, 1993, Mr. Swanson resigned as President
and Chief Executive Officer, and from that date until his resignation from all
positions with the Company on May 20, 1993, Mr. Swanson provided transitional
services and received a base salary of $200,000. Certain severance compensation
provisions of his employment agreement became effective upon Mr. Swanson's
termination of employment, including the extension of payments equal to his
original base salary until May 20, 1994, continuing health benefits until age 65
and acceleration of the vesting of his SARs. In the event that such severance
payments are deemed to constitute "excess parachute payments" as that term is
defined in Section 280G of the Code, the Company is obligated under such
agreement to pay an additional amount equal to the federal excise tax
obligations of Mr. Swanson. Mr. Swanson's term as a Director expired August 9,
1993.
55
<PAGE>
Mr. Schwartz was elected President and Chief Executive Officer of
the Company on February 24, 1993, receiving an annual salary of $250,000, and
eligibility for incentive compensation in an amount of up to 60% of his salary
in the discretion of the Compensation Committee. Mr. Schwartz has announced
that he will resign his positions with the Company, which resignation is
expected to be effective on or before July, 1994. In connection with his
resignation, Mr. Schwartz will receive severance compensation equal to one
year's base salary and continued health benefits for one year. Mr. Schwartz
previously owned 45,676 1,193 shares of Senior Preferred Stock convertible into
an aggregate of 39,586 shares of Common Stock, Existing Warrants to purchase an
aggregate of 6,090 shares of Common Stock, and Contingent Warrants to purchase
3,480 shares of Common Stock, which he acquired from Warburg and Hanauer in
1993. In connection with his resignation, Mr. Schwartz sold all such securities
to Warburg and Hanauer for the same purchase price that he paid upon acquisition
of such securities.
In connection with his resignation effective April 30, 1994, Mr.
Dawson, formerly President of the Eastern Region of the Company, will receive,
pursuant to an agreement, severance compensation equal to three and one-half
months' salary, a payment of $40,000 and a relocation allowance of up to
$15,000.
REPORT ON REPRICING OF OPTIONS
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF THE COMPANY'S
FILINGS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE EXCHANGE ACT, THAT
MIGHT INCORPORATE OTHER FILINGS, INCLUDING THIS PROXY STATEMENT, IN WHOLE OR IN
PART, THE FOLLOWING COMPENSATION COMMITTEE REPORT ON REPRICING SHALL NOT BE
INCORPORATED BY REFERENCE INTO ANY SUCH FILINGS.
COMPENSATION COMMITTEE REPORT ON REPRICING. In August 1993, the
Board approved a program by which six officers of the Company, including three
of the executive officers named in the Summary Compensation Table, approved by
the Compensation Committee of the Board (the "Compensation Committee") were
offered the opportunity to exchange their outstanding out-of-the money stock
options for replacement options granted as of such date, with a new exercise
price based upon market value at such date of $4.125 per share. The vesting of
the new options re-commenced as of the new grant date, and will vest ratably
over five years instead of the previous three-year vesting period. The
Compensation Committee adopted the repricing program in order to incentivize
such officers of the Company to contribute to the financial performance of the
Company. At the time of the repricing, the exercise prices of outstanding
options were significantly higher than market value at the time of the
repricing. The six officers who were offered the opportunity to exchange
options were recommended to the Compensation Committee by senior management
based upon their increased levels of responsibility in the Company and
management's perception of each officer's prospective value to the Company. The
Compensation Committee approved such recommendations based in part on the
information provided by senior management and in part on the Committee's
perception of the officers' potential contributions to the Company.
56
<PAGE>
While ordinarily equity incentives are intended to be earned over
several years and subject to the risk that the value of the Common Stock will
not appreciate, the Compensation Committee believed that the issuance of the
replacement options was warranted by special circumstances facing the Company.
All of the options that were exchanged for new options were granted before the
Restructuring. Following the completion of the Restructuring in January 1993,
the Company experienced substantial changes in senior management and business
strategy. The Company has sold or closed a number of its operations in order to
allocate resources toward the Company's core business operations. These changes
have increased the need to retain and motivate those officers who remain with
the Company and who are responsible for implementing this business strategy.
The Compensation Committee determined that the best way to provide the needed
long-term incentives for these officers was through the issuance of stock
options with exercise prices at current market values and with vesting schedules
over five years (instead of the three-year vesting schedule which applied to
the original options). The Compensation Committee determined that new options
would allow the officers to participate in the benefits of appreciation in the
value of the Company's Common Stock after the Restructuring, encourage their
implementation of the strategies implemented after the Restructuring and better
motivate them to promote the creation of stockholder value over the long term.
Under the program, J. David Dawson, formerly President of the
Eastern Region, replaced an option to purchase 20,000 shares of Common Stock
with an exercise price of $6.875 per share, for an option to purchase the same
number of shares at $4.125 per share; Gordon Hess, Chief Administrative Officer,
replaced options to purchase 800 and 5,000 shares with exercise prices of $6.25
and $10.00 per share, respectively, for an option to purchase 5,800 shares at an
exercise price of $4.125 per share; and Neil R. Young, President of the
Midwest/Texas Region, replaced options to purchase 500, 800, and 5,000 shares at
exercise prices of $18.75, $6.25, and $10.00 per share, respectively, for an
option to purchase the 6,300 shares at $4.125 per share.
THE COMPENSATION COMMITTEE
Lawrence S. Bacow
Reuben S. Leibowitz
57
<PAGE>
<TABLE>
<CAPTION>
TEN-YEAR OPTION/SAR REPRICINGS(1)
- - -----------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------
Number of
Securities Exercise Price Length of Original
Underlying Market Price of at Option Term
Options/ Stock at Time of Time of Remaining at Date
SARs Repriced Repricing or Repricing or New of Repricing or
or Amendment Amendment Exercise Amendment(2)
Name Date Amended (#) ($) ($) Price ($)
- - -----------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J. David Dawson 08/09/93 20,000 4.125 6.875 4.125 9 years, 1 mo.
President,
Eastern Region
DeMoss, Jr., 12/03/87 2,837 18.75 38.75 18.75 7 yrs.
Emmett R. 12/03/87 2,000 18.75 39.40 18.75 6 yrs., 3 mos.
Executive Vice 12/03/87 2,000 18.75 46.25 18.75 7 yrs., 5 mos.
President
Ellis, Jr., 12/03/87 3,000 18.75 22.50 18.75 3 yrs., 6 mos.
Harold A. 12/03/87 400 18.75 16.90 18.75 4 yrs., 9 mos.
President and 12/03/87 1,000 18.75 51.90 18.75 5 yrs., 5 mos.
Chief 12/03/87 4,000 18.75 39.40 18.75 6 yrs., 3 mos.
Executive 12/03/87 5,000 18.75 25.00 18.75 10 yrs.
Officer 12/03/87 1,600 18.75 46.25 18.75 7 yrs., 5 mos.
Goodloe, Jr., 12/03/87 200 18.75 46.25 18.75 7 yrs., 5 mos.
John D.
President,
Southeast
Region
Hamilton, 12/03/87 476 18.75 28.75 18.75 8 yrs., 9 mos.
Joseph F. 12/03/87 2,222 18.75 45.00 18.75 7 yrs., 10 mos.
Chief 12/03/87 2,000 18.75 25.00 18.75 10 yrs.
Financial 12/03/87 2,000 18.75 43.15 18.75 8 yrs., 3 mos.
Officer
Hess, Gordon M. 08/09/93 800 4.125 6.25 4.125 8 yrs., 3 mos.
Chief 08/09/93 5,000 4.125 10.00 4.125 8 yrs., 7 mos.
Administrative
Officer
Hildebran, 12/03/87 920 18.75 22.50 18.75 3 yrs., 6 mos.
Robert C. 12/03/87 1,500 18.75 27.50 18.75 4 yrs., 2 mos.
President, 12/03/87 2,899 18.75 42.50 18.75 6 yrs., 3 mos.
Pacific 12/03/87 900 18.75 39.40 18.75 6 yrs., 3 mos.
Northwest 12/03/87 400 18.75 16.90 18.75 4 yrs., 9 mos.
Region 12/03/87 1,665 18.75 38.75 18.75 7 yrs.
12/03/87 800 18.75 51.90 18.75 5 yrs., 5 mos.
12/03/87 2,000 18.75 46.25 18.75 7 yrs., 5 mos.
McGee, Donald L. 12/03/87 1,500 18.75 22.50 18.75 3 yrs., 6 mos.
Senior Vice 12/03/87 550 18.75 27.50 18.75 4 yrs., 2 mos.
President 12/03/87 833 18.75 22.50 18.75 4 yrs., 9 mos.
12/03/87 200 18.75 16.90 18.75 4 yrs., 9 mos.
12/03/87 800 18.75 51.90 18.75 5 yrs., 5 mos.
12/03/87 1,000 18.75 43.15 18.75 8 yrs., 3 mos.
12/03/87 800 18.75 39.40 18.75 6 yrs., 3 mos.
12/03/87 500 18.75 25.00 18.75 10 yrs.
12/03/87 800 18.75 46.25 18.75 7 yrs., 5 mos.
</TABLE>
58
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Roth, Stanton F. 12/03/87 2,581 18.75 38.75 18.75 7 yrs., 1 mos.
President,
Northwest
Region
Royster, 12/03/87 400 18.75 16.90 18.75 4 yrs., 9 mos.
Phillip D. 12/03/87 400 18.75 51.90 18.75 5 yrs., 5 mos.
President, 12/03/87 800 18.75 39.40 18.75 6 yrs., 3 mos.
Pacific 12/03/87 1,500 18.75 29.40 18.75 9 yrs., 3 mos.
Southwest 12/03/87 1,000 18.75 46.25 18.75 7 yrs., 5 mos.
Region 08/09/93 4,100 4.125 18.75 4.125 4 yrs., 4 mos.
08/09/93 3,000 4.125 6.875 4.125 7 yrs., 6 mos.
08/09/93 800 4.125 6.250 4.125 8 yrs., 4 mos.
08/09/93 2,000 4.125 10.00 4.125 8 yrs., 7 mos.
Russell, John G. 12/03/87 1,500 18.75 22.50 18.75 3 yrs., 6 mos.
President, 12/03/87 400 18.75 16.90 18.75 4 yrs., 9 mos.
Pacific 12/03/87 500 18.75 51.90 18.75 5 yrs., 5 mos.
Southwest 12/03/87 4,781 18.75 38.75 18.75 7 yrs.
Region 12/03/87 800 18.75 39.40 18.75 6 yrs., 3 mos.
Scherb, Jr., 12/03/87 2,000 18.75 25.00 18.75 10 yrs.
Albert H. 12/03/87 2,000 18.75 46.25 18.75 7 yrs., 5 mos.
President,
Midwest
Region
Young, Neil R. 08/09/93 500 4.125 18.75 4.125 6 yrs., 10 mos.
President, 08/09/93 800 4.125 6.250 4.125 8 yrs., 4 mos.
Midwest 08/09/93 5,000 4.125 10.00 4.125 8 yrs., 7 mos.
Texas Region
<FN>
(1) Messrs Hess, Royster and Young are the only persons listed who currently
are executive officers of the Company.
(2) All options exchanged on December 3, 1987 reflect the one-for-five reverse
stock split that was effective January 29, 1993.
(3) Remaining lengths of option terms to the nearest month.
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee from January 29, 1993
through December 31, 1993 were Reuben S. Leibowitz (Chairman), Lawrence S. Bacow
and John Mullman, none of whom served as officers of the Company. John Mullman
resigned from the Board in January 1994. From January 1 through January 29,
1993, the members of the Compensation Committee were Marvin M. Grove, Robert C.
Kyle and Henry S. Miller, Jr., none of whom served as officers of the Company.
Until May 1992, Mr. Miller was Chairman of HSM Inc., a subsidiary
acquired by the Company in August 1984.
In connection with an exchange of obligations with respect to
certain partnerships between HSM Inc. and David Donosky, the son-in-law of Mr.
Miller and former President of the Texas Region of the Company, Mr. Donosky
owed, as of June 1, 1994, outstanding principal and accrued interest of
approximately $151,000 to HSM Inc.
59
<PAGE>
The debt is non-recourse and due in 1996, bearing interest at 11% per year. Mr.
Donosky also borrowed $240,000 from the Company on a recourse basis with
interest at the prime rate and due in November of 1993, secured by his rights to
purchase 23,850 shares of Common Stock as a result of a stock option exercise,
at a weighted average exercise price of $14.50 per share. As of June 1, 1994,
the outstanding principal and accrued interest on this loan was approximately
$209,000. As a result of his failure to purchase and sell the shares subject to
the exercised stock option within one year of the exercise, Mr. Donosky
defaulted in his obligation to the Company for payment of the purchase price of
the shares in the aggregate amount of approximately $346,000, and the shares
were not issued. The indebtedness related to the partnerships and the $240,000
loan had also been secured by a pledge of Mr. Donosky's non-qualified options to
purchase 20,000 shares of Common Stock at a weighted average exercise price of
$17.40 per share. These options expired upon termination of Mr. Donosky's
employment in January 1993. In February 1993, Mr. Donosky filed for bankruptcy
under Chapter 7 of the U.S. Bankruptcy Code.
Mr. Leibowitz is a Managing Director of E.M. Warburg, Pincus & Co.,
Inc., an affiliate of Warburg. Mr. Mullman is a Vice President, Corporate
Finance of Prudential. Warburg and Prudential entered into certain agreements
with the Company in connection with the Restructuring in 1993 and the Financing
Transactions in 1994 as described below.
1993 RESTRUCTURING. On January 29, 1993, the stockholders of the
Company approved the Restructuring, pursuant to which Warburg (for a purchase
price of $12,850,000) and Hanauer (for a purchase price of $900,000) purchased
(i) 128,266 and 8,894 shares, respectively, of newly issued Senior Preferred
Stock, (ii) Existing Warrants initially to purchase 340,000 and 160,000 shares
of Common Stock, respectively, at an exercise price of $5.00 per share, (iii)
Existing Warrants initially to purchase 142,000 and 58,000 shares of Common
Stock, respectively, at an exercise price of $5.50 per share and (iv) Contingent
Warrants to purchase 373,818 and 26,182 shares of Common Stock, respectively.
The funds used by Warburg to purchase the Senior Preferred Stock, the Existing
Warrants and the Contingent Warrants were provided from Warburg's investment
capital. Mr. Hanauer purchased the Senior Preferred Stock, the Existing
Warrants and the Contingent Warrants with funds borrowed in the ordinary course
of business under Mr. Hanauer's unsecured line of credit with First National
Bank of Blue Island. The Company owed approximately $530,000 to Warburg at
December 31, 1993 for reimbursement of its expenses related to the
Restructuring. As of April 1, 1994, such obligation had been paid. In
connection with the Restructuring, the Company paid certain fees and expenses to
an affiliate of Mr. Hanauer. See "Related Party Transactions."
Pursuant to the Restructuring, the Company and Prudential agreed to
restructure the $5 million 1991 Revolving Credit Note, $10 million of the Old
Notes and $25 million of the Old Subordinated Notes held by Prudential.
Prudential and the Company entered into the Prudential Debt Agreement pursuant
to which the Company issued to Prudential (i) a $5 million Revolving Credit Note
upon cancellation of the 1991 Revolving Credit Note, (ii) $10 million of the
Senior Notes upon cancellation of all of the Old Senior Notes and (iii) $10
million of the Company's PIK Notes upon conversion of $10 million of the Old
Subordinated Notes. In addition, prior to the Restructuring, Prudential held
warrants
60
<PAGE>
to purchase 397,549 shares of Common Stock at an exercise price of $7.30 per
share, which Prudential exercised through the cancellation of approximately
$1,982,000 of the accrued and unpaid interest on the Old Subordinated Notes and
cancellation of approximately $920,000 of the PIK Notes. In addition,
Prudential, in exchange for the cancellation of $15 million of Subordinated
Notes, purchased (x) 150,000 newly issued shares of Junior Preferred Stock and
(y) the Prudential 1993 Warrants initially to purchase 200,000 shares of Common
Stock at an exercise price of $5.50 per share. The Company reimbursed
Prudential for approximately $206,000 of its out-of-pocket costs and expenses
incurred in connection with the Restructuring.
As part of the Restructuring, Warburg, Prudential, Hanauer and the
Company entered into the Stockholders' Agreement, which provides for the
nomination of up to three persons for election as Director by Warburg and up to
two persons for election as Director by Prudential. Pursuant to the
Stockholders' Agreement, Mr. Leibowitz was nominated for election as a Director
by Warburg, and Mr. Mullman was nominated for election as a Director by
Prudential. Mr. Mullman has resigned from the Board.
On July 1, 1993, Warburg and Mr. Hanauer sold an aggregate of 1,193
shares of Senior Preferred Stock, $5.00 Warrants to purchase 4,350 shares of
Common Stock, $5.50 Warrants to purchase 1,740 shares of Common Stock, and
Contingent Warrants to purchase 3,480 shares of Common Stock to Wilbert F.
Schwartz, President and Chief Executive Officer of the Company, for a purchase
price of approximately $120,000, which was approximately equal to the
consideration paid by Warburg and Hanauer upon their acquisition of such
securities. In connection with his resignation, Mr. Schwartz has resold such
securities to Warburg and Hanauer for the same purchase price that he paid upon
acquisition of such securities.
FINANCING TRANSACTIONS. During March 1994, the Company, Warburg
and Prudential entered into an agreement in principle (the "Agreement") pursuant
to which the Prudential Debt Agreement would be amended to provide that the
Company will not be required to make principal payments on any of the debt owed
to Prudential under the Prudential Debt Agreement prior to November 1, 1997 and
certain other modifications. Pursuant to the Agreement Warburg agreed to
provide the $10 million Bridge Loan which is expected to be retired in
connection with the Rights Offering. As of June 1, 1994, the outstanding
principal amount of the Bridge Loan was $6 million. The Bridge Loan has an
interest rate of 5% per annum and is secured by the Company's commercial
brokerage revenues through a cash collateral account. If the Company does not
obtain stockholder approval for additional financing to retire the Bridge Loan,
such as the Rights Offering, by December 31, 1994, then the outstanding
principal amount of the Bridge Loan will bear interest at 10% per annum
retroactive to the date of the first advance under the Bridge Loan Agreement.
All outstanding principal and interest on the Bridge Loan mature on April 28,
1995. Prudential also will have a lien on the cash collateral account which
will be subordinated to the Bridge Loan.
61
<PAGE>
Warburg has agreed to acquire up to 3,900,000 shares of Common Stock
not acquired by the holders of Common Stock in the Rights Offering through the
retirement of the Bridge Loan.
The Agreement also contemplates certain amendments to the Senior
Preferred Stock held by Warburg, the Junior Preferred Stock held by Prudential,
the Existing Warrants held by each of Warburg and Prudential, and the Contingent
Warrants held by Warburg. In consideration of their agreements, the Company
would grant Warburg and Prudential five-year warrants to purchase approximately
325,000 and 150,000 shares of Common Stock of the Company, respectively, at an
exercise price of $2.375 per share. Warburg also has agreed to exercise its
Contingent Warrants through retirement of the Bridge Loan. The terms of the
Financing Transactions are described in further detail in this Proxy Statement
under "Proposal No. 1: Financing Transactions" and "Proposal No. 2: Amendments
to Preferred Stock."
PRUDENTIAL. In the ordinary course of business, Prudential, its
affiliates and franchisees paid the Company approximately $4.6 million during
1993 for management of several of its properties and for leasing commissions.
The Company also rents office space in the ordinary course of business under a
long-term lease from a partnership of which Prudential is a general partner,
paying approximately $1,312,000 in rent during 1993.
A limited partnership which is affiliated with the Company is a
partner in a joint venture formed to develop an office building in southern
California. As permanent financing for the project, the joint venture borrowed
$5.8 million on a non-recourse basis from Prudential in September 1990, secured
by an unamortized first mortgage on the property, at a rate of 10.02% per year
and a term of five years.
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF THE COMPANY'S
FILINGS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE EXCHANGE ACT, THAT
MIGHT INCORPORATE OTHER FILINGS, INCLUDING THIS PROXY STATEMENT, IN WHOLE OR IN
PART, THE FOLLOWING COMPENSATION COMMITTEE REPORT AND THE STOCK PERFORMANCE
GRAPH SHALL NOT BE INCORPORATED BY REFERENCE INTO ANY SUCH FILINGS.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee has furnished the following report on
executive compensation:
The Compensation Committee has developed and implemented
compensation policies, plans and programs which seek to reward achievement of
positive financial results for the Company, and thus stockholder value.
Providing longer-term equity incentives is an important additional method of
aligning closely the financial interests of the Company's senior officers with
those of its Stockholders. In order to attract and retain outstanding
executives, with the potential to contribute significantly to the success of the
Company, the Committee's policies seek to compensate executives commensurate
with "market" rates. "Market" refers not only to the geographic market of the
position and the services market of
62
<PAGE>
the position, but also to the market for executives with similar
responsibilities. The Company's executives are charged with leading the Company
or one of its business units out of its current difficult financial condition
within the continued recessionary conditions of the real estate market. Due to
the current financial volatility in the real estate services industry, the fixed
salaries of executives generally represent a smaller portion of total
compensation than might otherwise have been the case, and the cash incentive
compensation that may be earned is designated as a larger percentage of total
compensation. The Committee's policies include the objective of assuring
qualification of each executive's compensation for deductibility under Section
162(m) of the Code, which section generally imposes a $1 million cap on
deductibility for any taxable year of the compensation for the chief executive
officer and the other four most highly compensated executive officers.
During 1993, executive officers received compensation consisting of
three components: base salary, cash incentive compensation and longer-term
equity incentives. In the first quarter of 1993, the Compensation Committee
reviewed with the Chief Executive Officer the compensation of all executive
officers (except that the compensation of the Chief Executive Officer was
reviewed in his absence), for the Committee's consideration and approval. Base
salaries were proposed on the basis of the Committee members' knowledge of
comparative salaries within the real estate brokerage services industry and
judgments about the executives' individual past performance, level of
responsibilities and expectations of future performance. In setting base
salaries, the level of an executive's responsibilities was given the greatest
consideration. The cash incentive compensation was based upon attainment of
annual goals and was earned as a percentage of salary. The eligibility to
receive such cash incentive compensation was based upon achievement of targeted
levels of total revenue and profitability of the Company, and, with respect to
Regional Presidents, achievement of targeted levels of revenue and
profitability of the applicable region and attainment of individual performance
goals related to staffing, productivity and expense controls. No one factor
was a prerequisite to receiving incentive compensation.
Stock options are designed to align the interests of executives with
those of Stockholders, and further the growth, development and financial success
of the Company. The Committee believes that equity interests in the Company
held by the Company's management serve to retain and motivate management. In
determining the grants of stock options the Compensation Committee takes into
account the respective scope of responsibility and the anticipated performance
requirements and contributions to the Company of each proposed optionee. All
executive officers received options to purchase Common Stock of the Company
during 1993, with exercise prices set at fair market value at the dates of
grant, vesting over five years. The determination of the numbers of shares
underlying the equity incentives provided to each executive in 1993 was made by
the Compensation Committee, primarily based upon the executive's level of
responsibility.
Mr. Schwartz was elected as President and Chief Executive Officer in
February 1993. His compensation during 1993 consisted of a base salary agreed
upon by the Compensation Committee and Mr. Schwartz and cash incentive
compensation based upon achievement of specific objectives related to targeted
levels of pre-tax profitability of the Company, and individual performance goals
related to organizational development and
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redirection of Company strategy. Mr. Schwartz also was granted options to
purchase 400,000 shares of Common Stock with an exercise price of $3.50 per
share and vesting over five years. The Compensation Committee established the
number of options for Mr. Schwartz based upon his level of responsibility and
the Compensation Committee's judgment as to the appropriate incentive level for
purposes of achieving the objectives of the stock option plan. Prior to joining
the Company, Mr. Schwartz did not own any shares of Common Stock.
THE COMPENSATION COMMITTEE
Lawrence S. Bacow
Reuben S. Leibowitz
64
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STOCK PRICE PERFORMANCE
The following line graph shows a five-year comparison of cumulative
total stockholder return on the Company's Common Stock against the cumulative
total return on the S&P 500 Stock Index and a Peer Group of the Company. The
comparison assumes $100 was invested on December 31, 1988 in the foregoing and
that all dividends, if any, were reinvested. To the best knowledge of the
Company, its most significant competitors are privately held real estate
brokerage firms, and therefore the Company was unable to construct a Peer Group
containing companies whose sources of revenue and business are substantially
similar to those of the Company. The Peer Group was formed by selecting all
those public companies with the same Standard Industrial Classification (SIC)
Code, as the Company's. This SIC Code relates to real estate agents and
managers. In addition to the Company, the companies included in the SIC Code
Peer Group are: Dev-Tech Corp., Hotel Investors Trust, Income Opportunity
Realty Trust, Kennedy-Wilson Inc., Koll Management Services Inc., Meridian
Point Realty Trust '83, Meridian Point Realty Trust IV Co., Meridian Point
Realty Trust VI Co., Meridian Point Realty Trust VII Co. and Network Financial
Services.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
GRUBB & ELLIS COMPANY, S&P 500, AND SIC CODE PEER GROUP
(PERFORMANCE RESULTS THROUGH DECEMBER 31, 1993)
<TABLE>
<CAPTION>
S&P 500 Grubb & Ellis SIC Code Peer Group
------- ------------- -------------------
<S> <C> <C> <C>
12/88 $100.00 $100.00 $100.00
12/89 131.59 112.50 87.67
12/90 127.49 31.25 32.16
12/91 166.17 37.50 24.41
12/92 178.81 25.00 20.84
12/93 196.75 15.76 23.03
<FN>
* Total return assumes reinvestment of dividends on quarterly basis.
</TABLE>
65
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RELATED PARTY TRANSACTIONS
Following are descriptions of certain transactions and business
relationships between the Company and its Directors, executive officers and
principal stockholders. See also "Executive Compensation -- Compensation
Committee Interlocks and Insider Participation."
In May 1992, the Company entered into an agreement with the Meredith
Corporation's operating group known as "Better Homes and Garden Real Estate
Service" ("BH&G") whereby certain residential brokerage offices of the Company
in California and BH&G agreed to jointly offer marketing, training and other
support services to independent brokerage firms. Under the agreement, the
Company will be paid fees by Meredith Corporation based upon the performance of
the independent firms involved, and will, after the first year of the agreement,
be obligated to pay fees to Meredith Corporation based upon the Company's gross
revenue for the offices participating in the program. To date, the Company has
not paid any fees to Meredith Corporation. The Company believes the program
with Meredith Corporation will assist the participating offices to be more
competitive and will permit the Company to profit as a result of offering
mortgage services to Meredith Corporation franchisees. Meredith Corporation and
Greyhawk, a corporation of which Hanauer is a majority shareholder and chairman
of the board, are parties to certain agreements pursuant to which Greyhawk has
agreed to assist Meredith Corporation in developing its Better Homes and Gardens
franchises in several U.S. markets. Greyhawk is entitled to receive fees based
on fees which may be received in the future by Meredith Corporation from the
Company.
In connection with the Restructuring, Greyhawk was paid a fee of
$325,000 by the Company related to its efforts in introducing to the Company
various potential investors, including Warburg. An additional $46,000 was paid
by the Company to Greyhawk as reimbursement of travel and legal expenses related
to these efforts.
AUDITORS
The firm of Ernst & Young, certified public accountants, served as
auditors of the Company for the 1993 fiscal year. On January 29, 1993, Ernst &
Young was appointed by the Board as the Company's auditor for 1992, replacing
Coopers & Lybrand. The decision to change independent auditors was approved by
the Board as the Company's Audit Committee did not meet. In connection with the
Company's two most recent audited fiscal years, there were no disagreements with
Coopers & Lybrand on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved would have caused them to make reference to the
matter in their report. The audit report on the Company's financial statements
as of and for the years ended December 31, 1992 and 1993 did not contain any
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope or accounting principles. During the two most
recent audited fiscal years, there have been no reportable events. Although no
auditors have been appointed for 1994, it is anticipated that Ernst & Young will
be selected as auditors of the Company for the year ending December 31, 1994.
Representatives of Ernst & Young are expected to be present at the Annual
Meeting, will
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have an opportunity to make a statement if they desire to do so and are expected
to be available to respond to appropriate questions.
SUBMISSION OF STOCKHOLDER PROPOSALS
The proxy rules adopted by the Securities and Exchange Commission
provide that certain stockholder proposals must be included in the proxy
statement for the Company's annual meeting. The Company anticipates that the
Proxy Statement for next year's annual meeting will be mailed in April 1994 and
that the annual meeting will be held in May 1995. Therefore, in order for a
proposal to be considered for inclusion in next year's proxy statement, it must
be received by the Company no later than December 1, 1994.
REPORT TO STOCKHOLDERS
The Company's 1993 Annual Report to Stockholders, containing audited
financial statements for the fiscal year ended December 31, 1993, was previously
mailed to stockholders. Stockholders may request a copy of the Annual Report
from: Secretary, Grubb & Ellis Company, One Montgomery Street, Telesis Tower,
San Francisco, California 94104.
INCORPORATION BY REFERENCE; AVAILABLE INFORMATION
The Company's audited consolidated 1993 financial statements and
management's discussion and analysis of financial condition and results of
operations and its unaudited financial information for the quarter ended March
31, 1994 are incorporated by reference in this Proxy Statement from the
Company's 1993 Annual Report to Stockholders and Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994, copies of which accompany this Proxy
Statement. THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM A
COPY OF THIS PROXY STATEMENT IS DELIVERED, UPON THE WRITTEN OR ORAL REQUEST OF
ANY SUCH PERSON, ADDITIONAL COPIES OF THE 1993 ANNUAL REPORT TO STOCKHOLDERS AND
QUARTERLY REPORT ON FORM 10-Q. REQUESTS FOR SUCH COPIES SHOULD BE ADDRESSED TO:
INVESTOR RELATIONS, GRUBB & ELLIS COMPANY, ONE MONTGOMERY STREET, TELESIS TOWER,
SAN FRANCISCO, CALIFORNIA 94104.
BY ORDER OF THE BOARD OF DIRECTORS
Robert J. Walner
Secretary
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APPENDIX A
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
GRUBB & ELLIS COMPANY, a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: That on May __, 1994, the Board of Directors of said
Corporation duly adopted the following resolution setting forth proposed
amendments to the Restated Certificate of Incorporation of said Corporation,
declaring said amendments to be advisable and calling a meeting of the
stockholders of said Corporation for consideration thereof. The resolution
setting forth the proposed amendments is as follows:
RESOLVED, that Article IV of the Certificate of Incorporation of this
Corporation is hereby amended to read in its entirety as follows:
"The total number of shares of capital stock which the Corporation
shall have authority to issue is twenty-six million (26,000,000) shares, of
which twenty-five million (25,000,000) shares with a par value of $.01 each
shall be designated Common Stock, and of which one million (1,000,000) shares
with a par value of $.01 each shall be designated Preferred Stock, of which
Preferred Stock fifty thousand (50,000) shares with a par value of $.01 each
shall be designated Series A Senior Convertible Preferred Stock ("Series A
Senior Preferred Stock"), two hundred thousand (200,000) shares with a par value
of $.01 each shall be designated Series B Senior Convertible Preferred Stock
("Series B Senior Preferred Stock") and two hundred thousand (200,000) shares
with a par value of $.01 each shall be designated Junior Convertible Preferred
Stock. Except as noted in the second following paragraph, as used herein,
"Senior Convertible Preferred Stock," shall mean collectively, the Series A
Senior Preferred Stock and the Series B Senior Preferred Stock, or either of
them. As used herein, "Convertible Preferred Stock" shall mean collectively,
the Senior Convertible Preferred Stock and the Junior Convertible Preferred
Stock, or either of them.
Upon the filing on January 29, 1993 of the Certificate of Amendment of
Certificate of Incorporation (the "Amendment"), every five shares of outstanding
Common Stock were automatically reclassified, changed and converted into one
share of Common Stock. No fractional shares of Common Stock were issued upon
such conversion, but in lieu thereof, the Corporation paid a cash adjustment in
respect of such fractional interest in an amount equal to such fractional
interest multiplied by the Market Price of a share of Common Stock on the date
on which the Amendment was filed. Unless otherwise requested by the holders
thereof, the share certificates representing the shares of Common Stock
outstanding prior to the filing of the Amendment represent such shares as
reclassified, changed and converted following the filing of the Amendment. In
addition, on December 8, 1993, the Company filed a Restated Certificate of
Incorporation restating, integrating, and not further amending the provisions of
the Company's certificate of incorporation as amended and supplemented before
that date.
Upon the filing of this Certificate of Amendment of Restated
Certificate of Incorporation (the "Certificate of Amendment"), Warburg, Pincus
Investors, L.P. ("Warburg") will exchange all of its shares of Senior
Convertible Preferred Stock held prior to such filing ("Existing
<PAGE>
Senior Convertible Preferred Stock") for an equal number of shares of Series B
Senior Preferred Stock. Effective immediately after the issuance of such shares
of Series B Senior Preferred Stock, each remaining share of Existing Senior
Convertible Preferred Stock shall be automatically reclassified, changed and
converted into one share of Series A Senior Preferred Stock. Unless otherwise
requested by the holders thereof, the share certificates representing the shares
of Existing Senior Convertible Preferred Stock outstanding prior to the filing
of the Certificate of Amendment which have not been exchanged for Series B
Senior Convertible Stock shall represent shares of Series A Senior Convertible
Preferred Stock as reclassified, changed and converted following the issuance of
the Series B Senior Convertible Stock.
The class of capital stock of the Corporation designated Common Stock
shall have (i) subject to the proviso at the end of this sentence, full voting
rights, with one vote represented by each share of stock; (ii) rights to payment
of dividends without preference if, as, and when declared by the Board of
Directors of the Corporation; and (iii) rights to liquidation distributions of
the Corporations's assets without preference after payment of preferential
liquidation distributions, if any, payable on any issued and outstanding series
of Preferred Stock; provided, however, that, notwithstanding the provisions of
clause (i) of this sentence, the holders of Common Stock shall not have the
right to vote on any of the matters described in Section 4(b)(i) or 4(b)(ii)
below in this Article IV except in clauses (A) and (D) thereof, except as
otherwise required by the laws of the State of Delaware.
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby expressly vested with authority to fix
by resolution or resolutions the designations and the powers, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof (including, without
limitation, the voting powers, if any, the dividend rate, conversion rights,
redemption price, or liquidation preference), of any wholly unissued series of
Preferred Stock, to fix the number of shares constituting any such series, and
to increase or decrease the number of shares of any such series (but not below
the number of shares thereof then outstanding). In case the number of shares of
any such series shall be so decreased, the shares constituting such decrease
shall resume the status which they had prior to the adoption of the resolution
or resolutions originally fixing the number of shares of such series.
A statement of the designations and the voting powers, preferences and
relative, participating, optional and other special rights of the shares of the
Senior Convertible Preferred Stock and the Junior Convertible Preferred Stock,
and the qualifications, limitations or restrictions thereof are as follows:
1. RANK. The Senior Convertible Preferred Stock shall, with respect
to dividend rights and rights on liquidation, winding up and dissolution, rank
prior to any other equity securities of the Corporation, including all classes
of Common Stock and any other series of Preferred Stock of the Corporation, with
the Series A Senior Preferred Stock and the Series B Senior Preferred Stock
ranking on an equal priority in all such foregoing respects. The Junior
Convertible Preferred Stock shall, with respect to dividend rights and rights on
liquidation, winding up and dissolution, rank prior to any other equity
securities of the Corporation, including all classes of Common Stock and any
other series of Preferred Stock of the Corporation other than the Senior
Convertible Preferred Stock which shall rank prior to the Junior Convertible
Preferred Stock (all of such equity securities of the Corporation to which the
Junior Convertible Preferred Stock ranks prior are collectively referred to
herein as the "Junior Stock").
2. DIVIDENDS.
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<PAGE>
(a) SENIOR CONVERTIBLE PREFERRED STOCK. The holders of Senior
Convertible Preferred Stock shall be entitled to receive, when and as declared
by the Board of Directors out of funds legally available therefor, cumulative
dividends at a rate (the "Senior Dividend Rate") equal to the greater of 12% or
the Junior Preferred Dividend Rate (as defined below). Such dividends shall be
computed on the basis of the Series A Senior Preferred Stock Stated Value and
the Series B Senior Preferred Stock Stated Value, respectively, and shall be
payable annually on the first day of each October commencing on the first of
such dates to occur after the Issue Date. Dividends shall accrue on each share
of Senior Convertible Preferred Stock from the Issue Date and shall accrue from
day to day, whether or not earned or declared. Accrued but unpaid dividends on
the Senior Convertible Preferred Stock shall increase at a compounding rate
equal to the Senior Dividend Rate compounded annually. Dividends paid on the
shares of Senior Convertible Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of all, but not less than all shares of Senior Convertible Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 30 days prior to the date
fixed for the payment thereof. During such time as any shares of the Senior
Convertible Preferred Stock are outstanding, the Corporation shall not declare,
pay or set apart for payment any dividend on any of the Junior Convertible
Preferred Stock or Junior Stock, other than a redemption pursuant to Section
5(h), or make any payment on account of, or set apart money for a sinking or
other similar fund or make any payment for, the purchase, redemption or other
retirement of, any of the Junior Convertible Preferred Stock or Junior Stock or
any warrants, rights, calls or options exercisable for or convertible into any
of the Junior Convertible Preferred Stock or Junior Stock, or make any
distribution in respect thereof, either directly or indirectly, and whether in
cash, obligations or shares of the Corporation or other property (other than
distributions or dividends in Junior Convertible Preferred Stock or Junior Stock
to the holders of Junior Convertible Preferred Stock or Junior Stock), and shall
not permit any corporation or other entity directly or indirectly controlled by
the Corporation to purchase or redeem any of the Junior Convertible Preferred
Stock or Junior Stock or any warrants, rights, calls or options exercisable for
or convertible into any of the Junior Convertible Preferred Stock or Junior
Stock, other than a redemption pursuant to Section 5(h), unless prior to or
concurrently with such declaration, payment, setting apart for payment,
purchase, redemption or distribution, as the case may be, the full cumulative
dividends on all outstanding shares of Senior Convertible Preferred Stock shall
have been paid in full or contemporaneously are declared and paid through the
most recent dividend payment date. Notwithstanding the foregoing, a redemption
pursuant to Section 5(h) may be effected prior to the payment in full of
cumulative dividends on all outstanding shares of Senior Convertible Preferred
Stock. The dividend rights of the Series A Senior Preferred Stock and Series B
Senior Preferred Stock shall be on an equal priority.
(b) JUNIOR CONVERTIBLE PREFERRED STOCK. The holders of Junior
Convertible Preferred Stock shall be entitled to receive, when and as declared
by the Board of Directors out of funds legally available therefor, cumulative
dividends payable in cash at a rate (the "Junior Preferred Dividend Rate") of 5%
per annum through December 31, 2001, 10% per annum from January 1, 2002 through
December 31, 2002, 11% per annum from January 1, 2003 to December 31, 2003, 12%
per annum from January 1, 2004 through December 31, 2004, and commencing on
January 1, 1995 and on each January 1 thereafter, such rate shall increase by
2%. Such dividends shall be computed on the basis of the Junior Convertible
Preferred Stock Stated Value and shall be payable annually on the first day of
each October commencing on the first of such dates to occur after the shares of
Junior Convertible Preferred Stock are initially issued. Dividends shall accrue
on each share of Junior Convertible Preferred Stock from the date of issuance
thereof and shall accrue from
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day to day, whether or not earned or declared. Accrued but unpaid dividends
shall increase at a compounding rate equal to the Junior Preferred Dividend Rate
compounded annually. Dividends paid on the shares of Junior Convertible
Preferred Stock in an amount less than the total amount of such dividends at the
time accrued and payable on such shares shall be allocated pro rata on a share-
by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Junior Convertible Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 30 days
prior to the date fixed for the payment thereof. During such time as any shares
of the Junior Convertible Preferred Stock are outstanding, the Corporation shall
not declare, pay or set apart for payment any dividend on any of the Junior
Stock or make any payment on account of, or set apart money for a sinking or
other similar fund or make any payment for, the purchase, redemption or other
retirement of, any of the Junior Stock or any warrants, rights, calls or options
exercisable for or convertible into any of the Junior Stock, or make any
distribution in respect thereof, either directly or indirectly, and whether in
cash, obligations or shares of the Corporation or other property (other than
distributions or dividends in Junior Stock to the holders of Junior Stock), and
shall not permit any corporation or other entity directly or indirectly
controlled by the Corporation to purchase or redeem any of the Junior Stock or
any warrants, rights, calls or options exercisable for or convertible into any
of the Junior Stock, unless prior to or concurrently with such declaration,
payment, setting apart for payment, purchase, redemption or distribution, as the
case may be, the full cumulative dividends on all outstanding shares of Junior
Convertible Preferred Stock shall have been paid in full or contemporaneously
are declared and paid through the most recent dividend payment date.
3. LIQUIDATION PREFERENCE.
(a) SENIOR CONVERTIBLE PREFERRED STOCK. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation, the holders of the shares of Series A Senior Preferred Stock
and Series B Senior Preferred Stock then outstanding shall be entitled to be
first paid out of the assets of the Corporation available for distribution to
its stockholders an amount in cash equal to $100.00 per share of Series A Senior
Preferred Stock (the "Series A Senior Preferred Stock Stated Value") and $100.00
per share of Series B Senior Preferred Stock (the "Series B Senior Preferred
Stock Stated Value"), respectively, plus an amount equal to all dividends
(whether or not earned or declared) on such shares accrued and unpaid thereon to
the date of final distribution, before any payment shall be made or any assets
distributed to the holders of the Junior Convertible Preferred Stock or Junior
Stock. Except as provided in the preceding sentence, holders of the Senior
Convertible Preferred Stock shall not be entitled to any distribution in the
event of liquidation, dissolution or winding up of the affairs of the
Corporation. If, upon any such liquidation, dissolution or winding up of the
Corporation, the remaining assets of the Corporation available for distribution
to its stockholders shall be insufficient to pay the holders of the Senior
Convertible Preferred Stock the full amount to which they shall be entitled, the
holders of any of the Senior Convertible Preferred Stock shall share ratably in
any distribution of the remaining assets and funds of the Corporation in
proportion to the respective amounts which would otherwise be payable in respect
of the shares held by them upon such distribution if all amounts payable on or
with respect to such shares were paid in full. The distribution rights of the
Series A Senior Preferred Stock and Series B Senior Preferred Stock shall be on
an equal priority.
(b) JUNIOR CONVERTIBLE PREFERRED STOCK. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation, if assets are remaining after the payment in full of the
preferential amount of the Series A Senior Preferred Stock Stated Value and the
Series B Senior Preferred Stock Stated Value set forth in Section 3(a), the
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<PAGE>
holders of the shares of Junior Convertible Preferred Stock then outstanding
shall be next entitled to be first paid out of the assets of the Corporation
available for distribution to its stockholders an amount in cash equal to
$100.00 per share (the "Junior Convertible Preferred Stock Stated Value") plus
an amount equal to all dividends (whether or not earned or declared) on such
shares accrued and unpaid thereon to the date of final distribution, before any
payment shall be made or any assets distributed to the holders of any of the
Junior Stock. Except as provided in the preceding sentence, holders of the
Junior Convertible Preferred Stock shall not be entitled to any distribution in
the event of liquidation, dissolution or winding up of the affairs of the
Corporation. If, upon any such liquidation, dissolution or winding up of the
Corporation, the remaining assets of the Corporation available for distribution
to its stockholders shall be insufficient to pay the holders of the Junior
Convertible Preferred Stock the full amount to which they shall be entitled, the
holders of the Junior Convertible Preferred Stock shall share ratably in any
distribution of the remaining assets and funds of the Corporation in proportion
to the respective amounts which would otherwise be payable in respect of the
shares held by them upon such distribution if all amounts payable on or with
respect to such shares were paid in full.
(c) For the purposes of this Section 3, neither the voluntary sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all the property or assets of the
Corporation nor the consolidation or merger of the Corporation with one or more
other corporations shall be deemed a liquidation, dissolution or winding up,
voluntary or involuntary.
(d) The liquidation payment with respect to each outstanding
fractional share of Convertible Preferred Stock shall be equal to a ratably
proportionate amount of the liquidation payment with respect to each outstanding
share of Convertible Preferred Stock.
4. VOTING RIGHTS.
(a) RIGHT TO VOTE. Except as otherwise required by law, the Senior
Convertible Preferred Stock, the Junior Convertible Preferred Stock, the Common
Stock and any other capital stock of the Corporation entitled to vote with the
Common Stock shall be deemed to be one class for the purpose of voting, or
giving written consent in lieu of voting, on all matters submitted for the
approval of the stockholders of the Corporation. Each person in whose name
shares of Convertible Preferred Stock shall be registered on the record date for
determining the holders of the Convertible Preferred Stock entitled to vote at
any meeting of stockholders (or adjournment thereof) or to consent to corporate
action in writing without a meeting shall be entitled to, at such meeting or
with respect to such action, one vote for each share of Common Stock of the
Corporation into which each share of Convertible Preferred Stock registered in
the name of such person on such record date could be converted (with any
fractional share determined on an aggregate conversion basis being rounded to
the nearest whole share).
(b) SIGNIFICANT EVENTS.
(i) During such time as any shares of Senior Convertible
Preferred Stock are outstanding, the Corporation will not, without the
affirmative vote or consent of the holders of at least two-thirds of the
issued and outstanding shares of Senior Convertible Preferred Stock voting
together as one single and separate class, (A) create, authorize or issue
(including on conversion or exchange of any convertible or exchangeable
securities or by reclassification) any class or series of shares ranking on
a parity with or prior to the Senior
5
<PAGE>
Convertible Preferred Stock, either as to dividends upon voluntary or
involuntary liquidation, dissolution or winding up, (B) increase the
authorized shares of, or issue (including on conversion or exchange of any
convertible or exchangeable securities or by reclassification) any shares
of Senior Convertible Preferred Stock, (C) amend, alter, waive the
application of, or repeal (whether by merger, consolidation or otherwise)
any provision of the Certificate of Incorporation of the Corporation, enter
into any agreement or take any other corporate action which in any manner
would alter, change or otherwise adversely affect the powers, rights or
preferences of the Senior Convertible Preferred Stock, PROVIDED, that the
vote of holders of a series of Senior Convertible Preferred Stock shall not
be required under this clause (C) with respect to any such amendment,
alteration, waiver, repeal, agreement or other corporate action if the
effect thereof would not adversely affect the powers, rights or preferences
of that series of Senior Convertible Preferred Stock, (D) effect the
reorganization, recapitalization, liquidation, dissolution or winding up of
the Corporation, or the sale, lease, conveyance or exchange of all or
substantially all of the assets, property or business of the Corporation,
or the merger or consolidation of the Corporation with or into any other
corporation, if such transaction in any manner would alter, change or
otherwise adversely affect the powers, rights or preferences of the Senior
Convertible Preferred Stock or (E) take any action which would cause a
dividend or other distribution to be deemed to be received by the holders
of the Senior Convertible Preferred Stock for federal income tax purposes
unless such dividend or other distribution is actually received by such
holders.
(ii) During such time as any shares of Junior Convertible
Preferred Stock are outstanding, the Corporation will not, without the
affirmative vote or consent of the holders of at least two-thirds of the
issued and outstanding shares of Junior Convertible Preferred Stock voting
together as a separate class, (A) create, authorize or issue (including on
conversion or exchange of any convertible or exchangeable securities or by
reclassification) any class or series of shares ranking on a parity with or
prior to the Junior Convertible Preferred Stock, either as to dividends or
redemption or upon voluntary or involuntary liquidation, dissolution or
winding up, (B) increase the authorized shares of, or issue (including on
conversion or exchange of any convertible or exchangeable securities or by
reclassification) any shares of Junior Convertible Preferred Stock,
(C) amend, alter, waive the application of, or repeal (whether by merger,
consolidation or otherwise) any provision of the Certificate of
Incorporation of the Corporation, enter into any agreement or take any
other corporate action which in any manner would alter, change or otherwise
adversely affect the powers, rights or preferences of the Junior
Convertible Preferred Stock, (D) effect the reorganization,
recapitalization, liquidation, dissolution or winding up of the
Corporation, or the sale, lease, conveyance or exchange of all or
substantially all of the assets, property or business of the Corporation,
or the merger or consolidation of the Corporation with or into any other
corporation, if such transaction in any manner would alter, change or
otherwise adversely affect the powers, rights or preferences of the Junior
Convertible Preferred Stock or (E) take any action which would cause a
dividend or other distribution to be deemed to be received by the holders
of the Junior Convertible Preferred Stock for federal income tax purposes
unless such dividend or other distribution is actually received by such
holders.
(c) WRITTEN CONSENT. Whenever holders of the Convertible Preferred
Stock are required or permitted to take any action by vote, such action may be
taken without a meeting by written consent, setting forth the action so taken
and signed by the holders of the outstanding Senior Convertible Preferred Stock
or Junior Convertible Preferred Stock, as the case may be, having not
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less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all such shares entitled to vote thereon
were present and voted.
5. CONVERSION. Holders of the Convertible Preferred Stock shall
have the following conversion rights (collectively, the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series A Senior Preferred Stock,
Series B Senior Preferred Stock and Junior Convertible Preferred Stock shall be
convertible, at the option of the holder thereof, at any time and from time to
time, into such number of validly issued, fully paid and nonassessable shares of
Common Stock of the Corporation, as is determined by dividing the Series A
Senior Preferred Stock Stated Value, the Series B Senior Preferred Stock Stated
Value or the Junior Convertible Preferred Stock Stated Value, as the case may
be, by the respective "Conversion Prices" (as defined below) in effect at the
time of the conversion; provided, however, that if such share shall be called
for redemption pursuant to Section 5(h), it may not be converted after the
redemption date unless the Corporation shall have failed to pay or provide for
the payment of the redemption price therefor (in accordance with Section 5(h)).
The Conversion Prices initially in effect shall be $______(1) for the Series A
Senior Preferred Stock (the "Series A Senior Preferred Stock Conversion Price"),
$_______ for the Series B Senior Preferred Stock (the "Series B Senior Preferred
Stock Conversion Price"), and $5.6085 for the Junior Convertible Preferred Stock
(the "Junior Preferred Stock Conversion Price") (the Series A Senior Preferred
Stock Conversion Price, the Series B Senior Preferred Stock Conversion Price,
and the Junior Preferred Stock Conversion Price, collectively the "Conversion
Prices" and each individually, a "Conversion Price"). Such initial Conversion
Prices, and the rate at which shares of Convertible Preferred Stock may be
converted into shares of Common Stock, shall be subject to adjustment as
provided in Section 5(d) below.
(b) FRACTIONAL SHARES. No fractional shares of Common Stock shall be
issued upon conversion of the Convertible Preferred Stock, but in lieu thereof,
the Corporation shall pay a cash adjustment in respect of such fractional
interest in an amount equal to such fractional interest multiplied by the Market
Price of a share of Common Stock on the date on which such shares of Convertible
Preferred Stock are deemed to have been converted.
(c) MECHANICS OF CONVERSION.
(i) In order for a holder of the Convertible Preferred Stock to
convert shares of Convertible Preferred Stock into shares of Common Stock,
such holder shall surrender the certificate or certificates for such shares
of Convertible Preferred Stock, at the office of the transfer agent for the
Convertible Preferred Stock (or at the principal office of the Corporation
if the Corporation serves as its own transfer agent), together with written
notice that such holder elects to convert all or any number of the shares
of the Convertible Preferred Stock represented by such certificate or
certificates. Such notice shall state such holder's name or the names of
the nominees in which such holder wishes the certificate or certificates
for shares of Common Stock to be issued. If required by the Corporation,
certificates surrendered for conversion shall be endorsed or accompanied by
a written instrument or instruments of transfer, in form satisfactory to
the Corporation, duly executed by the registered holder or his or its
attorney duly authorized in writing. The date on which
- - ------------------------
1. The Series A Senior Preferred Conversion Price and the Series B Senior
Preferred Conversion Price shall be determined in accordance with Article 4 of
the Restated Certificate of Incorporation immediately prior to the filing of
this Amendment after giving effect to the Financing Transactions.
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the transfer agent (or the Corporation, if the Corporation serves as its
own transfer agent) receives such certificate or certificates and notice
shall be the conversion date ("Conversion Date"). As soon as practicable,
and in any event within five business days, after the Conversion Date, the
Corporation shall issue and deliver, or cause to be issued and delivered,
to such holder of Convertible Preferred Stock, or to his or its nominees,
(i) a certificate or certificates for the number of validly issued, fully
paid and nonassessable shares of Common Stock to which such holder shall be
entitled upon conversion and (ii) if fewer than the full number of shares
of Convertible Preferred Stock evidenced by the surrendered certificate or
certificates are being converted, a new certificate or certificates of like
tenor for the number of shares evidenced by such surrendered certificate or
certificates less the number of shares converted.
(ii) During such times as any shares of Convertible Preferred
Stock are outstanding, the Corporation shall reserve and keep available out
of its authorized but unissued stock, for the purpose of effecting the
conversion of Convertible Preferred Stock, such number of its duly
authorized shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of Convertible Preferred
Stock.
(iii) All shares of Convertible Preferred Stock which shall have
been surrendered for conversion as herein provided shall no longer be
deemed to be outstanding and all rights with respect to such shares
(including the rights, if any, to receive notices and to vote) shall
immediately cease and terminate on the Conversion Date, except only the
right of the holders thereof to receive shares of Common Stock in exchange
therefor. Such conversions shall be deemed to have been made at the close
of business on the Conversion Date and the converting holder shall be
treated for all purposes as having become the record holder of such Common
Stock at such time. Any shares of Convertible Preferred Stock so converted
shall be retired and canceled and shall not be reissued, and the
Corporation may from time to time take such appropriate action as may be
necessary to reduce the authorized Convertible Preferred Stock accordingly.
(d) ANTI-DILUTION PROVISIONS.
(i) ADJUSTMENTS; CAPITAL STOCK. The Series A Senior Preferred
Stock Conversion Price set forth above shall be subject to adjustment from
time to time as hereinafter provided. For purposes of this Section 5, the
term "Capital Stock" as used herein includes the Corporation's Common Stock
and shall also include any capital stock of any class of the Corporation
thereafter authorized which shall not be limited to a fixed sum or
percentage in respect of the rights of the holders thereof to participate
in dividends and in the distribution of assets upon the voluntary or
involuntary liquidation, dissolution or winding up of the Corporation.
(ii) ADJUSTMENT OF SERIES A SENIOR PREFERRED STOCK CONVERSION
PRICE UPON ISSUANCE OF ADDITIONAL SHARES OF CAPITAL STOCK.
(A) In case the Corporation, at any time or from time to
time after the Issue Date shall issue or sell Additional Shares of
Capital Stock without consideration or for a consideration per share
less than the greater of the Series A Senior Preferred Stock
Conversion Price or the Market Price in effect, in each case, on the
date of such issue or sale, then, and in each such case, subject to
Section 5(d)(viii),
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the Series A Senior Preferred Stock Conversion Price shall be reduced,
concurrently with such issue or sale, to a price (calculated to the
nearest .001 of a cent) determined by multiplying such Series A Senior
Preferred Stock Conversion Price by a fraction:
(1) the numerator of which shall be (a) the number of
shares of Capital Stock outstanding immediately prior to such
issue or sale plus (b) the number of shares of Capital Stock
which the aggregate consideration received by the Corporation for
the total number of such Additional Shares of Capital Stock so
issued or sold would purchase at the greater of such Market Price
or such Series A Senior Preferred Stock Conversion Price, and
(2) the denominator of which shall be the number of shares
of Capital Stock outstanding immediately after such issue or
sale,
provided that, for the purposes of this Section 5(d)(ii)(A), (w)
immediately after any Additional Shares of Capital Stock are deemed to have
been issued pursuant to Section 5(d)(iii) or 5(d)(iv), such Additional
Shares shall be deemed to be outstanding, and (x) treasury shares shall not
be deemed to be outstanding; and provided further that, for the purposes of
this Section 5(d)(ii)(A), (y) the crediting of shares of the Corporation's
Common Stock to participating real estate salespersons under the
Corporation's Deferred Equity Program which was adopted by the Corporation
on October 18, 1989 shall cause an adjustment in the Series A Senior
Preferred Stock Conversion Price concurrently with such crediting of the
shares of the Corporation's Common Stock and (z) the issuance of such
shares previously credited to participating real estate salespersons under
the Corporation's Deferred Equity Program shall not cause an adjustment in
the Series A Senior Preferred Stock Conversion Price.
(B) In case the Corporation, at any time or from time to
time after the Issue Date, shall declare, order, pay or make a
dividend or other distribution (including, without limitation, any
distribution of other or additional stock or other securities or
property or Options by way of dividend or spinoff, reclassification,
recapitalization or similar corporate rearrangement) on the Capital
Stock, other than (1) a dividend payable in Additional Shares of
Capital Stock or in Options for Capital Stock or Convertible
Securities or (2) a dividend payable in cash or other property and
declared out of retained earnings of the Corporation, then, and in
each such case, subject to Section 5(d)(viii), the Series A Senior
Preferred Stock Conversion Price in effect immediately prior to the
close of business on the record date fixed for the determination of
holders of any class of securities entitled to receive such dividend
or distribution shall be reduced, effective as of the close of
business on such record date, to a price (calculated to the nearest
.001 of a cent) determined by multiplying the Series A Senior
Preferred Stock Conversion Price by a fraction:
(1) the numerator of which shall be the Market Price in
effect on such record date or, if any class of Capital Stock
trades on an ex-dividend basis, on the date prior to the
commencement of ex-dividend trading, less the value of such
dividend or distribution which has not been declared out of
retained earnings (as determined in good faith by the Board of
Directors of the Corporation) applicable to one share of Capital
Stock, and
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<PAGE>
(2) the denominator of which shall be such Market Price.
(iii) TREATMENT OF OPTIONS AND CONVERTIBLE SECURITIES. In case
the Corporation, at any time or from time to time after the Issue Date,
shall issue, sell, grant or assume, or shall fix a record date for the
determination of holders of any class of securities entitled to receive,
any Options or Convertible Securities, then, and in each such case, the
maximum number of Additional Shares of Capital Stock (as set forth in the
instrument relating thereto, without regard to any provisions contained
therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or, in the case of Convertible Securities and
Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Capital Stock issued
as of the time of such issue, sale, grant or assumption or, in case such a
record date shall have been fixed, as of the close of business on such
record date, provided that such Additional Shares of Capital Stock shall
not be deemed to have been issued unless the consideration per share
(determined pursuant to Section 5(d)(v)) of such shares would be less than
the greater of the applicable Conversion Price or the Market Price in
effect, in each case, on the date of and immediately prior to such issue,
sale, grant or assumption or immediately prior to the close of business on
such record date or, if the Capital Stock trades on an ex-dividend basis,
on the date prior to the commencement of ex-dividend trading, as the case
may be, and provided, further, that in any such case in which Additional
Shares of Capital Stock are deemed to be issued,
(A) no further adjustment of the Series A Senior Preferred
Conversion Price shall be made upon the subsequent issue or sale of
Additional Shares of Capital Stock or Convertible Securities upon the
exercise of such Options or the conversion or exchange of such
Convertible Securities;
(B) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any change
in the consideration payable to the Corporation, or change in the
number of Additional Shares of Capital Stock issuable, upon the
exercise, conversion or exchange thereof (by change of rate or
otherwise), the Conversion Price computed upon the original issue,
sale, grant or assumption thereof (or upon the occurrence of the
record date with respect thereto), and any subsequent adjustments
based thereon, shall, upon any such change becoming effective, be
recomputed to reflect such change insofar as it affects such Options,
or the rights of conversion or exchange under such Convertible
Securities, which are outstanding at such time;
(C) upon the expiration of any such Options or of the
rights of conversion or exchange under any such Convertible Securities
which shall not have been exercised (or upon purchase by the
Corporation and cancellation or retirement of any such Options which
shall not have been exercised or of any such Convertible Securities
the rights of conversion or exchange under which shall not have been
exercised), the Conversion Price computed upon the original issue,
sale, grant or assumption thereon (or upon the occurrence of the
record date with respect thereto), and any subsequent adjustments
based thereon, shall, upon such expiration (or such cancellation or
retirement, as the case may be), be recomputed as if:
(1) in the case of Options for Capital Stock or of
Convertible Securities, the only Additional Shares of Capital
Stock issued or sold (or
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<PAGE>
deemed issued or sold) were the Additional Shares of Capital
Stock, if any, actually issued or sold upon the exercise of such
Options or the conversion or exchange of such Convertible
Securities and the consideration received therefor were (a) an
amount equal to (i) the consideration actually received by the
Corporation for the issue, sale, grant or assumption of all such
Options, whether or not exercised, plus (ii) the consideration
actually received by the Corporation upon such exercise, minus
(iii) the consideration paid by the Corporation for any purchase
of such Options which were not exercised, or (b) an amount equal
to (i) the consideration actually received by the Corporation for
the issue, sale, grant or assumption of all such Convertible
Securities which were actually converted or exchanged, plus (ii)
the additional consideration, if any, actually received by the
Corporation upon such conversion or exchange, minus (iii) the
excess, if any, of the consideration paid by the Corporation for
any purchase of such Convertible Securities, the rights of
conversion or exchange under which were not exercised, over an
amount that would be equal to the fair value (as determined in
good faith by the Board of Directors of the Corporation) of the
Convertible Securities so purchased if such Convertible
Securities were not convertible into or exchangeable for
Additional Shares of Capital Stock, and
(2) in the case of Options for Convertible Securities, only
the Convertible Securities, if any, actually issued or sold upon
the exercise of such Options were issued at the time of the
issue, sale, grant or assumption of such Options, and the
consideration received by the Corporation for the Additional
Shares of Capital Stock deemed to have then been issued were an
amount equal to (a) the consideration actually received by the
Corporation for the issue, sale, grant or assumption of all such
Options, whether or not exercised, plus (b) the consideration
deemed to have been received by the Corporation (pursuant to
Section 5(d)(v)) upon the issue or sale of the Convertible
Securities with respect to which such Options were actually exer-
cised, minus (c) the consideration paid by the Corporation for
any purchase of such Options which were not exercised.
(iv) TREATMENT OF STOCK DIVIDENDS, STOCK SPLITS, ETC.; CERTAIN
STOCK REPURCHASES.
(A) In case the Corporation, at any time or from time to time
after the Issue Date, shall declare or pay any dividend or other
distribution on the Capital Stock payable in Capital Stock, or shall
effect a subdivision of the outstanding shares of Capital Stock into a
greater number of shares of Capital Stock (by reclassification or
otherwise than by payment of a dividend in Capital Stock), then, and
in each such case, Additional Shares of Capital Stock shall be deemed
to have been issued (1) in the case of any such dividend, immediately
after the close of business on the record date for the determination
of holders of any class of securities entitled to receive such
dividend, or (2) in the case of any such subdivision, at the close of
business on the day immediately prior to the day upon which such
corporate action becomes effective.
(B) If the Corporation at any time or from time to time after
the Issue Date shall, directly or indirectly, including through a
Subsidiary (as defined below) or
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<PAGE>
otherwise, purchase, redeem or otherwise acquire (a "Repurchase") any
of its Capital Stock at a price per share greater than the Market
Price, then the Series A Senior Preferred Stock Conversion Price upon
each such Repurchase shall be adjusted to the price determined by
multiplying the Series A Senior Preferred Stock Conversion Price by a
fraction (1) the numerator of which shall be the number of shares of
Capital Stock outstanding immediately prior to the such Repurchase
minus the number of shares of Capital Stock which the aggregate
consideration for total repurchased Capital Stock would purchase at
the Market Price; and (2) the denominator of which shall be the number
of shares of Capital Stock outstanding immediately after such
Repurchase. For the purposes of this Subsection 5(d)(iv)(B), the date
as of which the Series A Senior Preferred Stock Conversion Price shall
be computed shall be the earlier of (x) the date on which the
Corporation shall enter into contract for the Repurchase of such
Capital Stock, or (y) the date of the actual Repurchase of such
Capital Stock. For purposes of this Section 5(d)(iv)(B), a Repurchase
of Convertible Securities shall be deemed to be a Repurchase of the
underlying Capital Stock, and the computation herein required shall be
made on the basis of the full exercise, conversion or exchange for
such Convertible Securities on the date as of which such computation
is required hereby to be made even if such Convertible Securities are
not exercisable, convertible or exchangeable on such date.
(v) COMPUTATION OF CONSIDERATION. For the purposes of this
Section 5:
(A) The consideration for the issue or sale of
any Additional Shares of Capital Stock or for the issue, sale, grant
or assumption of any Options or Convertible Securities, irrespective
of the accounting treatment of such consideration,
(1) insofar as it consists of cash, shall be computed as
the amount of cash received by the Corporation, and insofar as it
consists of securities or other non-cash consideration, shall be
computed as of the date immediately preceding such issue, sale,
grant or assumption as the fair value (as determined in good
faith by the Board of Directors of the Corporation) of such
consideration (or, if such consideration is received for the
issue or sale of Additional Shares of Capital Stock and the
Market Price thereof is less than the fair value, as so
determined, of such consideration, then such consideration shall
be computed as the Market Price of such Additional Shares of
Capital Stock), in each case without deducting any expenses paid
or incurred by the Corporation, any commissions or compensation
paid or concessions or discounts allowed to underwriters, dealers
or others performing similar services and any accrued interest or
dividends in connection with such issue or sale, and
(2) in case Additional Shares of Capital Stock are issued
or sold or Options or Convertible Securities are issued, sold,
granted or assumed together with other stock or securities or
other assets of the Corporation for a consideration which covers
both, shall be the proportion of such consideration so received,
computed as provided in subsection (1) above, allocable to such
Additional Shares of Capital Stock or Options or Convertible
Securities, as the case may be, all as determined in good faith
by the Board of Directors of the Corporation.
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(B) All Additional Shares of Capital Stock, Options or
Convertible Securities issued in payment of any dividend or other
distribution on any class of stock of the Corporation and all
Additional Shares of Capital Stock issued to effect a subdivision of
the outstanding shares of Capital Stock into a greater number of
shares of Capital Stock (by reclassification or otherwise than by
payment of a dividend in Capital Stock) shall be deemed to have been
issued without consideration.
(C) Additional Shares of Capital Stock deemed to have been
issued for consideration pursuant to Section 5(d)(iii), relating to
Options and Convertible Securities, shall be deemed to have been
issued for a consideration per share determined by dividing
(1) the total amount, if any, received and receivable by
the Corporation as consideration for the issue, sale, grant or
assumption of the Options or Convertible Securities in question,
plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to
any provision contained therein for a subsequent adjustment of
such consideration) payable to the Corporation upon the exercise
in full of such Options or the conversion or exchange of such
Convertible Securities or, in the case of Options for Convertible
Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible
Securities, in each case comprising such consideration as
provided in the foregoing subsection (A), by
(2) the maximum number of shares of Capital Stock (as set
forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
(D) In case the Corporation shall issue any Additional
Shares of Capital Stock, Options or Convertible Securities in
connection with the acquisition by the Corporation of the stock or
assets of any other corporation or the merger of any other corporation
into the Corporation under circumstances where on the date of issue of
such Additional Shares of Capital Stock, Options or Convertible
Securities the consideration received for such Additional Shares of
Capital Stock or deemed to have been received for the Additional
Shares of Capital Stock deemed to be issued pursuant to Section
5(d)(iii) is less than the Market Price of the Capital Stock in effect
immediately prior to such issue but on the date the number of
Additional Shares of Capital Stock or the amount and the exercise
price or conversion price of such Options or Convertible Securities to
be so issued were set forth in a binding agreement between the
Corporation and the other party or parties to such transaction the
consideration received for such Additional Shares of Capital Stock or
deemed to have been received for the Additional Shares of Capital
Stock deemed to be issued pursuant to Section 5(d)(iii) would not have
been less than the Market Price of the Capital Stock then in effect,
such Additional Shares of Capital Stock shall not be deemed to have
been issued for less than the Market Price of the Capital Stock if
such terms so set forth in such binding agreement are not changed
prior to the date of issue.
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(vi) ADJUSTMENTS FOR COMBINATIONS, ETC. In case the outstanding
shares of Capital Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Capital
Stock, the Conversion Prices in effect immediately prior to such
combination or consolidation shall, concurrently with the effectiveness of
such combination or consolidation, be proportionately increased.
(vii) DILUTION IN CASE OF OTHER SECURITIES. In case any Other
Securities shall be issued or sold or shall become subject to issue or sale
upon the conversion or exchange of any securities of the Corporation or to
subscription, purchase or other acquisition pursuant to any options issued
or granted by the Corporation for a consideration such as to dilute, on a
basis to which the standards established in the other provisions of this
Section 5 are applicable, the conversion rights of the holders of the
Series A Senior Preferred Stock, then, and in each such case, the
computations, adjustments and readjustments provided for in this Section 5
with respect to the applicable Conversion Price shall be made as nearly as
possible in the manner so provided and applied to determine the amount of
Other Securities from time to time receivable upon the conversion of the
Series A Senior Preferred Stock, so as to protect the holders of the Series
A Senior Preferred Stock against the effect of such dilution.
(viii) MINIMUM ADJUSTMENT AND TIMING OF ADJUSTMENT OF CONVERSION
PRICE.
(A) If the amount of any adjustment of the Series A Senior
Preferred Stock Conversion Price required pursuant to this Section 5
would be less than one percent (1%) of such Conversion Price in effect
at the time such adjustment is otherwise so required to be made, such
amount shall be carried forward and adjustment with respect thereto
made at the time of and together with any subsequent adjustment which,
together with such amount and any other amount or amounts so carried
forward, shall aggregate at least one percent (1%) of such Conversion
Price; provided that, upon the conversion of any shares of Series A
Senior Preferred Stock, all adjustments carried forward and not
theretofore made up to and including the date of such conversion
shall, with respect to the Series A Senior Preferred Stock then
converted, be made to the nearest .001 of a cent.
(B) Each Series A Senior Preferred Conversion Price shall
be adjusted within 90 days of the end of each fiscal year of the
Corporation with respect to events subject to the anti-dilution
provisions of the Series A Senior Preferred Stock which have occurred
during such fiscal year; provided that, upon the conversion of any
shares of Series A Senior Preferred Stock, all adjustments carried
forward and not theretofore made up to and including the date of such
conversion shall, with respect to the shares of Series A Senior
Preferred Stock then converted, be made to the nearest .001 of a cent
and provided further that the applicable Series A Senior Preferred
Conversion Price shall also be adjusted prior to any transfer or other
disposition of any Series A Senior Preferred Stock and promptly at any
time upon the request of the holder of any Series A Senior Preferred
Stock, subject to the provisions of clause 5(d)(viii)(A) above.
(ix) CHANGES IN CAPITAL STOCK; SERIES A SENIOR PREFERRED STOCK.
In case at any time the Corporation shall be a party to any transaction
(including, without limitation, a merger, consolidation, sale of all or
substantially all of the Corporation's assets, liquidation or
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<PAGE>
recapitalization of the Capital Stock) in which the previously outstanding
Capital Stock shall be changed into or exchanged for different securities
of the Corporation or common stock or other securities of another
corporation or interests in a noncorporate entity or other property
(including cash) or any combination of any of the foregoing or in which the
Capital Stock ceases to be a publicly traded security either listed on the
New York Stock Exchange or the American Stock Exchange or quoted by NASDAQ
or any successor thereto or comparable system (each such transaction being
herein called the "Transaction," the date of consummation of the
Transaction being herein called the "Consummation Date," the Corporation
(in the case of a recapitalization of the Capital Stock or any other such
transaction in which the Corporation retains substantially all of its
assets and survives as a corporation) or such other corporation or entity
(in each other case) being herein called the "Acquiring Company," and the
common stock (or equivalent equity interests) of the Acquiring Company
being herein called the "Acquirer's Common Stock"), then, as a condition of
the consummation of the Transaction, lawful and adequate provisions shall
be made so that each holder of Series A Senior Preferred Stock, upon the
conversion thereof at any time on or after the Consummation Date (but
subject, in the case of an election pursuant to clause (B) or (C) below, to
the time limitation hereinafter provided for such election),
(A) shall be entitled to receive, and any Series A Senior
Preferred Stock shall thereafter represent the right to receive, in
lieu of the Common Stock issuable upon such conversion prior to the
Consummation Date, such number of shares of the Acquirer's Common
Stock as are issuable in exchange for each share of Common Stock,
unless the Acquiring Company fails to meet the requirements set forth
in clauses (D), (E) and (F) below, in which case shares of the common
stock of the corporation (herein called a "Parent") which directly or
indirectly controls the Acquiring Company if it meets the requirements
set forth in clauses (D), (E) and (F) below, at an aggregate
conversion price for such number of shares equal to the lesser of (1)
the Conversion Price in effect immediately prior to the Consummation
Date multiplied by a fraction the numerator of which is the aggregate
market price for such number of shares (determined in the same manner
as provided in the definition of Market Price) of the Acquirer's
Common Stock or the Parent's common stock, as the case may be,
immediately prior to the Consummation Date and the denominator of
which is the Market Price per share of Common Stock immediately prior
to the Consummation Date, or (2) the aggregate market price for such
number of shares (as so determined) of the Acquirer's Common Stock or
the Parent's common stock, as the case may be, immediately prior to
the Consummation Date (subject in each case to adjustments from and
after the Consummation Date as nearly equivalent as possible to the
adjustments provided for in this Section 5),
or at the election of the holder of such Series A Senior Preferred Stock
pursuant to notice given to the Corporation on or before the later of (1)
the thirtieth day following the Consummation Date, and (2) the sixtieth day
following the date of delivery or mailing to such holder of the last proxy
statement relating to the vote on the Transaction by the holders of the
Capital Stock,
(B) shall be entitled to receive, and any Series A Senior
Preferred Stock shall thereafter represent the right to receive, in
lieu of the Capital Stock issuable upon such conversion prior to the
Consummation Date, the highest amount of securities or other property
to which such holder would actually have been entitled as
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<PAGE>
a stockholder upon the consummation of the Transaction if such holder
had converted such Series A Senior Preferred Stock immediately prior
thereto (subject to adjustments from and after the Consummation Date
as nearly equivalent as possible to the adjustments provided for in
this Section 5), provided that if a purchase, tender or exchange offer
shall have been made to and accepted by the holders of more than 50%
of the outstanding shares of Capital Stock, and if the holder of such
Series A Senior Preferred Stock so designates in such notice given to
the Corporation, the holder of such Series A Senior Preferred Stock
shall be entitled to receive in lieu thereof, the highest amount of
securities or other property to which such holder would actually have
been entitled as a stockholder if such holder had converted such
Series A Senior Preferred Stock prior to the expiration of such
purchase, tender or exchange offer and accepted such offer (subject to
adjustments from and after the consummation of such purchase, tender
or exchange offer as nearly equivalent as possible to the adjustments
provided for in this Section 5),
or, if neither the Acquiring Company nor the Parent meets the requirements
set forth in clauses (D), (E) and (F) below, at the election of the holder
of Series A Senior Preferred Stock pursuant to notice given to the
Corporation on or before the later of (1) the thirtieth day following the
Consummation Date, and (2) the sixtieth day following the date of delivery
or mailing to such holder of the last proxy statement relating to the vote
on the Transaction by the holders of the Common Stock,
(C) shall be entitled to receive, within 15 days after such
election, in full satisfaction of the Conversion Rights afforded to
the Series A Senior Preferred Stock held by such holder under this
Section 5, an amount equal to the fair market value of such conversion
rights as determined by an independent investment banker (with an
established national reputation as a valuer of equity securities)
selected by the Corporation, such fair market value to be determined
with regard to all material relevant factors but without regard to the
effects on such value of the Transaction.
The Corporation agrees to obtain, and deliver to each holder of Series A
Senior Preferred Stock a copy of, the determination of an independent
investment banker (selected by the Corporation and reasonably satisfactory
to the holders of Series A Senior Preferred Stock) necessary for the
valuation under clause (C) above within 15 days after the Consummation Date
of any Transaction to which clause (C) is applicable.
The requirements referred to above in the case of the Acquiring
Company or its Parent are that immediately after the Consummation Date:
(D) it is a solvent corporation organized under the laws of
any State of the United States of America having its common stock
listed on the New York Stock Exchange or the American Stock Exchange
or quoted by NASDAQ or any successor thereto or comparable system, and
such common stock continues to meet such requirements for such listing
or quotation,
(E) it is required to file, and in each of its three fiscal
years immediately preceding the Consummation Date has filed, reports
with the Securities and Exchange Commission pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended, and
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(F) in the case of the Parent, such Parent is required to
include the Acquiring Company in the consolidated financial statements
contained in the Parent's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission and is not itself included in the
consolidated financial statements of any other Person (other than its
consolidated subsidiaries).
Notwithstanding anything contained herein to the contrary, the Corporation
shall not effect any Transaction unless prior to the consummation thereof
each corporation or entity (other than the Corporation) which may be
required to deliver any securities or other property upon the conversion of
Series A Senior Preferred Stock, the surrender of Series A Senior Preferred
Stock or the satisfaction of conversion rights as provided herein shall
assume, by written instrument delivered to each holder of Series A Senior
Preferred Stock, the obligation to deliver to such holder such securities
or other property to which, in accordance with the foregoing provisions,
such holder may be entitled, and such corporation or entity shall have
similarly delivered to each holder of Series A Senior Preferred Stock an
opinion of counsel for such corporation or entity, satisfactory to each
holder of Series A Senior Preferred Stock, which opinion shall state that
all the outstanding Series A Senior Preferred Stock, including, without
limitation, the conversion provisions applicable thereto, if any, shall
thereafter continue in full force and effect and shall be enforceable
against such corporation or entity in accordance with the terms hereof and
thereof, together with such other matters as such holders may reasonably
request.
(x) TREATMENT OF STOCK DIVIDENDS, STOCK SPLITS, ETC.; CERTAIN
TRANSACTIONS. In case the Corporation, at any time or from time to time
after the Issue Date, shall be a party to any Transaction, each holder of
Series B Senior Preferred Stock and each holder of Junior Convertible
Preferred Stock, upon the exercise thereof at any time on or after the
Consummation Date shall be entitled to receive, and such Series B Senior
Preferred Stock and Junior Convertible Preferred Stock shall thereafter
represent the right to receive, in lieu of the Common Stock issuable upon
conversion prior to the Consummation Date the kind and amount of securities
or property (including cash) which it would have owned or have been
entitled to receive after the happening of such Transaction had such Series
B Senior Preferred Stock or Junior Convertible Preferred Stock been
converted immediately prior to such Transaction.
Notwithstanding anything contained herein to the contrary, the
Corporation shall not effect any Transaction unless prior to the
consummation thereof each corporation or entity (including, without
limitation, the Corporation) which may be required to deliver any secu-
rities or property (including cash) upon the conversion of Series B Senior
Preferred Stock or Junior Convertible Preferred Stock, the surrender of
Series B Senior Preferred Stock or Junior Convertible Preferred Stock or
the satisfaction of conversion rights as provided herein shall assume, by
written instrument delivered to each holder of Series B Senior Preferred
Stock or Junior Convertible Preferred Stock, the obligation to deliver to
such holder such securities or other property to which, in accordance with
the foregoing provisions, such holder may be entitled, and such corporation
or entity shall have similarly delivered to each holder of Series B Senior
Preferred Stock or Junior Convertible Preferred Stock an opinion of counsel
for such corporation or entity, satisfactory to each such holder, which
opinion shall state that all the rights and privileges, including without
limitation, conversion privileges of the Series B Senior Preferred Stock
and the Junior Convertible Preferred Stock shall thereafter continue in
full force and effect and shall be enforceable against such
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corporation or entity in accordance with the terms hereof and thereof,
together with such other matters as such holders may reasonably request.
In case the Corporation shall (i) pay a dividend in shares of
Capital Stock or make a distribution to all holders of shares of Capital
Stock in shares of Capital Stock, (ii) subdivide its outstanding shares of
Capital Stock, (iii) combine its outstanding shares of Capital Stock into a
smaller number of shares of Capital Stock or (iv) issue by reclassification
of its shares of Capital Stock other securities of the Corporation, the
Series B Preferred Stock Conversion Price and the Junior Preferred Stock
Conversion Price shall be adjusted (to the nearest cent) by multiplying,
(x) in the case of the Series B Senior Preferred Stock, the Series B
Preferred Stock Conversion Price immediately prior to such adjustment by a
fraction, of which the numerator shall be the number of shares of Common
Stock for which each share of Series B Senior Preferred Stock may be
converted immediately prior to such adjustment, and of which the
denominator shall be the number of shares of Common Stock for which each
share of Series B Senior Preferred Stock may be converted immediately
thereafter, or (y) in the case of the Junior Preferred Stock Conversion
Price, the Junior Preferred Stock Conversion Price immediately prior to
such adjustment by a fraction, of which the numerator shall be the number
of shares of Common Stock for which each share of Junior Convertible
Preferred Stock may be converted immediately prior to such adjustment, and
of which the denominator shall be the number of shares of Common Stock for
which each share of Junior Convertible Preferred Stock may be converted
immediately thereafter. An adjustment made pursuant to the foregoing
sentence shall become effective immediately after the effective date of
such event retroactive to the record date, if any, for such event.
(xi) CERTAIN ISSUES AND REPURCHASES EXCEPTED. Anything herein to
the contrary notwithstanding, the Corporation shall not be required to make any
adjustment of the Series A Senior Preferred Conversion Prices in the case of (A)
the issuance of shares of the Senior Convertible Preferred Stock on the Issue
Date and the issuance of shares of Series A Senior Preferred Stock and Series B
Senior Preferred Stock pursuant to this Article IV upon the filing of the
Certificate of Amendment as described herein, (B) the issuance of shares of the
Junior Convertible Preferred Stock on the Issue Date, (C) the issuance of
warrants to purchase shares of Common Stock (the "Warburg Warrants")
concurrently with the issuance of the Senior Convertible Preferred Stock on
January 29, 1993 (the "Restructuring Date"), and any amendments to such Warburg
Warrants through the date of filing of the Certificate of Amendment, (D) the
issuance to The Prudential Insurance Company of America ("Prudential") of
warrants to purchase shares of Common Stock (the "New Prudential Warrants")
concurrently with the issuance of the Junior Convertible Preferred Stock, and
any amendments to such New Prudential Warrants through the date of filing of the
Certificate of Amendment, (E) the issuance of warrants to purchase shares of
Common Stock (the "1994 Warrants") concurrently with the filing of this
Certificate of Amendment, and any amendments to such 1994 Warrants, (F) the
issuance of shares of Capital Stock issuable upon conversion of the Convertible
Preferred Stock or upon exercise of the Warburg Warrants, the New Prudential
Warrants, the 1994 Warrants, the Stock Subscription Warrant, dated as of
November 25, 1986, by the Corporation to Prudential or any other Option or right
outstanding on the Issue Date to purchase or otherwise acquire Capital Stock,
(G) the granting by the Corporation, after the Issue Date, of Options to
purchase Capital Stock or the sale or grant, after the Issue Date, of Capital
Stock, pursuant to option or stock purchase plans or agreements, or other
incentive compensation plans or agreements, heretofore or hereafter adopted in
respect of, or entered into with, directors, officers, employees or salespersons
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(other than pursuant to the Corporation's Preferred Equity Program) of the
Corporation or any of its Subsidiaries in connection with their employment,
being directors or acting as salesperson, provided that the consideration
for the sale or grant of any such Options or Capital Stock (including the
exercise price of any Option) is at least equal to the Market Price of such
shares of Capital Stock on the date such Options are granted or the date
established by any such plan for a purchase thereunder, as the case may be,
(H) the Repurchase from any director, officer, employee or salesperson of
the Corporation or any Subsidiary of any Option or share of Capital Stock
upon his resignation or other termination from being a director, officer,
employee or salesperson of the Corporation or any Subsidiary or (I) the
issuance of shares of Common Stock in payment of the redemption price of
the Rights issued pursuant to the Rights Agreement, dated as of March 13,
1989, as amended, between the Corporation and Bank of America N.T. & S.A.,
as Rights Agent.
(xii) NOTICE OF ADJUSTMENT. Upon the occurrence of any event
requiring an adjustment of any Conversion Price, then and in each such case
the Corporation shall promptly deliver to each holder of Convertible
Preferred Stock a certificate signed by the President or any Vice President
and the Secretary or any Assistant Secretary of the Corporation (an
"Officers' Certificate") stating the applicable Conversion Price resulting
from such adjustment and the increase or decrease, if any, in the number of
shares of Common Stock issuable upon conversion of such Convertible
Preferred Stock, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based. Within 90
days after each fiscal year in which any such adjustment shall have
occurred, or within 30 days after any request therefor by any holder of
Convertible Preferred Stock stating that such holder contemplates
conversion of such Convertible Preferred Stock, the Corporation will obtain
and deliver to each holder of Convertible Preferred Stock the opinion of
its regular independent auditors or another firm of independent public
accountants of recognized national standing selected by the Corporation's
Board of Directors who are satisfactory to the registered holders of a
majority of the Convertible Preferred Stock, which opinion shall confirm
the statements in the most recent Officers' Certificate delivered under
this Section 5(d)(xi). It is understood and agreed that the independent
public accountant rendering any such opinion shall be entitled expressly to
assume in such opinion the accuracy of any determination of fair value made
by the Board of Directors of the Corporation pursuant to Section 5(d)(v).
(xiii) OTHER NOTICES. In case at any time:
(A) the Corporation shall declare or pay to the holders of
Capital Stock any dividend other than a regular periodic cash dividend
or any periodic cash dividend in excess of 115% of the cash dividend
for the comparable fiscal period in the immediately preceding fiscal
year;
(B) the Corporation shall declare or pay any dividend upon
Capital Stock payable in stock or make any special dividend or other
distribution (other than regular cash dividends) to the holders of
Capital Stock;
(C) the Corporation shall offer for subscription pro rata
to the holders of Capital Stock any additional shares of stock of any
class or other rights;
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(D) there shall be any capital reorganization, or
reclassification of the Capital Stock of the Corporation, or
consolidation or merger of the Corporation with, or sale of all or
substantially all of its assets to, another corporation or other
entity;
(E) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Corporation; or
(F) there shall be any other Transaction;
then, in any one or more of such cases, the Corporation shall give to each
holder of Convertible Preferred Stock (1) at least 15 days prior to any
event referred to in clause (A) or (B) above, at least 30 days prior to any
event referred to in clause (C), (D) or (E) above, and within five business
days after it has knowledge of any pending Transaction, written notice of
the date on which the books of the Corporation shall close or a record
shall be taken for such dividend, distribution or subscription rights or
for determining rights to vote in respect of any such reorganization, re-
classification, consolidation, merger, sale, dissolution, liquidation,
winding-up or Transaction and (2) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation,
winding-up or Transaction known to the Corporation, at least 30 days prior
written notice of the date (or, if not then known, a reasonable
approximation thereof by the Corporation) when the same shall take place.
Such notice in accordance with the foregoing clause (1) shall also specify,
in the case of any such dividend, distribution or subscription rights, the
date on which the holders of Capital Stock shall be entitled thereto, and
such notice in accordance with the foregoing clause (2) shall also specify
the date on which the holders of Capital Stock shall be entitled to
exchange their Capital Stock for securities or other property deliverable
upon such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation, winding-up or Transaction, as the case may be.
Such notice shall also state that the action in question or the record date
is subject to the effectiveness of a registration statement under the
Securities Act of 1933, as amended, or to a favorable vote of security
holders, if either is required.
(xiv) CERTAIN EVENTS. If any event occurs as to which, in the
good faith judgment of the Board of Directors of the Corporation, the other
provisions of this Section 5 are not strictly applicable or if strictly
applicable would not fairly protect the conversion rights of the holders of
the Series A Senior Preferred Stock in accordance with the essential intent
and principles of such provisions, then the Board of Directors of the
Corporation shall appoint its regular independent auditors or another firm
of independent public accountants of recognized national standing who are
satisfactory to the holders of a majority of the Series A Senior Preferred
Stock which shall give their opinion upon the adjustment, if any, on a
basis consistent with such essential intent and principles, necessary to
preserve, without dilution, the rights of the holders of the Series A
Senior Preferred Stock. Upon receipt of such opinion, the Board of Direc-
tors of the Corporation shall forthwith make the adjustments described
therein; provided, that no such adjustment shall have the effect of
increasing any Series A Senior Preferred Stock Conversion Price as other-
wise determined pursuant to this Section 5. The Corporation may make such
reductions in the Series A Senior Preferred Conversion Price or increase in
the number of shares of Common Stock purchasable hereunder as it deems
advisable, including any reductions or increases, as the case may be,
necessary to ensure that any event treated for Federal income tax purposes
as a distribution of stock or stock rights not be taxable to recipients.
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(e) NO IMPAIRMENT. The Corporation shall not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but shall at
all times in good faith assist in the carrying out of all the provisions of this
Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series A Senior Preferred Stock against impairment.
(f) MANDATORY CONVERSION. If (i) at all times during a two-year
period prior to the date of conversion the ratio of Consolidated Debt to EBITDA
(each as defined below) of the Corporation has not exceeded 3.0:1.0, (ii) on
each Trading Day during a six-month period prior to the date of conversion the
Daily Market Price of the Common Stock has exceeded $8.75 per share, subject to
proportionate adjustment whenever there shall occur a stock split, combination,
reclassification or other similar event involving the Common Stock, and (iii)
the Corporation is in full compliance with all of the terms and conditions of
all agreements pursuant to which the Corporation or any Subsidiary shall have
incurred Indebtedness for borrowed money all, but not less than all, of the then
outstanding shares of Convertible Preferred Stock shall be converted into shares
of Common Stock as provided below. The Corporation shall provide written notice
of the occurrence of the foregoing events giving rise to such mandatory
conversion by United States certified or registered mail, postage prepaid,
mailed not more than 30 days thereafter to all holders of record of the shares
to be converted at such holders' addresses as the same appear on the stock
register of the Corporation. Each such notice shall state the proposed date on
which such mandatory conversion will occur (which date shall not be fewer than
30 days after the date notice thereof is received), the applicable Conversion
Price and the place or places where certificates for shares of the Convertible
Preferred Stock are to be surrendered for conversion. From and after the date
of mandatory conversion, the certificates for the Convertible Preferred Stock
shall be deemed to represent only the shares of Common Stock into which such
shares of Convertible Preferred Stock shall have been converted. The Holder of
such certificates shall surrender such certificates for conversion upon and
pursuant to the request of the Corporation.
(g) CERTAIN DEFINITIONS. For purposes of this Article IV, the
following terms shall have the following meanings:
(i) "ADDITIONAL SHARES OF CAPITAL STOCK" shall mean all
shares (including treasury shares) of Capital Stock issued or sold
(or, pursuant to Sections 5(d)(iii) or 5(d)(iv) deemed to be issued)
by the Corporation after the Issue Date, whether or not subsequently
reacquired or retired by the Corporation, other than shares of Common
Stock issued upon the conversion of the Convertible Preferred Stock.
(ii) "CONSOLIDATED DEBT" shall mean with respect to any
Person, the total Indebtedness of such Person and its Subsidiaries on
a consolidated basis determined in accordance with GAAP.
(iii) "CONVERTIBLE SECURITIES" shall mean any evidences
of indebtedness, shares of stock (other than Common Stock)
or securities directly or indirectly convertible into or exchangeable
for Additional Shares of Capital Stock.
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(iv) "DAILY MARKET PRICE" shall mean, on any date specified
herein, (A) if any class of Capital Stock is listed or admitted to
trading on any national securities exchange, the average of the high
and low sale price of shares of each such class of Capital Stock or if
no such sale takes place on such date, the average of the highest
closing bid and lowest closing asked prices thereof on such date, in
each case as officially reported on all national securities exchanges
on which each such class of Capital Stock is then listed or admitted
to trading, or (B) if no shares of any class of Capital Stock are then
listed or admitted to trading on any national securities exchange, the
highest closing price of any class of Capital Stock on such date in
the over-the-counter market as shown by NASDAQ or, if no such shares
of any class of Capital Stock are then quoted in such system, as
published by the National Quotation Bureau, Incorporated or any
similar successor organization, and in either case as reported by any
member firm of the New York Stock Exchange selected by the
Corporation. If no shares of any class of Capital Stock are then
listed or admitted to trading on any national securities exchange and
if no closing bid and asked prices thereof are then so quoted or
published in the over-the-counter market, "Daily Market Price" shall
mean the higher of (x) the book value per share of Capital Stock
(assuming for the purposes of this calculation the economic
equivalence of all shares of all classes of Capital Stock) as
determined on a fully diluted basis in accordance with generally
accepted accounting principles by a firm of independent public
accountants of recognized standing (which may be its regular auditors)
selected by the Board of Directors of the Corporation as of the last
day of any month ending within 60 days preceding the date as of which
the determination is to be made or (y) the fair value per share of
Capital Stock (assuming for the purposes of this calculation the
economic equivalence of all shares of all classes of Capital Stock),
as determined on a fully diluted basis in good faith by an independent
brokerage firm or Standard & Poor's Corporation (as selected by the
Board of Directors of the Corporation), as of a date which is 15 days
preceding the date as of which the determination is to be made.
(v) "EBITDA" shall mean, with respect to any Person, for
any period, the sum of (A) the net income of such Person and its
Subsidiaries on a consolidated basis before taxes, excluding
extraordinary items and income or loss from discontinued operations,
(B) total interest expense of such Person and its Subsidiaries on a
consolidated basis and (C) depreciation and amortization for such
Person and its Subsidiaries on a consolidated basis.
(vi) "GAAP" shall mean generally accepted accounting
principles set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified
Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other
entity as may be approved by a significant segment of the accounting
profession.
(vii) "INDEBTEDNESS" shall mean, with respect to any Person,
all items (excluding items of contingency reserves or of reserves for
deferred income taxes) which in accordance with GAAP would be included
in determining total liabilities as shown on the liability side of a
balance sheet of such Person as of the date on which Indebtedness is
to be determined.
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(viii) "ISSUE DATE" shall mean the date on which shares of
Convertible Preferred Stock are first issued by the Corporation.
"Issue Date" with respect to the shares of Series A Senior Preferred
Stock and Series B Senior Preferred Stock outstanding on the date of
filing of the Certificate of Amendment shall be deemed to be the date
of issuance of the respective shares of Existing Senior Convertible
Preferred Stock which were exchanged for or converted into such shares
of Series A Senior Preferred Stock and Series B Senior Preferred
Stock.
(ix) "MARKET PRICE" shall mean, on any date specified
herein, (A) if any class of Capital Stock is listed or admitted to
trading on any national securities exchange, the highest price
obtained by taking the arithmetic mean over a period of 20 consecutive
Trading Days ending the second Trading Day prior to such date of the
average, on each such Trading Day, of the high and low sale price of
shares of each such class of Capital Stock or if no such sale takes
place on such date, the average of the highest closing bid and lowest
closing asked prices thereof on such date, in each case as officially
reported on all national securities exchanges on which each such class
of Capital Stock is then listed or admitted to trading, or (B) if no
shares of any class of Capital Stock are then listed or admitted to
trading on any national securities exchange, the highest closing price
of any class of Capital Stock on such date in the over-the-counter
market as shown by NASDAQ or, if no such shares of any class of
Capital Stock are then quoted in such system, as published by the
National Quotation Bureau, Incorporated or any similar successor
organization, and in either case as reported by any member firm of the
New York Stock Exchange selected by the Corporation. If no shares of
any class of Capital Stock are then listed or admitted to trading on
any national securities exchange and if no closing bid and asked
prices thereof are then so quoted or published in the over-the-counter
market, "Market Price" shall mean the higher of (x) the book value per
share of Capital Stock (assuming for the purposes of this calculation
the economic equivalence of all shares of all classes of Capital
Stock) as determined on a fully diluted basis in accordance with
generally accepted accounting principles by a firm of independent
public accountants of recognized standing (which may be its regular
auditors) selected by the Board of Directors of the Corporation as of
the last day of any month ending within 60 days preceding the date as
of which the determination is to be made or (y) the fair value per
share of Capital Stock (assuming for the purposes of this calculation
the economic equivalence of all shares of all classes of Capital
Stock), as determined on a fully diluted basis in good faith by an
independent brokerage firm or Standard & Poor's Corporation (as
selected by the Board of Directors of the Corporation), as of a date
which is 15 days preceding the date as of which the determination is
to be made.
(x) "OPTIONS" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Additional Shares
of Capital Stock or Convertible Securities.
(xi) "OTHER SECURITIES" shall mean any stock (other than
Capital Stock) and any other securities of the Corporation or any
other Person (corporate or otherwise) which the holders of the
Convertible Preferred Stock at any time shall be entitled to receive,
or shall have received, upon the conversion or partial conversion of
the Convertible Preferred Stock, in lieu of or in addition to Common
Stock, or which at any time shall be issuable or shall have been
issued in exchange for or in
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replacement of Common Stock or Other Securities pursuant to Section
5(d)(ix) or otherwise.
(xii) "PERSON" shall mean any individual, firm, corporation
or other entity, and shall include any successor (by merger or
otherwise) of such entity.
(xiii) "SUBSIDIARY" shall mean any corporation or other entity
the majority of the outstanding voting shares of which is at the time
owned (either alone or through Subsidiaries or together with
Subsidiaries) by the Corporation or another Subsidiary.
(xiv) "TRADING DAY" shall mean any day on which the New York
Stock Exchange is open for trading on a regular basis.
(xv) "TRANSACTION" shall have the meaning set forth in
Section 5(d)(ix).
(h) JUNIOR CONVERTIBLE PREFERRED STOCK.
(i) In the event that the Corporation undertakes to sell its
Common Stock through an underwritten public offering (an "Offering"), and
if the underwriter advises the Corporation that in order to complete such
Offering on the most favorable terms to the Corporation it is necessary for
the Junior Convertible Preferred Stock to be retired, then the Corporation
may so notify the holders of the Junior Convertible Preferred Stock (the
"Conversion Notice"), and such holders shall, on or prior to the Conversion
Date (as defined below) convert their Junior Convertible Preferred Stock
into Common Stock pursuant to the terms of this Article IV. The holders of
the Junior Convertible Preferred Stock shall be obligated to convert their
Junior Convertible Preferred Stock only if (A) on or prior to the
Conversion Date, all the holders of the Series B Senior Preferred Stock
shall have converted their Series B Senior Preferred Stock into Common
Stock, or all Series B Senior Preferred Stock shall otherwise have been
retired, and (B) the Market Price of the Common Stock at the Conversion
Date is greater than the sum of the Junior Preferred Stock Stated Value
plus accrued dividends per share of Junior Convertible Preferred Stock
(such sum being referred to herein as the "Accreted Value"); PROVIDED that
if at the Conversion Date, the Market Price of the Common Stock is less
than the Accreted Value, then each holder of the Junior Convertible
Preferred Stock must either, at its option (A) convert the Junior
Convertible Preferred Stock into Common Stock on or prior to the Conversion
Date or (B) require the Corporation to redeem the Junior Convertible
Preferred Stock at the Accreted Value, in which case such holder shall
notify the Corporation of its election on or prior to the Conversion Date.
If a holder elects to require the Corporation to redeem the Junior
Convertible Preferred Stock, then the Corporation shall make such
redemption within 60 days after the Conversion Date; PROVIDED that the
Corporation shall be obligated to redeem the Junior Convertible Preferred
Stock only if it has sufficient funds legally available on the redemption
date in order to redeem shares of Junior Convertible Preferred Stock
pursuant to this Section 5(h); PROVIDED FURTHER that if the Board
determines not to proceed with the Offering any notice of redemption shall
be withdrawn and the Corporation's obligation to redeem such shares shall
terminate. "Conversion Date" shall mean the date stated in the Conversion
Notice on or prior to which the holders of the Junior Convertible Preferred
Stock shall be required to convert their Junior Convertible Preferred Stock
in accordance with this Section 5(h). Without the consent of
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each holder of Junior Convertible Preferred Stock, the Conversion Date may
not be a date earlier than the closing date of the Offering; PROVIDED that
the Conversion Notice may identify the Offering's closing date as "the
closing date," in lieu of using a calendar date.
(ii) If the Corporation shall be required to redeem shares Junior
Convertible Preferred Stock pursuant to Section 5(h)(i), then notice of
such redemption shall be given by United States certified or registered
mail, postage prepaid, mailed not less than thirty (30) days nor more than
sixty (60) days prior to the redemption date, to all holders of record of
the shares to be redeemed at such holders' addresses as the same appear on
the stock register of the Corporation. Each such notice shall state: (A)
the redemption date; (B) the number of shares of Junior Convertible
Preferred Stock to be redeemed and, if less than all the shares held by
such holder are to be redeemed from such holder, the number of shares to be
redeemed from such holder; (C) the redemption price; and (D) the place or
places where certificates for shares of the Junior Convertible Preferred
Stock are to be surrendered for payment of the redemption price.
(iii) Notice having been mailed as aforesaid, from and after the
redemption date (unless default shall be made by the Corporation in
providing payment of the redemption price by deposit with a bank or trust
company having capital and surplus of at least $50,000,000 of the shares
called for redemption) said shares shall no longer be deemed to be
outstanding, and all rights of the holders thereof as stockholders of the
Corporation (except the right to receive from the Corporation the
redemption price) shall cease. Upon surrender, in accordance with the
above-mentioned notice, of the certificates for any shares so redeemed
(properly endorsed or signed for transfer, if the Board of Directors of the
Corporation shall so require and the notice shall so state), such shares
shall be redeemed by the Corporation at the redemption price provided for
in this Section 5(h). In the event fewer than all of the shares
represented by any such certificate are redeemed, a new certificate shall
be issued, without cost to the holder thereof, representing the unredeemed
shares. The provisions of this Section 5(h)(iii) shall be subject to
Section 5(h)(i).
(i) REACQUIRED SHARES. Shares of Convertible Preferred Stock which
have been issued and reacquired in any manner, including shares purchased or
redeemed or exchanged, shall (upon compliance with any applicable provisions of
the laws of the State of Delaware) have the status of authorized and unissued
shares of Preferred Stock undesignated as to series and may be redesignated and
reissued as part of any series of the Preferred Stock; provided, however, that
no such issued and reacquired shares of Senior Convertible Preferred Stock shall
be reissued or sold as Series A Senior Preferred Stock and no such issued and
reacquired shares of Junior Convertible Preferred Stock shall be reissued or
sold as Junior Convertible Preferred Stock.
SECOND: That thereafter, pursuant to resolution of the Board of
Directors, a meeting of the stockholders of said corporation was duly called and
held, upon notice in accordance with Section 222 of the General Corporation Law
of the State of Delaware at which meeting the necessary number of shares as
required by statute were voted in favor of the amendments.
THIRD: That said amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
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IN WITNESS WHEREOF, GRUBB & ELLIS COMPANY has caused this certificate
to be signed by Robert J. Walner, its Senior Vice President, and Carol M.
Vanairsdale, its Assistant Secretary, this _____ day of _________, 1994.
GRUBB & ELLIS COMPANY
______________________________
Robert J. Walner
Senior Vice President
Attest:
______________________________
Carol M. Vanairsdale
Assistant Secretary
<PAGE>
APPENDIX B
FLEMINGS ROBERT FLEMING INC.
1285 Avenue of the Americas
New York, NY 10019
212-713-8500
FAX 212-713-8694
May 10, 1994
PRIVATE & CONFIDENTIAL
Board of Directors
Grubb & Ellis Company
One Montgomery Street
Telesis Tower, 9th Floor
San Francisco, CA 94104
Members of the Board:
You have requested our opinion as investment bankers regarding the fairness,
from a financial point of view, of the consideration paid by Grubb & Ellis
Company (the "Company") to Warburg, Pincus Investors, L.P. ("Warburg") and The
Prudential Insurance Company of America ("Prudential") for their participation
in the financing transactions described in the Proposed Bridge Loan and Rights
Offering Term Sheet dated March 28, 1994 by and among the Company, Warburg and
Prudential (the "Financing Transactions") and the form, methodology and terms of
the Financing Transactions to the Company and its Common Stockholders (not
including Warburg, Prudential and Joe F. Hanauer).
As you are aware, as of the date of this letter and the period prior hereto, no
employee or associate of Robert Fleming Inc. ("Flemings") has or had any direct
financial interest in the Company or in any of its affiliates; acts or has acted
as an officer, director, or employee of the Company or any of its affiliates; or
has any relationship with the Company or any of its affiliates, except that
Flemings has acted as financial advisor for other companies that Warburg or its
affiliates have significant or controlling interests in. We are not aware of
any situation or condition that might affect our capacity to perform the
valuations we were engaged to perform.
In connection with rendering our opinion, we have reviewed and analyzed, among
other things, the following: (i) drafts of the proxy statement related to the
Financing Transactions; drafts of the registration statement related to the
Rights Offering, and such other publicly available information concerning the
Company which we believed to be relevant to its inquiry, (ii) financial and
operating information with respect to the business, operations and prospects of
the Company furnished to us by the Company, (iii) trading history of the
Company's Common Stock and a comparison of that trading history and various
valuation
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measures with those of other companies which we deemed relevant, (iv) a
comparison of the historical financial results and present financial condition
of the Company with those of other companies which we deemed relevant, and (v) a
comparison of the financial terms of the Financing Transactions with the terms
of certain other recent transactions which we deemed relevant. In addition, we
had discussions with the management of the Company concerning its business,
operations, assets, financial condition and prospects and undertook such other
studies, analyses and investigations as we deemed appropriate.
In rendering our opinion, we have relied upon the accuracy and completeness of
the financial information and other information provided by the Company and used
by us in arriving at our opinion without independent verification. In arriving
at our opinion, we did not conduct a physical inspection of the properties and
facilities of the Company, did not meet with individual agents from any of the
sales offices of the Company, and did not make or obtain any evaluations or
appraisals of the assets or liabilities of the Company. Our opinion was based
on market, economic and other conditions as they existed, and could be
evaluated, as of the date thereof. Our opinion assumes that Warburg, Prudential
and Joe F. Hanauer effected a change in control of the Company in the
restructuring in 1993. Regarding the exercise price of the rights for the
Rights Offering, we were not requested and did not give any opinion to the
Board, and our opinion does not constitute a recommendation to any stockholder
of the Company as to how such stockholder should vote with respect to approving
the Financing Transactions or whether or not such stockholder should participate
in the Rights Offering, if approved.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the consideration paid by the Company to
Warburg and Prudential for their participation in the Financing Transactions and
the form, methodology and terms of the Financing Transactions are fair to the
holders of Common Stock of the Company (other than Warburg, Prudential and Joe
F. Hanauer) from a financial point of view.
Very truly yours,
C.F. Stone, III
Managing Director
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GRUBB & ELLIS COMPANY
PROXY - For the Annual Meeting - August 16, 1994
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned, being a stockholder of Grubb & Ellis Company (the
"Company") and having received the Notice of Annual Meeting of Stockholders
dated June __, 1994 and the accompanying Proxy Statement, appoints Joe F.
Hanauer and Robert J. Walner and each or any of them as Proxies, with full power
of substitution, to represent and vote all the shares of Common Stock which the
undersigned may be entitled to vote at the Annual Meeting of Stockholders to be
held at the Grand Hyatt on Union Square Hotel, 345 Stockton Street, San
Francisco, California in San Francisco Rooms A, B and C on Tuesday, August 16,
1994 at 3:00 p.m. or at any and all adjournments thereof, with all powers which
the undersigned would possess if personally present.
The shares represented by this Proxy will be voted in the manner directed
herein by the undersigned. If no direction is made, the Proxy will be voted
"FOR" the proposals described in item (1) (the "Financing Transactions") and
item (2) (the "Amendments to Preferred Stock") and "FOR" all nominees listed
under item (3), all of said items being more fully described in the Notice of
Annual Meeting of Stockholders and the accompanying Proxy Statement. The
Amendments to Preferred Stock proposal will be submitted to the stockholders for
a vote only if the Financing Transactions are approved by the stockholders. If
any of the named nominees listed under item (3) should become unavailable prior
to the Annual Meeting, the proxy will be voted for any substitute nominee or
nominees designated by the Board of Directors. The undersigned ratifies and
confirms all that said Proxies or their substitutes may lawfully do by virtue
hereof. In the event that sufficient votes in favor of the Financing
Transactions are not received by the time scheduled for the Annual Meeting, the
Company may adjourn the Annual Meeting to permit further solicitation of proxies
with respect to any such proposal.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
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PLEASE MARK
/X/ VOTES AS IN
THIS EXAMPLE
The Board of Directors recommends a vote
FOR proposals 1 and 2 and
FOR all nominees for Directors
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FOR AGAINST ABSTAIN
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1. Approval of the transactions described under "Proposal No. 1: Financing / / / / / /
Transactions" in the Proxy Statement.
2. Approval and adoption of the amendments to the Company's Restated Certificate / / / / / /
of Incorporation described under "Proposal No. 2: Amendments to Preferred
Stock" in the Proxy Statement.
3. Nominees for election of Directors: Joe F. Hanauer, R. David Anacker, Lawrence FOR ALL WITHHELD FOR ALL
S. Bacow, Rueben S. Leibowitz, John D. Santoleri and Wilbert F. Schwartz. NOMINEES FROM ALL NOMINEES
NOMINEES EXCEPT AS
Nominees excepted: NOTED
/ / / / / /
4. In accordance with the judgments of the proxies, upon such other business as
may properly come before the meeting and at any and all adjournments thereof.
MARK HERE FOR
/ / ADDRESS CHANGE
AND INDICATE
Please date and sign exactly as name appears hereon. Joint owners should Signature:__________________________ Date:_________
each sign. The full title or capacity of any person signing for a corporation,
partnership, trust or estate should be indicated. Signature:__________________________ Date:_________
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